Tuesday, August 15, 2017

ISDA opposes EC’s proposed amendments on harmonization of moratoria powers

By Amanda Maine, J.D.

The International Swaps and Derivatives Association (ISDA) has published a position paper outlining its concerns with the European Commission’s proposed amendments to its Bank Recovery and Resolution Directive (BRRD). A bank resolution occurs when authorities determine that a failing bank cannot go through regulatory insolvency proceedings without harming public interest and causing financial instability. ISDA addressed in particular two proposals relating to moratoria powers by EU resolution authorities for use in pre-resolution and for use in resolution.

Proposals. The amendments, which are part of a proposal to amend the EU BRRD, were published in November 2016 (known as BRRD 2). The proposals would give new powers to authorities to suspend payment and delivery obligations (the moratoria proposal). According to the EC, the purpose of BRRD 2 is to harmonize the application by resolution authorities of the use of moratoria tools. The new moratoria powers would have the effect of suspending payment and delivery options for up to five working days. Other amendments to the moratoria proposals could reduce in-resolution power to a three-day working period or extend it up to 20 days.

ISDA concerns. The position paper laid out a number of concerns troubling ISDA. The moratoria power would trigger a corresponding stay of termination rights under Article 68, leading to the inability of the parties to enforce payment and delivery obligations and negating their rights to terminate, close out, or net any agreements, according to ISDA.

ISDA also claims that the proposed moratoria powers would put institutions subject to BRRD 2 at a competitive advantage as it would be a “substantial departure” from already existing frameworks put in place by the Financial Stability Board (FSB), global regulators, and market participants, pointing out that the FSB’s two-business-day limitation on stays is a “carefully negotiated balance.” The EU would be out of synch with other jurisdictions if the proposed moratoria are adopted, ISDA stated.

Extending the length of the existing stay periods could also result in significant and adverse increases in capital and margin requirements from loss of netting, as well as increasing counterparties’ margin period of risk and requiring them to account for the exposure to market movements for a potentially undefined number of days, ISDA advised.

In addition, ISDA argued that a freeze on the making and receiving of payments, which is fundamental to the business of BRRD institutions, would increase the risk that the bank at issue would fail, which is contrary to the principle objective of the BRRD. The EC’s stated purpose of the proposal—harmonizing European moratoria provisions—would not be achieved if authorities are provided the discretion to extend the in-resolution moratorium up to 20 days, according to ISDA.