In what it described as a “major industry initiative”, the International Swaps and Derivatives Association (ISDA) announced agreement in principle of the proposed Protocol on 11 October 2014. The purpose of the Protocol is to impose a stay on the counterparties' cross default and early termination rights in the event that one of them is subject to resolution action in its jurisdiction.
18 major banks (global systemically important banks in the language of the Financial Stability Board (FSB) with whom ISDA has coordinated on the Protocol) and certain of their subsidiaries have agreed in principle to sign the Protocol.1 The Protocol will apply to standard ISDA derivatives contracts between them.
The Protocol is expected to be implemented in November 2014 and to take effect from 1 January 2015 (save that the US bankruptcy related provisions will become effective later). It will cover existing trades as well as new trades between the adhering counterparties.
The FSB began a consultation in September 2014 on proposals for cross-border recognition of resolution actions including contractual approaches to cross-border recognition of stays on cross default and early termination rights.
The concern is that whilst a stay as part of a statutory resolution regime (such as Title II of the US Dodd-Frank Act and in the EU pursuant to the EU Bank Recovery and Resolution Directive) may be effective in a party’s jurisdiction, these stays may not be effective on cross-border trades. The whole purpose of resolution action in respect of a counterparty with a significant amount of such trades may be at risk as a result of the simultaneous close-out of derivatives transactions. The Protocol enables adhering counterparties to apply overseas resolution regimes to their derivative contracts.
Future expansion of the Protocol
It is expected that broader adoption of these stay provisions will take place next year. As regulators seek to expand the resolution regimes in their respective jurisdictions in 2015, the coverage of the Protocol is likely to be expanded at the same time.