The Financial Stability Board (“FSB”) released a consultation, on September 29, 2014, on establishing an effective cross-border recognition framework for cross-border resolution. The FSB is proposing: (i) a set of elements for inclusion in statutory cross-border recognition frameworks; and (ii) contractual approaches to cross-border recognition including (a) temporary stays on early termination rights in financial contracts; and (b) bail-in of debt instruments. For temporary stays, the FSB paper states that the International Swaps and Derivatives Association has developed a draft protocol to its Master Agreement which would support the cross-border enforcement for OTC derivatives governed by the Master Agreement between adopting parties. The draft protocol is expected to be launched in the near future and an initial set of G-SIBs are expected to adhere to it by the end of October. It is intended that the adopted protocol would govern existing and new OTC derivatives contracts between adopting banks from January 2015. Other proposed methods for contractual measures are through the imposition by prudential regulators of rules requiring firms to adopt the necessary contractual language on stays in resolution with all their counterparties. Jurisdictions with the power to require firms to improve resolvability may require firms to do so through the use of contractual stay provisions. The FSB considers that through imposing direct requirements on regulated entities, unregulated firms will also be caught by the requirements.
The FSB also proposes key principles for the enforceability of bail-in of debt instruments, which principles are based on existing and emerging practices in some jurisdictions which already require contractual recognition clauses to be included in capital or debt instruments governed by foreign law, including, in certain jurisdictions, the requirement for firms to show to regulators that any statutory bail-in of such instrument would be enforceable. The FSB is proposing that regulators should require all entities issuing debt governed by the law of a foreign jurisdiction to include recognition clauses for statutory bail-in of those debt instruments.
The FSB intends to finalize guidance on key principles for recognition clauses as well as the core elements of statutory recognition frameworks by end-2015. FSB members are expected to take action to promote the adoption of contractual clauses recognizing stays on early termination rights and exercise of bail-in powers by end-2015. Responses to the consultation are due by December 1, 2014.
The FSB paper is available at: