On May 3, 2016, the International Swaps and Derivatives Association, Inc. (ISDA) published the ISDA Resolution Stay Jurisdictional Modular Protocol (the JMP).1 The JMP complements the ISDA 2015 Universal Resolution Stay Protocol (the 2015 Protocol), which ISDA published in November 2015.2 Both the JMP and the 2015 Protocol relate to regulatory efforts to reduce risks associated with "too-big-to-fail" institutions; both are intended to help ensure the preservation of transactions of banking organizations that become subject to resolution or reorganization proceedings. They do so via contractual amendments pursuant to which a bank's counterparties agree to the applicability of short-term stay mechanisms under bank resolution regimes. Affected agreements include master repurchase and securities lending agreements, as well as ISDA master agreements.
The 2015 Protocol primarily targeted transactions between the largest banking organizations worldwide. The JMP targets transactions between a variety of banking organizations, on the one hand, and their counterparties, on the other. Thus while the 2015 Protocol concerned large sell-side organizations, the JMP concerns buy-side firms as well.
With the JMP, ISDA also published and made available for adherence the first of several expected "modules" under the JMP: the UK (PRA Rule) Jurisdictional Module (the UK Module).3 The UK Module relates to final rules (the UK PRA Rules) recently published by the UK Prudential Regulation Authority (PRA)4 that apply to a variety of UK banking organizations and certain UK systemically important investment firms (along with their subsidiaries, where relevant). Those banking organizations and investment firms will be able to comply with the UK PRA Rules by adhering to the UK Module via the JMP, and then seeking complementary adherence by their counterparties. Future modules to the JMP will perform analogous roles under regulations in other Financial Stability Board (FSB) jurisdictions.
One of those jurisdictions is the United States. On the date that ISDA published the JMP and UK Module, the Board of Governors of the Federal Reserve System (the Federal Reserve) voted in favor of publishing a related
1 The JMP and related "General FAQs" are available on ISDA's website: http://www2.isda.org/functional-areas/protocolmanagement/protocol/24. 2 The 2015 Protocol is available at: http://assets.isda.org/media/ac6b533f-3/5a7c32f8.pdf/. 3 The UK Module and related "Module FAQs" are available on ISDA's website: http://www2.isda.org/functional-areas/protocolmanagement/protocol/25. 4 See UK PRA Rulebook: CRR Firms and Non-Authorised Persons: Stay in Resolution Instrument 2015 (PRA 2015/82), available at: http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps2515app1.pdf.
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notice of proposed rulemaking (the NPR).5 Once the rules proposed in the NPR are finalized, they are likely to result in ISDA's publication of a U.S. jurisdictional module for the JMP. However, as discussed below, the Federal Reserve NPR has broader implications than the UK PRA Rules (or expected rules in other FSB jurisdictions), and it proposes different mechanisms for compliance. Thus, the U.S. jurisdictional module may have operative terms that are distinctly different from those of the UK Module (or of any other module under the JMP).
A previous Sidley Update6 described the 2015 Protocol and its background and anticipated many details of the JMP and some elements of the NPR. In this Sidley Update, we provide initial high-level observations regarding the JMP and the UK Module and brief comments regarding the NPR. This Sidley Update is intended to provide an initial orientation for the many market participants that have not been directly affected by the 2015 Protocol, but that will now need to consider issues associated with ISDA's resolution stay initiatives.
JMP Operation. Each module of the JMP will amend agreements between adherents to ensure that stay mechanisms applicable to a bank adherent that becomes subject to resolution proceedings will be respected in a cross-border context (e.g., without regard to the agreement's governing law or the jurisdiction of the bank's counterparty). For example, the UK Module operates to insert a choice of law provision in contracts that are not governed by European Economic Area law to ensure that related UK resolution regime stay powers are enforceable under those contracts as if the contracts were governed by the laws of any part of the United Kingdom (e.g., English law).7 (Very generally speaking, the resolution stay powers addressed by the JMP give resolution authorities one or two business days to resolve a failing banking organization; if resolution is successful, stayed rights effectively lapse; if resolution is not successful, the stays are lifted and termination rights are exercisable.)
Modularity and Jurisdiction-by-Jurisdiction Application. A feature of the JMP that distinguishes it from the 2015 Protocol (and from other ISDA protocols) is a mechanism that permits jurisdiction-byjurisdiction adherence. In other words, parties will have the option to adhere separately to each jurisdictional module under the JMP (rather than to adhere once to the JMP for all jurisdictions). The UK Module is only the first JMP module; it relates to, and facilitates compliance with, the UK PRA Rules. Other FSB jurisdictions are at various stages in their efforts to put in place similar requirements; the Federal Reserve's NPR is one example.8 It is expected that each time an FSB jurisdiction finalizes its requirements, a related JMP module will be published and made available by ISDA for adherence via the
5 See Federal Reserve, Notice of Proposed Rulemaking, Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and the U.S. Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions (May 3, 2016), available at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20160503b1.pdf. 6 See Sidley Update, New ISDA Resolution Stay Protocols: Challenges for Buy-side and Sell-side Firms Alike (November 19, 2015), available at: http://www.sidley.com/news/11-19-2015-derivatives-update. 7 See UK Module, Section 3 (the counterparty of a bank subject to resolution under the UK bank resolution regime "shall be entitled to exercise `termination rights' under, or rights to enforce a `security interest' in connection with, [any amended] Covered Agreement, to the extent that it would be entitled to do so under the `Special Resolution Regime' if such Covered Agreement were governed by the laws of any part of the `United Kingdom'") (italics and quotes in original). 8 Another example is German legislation enacting a related statutory amendment to its resolution regime (the German Regulations). See Article 60a of the German Recovery and Resolution Act (Contractual Recognition of Temporary Suspension of Termination Rights) (unofficial translation), available at: https://www.gesetze-im-internet.de/bundesrecht/sag/gesamt.pdf; see also Federal Reserve NPR at 37 notes 76-77 (citing Swiss requirements, as well as the German Regulations).
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JMP (assuming the jurisdiction's requirements are specific enough to support the kinds of contractual mechanisms by which the JMP is expected to operate).
Module Operation. Each module of the JMP will tie closely to legal requirements imposed on banking organizations that are subject to the respective jurisdiction's bank resolution regime9--defined in the JMP as "Regulated Entities." The JMP defines Regulated Entities by cross-reference to the respective jurisdiction's legal requirements. It also cross references express legal requirements for purposes of defining the agreements that must be amended by Regulated Entities--defined in the JMP as "Covered Agreements." Thus, for example, the UK Module incorporates by reference a number of definitions and other legal concepts directly from UK PRA Rules. Accordingly, adherents may wish to consider seeking local law advice when evaluating JMP modules.
Timing for Module Adherence. The question of when particular Regulated Entities will adhere to the JMP, and seek to have their counterparties adhere, will be answered on a jurisdiction-by-jurisdiction basis (as, of course, will the identity of Regulated Entities for each jurisdiction). For example, the UK PRA Rules provide a phase-in schedule: Regulated Entities that are subject to the UK PRA Rules are required to comply by June 1, 2016, with respect to any of their counterparties that are categorized as banks or building societies, or that are authorized to engage in certain regulated activities (notably proprietary trading),10 but will not be required to comply until January 1, 2017, with respect to other counterparties (e.g., alternative investment funds and corporates).11 The NPR indicates that the final U.S. rules will take effect on the first day of the first calendar quarter that begins at least one year after their issuance.12
Covered Agreements. "Covered Agreements" under a given jurisdictional module will likely include, at a minimum, ISDA master agreements and various kinds of repurchase agreements, securities lending agreements or other agreements governing securities financing transactions (SFTs). Those kinds of agreements are the focus of the 2015 Protocol. However, each jurisdictional module will take its definition of Covered Agreement from the relevant jurisdiction's particular requirements.13 In the case of the UK Module, Covered Agreements are defined as "each `third-country law financial arrangement' between [the] Module Adhering Party and [the] Regulated Entity Counterparty, each `third-country law financial arrangement' provided by such Regulated Entity Counterparty for the benefit of such Module Adhering Party and each `third-country law financial arrangement' provided by such Module Adhering
9 ISDA emphasized: "In preparing Jurisdictional Modules, ISDA will aim to follow the text of finalized Stay Regulations to the greatest extent possible and will not engage in analysis or interpretations of regulatory requirements." See General FAQs. 10 That is, firms authorized under the EU Markets in Financial Instruments Directive to "deal on own account," a category that would generally apply to sell-side organizations and market makers. 11 See UK PRA Rules, Section 3 (setting forth transitional provisions under the rules). 12 See Federal Reserve NPR, Section 252.82(b). Although the German Regulations have been finalized and became effective January 1, 2016, the jurisdictional module for Germany is not yet available; we understand that some form of temporary relief has accordingly been provided to German banks. 13 Under the JMP, a Covered Agreement is defined by reference to a particular jurisdictional module and to any two adhering parties in respect of that module. The JMP also includes a more generic, though similarly defined, term, "Protocol Covered Agreement." See JMP, Section 5 ("Protocol Covered Agreement means, with respect to a Jurisdictional Module, any agreement that is a Covered Agreement for purposes of such Jurisdictional Module.").
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Party for the benefit of such Regulated Entity Counterparty."14 The italicized terms in the definition refer to those terms as defined under the UK PRA Rules. In contrast, the proposed rules under the NPR would generally target "qualified financial contracts" (QFCs) as defined under Title II of the Dodd-Frank Act.15
As in the case of other ISDA protocols, the JMP operates, generally speaking, to amend existing agreements between two adhering parties. Agreements that parties execute after they adhere in respect of a jurisdictional module must directly include terms that are mandated by the applicable jurisdiction's regulations (though those agreements may do so via incorporation by reference of JMP module terms).
Regulated Entities. When a Regulated Entity as defined under a given jurisdictional module adheres to that jurisdictional module, it will designate itself in its adherence letter as a "Regulated Entity" for the jurisdictional module. Regulated Entities will be determined on a jurisdiction-by-jurisdiction basis; as a consequence, the defined term for a particular jurisdictional module may be broad or narrow. For example, under the UK Module, the category is broad and includes a variety of banking organizations without reference to their size, along with certain systemically important investment firms regulated by the PRA;16 in contrast, the NPR principally targets the largest U.S. banking organizations, and the U.S. module will likely have a definition of "Regulated Entity" that is commensurately narrow.17 In both jurisdictions, various affiliates will be covered by the definition as well.
As noted above, the Regulated Entities for a given jurisdictional module are those banking organizations that are directly obligated under the jurisdiction's requirements. Although such requirements directly bind Regulated Entities (and not their counterparties as such), the requirements will result in requests by Regulated Entities that their counterparties adhere to the JMP in order to amend existing trading agreements. However, as a consequence of the varying jurisdictional approaches to defining Regulated Entities, buy-side market participants that deal directly with a broad set of sell-side counterparties may expect to receive more requests for JMP module adherence in some jurisdictions than in others.
Module Adhering Parties and Regulated Entity Counterparties. When counterparties that are not Regulated Entities adhere to a jurisdictional module, they designate themselves in their adherence letters as "Module Adhering Parties" for that module.18 Each Module Adhering Party must then select
14 UK Module, Introductory Paragraphs. 15 See Section 210(c)(8)(D) of Title II ("The term `qualified financial contract' means any securities contract, commodity contract, forward contract, repurchase agreement, swap agreement and any similar agreement that the [FDIC] determines by regulation, resolution or order to be a qualified financial contract for purposes of this paragraph.") 16 See UK Module, Section 4 ("Regulated Entity" means an Adhering Party that has identified itself as a Regulated Entity in its Adherence Letter with respect to this UK (PRA Rule) Jurisdictional Module and that is any of the following:-- (a) A "BRRD undertaking" which is: (i) a "CRR firm"; (ii) a "financial holding company" whose "registered office" or, if the "financial holding company" does not have a "registered office," whose "head office" is in the "United Kingdom"; or (iii) a "mixed financial holding company" whose "registered office" or, if the "mixed financial holding company" does not have a "registered office," whose "head office" is in the "United Kingdom"; and (b) A "subsidiary" of a "BRRD Undertaking" which is: (i) a "credit institution"; (ii) an "investment firm" or an "undertaking" which would be an "investment firm" if it had its head office in an "EEA State"; or (iii) a "financial institution"; and is not a "BRRD undertaking" which falls within clause (a) of this definition.). 17 See Federal Reserve NPR, Section 252.82 (Defining "covered entity" as "(1) A bank holding company that is identified as a global systemically important BHC . . . ; (2) A subsidiary of a company identified in paragraph (a)(1) of this section (other than a subsidiary that is a covered bank); or (3) A U.S. subsidiary, U.S. branch, or U.S. agency of a global systemically important foreign banking organization (other than a U.S. subsidiary, U.S. branch, or U.S. agency that is a covered bank, section 2(h)(2) company or a DPC branch subsidiary)."). 18 Note that a banking organization that adheres to a given jurisdictional module as a Regulated Entity may adhere (and most, if not all, such banking organizations will adhere) also as a Module Adhering Party thereunder. Such adherence in both capacities will permit the banking organization to agree to amendments to agreements with other Regulated Entities in order to enable those other Regulated Entities to satisfy their own regulatory
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those Regulated Entities as to which it is adhering (including credit support providers, to the extent that credit support documents entered into or provided by Regulated Entities are Covered Agreements under the jurisdictional module). Each Regulated Entity that is so selected by a Module Adhering Party becomes a "Regulated Entity Counterparty" for that Module Adhering Party under that module. The module then operates to amend Covered Agreements between the Module Adhering Party and each of its Regulated Entity Counterparties in the manner set out in the module (as described above).
The Availability of Dealer-by-Dealer Adherence. A Module Adhering Party--e.g., a buy-side adherent--will generally have three options when it adheres in respect of a particular jurisdictional module (subject to any restrictions imposed by that jurisdiction's related regulatory requirements). It will be permitted to adhere in respect of: (i) all Regulated Entities in the respective jurisdiction; (ii) all FSB-designated G-SIBs (as of the publication date of the jurisdictional module) that are Regulated Entities in the respective jurisdiction;19 or (iii) only those Regulated Entities in the jurisdiction that it specifically identifies. The UK Module operates in this manner.
The first and second of the adherence options introduce a dynamic element. If a Module Adhering Party adheres by one of those two mechanisms, its Regulated Entity Counterparties may change over time without it taking further action. That would occur if, after the adherence date for the respective jurisdictional module, one or more of its counterparties (i) adhered as a Regulated Entity to the jurisdictional module (in the case of the first option) or (ii) adhered as a Regulated Entity to the jurisdictional module and was an entity in a G-SIB group under that jurisdictional module (in the case of the second option).
The third option, which is sometimes referred to as "dealer-by-dealer" adherence, is not dynamic. In the case of dealer-by-dealer adherence, a Module Adhering Party must deliver a separate "Module Adherence Notice" to each selected Regulated Entity that it designates as a Regulated Entity Counterparty; one means of delivering such notices will be through ISDA Amend. If a Module Adhering Party does not adhere in respect of a given Regulated Entity under a jurisdictional module, its agreements with that Regulated Entity will not be amended by the module. However, as a consequence, the Module Adhering Party is likely to find that the Regulated Entity will no longer enter into transactions with the counterparty under those agreements (unless the agreements are otherwise amended to comply with regulatory requirements, as discussed below).
Agent/Client Adherence. The JMP, like other ISDA protocols, includes provisions that permit investment advisers, asset managers and other agents to adhere on behalf of one or more clients for which they have legal authority to do so. When an agent adheres on behalf of clients, it does so "with respect to Protocol Covered Agreements entered into, received or provided by such Agent on behalf of such Clients."20 The form of adherence letter for each jurisdictional module will provide agents with two
obligations. Dual-capacity adherence is necessary because the JMP operates in one direction: Module Adhering Parties agree to certain consequences of resolution proceedings to which their Regulated Entity Counterparties may become subject, but the reverse is not true under the JMP. 19 Under the JMP, G-SIB "means, with respect to a Jurisdictional Module, a banking group that has been designated by the Financial Stability Board as a `global systemically important bank' as of the publication date of such Jurisdictional Module." See JMP, Section 5. 20 JMP, Section 4(f)(i). The provision also indicates that adherence by an agent with respect to its clients operates "only to designate such Clients as Module Adhering Parties but not Regulated Entities."
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alternatives: (i) adherence on behalf of all clients represented by the agent; or (ii) adherence on behalf of some, but not all, of the agent's clients. In the latter case, the agent will be required to identify clients (which may, in certain circumstances, be achieved via a unique client identifier) for which it is adhering either in its adherence letter (which will be made public on ISDA's website) or in bilateral communications with respective Regulated Entity Counterparties (which will not be made public on ISDA's website). ISDA emphasized: "If . . . you have authority from some clients only but you are not able to disclose such clients whether by name or a unique identifier, you cannot adhere to a Jurisdictional Module on behalf of such clients."21
One of the more complicated considerations will arise for an agent if the agent selects to adhere in respect of different Regulated Entity Counterparties for different clients. For example, if an agent adheres for two-thirds of its clients with respect to all Regulated Entities under a given module, and adheres for the other clients with respect to only some Regulated Entities under the module, it will execute two separate adherence letters for that module (one taking the approach of designating all Regulated Entities as Regulated Entity Counterparties, and the other taking the approach of dealer-bydealer adherence). The number of adherence letters for the jurisdictional module will grow with the number of permutations of adhering clients and Regulated Entity Counterparties.
A second complication may concern circumstances, should they arise, in which an agent does not have authority to make particular amendments on behalf of a given client. ISDA explains:
"If an agent does not have the requisite authority from a client to make the amendments contemplated by a Jurisdictional Module to a particular agreement that is a Covered Agreement, it is the responsibility of the agent to notify each Regulated Entity Counterparty with respect to such client bilaterally to make sure such agreement is not amended."22
Moreover, where an agent adheres on behalf of some clients, but not all clients, in respect of "an umbrella or similar agreement"--an "Agent Protocol Covered Agreement" as defined under the JMP--the agent may notify the respective Regulated Entity Counterparty that adherence in respect of the Agent Protocol Covered Agreement does not extend to a given client. If the agent provides such a notification, the agent will be deemed to have represented under the JMP that "such notification is being made only because the Agent lacks the consent, approval, agreement, authorization or other action of such Client necessary to make such amendments."23 In other words, if an agent amends an umbrella Agent Protocol Covered Agreement by adherence to the JMP, then it must do so in respect of all clients for which it has requisite authority--it does not have an option to pick and choose among those clients for which it has authority under such an agreement.
Modular "Over Compliance." Adherence to the JMP may result in "over compliance." In other words, the amendments effected by adherence to a given JMP module may exceed the specific requirements imposed on Regulated Entities in the respective jurisdiction. That possibility is demonstrated by the UK
21 General FAQs. 22 General FAQs. 23 JMP, Section 4(f)(iv)(B).
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Module and the UK PRA Rules. The UK Module amends all outstanding transactions under Covered Agreements for the module, but the UK PRA Rules require only that new transactions under, or material amendments to, Covered Agreements be subject to the amendments. Thus, the UK Module will have retroactive effect, even though the UK PRA Rules are applicable only prospectively.
Alternative Means of Compliance. The JMP is not the exclusive means by which Regulated Entities may comply with their new regulatory obligations. A Regulated Entity may comply through bilateral ad hoc amendments to agreements with its counterparties. However, it is unclear whether or to what extent Regulated Entities will entertain requests for agreement amendments that are not effected via adherence to the JMP. Moreover, regulatory requirements in some jurisdictions may expressly favor the JMP (vis--vis other approaches). As discussed below, an eventual U.S. module to the JMP may reflect such a bias.
The Federal Reserve NPR. The NPR is distinct for a number of reasons. First and foremost, it is distinct because the Federal Reserve's proposed rules would operate in two fundamentally different ways, only one of which is similar to the operation of the UK PRA Rules (and the rules expected in other FSB jurisdictions). That similarity relates to provisions that would, in effect, mandate choice of law provisions in covered QFCs. For example, the NPR proposed rules state:
"A covered QFC must explicitly provide that . . . [d]efault rights with respect to the covered QFC that may be exercised against the covered entity are permitted to be exercised to no greater extent than the default rights could be exercised under the U.S. special resolution regimes if the covered QFC was governed by the laws of the United States or a state of the United States and the covered entity were under the U.S. special resolution regime."24
The term "U.S. special resolution regimes" means the Federal Deposit Insurance Act (FDIA), which governs the resolution of FDIC-insured depository institutions, and the orderly liquidation authority (OLA) under Title II of the Dodd-Frank Act, which governs resolution of systemically important financial institutions. The term does not include the U.S. Bankruptcy Code--e.g., Chapter 11 reorganization-- which gives counterparties to QFCs a safe harbor exemption from more generally applicable automatic stays that are triggered when a debtor files for relief. In other words, absent from the Bankruptcy Code are the kinds of short-term stay mechanisms found in the FDIA and OLA that are applicable to QFCs.
A second, unique aspect of the NPR addresses that absence. Under the NPR's proposed rules, QFCs of a covered entity could not permit counterparties to exercise a range of cross-default rights related, directly or indirectly, to an affiliate of the covered entity becoming subject to a receivership, insolvency, liquidation, resolution or similar proceeding. In addition, QFCs could not prohibit the transfer of any credit enhancement provided by a covered affiliate of the covered entity (or any interest or obligation therein or thereunder, or any property securing the covered affiliate credit enhancement) upon an affiliate of the covered entity becoming subject to such a proceeding (subject to limited exceptions).25 Of
24 Federal Reserve NPR, Section 252.83(b)(2). The proposed rules would also require covered QFCs to permit certain transfers in connection with U.S. special resolution regimes. See Federal Reserve NPR, Section 252.83(b)(1). 25 See Federal Reserve NPR, Section 252.84(b).
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particular relevance in both cases are QFCs which are entered into by covered entities that are subsidiaries of bank holding companies (BHCs) and are guaranteed by their BHC parents.
Thus, covered QFCs of such BHC subsidiaries would be required to include contractual terms that, in effect, override Bankruptcy Code safe harbor protections for cross-defaults (subject to certain specified creditor protection provisions included in the NPR's proposed rules).26 This portion of the proposed rules is unique to U.S. regulatory efforts to ensure orderly resolution under the Bankruptcy Code; it is unrelated to cross-border enforcement of special resolution regimes (such as the FDIA and OLA).
Perhaps the most interesting aspect of the NPR is its direct and express reliance on ISDA protocol terms despite (or perhaps because of) differences between those terms and the NPR requirements. The NPR would expressly permit compliance with its cross-default requirements through adherence to the 2015 Protocol. The 2015 Protocol includes provisions that are tied to certain U.S. insolvency proceedings, including provisions that would amend agreements to limit the exercise, on a short-term basis, of specified cross-default rights in the context of certain Chapter 11 proceedings.27
Most obviously, the proposed NPR compliance mechanism would permit the world's largest banking organizations, which have already adhered to the 2015 Protocol, to satisfy (without further action) these U.S.-centric cross-default requirements as applied to QFCs between such banking organizations. However, the Federal Reserve's intention with respect to the 2015 Protocol also extends to the rest of the market as well, at least in substance. That intention is evidenced clearly in this statement:
"ISDA is expected to supplement the  Protocol with ISDA Resolution Stay Jurisdictional Modular Protocols [sic] for the United States and other jurisdictions. A jurisdictional module for the United States that is substantively identical to the  Protocol in all respects aside from exempting QFCs between adherents that are not covered entities or covered banks would be consistent with the current proposal."28
Thus despite market expectations that buy-side firms will not adhere to the 2015 Protocol, including statements by ISDA,29 the Federal Reserve appears to be suggesting that buy-side participants adhere to
26 The proposed rule provisions allowing covered QFCs to include terms aimed at providing certain creditor protections are found in Sections 252.84(d)-(i). The NPR emphasizes that only cross-defaults, not direct defaults, would be limited contractually in the context of Chapter 11 proceedings: "[T]he QFC counterparty would retain its ability under the Bankruptcy Code's safe harbors to exercise direct default rights." Federal Reserve NPR at 43. 27 Our previous Sidley Update (see supra note 6) describes the two principal operative features of the 2015 Protocol: Section 1 of the 2015 Protocol, which helps ensure the cross-border enforceability of resolution regimes in various FSB jurisdictions, and Section 2, which limits cross-default rights in the context of certain U.S. insolvency proceedings. 28 Federal Reserve NPR at 48 note 106. 29 When the 2015 Protocol was published, ISDA stated: "While the ISDA 2015 Universal Protocol is open to any entity to voluntarily adhere, it was not developed with the expectation of being used by broader market participants, including buy-side institutions, as a means of complying with regulations applicable to their dealer counterparties." ISDA 2015 Universal Resolution Stay Protocol FAQs, available at: http://www2.isda.org/functional-areas/protocol-management/faq/22. In the General FAQs published with the JMP, ISDA continued in a similar vein: "It is expected that market participants will utilize the ISDA Jurisdictional Modular Protocol, rather than the ISDA 2014 Protocol or the  Protocol, to comply with Stay Regulations." However, the General FAQs later state: "Section 1 and Section 2 of the  Protocol will not form a part of the ISDA Jurisdictional Modular Protocol unless those amendments are specifically required for compliance with Stay Regulations."
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a U.S. jurisdictional module that includes terms that are, from a U.S. perspective, identical to those in 2015 Protocol.30
It is also clear from the NPR that certain elements of the JMP that buy-side participants may consider important--such as dealer-by-dealer adherence31--may be inconsistent with the Federal Reserve position. The Federal Reserve describes a trade-off when explaining why requirements under the proposed rules could be satisfied via contractual amendments effected by adherence to the 2015 Protocol (even though the 2015 Protocol does not meet the conditions set out in the proposed rules). And in doing so, the Federal Reserve states a clear preference for the "universal" approach taken by the 2015 Protocol.
In analyzing the trade-off, the Federal Reserve first lists a number of elements of the 2015 Protocol that are more favorable to buy-side adherents, and thus would not satisfy certain conditions under the proposed rules:
"The scope of the stay and transfer provisions in the  Protocol are narrower than the stay and transfer provisions required under the proposal. . . . [And the 2015] Protocol also provides a number of protections to supported parties that are additional to, or stronger versions of, the creditor protections the proposal otherwise permits for supported parties. . . . In addition, the Protocol is more specific than the proposal as to the form and timing of the assurance that the covered affiliate support provider's assets (or net proceeds therefrom) would be transferred to the transferee."32
However, the Federal Reserve then describes a number of features of the 2015 Protocol that favor the Federal Reserve's regulatory perspective (at the expense of buy-side protections and flexibility):
"[T]he  Protocol includes a number of desirable features that the proposal lacks. First, when an entity (whether or not it is a covered entity) adheres to the  Protocol, it necessarily adheres to the  Protocol with respect to all covered entities that have also adhered to the  Protocol rather than one or a subset of covered entities (as the proposal may otherwise permit). Since many covered entities have already adhered to the  Protocol, any other entity that chooses to adhere will simultaneously adhere with respect to all covered entities. This feature appears to allow the  Protocol to address impediments to resolution on an industry-wide basis and increase market certainty, transparency, and equitable treatment with respect to default rights of non-defaulting parties. Other features of the Protocol that the proposal otherwise lacks also reflect positively toward other proposed factors relevant to proposals for enhanced creditor
30 The carve out in the operative phrase of the Federal Reserve's statement--"substantively identical to the  Protocol in all respects aside from exempting QFCs between adherents that are not covered entities or covered banks"-- indicates that a U.S. jurisdictional module would not be required to amend a QFC between two adherents where neither adherent is subject to the Federal Reserve's final rules or to related rules of the Office of the Comptroller of the Currency (i.e., where neither adherent is a "covered entity" or a "covered bank" as defined). 31 See infra text at notes 31-36. 32 Federal Reserve NPR at 49-50. The Federal Reserve goes on to catalogue several additional creditor protections that are built into the 2015 Protocol but not the proposed rules.
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protections: The Protocol amends all existing transactions of adhering parties; . . . . Finally, the Protocol is not limited to resolution under the U.S. Bankruptcy Code but also includes U.S. special resolution regimes and certain non-U.S. special resolution regimes, which should help facilitate the resolution of a G-SIB across a broader range of scenarios."33
In other words, the Federal Reserve is not proposing to mandate, by rule, that large U.S. G-SIBs trade with buy-side counterparties only if the counterparties agree to amendments that are consistent with the 2015 Protocol. However, the Federal Reserve is proposing that, in the absence of such an agreement, the alternative for U.S. G-SIBs and their counterparties--i.e., compliance with the rules as otherwise proposed--may be even less attractive from a counterparty (creditor protection) perspective.
In addition, the proposed rules themselves suggest potential limitations on alternative approaches to compliance in a detailed section that would govern requests for the approval of any alternative approach, including a requirement for approval by the Federal Reserve itself.34 That section specifies 10 "Considerations" that the Federal Reserve may take into account when reviewing a request.35 The Considerations include whether the request would permit adherence "with respect to only one or a subset of covered entities"--i.e., whether dealer-by-dealer adherence is permitted--and whether adherence would apply to "existing and future transactions."36 However, the Considerations also include at least one element that may suggest a willingness on the part of the Federal Reserve to consider buyside expectations: one of the listed Considerations focuses on the extent to which an alternative approach "facilitates, on an industry-wide basis, contractual modifications."37 Moreover, the NPR's discussion of compliance alternatives states:
"The proposed request-and-approval process would improve flexibility by allowing for an industry-proposed alternative to the set of creditor protections permitted by the proposed rule while ensuring that any approved alternative would serve the proposal's policy goals to at least the same extent as a covered QFC that complies fully with the proposed rule."38
Thus, given the NPR's favorable discussion of the 2015 Protocol, and the differences between the 2015 Protocol and the JMP, it is difficult to anticipate the Federal Reserve's response to industry proposals that reflect the latter, and derogate from the former.
As we indicated in our November 2015 Sidley Update, the challenges for buy-side market participants when considering the JMP concern understanding the complex international regulatory context and the resulting
33 Federal Reserve NPR at 51-52 (emphasis added). 34 See Federal Reserve NPR, Section 252.85(a)-(d). 35 See Federal Reserve NPR, Section 252.85(d). 36 Federal Reserve NPR, paragraphs (6) and (4) of Section 252.85(d). 37 Federal Reserve NPR, Section 252.85(d)(3). 38 Federal Reserve NPR at 56.
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protocol-driven contractual paradigm. Moreover, for investment advisers and asset managers representing buy-side clients, there is now the challenge of communicating the terms and consequences of the JMP to their clients, investors and accounts. And as noted above, the JMP does not present buy-side firms with an ISDA protocol fait accompli, although alternatives to compliance may be difficult to pursue.
For the sell-side--by which we generally mean Regulated Entities under the JMP--the challenges will involve educating counterparties and encouraging them to act before regulatory deadlines take effect. In some circumstances, the challenges may arise as counterparties request alternative (non-protocol) approaches--that is, ad hoc documentation amendments that meet regulatory requirements but that do not do so solely via the JMP and which may, therefore, attract regulatory attention.
Both the buy-side and the sell-side will need to grapple with the unique aspects of the Federal Reserve's NPR, particularly as they relate to restricting cross-default rights in the context of certain bankruptcy and insolvency proceedings, and as they create incentives for broader market buy-in to one or more key terms of the 2015 Protocol.
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