new isda resolution stay protocols isda resolution stay... · 2016. 2. 4. · • operating...

New ISDA Resolution

Stay Protocols

Presented by

Miki Navazio, Partner, Sidley Austin LLP

February 4, 2016

Overview

• Three ISDA Resolution Stay Protocols

– ISDA 2014 Resolution Stay Protocol (Original Protocol)

• November 2014

– ISDA 2015 Universal Resolution Stay Protocol (2015 Protocol)

• November 2015

– ISDA Resolution Stay Jurisdictional Modular Protocol (JMP)

• 2016 (anticipated)

1

Overview (cont.)

• New Legislative and Regulatory Requirements

– Reason

• Regulatory efforts to mitigate “too-big-to-fail” risk of large banking organizations

• Stability of swap transactions of a G-18 organization subject to certain

resolution/reorganization proceedings

– Direct targets:

• Certain FSB-designated global systemically important banks (GSIBs)

• Certain other banking organizations (collectively, Covered Banking Organizations)

– Indirect targets:

• Counterparties of Covered Banking Organizations (Counterparties)

2

Original Protocol

• Adherence

– Eighteen of the largest banking organizations worldwide (G-18)

• Identified subsidiaries

• Limitations

– Applies only to swap transactions

• Not to repurchase agreements or other security financing transactions, such as

securities lending (collectively, SFTs)

– Applies principally to transactions between G-18 institutions

• Not to transactions between G-18 and other market participants, such as large

institutional and buy-side counterparties

3

Original Protocol (cont.)

• Limitations Now Being Addressed

– Two new ISDA protocols

• 2015 Protocol

• JMP

– Related legislative and regulatory initiatives in FSB jurisdictions

• BRRD (EU)

• OLA (US)

• Related initiatives in Switzerland and Japan

4

2015 Protocol

• Initial Adherents

– G-18

– Three additional GSIBs

• Potential Additional Adherents

– Other GSIBs

– Certain other banking organizations

• Not Intended for Broader Market Adherence

– JMP will be intended for broader adherence

– Any suggestion that non-banking organizations adhere to 2015

Protocol should be carefully considered

5

2015 Protocol (cont.)

• Similar in Substance to Original Protocol

– Principal change: coverage of SFT agreements

• Protocol “Attachment”

– Two distinct elements:

• Section 1: Directed at adherents subject to resolution regimes in FSB jurisdictions

• Section 2: Directed at adherents only if subject to certain insolvency laws in the United

States

6


– Section 1 and 2 commonalities:

• Cover the same kinds of agreements

– ISDA Master Agreements (also covered by 2014 Protocol)

– SFT Agreements (not covered by 2014 Protocol)

• Industry standard master agreements:

– Repurchase agreements (MRA, GMRA)

– Securities lending agreements (MSLA, GMSLA, OSLA, etc.)

– Other Agreements

• Subject to future publication of Other Agreements Annex (and adherence thereto)

• Amend only existing agreements between two adhering parties

• Affect the availability of certain termination and other rights in the context of resolution

and reorganization proceedings

• Are subject to certain opt-out mechanisms (creditor protections)

7


– Section 1 and 2 basic differences:

• Section 1: Choice of law provision

– Related to resolution proceedings in various FSB jurisdictions

– Applicable only in cross-border context

• Section 2: Override of certain cross-defaults

– Related to reorganization/resolution proceedings only in the United States

– Applicable irrespective of cross-border context

8


• Section 1

– Contractual recognition of resolution regime as though the ISDA

master or SFT agreement were governed by the law of the resolution

regime’s jurisdiction

• Default rights restricted accordingly

• Transfer limitations overridden accordingly

– Does not operate to override default rights triggered by event(s) other

than resolution

• Thus, if a default occurs as the result of failure to make payments or deliveries, for

example, Section 1 would not operate to stay any resulting termination rights

9


• Section 1

– Operates where an adherent becomes subject to certain resolution

regimes:

• Six FSB “Identified Regimes”

– United States (OLA/FDIA)

– United Kingdom (BRRD-based)

– Germany (BRRD-based)

– France (BRRD-based)

– Switzerland

– Japan

• Mechanism to extend coverage to other FSB (and GSIB home jurisdiction) resolution

regimes once finalized

– Such regimes (Protocol-eligible Regimes) must satisfy key restrictive conditions related to

creditor protections

– For example, stays of termination rights may generally not exceed two business days pending

successful resolution

10


– Section 1 Example: Large UK Banking Organization

• Subject to UK resolution proceedings

– Imposition of temporary stay on exercise of termination rights by counterparties under ISDA

master agreements

• Master agreements governed by UK law:

– U.K. stay enforceable without reference to conflicts of law principles

• Master agreements not governed by UK law:

– Master agreement governed by New York law with U.S. bank counterparty:

• Section 1 moots question of whether New York court would enforce the UK stay

• U.S. bank counterparty agrees contractually (upon adherence) to effectiveness of stay as

though master agreement were governed by UK law

• N.B.: New York court may have enforced UK stay in any case (on the basis of New York

conflicts of law principles)

11


• Section 2

– Operates most importantly where:

• Adherent has an affiliated credit enhancement provider (e.g., guarantor), and

• Affiliated credit enhancement provider becomes subject to:

– Reorganization under Chapter 11, or

– Resolution under FDIA (by FDIC)

– Overrides certain rights of adherent’s counterparty under cross-default

provisions (and certain transfer limitations) upon reorganization/

resolution of affiliated credit enhancement provider

• Temporary stay of cross-default rights (48 hours/One business day)

• Override of certain transfer restrictions (qualifying DIP financing or transfer orders)

– Significant creditor protection conditions must be satisfied

12


– Section 2 Example:

• Operating subsidiary of a large U.S. bank holding company

• Holding company guarantees operating subsidiary trades under ISDA master

agreements

• Holding company seeks protection under Chapter 11

• Section 2 operates, in effect:

– to stay temporarily counterparty’s cross-default rights against operating subsidiary, and

– to override certain transfer restrictions (related to qualifying DIP financing arrangements or

transfer orders)

13


– Section 2 also operates where affiliate of adhering party is not a credit

enhancement provider:

• “Specified Entity” (in ISDA master terms)

• Subject to:

– Chapter 7 liquidation

– Chapter 11 reorganization, or

– Resolution by FDIC under FDIA

– SPIC proceeding under Securities Investor Protection Act

• Overrides cross-default rights triggered solely by Specified Entity reorganization/

resolution

– Simple override – not limited to temporary stay

14


– Section 2 does not operate where:

• Insolvent affiliate is a credit enhancement provider, and is subject to Chapter 7 or

SIPC proceedings

– Since there is no reorganization or resolution (only liquidation), temporary stay would not serve

the same purpose

– Does not, in any case, operate to override termination rights triggered

by direct defaults

• Thus, in the example above, if the operating subsidiary itself were to file for

Chapter 11 protection or fail to make payments, Section 2 would not operate to stay

any resulting termination rights

15


• Section 2 vs. Section 1

– Function

• Section 1 eliminates doubt about cross-border enforceability of existing statutory

resolution or reorganization powers

• Section 2 introduces, via contract, powers that are absent from the Bankruptcy Code

and the FDIA

– Powers that reach affiliates of entity subject to Bankruptcy Code reorganization or FDIA

resolution

– Thus Section 2 partially bridges gap between:

• Reorganization powers under the Bankruptcy Code and the FDIA, and

• Greater powers of the orderly liquidation authority (OLA) created under Dodd-Frank

Act

– OLA applies only in cases of systemic threat

– OLA reaches affiliates of an entity subject to OLA proceedings

16


– Effectiveness

• Section 1: January 1, 2016

– 2015 Protocol has replaced Original Protocol between parties that have adhered to both

• Section 2: Not yet in effect

– 2015 Protocol (like Original Protocol) conditions effectiveness of Section 2 on adoption by U.S.

regulators of regulations requiring related amendments

– U.S. regulations related to Section 2 are expected to be proposed in the near future

• Together with proposal of U.S. regulations related to JMP (imposing obligations on Covered

Banking Organizations in the United States)

17

Jurisdictional Modular Protocol

• ISDA:

The operative provisions of the ISDA Jurisdictional Modular Protocol are aimed at

achieving an outcome substantially similar to the outcome under Section 1 of the ISDA

2015 Universal Protocol, which results in counterparties to financial institutions

consenting to be subject to and “opting in” to stays on or overrides of certain

termination rights under [special resolutions regimes], notwithstanding the governing

law of their agreements.

18

Jurisdictional Modular Protocol (cont.)

• Modularity: How Will the JMP Operate?

– ISDA:

[T]he operative provisions of the ISDA Jurisdictional Modular Protocol are being

developed to facilitate compliance with the specific legislative or regulatory

requirements in different jurisdictions.

– Dubbed “modular” because a separate set of provisions – a “module” –

will address requirements in each FSB jurisdiction

– Requirements will vary across FSB jurisdictions

• Thus each jurisdictional module of the JMP will be keyed to the respective FSB

jurisdiction’s requirements

– Timing of final requirements in different FSB jurisdictions will vary

• Thus availability of different JMP jurisdictional modules will vary

– Adherence by module

• Not “universal” (in contrast to the 2015 Protocol)

19


– ISDA:

FSB members have committed to issue regulations that would require certain

regulated financial institutions to ensure that their counterparties opt in to [various

national resolution regimes], notwithstanding the governing law of agreements.

– Related legislation and regulations

• U.K. regulations finalized

– Phased-in compliance (starting June 1, 2016, between banking organizations)

– Applicable to “BRRD undertakings” under U.K. resolution regime

– Covering “third-country law financial arrangements”

• German legislation finalized

– Effective January 1, 2016

– Applicable to “institutions and group entities” under German resolution regime

– Covering “financial contracts”

• Swiss law

• U.S. proposed rules expected Q1 2016 (?)

20


• Adherents: Which Parties Will the JMP Affect?

– JMP adherents to a given jurisdictional module:

• Covered Banking Organizations directly subject to that jurisdiction’s requirements

• Counterparties of such Covered Banking Organizations

– Covered Banking Organizations will be determined differently in each

FSB jurisdiction

• For example, compare U.K. “BRRD undertakings” to German “institutions and group

entities”

21


• Transaction Coverage: Which Transactions Will Be Subject

to the JMP?

– Coverage for each jurisdictional module will depend principally on the

relevant jurisdiction’s final requirements

• For example, compare U.K. “third-country law financial arrangements” to German

“financial contracts”

• In any case, JMP likely to address only existing agreements

– Existing agreements would be amended by JMP

– New agreements would need to include required provisions directly

• Potential for incorporation of JMP modules “by reference”

22


– However, there is potential for JMP modules to exceed express

requirements in respective jurisdictions

• JMP modules may amend existing transactions under a covered agreement

(retroactive application) even if respective requirements target only new transactions

(prospective application)

• It remains to be determined whether (or to what degree) Counterparties are able to

adhere in respect of some but not all Covered Banking Organizations in a given

jurisdiction

23


• Timing: When Will the JMP Be Published?

– ISDA:

Working with buy-side members and trade associations, ISDA will publish the

separate Protocol [in 2016] for those firms that choose to use it.

24

New ISDA Resolution Stay Protocols

Discussion

25

Original Protocol Adherents (G-18)

Bank of America Bank of Tokyo-Mitsubishi

Barclays BNP Paribas

Citigroup Credit Agricole

Credit Suisse Deutsche Bank

Goldman Sachs HSBC

JPMorgan Chase Mizuho Financial Group

Morgan Stanley Nomura

Royal Bank of Scotland Société Générale

Sumitomo Mitsui Financial Group UBS

Additional 2015 Protocol Adherents (initial)

ING Bank Unicredit

Wells Fargo

26

Other GSIBs

Agricultural Bank of China Bank of China

Bank of New York Mellon China Construction Bank

BPCE Group Industrial and Commercial Bank of China

Nordea Santander

State Street

27

Contact

• Miki Navazio

Partner

[email protected]

+1 212 839 5310

• William Shirley

Counsel

[email protected]

+1 212 839 5965

28

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