Title II
stay. The placement of the parent company into receivership may be treated
by these counterparties as an event of default due to the presence of a parent
guarantee or other cross-default provisions triggered by the parent-level
insolvency. Unless market participants make the appropriate contractual changes
that will ensure that the entry of the parent company into Title II will not
trigger the close-out provisions of those over-the-counter derivatives and
other qualified financial contracts that are outside the reach of Title II’s
U.S. application, he reasoned, foreign
counterparties to the systemically important firm will tend to exercise this
right whenever it is in their individual economic interest to do so. This would
create significant difficulties because such actions could greatly complicate
the operations of the firm during a time when it is already under considerable
stress and would propagate stress more broadly in financial markets.
The Fed official said that there are two main
options for addressing this issue, and they are not mutually exclusive.
Existing derivative contracts could be amended and future contracts could
provide that the parent’s entry into the Title II proceeding does not trigger
the close-out option, or legal changes could be implemented abroad so that the
one-day stay that applies to qualified financial contracts governed by U.S. law
is enforceable against those contracts governed by foreign law.
A second issue of
Fed concern with respect to cross-border Title II resolution is that U.S.
regulators cannot be certain how foreign authorities will react when the parent
is put into the Title II proceeding. U.S. authorities, while they have been in
discussion with their colleagues abroad to enable the coordination needed for a
smooth cross-border resolution process, cannot always be certain of the
circumstances under which host authorities may choose to take or be required to
take actions such as unilateral ring-fencing that might disrupt the
implementation of the single point of entry approach. He emphasized that U.S.
regulators must continue to work with foreign regulators to iron out any issues
ahead of time so that the resolution regime will work well for global, systemically
important firms.