On May 3, 2016, the US Federal Reserve Board proposed a rule to support US financial stability by enhancing the resolvability of large, complex financial firms. The proposed rule would require US global systemically important banking institutions and the US operations of foreign GSIBs to amend certain bilateral, uncleared qualified financial contracts, including derivatives, repurchase agreements, reverse repurchase agreements and securities lending and borrowing agreements, to prohibit the immediate cancellation of such contracts and the exercise of certain other default rights by counterparties if the firm enters bankruptcy or a resolution proceeding. Under the proposal, GSIBs may comply by using QFCs that are modified by the International Swaps and Derivatives Association 2015 Resolution Stay Protocol.
The rule would ensure consistency with restrictions on financial contracts under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act that support the orderly resolution of financial firms. Additionally, by requiring GSIBs to clarify in their QFCs that the US special resolution regimes apply, the proposal would help ensure that all QFC counterparties (both domestic and foreign) would be treated similarly in an orderly resolution. The proposal also requires GSIBs to ensure that their QFCs restrict the ability of counterparties to terminate, liquidate collateral or exercise other default rights based on the resolution of an affiliate of the GSIB. This restriction on default rights means that the affiliates of a GSIB that are able to meet their obligations should not be forced to enter resolution by the failure of another affiliate of the GSIB.
Comments on the proposal are due by August 5, 2016. The Federal Reserve Board press release is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20160503b.htm and the proposed rule is available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160503b1.pdf.