The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have put in place regulations (the “Stay Regulations”) to help ensure that a US insolvency proceeding of a global systemically important bank (a “G-SIB”) and its subsidiaries/affiliates can be achieved (i) in as orderly a manner as possible and (ii) while minimizing any destabilizing effects the insolvency may have on capital and/or other relevant markets, and the US economy.
The Stay Regulations impose certain required terms for securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements, and other qualified financial contracts (“QFCs”) of G-SIBs. The Stay Regulations thereby restrict counterparties to QFCs from exercising, to the extent provided for in their contracts, certain specified insolvency-related default and cross-default rights against a G-SIB, and prohibit the enforcement of any transfer restrictions that would stand in the way of federal banking rehabilitation or liquidation proceedings for a G-SIB.
In order to enter into future QFCs with a G-SIB or its subsidiaries/affiliates that are subject to the Stay Regulations, a counterparty will need to comply with the Stay Regulations. A QFC is made compliant by (a) the insertion of necessary contractual language, if it is a new QFC or (b) amendment of existing provisions to include such language, if not currently provided in the existing QFC.
A counterparty may amend existing QFCs by any of the following approaches: (i) enter into the ISDA 2018 US Resolution Stay Protocol (the “ISDA Protocol”) or an alternative Protocol, (ii) enter into bilateral contracts that conform to the Stay Regulations with each relevant G-SIB or its relevant subsidiaries/affiliates, or (iii) insert specific language into any existing contracts with each relevant G-SIB or its subsidiaries/affiliates in a manner that conforms with the Stay Regulations.
Adhering to the ISDA Protocol results in a counterparty amending all of its QFCs with all G-SIBs and their subsidiaries/affiliates that have also adhered to the ISDA Protocol, which can save substantial time and cost in completing documentation amendments, and provides certain bankruptcy-related creditor benefits to the adhering counterparty. However, in adhering, a counterparty is also providing various representations and warranties, including that the counterparty has the necessary power and authority to amend its QFCs by adhering to the ISDA Protocol and that the counterparty has received any consents necessary in order to amend its QFCs. So, prior to adhering, the counterparty should take all necessary steps to (i) be fully knowledgeable as to all QFCs it is thereby amending and (ii) be able to make the required representations and warranties.
As an alternative to adherence to the ISDA Protocol, a counterparty that has determined that it prefers the flexibility of amending individually its QFCs with selected G-SIBs and their subsidiaries/affiliates, and that the bankruptcy-related creditor benefits provided by the ISDA Protocol are not of significant value to it, will prefer to use a bilateral contract or to insert language into individual contracts to amend the relevant QFCs.
The Stay Regulations are detailed and complex in nature and should be given careful consideration when entering into future QFCs or amending existing QFCs. Please reach out to us with questions.