On July 31, 2018, the International Swaps and Derivatives Association (ISDA) published its 2018 US Resolution Stay Protocol.
Unlike prior ISDA protocols published in 2014, 2015 and 2016, which were intended to comply with special resolution regimes through a voluntary contractual stay of remedies under derivative and other types of netting agreements, the 2018 US Protocol is designed to allow market participants to comply with certain regulations issued by the Board of Governors of the Federal Reserve System1, the Federal Deposit Insurance Corporation (FDIC)2 and the Office of the Comptroller of the Currency (OCC)3. These regulations require global systemically important banking organizations (G-SIBs) to include contractual stays on counterparty early termination rights within "qualified financial contracts" (QFCs), as defined in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank),4 subject to the 2018 US Protocol (In-scope Protocol Covered Agreements)5.
Similar to formats used in connection with other ISDA protocols, the 2018 US Protocol allows for market participants to amend the terms of existing In-scope Protocol Covered Agreements to provide (a) that default rights under such agreements are restricted as provided under the orderly liquidation authority provisions of Title II of Dodd-Frank6 and the Federal Deposit Insurance Act7, and (b) that counterparties of G-SIBs will be limited in their ability to exercise default rights related directly or indirectly to certain affiliates of covered financial institutions.
The amendments contemplated by the 2018 US Protocol will be effective on the later to occur of the implementation date (i.e., the date on which ISDA accepts an adherence letter from the later of the two adhering parties to adhere to the 2018 US Protocol) and the compliance date (which may be January 1, 2019, July 1, 2019, or January 1, 2020, depending on the respective status of each adhering party). Adherence to the 2018 US Protocol will be open from the second half of August 2018, at which time ISDA has indicated that it will publish Frequently Asked Questions with additional background information related to the protocol. No cutoff date is currently anticipated for adherence, although ISDA has reserved the right to designate one with 30 days' prior notice on its 2018 US Protocol webpage.
1. 12 C.F.R. §§ 252.2 and 252.81-88.↩
2. 12 C.F.R. §§ 382.1-7.↩
3. 12 C.F.R. §§ 47.1-8.↩
4. 12 U.S.C. §5390(c)(8)(D).↩
5. The term "In-scope QFC" is defined in the 2018 US protocol to mean a QFC that explicitly (a) restricts the transfer of a QFC (or any interest or obligation in or under, or any property securing, the QFC) from certain financial entities subject to US regulations; or (b) provides one or more default rights described in the Attachment to the 2018 US Protocol with respect to a QFC that may be exercised against an entity described in the foregoing clause (a).↩
6. 12 U.S.C. §§5381 et seq.↩
7. 12 U.S.C. Chapter 16.↩
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