The Managed Funds Association ("MFA") submitted comments concerning a Board of Governors of the Federal Reserve System ("FRB") proposed rule imposing certain restrictions on qualified financial contracts ("QFCs") entered into by global systemically important banking organizations ("GSIBs"). Under the proposed rule, covered QFC's would not include cross-defaults resulting from the insolvency of affiliates of GSIBs. Further, GSIB affiliates that provide credit support could transfer those obligations without giving other parties the right to terminate the QFCs. The proposed rule is intended to facilitate the resolution of large financial companies by allowing their QFCs to be transferred to solvent counterparties.
The MFA argued that the proposed rule may have the unintended consequence of encouraging counterparties to QFCs to terminate or transfer contracts at the first sign of trouble in order to avoid the consequences of insolvency. The MFA criticized other aspects of the rulemaking such as the requirement that GSIBs amend existing QFCs when entering into new transactions. That requirement would cause the rule to cover existing transactions retroactively in certain circumstances.
The MFA stated:
We are troubled that the Board may be setting a precedent by using regulation to alter the effect of the U.S. Bankruptcy Code. In our view, the Board's proposed restrictions on certain end-user default rights during U.S. bankruptcy proceedings is inconsistent with Congressional intent and is a substantial constraint on a key risk mitigation tool that end-users need to protect themselves and their investors and/or beneficiaries.
According to the MFA, many of the goals promoted by the proposed rules have been achieved already, and the benefits of extending a rule to include end users may not justify the costs imposed on them.
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