On Saturday, the International Swaps and Derivatives Association’s (ISDA) announcement, a breakthrough on a protocol to the ISDA Master Agreement, was seen as an important step in improving the effectiveness of cross-border resolution actions. Under this protocol, counterparties have agreed to the cross-border enforceability of temporary stays on early termination and cross-default rights in over-the-counter (OTC) bilateral derivatives contracts.
As part of this announcement, an initial set of 18 global “systemically important” banks and other large dealers have committed to execute the protocol by the time of the next G20 Summit in November. Once enacted, the protocol will reduce the risk the resolution of a bank with significant cross-border operations might trigger; a chain of termination events in bilateral OTC derivatives contracts that leads to disruption in the wider market. With the adoption of the protocol by the top 18 dealers in November, over 90% of their OTC bilateral trading activity will be covered by stays of either a contractual or statutory nature.
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The Financial Stability Board (FSB), which was set up by the G20, welcomed the ISDA announcement and called on all systemically important banks and other firms with significant derivatives exposures to adhere to the protocol by the end of 2015 and ensure that similar financial contracts include contractual language that gives effect to stays in resolution on a cross-border basis. The FSB said its members have committed to support this adoption process through the necessary regulatory or supervisory action.
Mark Carney, Governor of the Bank of England and Chairman of the FSB, stated that the announcement “marks another important step towards completion of our comprehensive global reform agenda to end too-big-to-fail. The global financial crisis exposed critical cross-border obstacles to resolution that contributed to substantial public funds being put at risk to save multiple private entities. When the protocol goes live in November, it will close off much of the cross-border close-out risk that statutory stays have not been able to eliminate because their reach is limited to national borders. This is a major achievement by the industry. We now need to extend this process to other financial market participants, and to other financial contracts that pose cross-border close-out risk in resolution.”