The International Swaps and Derivatives Association, Inc. (“ISDA”) published the ISDA 2014 Resolution Stay Protocol (the “Protocol”) on November 12, 2014 in response to continued efforts by regulators to build additional flexibility into the statutory regimes that would apply in the event of the insolvency of a major financial institution. In broad terms, each adherent to the Protocol agrees to delay the exercise of certain contractual rights that it otherwise would have upon the insolvency of a financial institution counterparty. The delay is intended to increase the likelihood that the relevant regulator can achieve an orderly resolution of the insolvency.
Under an ISDA Master Agreement, the insolvency of a counterparty or an affiliate triggers close-out rights and can have implications for cross-default. Since the financial crisis, regulators have been concerned that in the case of an insolvency of a major financial institution the immediate exercise of these close-out rights by all of its various counterparties could effectively prevent a successful and orderly resolution. In response, certain statutory regimes, including Dodd-Frank, have been amended to impose stays on the exercise of these rights, with similar legislation pending in other jurisdictions. The timing of the stay depends on the resolution regime of the bank’s jurisdiction: some impose a 48-hour stay, while others implement a stay until the end of the following business day. However, these statutory regimes generally do not account for cross-border trades, making voluntary adoption of a stay necessary.
In an industry effort to fill the gap of stays for cross-border trades, an ISDA working group generated the Protocol, which amends bilateral ISDA Master Agreements to suspend close-out and early termination rights in the event a counterparty becomes subject to insolvency proceedings. Eighteen major banks and their affiliates have launched the Protocol as initial adherents.
The Protocol will apply to cleared and uncleared trades governed by an ISDA Master Agreement and is now open to adherence. The Protocol will only amend an ISDA Master Agreement if both counterparties to an agreement have adhered to the Protocol. Adherence is voluntary, and each adhering party must submit a one-time fee of $500 to ISDA. The provisions will become effective between the initial adhering parties on January 1, 2015.