In a joint letter to the International Swaps and Derivatives Association (ISDA), U.S. and global financial regulators in charge of resolution authorities for failing financial institutions urged the adoption of uniform language in derivatives contracts to delay the early termination of those instruments in the event of the resolution of a global systemically important financial institution (G-SIFI). In the letter, the resolution authorities expressed support for the adoption of changes to ISDA's standard documentation to provide for short-term suspension of early termination rights and other remedies in the event of a G-SIFI resolution. The letter to ISDA was signed by FDIC Chair Martin Gruenberg, Bank of England Governor Mark Carney, Patrick Raaflaub, CEO of the Swiss Financial Market Supervisory Authority, and Elke Konig, President of the German Federal Financial Supervisory Authority.
In the view of the regulators, the adoption of such changes would allow derivatives contracts to remain in effect throughout the resolution process following the implementation of a number of potential resolution strategies. By minimizing the disorderly unwinding of such contracts, reasoned the regulators, these changes would place resolution authorities in a better position to resolve G-SIFIs in a manner that promotes financial stability while providing market certainty and transparency.
According to the regulators, a key challenge in the development and implementation of resolution authorities for failed financial firms and accompanying strategies is the risk of the disorderly termination of derivatives contracts, particularly in the cross-border resolution context, arising out of the exercise of termination rights following the commencement of an insolvency or resolution action.
Thus, the regulators believe it essential for standard ISDA documentation to provide for a short-term suspension of early termination rights and other remedies on the basis of the commencement of an insolvency or resolution proceeding or exercise of a resolution power with respect to a counterparty or its credit support provider. Such a provision would allow the exercise of all applicable types of resolution powers, especially the transfer of the derivative contracts and associated guarantee obligations to a third party, including a bridge entity, on an expedited basis, the bail-in of a failing institution through the write-down of liabilities, or the conversion of liabilities into equity.
The international regulatory community continues to work closely to harmonize statutory approaches, noted the regulators, and a change in the underlying contracts for derivative instruments that is consistently adopted is a critical step to provide increased certainty to resolution authorities counterparties, and other market participants, particularly in the cross-border resolution context. As resolution regimes arc developed and implemented in an increasing number of jurisdictions, continued the authorities, ISDA is in a unique position to link these regimes by providing consistent and enforceable contractual provisions related to termination and other remedies with respect to derivatives transactions.