Open from November 12, 2014
Closed on November 2, 2015
**IMPORTANT UPDATE on the ISDA 2014 Resolution Stay Protocol:** This protocol is now closed and per the terms of the protocol agreement you are no longer able to submit an adherence letter for this protocol. This Protocol has been replaced with the ISDA 2015 Universal Resolution Stay Protocol.
The International Swaps and Derivatives Association, Inc. (ISDA) has published the ISDA 2014 Resolution Stay Protocol (Protocol) which enables parties to amend the terms of their Protocol Covered Agreement to contractually recognize the cross-border application of special resolution regimes applicable to certain financial companies and support the resolution of certain financial companies under the United States Bankruptcy Code.
The Protocol was developed by a working group of ISDA member institutions (including representatives from buy-side and sell-side institutions). It is a major component of a regulatory and industry initiative to address the too-big-to-fail issue by improving the effectiveness of cross-border resolution actions against a large bank. For more information on the background to the Protocol see link to the Background Note and the Press Release.
Please refer to the “Frequently Asked Questions” below for more information on the background and substance of the Protocol.
The Protocol is open to ISDA members and non-members. Parties will pay a one-time fee of $500 to ISDA to adhere to the Protocol. There is no cut-off date to this Protocol. ISDA does, however, reserve the right to designate a cut-off date by giving 30 days’ notice on this site.
Note that the Protocol is open to ISDA members and non-members, however, the first phase is expected to involve adherence by 18 major banks and certain of their subsidiaries and affiliates. They will adhere to the protocol on a voluntary basis during November 2014. As the need for adoption by other institutions will likely depend upon the scope of regulations yet to be issued, ISDA may publish amendments to the Protocol to reflect these regulations in due course. The mechanics of such amendments, in particular as they relate to parties that have already adhered to the Protocol, will be discussed at the relevant time.
NOTE THAT THE PROTOCOL IS CURRENTLY BEING AMENDED AND WILL BE RELAUNCHED IN NOVEMBER. IT IS NOT EXPECTED THAT ANY PARTIES WILL ADHERE UNTIL THE NEW PROTOCOL IS LAUNCHED. ANY PARTY WISHING TO ADHERE SHOULD CONTACT PROTOCOLMANAGEMENT@ISDA.ORG BEFORE SUBMITTING AN ADHERENCE LETTER.
Pursuant to Section 1(b) of the ISDA 2014 Resolution Stay Protocol, ISDA is designating a Cut-off Date under this Protocol of November 2, 2015. After this date, ISDA will not accept any further Adherence Letters to the ISDA 2014 Resolution Stay Protocol. Existing adherence letters and amendments made by the terms of this Protocol are not impacted by this designation.
NOTE: Adherence letters will only be processed on business days and therefore parties should submit their adherence letters taking this into account.
CLICK HERE FOR A STEP BY STEP GUIDE ON HOW TO ADHERE TO AN ISDA PROTOCOL.
ISDA has prepared this list of frequently asked questions to assist in your consideration of the ISDA 2014 RESOLUTION STAY PROTOCOL (the Protocol).
THESE FREQUENTLY ASKED QUESTIONS DO NOT PURPORT TO BE AND SHOULD NOT BE CONSIDERED A GUIDE TO OR AN EXPLANATION OF ALL RELEVANT ISSUES OR CONSIDERATIONS IN CONNECTION WITH THE PROTOCOL. PARTIES SHOULD CONSULT WITH THEIR LEGAL ADVISERS AND ANY OTHER ADVISER THEY DEEM APPROPRIATE PRIOR TO USING OR ADHERING TO THE PROTOCOL. ISDA ASSUMES NO RESPONSIBILITY FOR ANY USE TO WHICH ANY OF ITS DOCUMENTATION OR OTHER DOCUMENTATION MAY BE PUT.
These FAQs address questions under the following general headings:
The Protocol was developed by a working group of ISDA member institutions (including representatives from buy-side and sell-side institutions), in coordination with the Financial Stability Board (FSB). It is a major component of a regulatory and industry initiative to address the “too big to fail” issue.
A key challenge in developing effective resolution strategies for some SIFIs has been the effect of parties to OTC swaps exercising close-out rights and cross-default rights triggered by a SIFI’s financial distress or entry into resolution proceedings. New statutory regimes developed in response to the financial crisis of 2008, called “special resolution regimes” (SRRs), generally stay or override the exercise of certain direct defaults and cross defaults that arise in the context of resolution, provided that certain creditor protections are satisfied. However, the enforceability of such stays in foreign jurisdictions is not certain, and recognition in foreign resolution actions is permissive, not mandatory.
At the 2013 G-20 summit, the leaders of the G-20 signed a declaration committing to make progress towards ending too big to fail and implementing the guiding principles set forth in the FSB’s Key Attributes of Effective Resolution Regimes. In November 2013, regulatory authorities from Germany, Japan, Switzerland, the United Kingdom and the United States of America requested that ISDA revise standard ISDA Master Agreement documentation to eliminate close-out rights triggered by the resolution of a SIFI. In response to this request, ISDA has developed the Protocol to provide a contractual approach to cross-border recognition until comprehensive statutory regimes are adopted. As legislation emerges in response to this issue, ISDA will keep our membership informed, while also developing any additional required documentation amendments in a timely fashion.
1. WHAT DOES THE PROTOCOL DO?
The Protocol enables parties to amend the terms of their ISDA Master Agreements and any related credit support arrangements between, or provided for the benefit of, Adhering Parties to the Protocol (each such credit support arrangement, a Credit Enhancement and, collectively, with such ISDA Master Agreements, the Protocol Covered Agreements) by opting in to resolution regimes that stay and, in certain cases, override certain cross-default and direct-default rights included in derivatives contracts that arise upon the entry of a bank, or certain of its affiliated entities, into receivership, insolvency, liquidation, resolution or similar proceedings. In addition, the Protocol introduces similar stays and overrides under certain US insolvency regimes where none exist. In short, it prevents derivatives counterparties that have adhered to the Protocol from immediately terminating outstanding derivatives contracts, giving regulators time to resolve the troubled institution in an orderly way.
Section 1: SRR Provisions
Under Section 1 of the Protocol, Adhering Parties agree to “opt in” to the resolution regime applicable to their counterparty, and each “related entity” of their counterparty, if the counterparty or related entity becomes subject to proceedings under certain resolution regimes. As a result, a party’s ability to exercise close-out rights is subject to the resolution regime applicable to the entity in resolution, including any stays and overrides on the exercise of direct defaults or cross defaults. Related entities include Credit Support Providers, Specified Entities and certain parent entities. Section 1 intends to achieve parity of treatment between adherents to the Protocol and parties that are transacting under agreements that are governed by the laws of the jurisdiction of the applicable resolution regime.
Section 1 of the Protocol applies with respect to the resolution regimes in France, Germany, Japan, Switzerland, the United Kingdom and the United States of America (the Home Authorities). Section 1 can apply in other FSB jurisdictions, provided that any such resolution regime satisfies the requirements set forth in the Protocol.
The Section 1 SRR provisions will become effective between the initial Adhering Parties on January 1, 2015. Voluntary adherence by certain SIFIs and other banking groups is expected from November of this year and throughout 2015, while broader market adherence to the Protocol is expected only as a result of related regulations, which are expected in 2015, with effectiveness in 2016 or possibly 2017.
Section 2: US Insolvency Proceedings Provisions
US regulators expect to introduce regulations in 2015 that will require counterparties of certain banking groups to give up certain cross-default and direct-default rights arising when an affiliate (including a parent) becomes subject to proceedings under “ordinary” US insolvency regimes. Specifically, because the US Bankruptcy Code and the Federal Deposit Insurance Act (FDIA) do not provide for a stay on the exercise of cross-default rights statutorily, the Protocol must provide one contractually. Broadly speaking, the provisions of Section 2 are modelled on the Orderly Liquidation Authority (OLA). Under Section 2, Specified Entity defaults are overridden entirely; however, certain conditions need to be satisfied in order to override Credit Support Provider defaults.
The Section 2 US insolvency proceedings provisions will become effective as to all adherents, whenever they adhere, only on the date the related US regulations become effective and compliance therewith is required. Voluntary adherence by certain SIFIs and other banking groups is expected from November of this year and throughout 2015, while broader market adherence is expected only as a result of related regulations, which are expected in 2015, with effectiveness in 2016 or possibly 2017.
2. WHAT AGREEMENTS DOES THE PROTOCOL COVER?
The Protocol is limited to ISDA Master Agreements and Credit Enhancements. It amends any existing ISDA Master Agreements and Credit Enhancements, unless the parties agree bilaterally that the Protocol does not apply.
Future ISDA Master Agreements and Credit Enhancements will not be amended unless the parties agree bilaterally to make them subject to the terms of the Protocol. To do so, parties should consider including language that incorporates the Protocol by reference. Sample language is provided in Section 4 below.
In order for Credit Enhancements to be amended by the Protocol, each affiliate of a party that is a Credit Support Provider of an ISDA Master Agreement subject to the Protocol, or that otherwise provides a Credit Enhancement as defined under the Protocol, would need to adhere to the Protocol.
Further, where ISDA Master Agreements are secured or guaranteed by a third party and consent or other action by such third party is required for amendments to be made to such third-party agreements, such third-party agreements are not Protocol Covered Agreements unless such consent or other action has been obtained. An Adhering Party whose obligations under such agreements are so secured or guaranteed undertakes to each other Adhering Party with which it has entered into such agreements that it has procured such consent or other action by the third party and will provide proof thereof upon demand by such other Adhering Party. If the third party providing such security is also an Adhering Party, the required consent is deemed to have been given.
3. HOW TO SIGN UP TO THE PROTOCOL
Is there a closing date for adherence to the Protocol?
There is currently no cut-off date for adherence, but ISDA reserves the right to designate a closing date of the Protocol by giving 30 days’ notice on this site.
How do I submit my Adherence Letter?
Each entity executing an Adherence Letter will access the Protocol Management section of the ISDA website at www.isda.org to enter information online that is required to generate its form of Adherence Letter. Either by directly downloading the populated Adherence Letter from the Protocol Management system or upon receipt via e-mail of the populated Adherence Letter, the entity must print, sign and upload the signed Adherence Letter as a PDF (portable document format) attachment into the Protocol Management system. Once the signed Adherence Letter has been approved and accepted by ISDA, the Protocol adherent will receive an e-mail confirmation of the Protocol adherent’s adherence to the Protocol.
Is adherence public?
Yes. A list of Adhering Parties will be published on ISDA’s website.
Can entities that are not ISDA members sign up to the Protocol?
Yes. The Protocol is open to any entity. ISDA members and non-ISDA members alike adhere to the Protocol in the same way.
Can entities established outside the Home Authority jurisdictions sign up to the Protocol?
Yes. The Protocol is open to any entity to adhere in the same way.
What is a conformed copy?
A conformed copy of the Adherence Letter means that the name of the authorized signatory (for example, Patricia Smith) is typed rather than having Patricia Smith’s actual signature on the letter. ISDA only posts on its website the conformed copy of all Adherence Letters. A conformed copy of each Adherence Letter containing, in place of each signature, the printed or typewritten name of each signatory will be published by ISDA so that it may be viewed by all Protocol Participants.
Who is an authorized signatory?
An authorized signatory to the Adherence Letter is an individual who has the legal authority to bind the adhering institution.
Can I change the text of the Adherence Letter?
No. The Adherence Letter must be in the same format as the form of letter published in the Protocol and generated by the Protocol Management webpage.
Are there any costs to adhere to the Protocol?
Yes. Each party adhering to the Protocol must submit a one-time fee of US $500 to ISDA at or before the submission of its Adherence Letter. Adhering Parties should review the documents to be amended (i.e., the Protocol Covered Agreements) to identify the entity that signed the documents, and the capacity in which such entity signed the documents, to determine which entity submits the Adherence Letter. For example, if a parent company/agent has signed the agreement on behalf of all entities within the group, then only the parent company/agent needs to adhere. However, if each group entity has its own agreement in place which it has itself executed as principal, then each such entity would need to adhere.
Each individual legal entity is considered a separate Adhering Party for this purpose and would need to pay the adherence fee, except that an Investment/Asset Manager/Agent that adheres on behalf of one or more underlying funds or principals for whom it has entered into an ISDA Master Agreement or Credit Enhancement, using a single Adherence Letter, would only pay a single adherence fee for that Adherence Letter.
Can I revoke my participation in the Protocol?
Once an Adherence Letter has been accepted by ISDA, an Adhering Party is bound by all amendments with other parties that have already adhered to the Protocol or, subject to the discussion below, that adhere before a designation of the Annual Revocation Date.
An Adhering Party may, at any time during the period from October 1 to October 31 of a calendar year, deliver to ISDA a notice specifying the Annual Revocation Date as its cut-off date in respect of amendments with future Adhering Parties. The effect of such a letter will be to withdraw adherence for future Adhering Parties as of December 31 in that calendar year. Although amendments already made will not be revoked, any subsequent adherence by new Adhering Parties after the designated Annual Revocation Date will not bind the party that has submitted a Revocation Notice.
You can, however, bilaterally agree to amend your ISDA Master Agreement with your counterparty (the other Adhering Party), and any such subsequent amendments will supersede those made by the Protocol to the extent that they are inconsistent.
The Protocol contains specific opt-out provisions that are described below in more detail.
SPECIAL CONSIDERATIONS FOR INVESTMENT/ASSET MANAGERS
The Protocol is open to anyone to adhere; however, buy-side firms are not expected by regulators to voluntarily adhere prior to regulatory requirements. Should you choose to adhere, the following special considerations for adherence are set out below.
What if I am an investment or asset manager, and not all of my discretionary management agreements permit me to amend my client’s agreements?
If you are an investment or asset manager and act on behalf of multiple funds (each referred to here as a “client”), you may sign the Adherence Letter using one of the options below. If the elections in section 1 of the Adherence Letter vary between your clients, you should use the first method and adhere separately for each client individually or adhere for each group of clients with identical elections named/identified in the Adherence Letter. Alternatively, if you have the required authority, you may adhere with the same elections for all clients and then bilaterally agree any relevant variations with your counterparties.
If you have authority to adhere on behalf of all of your clients but do not wish to identify them on the Adherence Letter, you may do so by selecting “Investment/Asset Manager/or other agent on behalf of a fund/multiple funds/or other principal” from the dropdown under “Adherence Type” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals listed in the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) and another Adhering Party” will be provided for you.
If you do not have authority from all your clients (or do have authority from all your clients and wish to identify them), you can adhere on behalf of those clients whose permission you have by selecting “Investment/Asset Manager/or other agent on behalf of some but not all funds/or other principal it represents” and naming the Investment/Asset Manager/Agent. Standard language “acting on behalf of the funds, accounts or other principals listed in the appendix to this Adherence Letter in relation to the relevant Agreement (or other agreement which deems an Agreement to have been created) between it (as agent) on behalf of such fund, account or other principal and another Adhering Party” will be provided for you. You must then list the fund name(s) by either naming each in the field provided (“Name of Fund”) or selecting “Add more than 10 funds” and downloading a list of these funds.
The appendix to your Adherence Letter can either name the clients, or identify them with a unique identifier which will be known and recognized by all other Adhering Parties with which the relevant clients have entered into transactions. The appendix to your letter will be posted on the ISDA website with your Adherence Letter listing the clients or, if you have more than ten clients, we will add a link to a document listing these clients.
If you are using the second method above, any Protocol Covered Agreements which you enter into on behalf of clients that are not listed in your Adherence Letter(s) will not be covered by the Protocol. If you wish to implement the changes contained in the Protocol in those Protocol Covered Agreements, then you and the relevant counterparty would need to enter into a bilateral agreement to amend those Protocol Covered Agreements to include those changes.
If (a) you do not have authority from any of your clients or (b) you have authority from some clients only but you are not able to disclose such clients whether by name or a unique identifier, you cannot adhere to the Protocol on behalf of any such clients. In this case, you will need to enter into a bilateral amendment agreement with each relevant counterparty listing the clients whose Protocol Covered Agreement(s) with that counterparty will be amended by incorporating the amendments made by the Protocol.
If you wish to adhere on behalf of clients, you must ensure that you have the authority to do so from all clients on whose behalf you enter into transactions covered by the Protocol.
If you add a client to an umbrella master agreement after the date you adhere to the Protocol on behalf of your clients (whether that client was an existing client on, or a client acquired after, the Implementation Date) that client will be added to that umbrella master agreement as amended by the Protocol, unless otherwise agreed.
4. SPECIFIC QUESTIONS ON THE AMENDMENT LANGUAGE
Adherence to the Protocol
Am I required to adhere to the Protocol?
No. Adherence to the Protocol is voluntary.
I understand that only some entities are going to adhere to the Protocol on its date of publication – is that right? Who is expected to adhere on the publication date?
The Protocol is open to anyone to adhere. However, the first phase is expected to involve 18 major banks and certain of their affiliates. They are expected to adhere to the Protocol on a voluntary basis in November 2014.
What about other banks?
We understand that regulators will encourage other banks to adhere to the Protocol during 2015.
Can clearing houses and sovereigns adhere to the Protocol?
Clearing houses and sovereigns are permitted to adhere to the Protocol with respect to transactions documented under ISDA Master Agreements; however, clearing houses, in their capacities as central counterparties, are typically not parties to ISDA Master Agreements.
When are other entities, including the buy-side, expected to adhere?
The Protocol is open to anyone to adhere; however, buy-side firms are not expected by regulators to adhere prior to regulatory requirements. FSB members have committed to encourage broader adoption of the Protocol by imposing new regulations in their jurisdictions throughout 2015, and it is expected that additional market participants will adhere in response to those regulations.
This document says above that the Protocol was developed by a working group of ISDA member institutions. Which entities were involved in this process?
The working group consisted of sell-side firms, buy-side firms and representatives from several sell-side-oriented trade associations and buy-side-oriented trade associations. The working group held regular calls, during which all participants were invited to comment and discuss their concerns. Several in-person meetings were facilitated by ISDA, including meetings between the dealer working members and trade associations and the regulators, and the buy-side members and trade associations and the regulators.
When will the Protocol become effective?
Section 1 of the Protocol, which addresses SRRs, will become effective between any two Adhering Parties that submit Adherence Letters to ISDA on January 1, 2015.
The provisions in Section 2, which address default rights related to US insolvency proceedings in respect of an affiliate, will become effective only upon the compliance date established under the relevant regulations issued by US regulators.
Will the Protocol apply to all of my ISDA Master Agreements and Credit Enhancements if I adhere or just certain of them? Can I specify which agreements the Protocol applies to?
If you adhere, the Protocol will apply to all ISDA Master Agreements between you and any other Adhering Party that are entered into on or prior to the date ISDA has received adherence letters from both you and the other Adhering Party (the Implementation Date). The Protocol will also apply with respect to Credit Enhancements entered into between Adhering Parties or provided for the benefit of an Adhering Party.
Parties may subject any ISDA Master Agreements entered into subsequent to the Implementation Date to the Protocol by using language that incorporates the Protocol by reference. For example, Adhering Parties could use the following language to reflect that their ISDA Master Agreement, or relevant credit support document, is subject to the Protocol:
The terms of the ISDA 2014 Resolution Stay Protocol are incorporated into and form part of this Agreement, and this Agreement shall be deemed a [Covered Master Agreement] [Covered Credit Enhancement] for purposes thereof. In the event of any inconsistencies between this Agreement and the Protocol, the Protocol will prevail.
The Protocol will also apply to “deemed” ISDA Master Agreements between you and any other Adhering Party that are entered into pursuant to long-form confirmations and that are either (i) outstanding as of the Implementation Date or (ii) entered into any time after the Implementation Date. Upon the Adhering Parties’ entry into an ISDA Master Agreement with respect to any such confirmation, the Adhering Parties can opt to incorporate the Protocol by reference by using the incorporation language set forth above or similar language.
Can I adhere to only part of the Protocol?
No. Adhering Parties must adhere to the Protocol in its entirety.
Section 1: SRR Provisions
Why does Section 1 cover stays against direct counterparties and not just cross-defaults to failing parent entities?
Section 1 aims to achieve parity of treatment between parties that opt in to an SRR and parties that are subject to the laws of the jurisdiction of the SRR because it is the governing law of their ISDA Master Agreement or if it is otherwise applicable. As a result, the Protocol extends to direct-default rights, as well as cross-default rights, where such rights are stayed or overridden under the applicable SRR.
What happens if the resolution is successful?
If a resolution action is successful as determined by the provisions of the applicable SRR within the prescribed time frame and derivatives counterparties face a presumably creditworthy entity as a result (either a new entity or the recapitalised original entity), then Adhering Parties would no longer have the right to terminate outstanding derivatives transactions to the same extent as a counterparty already subject to such SRR.
What happens if the resolution isn’t successful?
If the bank isn’t resolved within a set time frame as determined by the provisions of the applicable SRR – typically by the end of the next business day or the business day after that – Adhering Parties can exercise cross-default and termination clauses to the same extent as a counterparty already subject to such SRR.
Doesn’t the Dodd-Frank Act and BRRD do this already? Why do we need a Protocol?
Yes. Title II of the Dodd-Frank Act establishes OLA, which imposes stays and overrides of direct-default and cross-default rights in the event of a resolution. The European Union Bank Recovery and Resolution Directive (BRRD) does something similar.
However, an issue arises with respect to cross-border trades, where a certain national resolution regime may not be recognized in a foreign jurisdiction by a foreign court. For instance, a UK bank holding company enters into resolution, and its US subsidiary has outstanding derivatives trades in place with a US counterparty under New York law. The stay and overrides under BRRD may not be recognized under New York law in a New York court, potentially enabling the US counterparty to exercise cross-default clauses and terminate the outstanding trades with the subsidiary. Adherence to the Protocol would, in this instance, mean that the US counterparty had opted in to UK-implementation of BRRD – and would be bound by the requirements thereunder.
What does it mean to “opt in” to a regime?
Under Section 1 of the Protocol, Adhering Parties opt in to certain resolution regimes. In the example in the previous question, adherence to the Protocol would mean the US counterparty had opted in to UK-implementation of BRRD, making it subject to a stay, to the extent provided under BRRD, on its derivatives with the US subsidiary in the event the UK parent company enters into resolution proceedings.
What regimes am I opting in to?
Under Section 1 of the Protocol, you will opt in to the SRRs that are applicable to your direct counterparty and each of its related entities, which includes affiliates that are Credit Support Providers or Specified Entities and the ultimate parent entity organized under the relevant SRR. You will opt in to the resolution regimes in the Home Authority jurisdictions (i.e., France, Germany, Japan, Switzerland, the United Kingdom and the United States of America).
You will also be opting in to the resolution regimes of other FSB jurisdictions, but only if they meet certain creditor protection safeguards (e.g., a stay period of no more than two business days and protection of netting). Such creditor protection safeguards are tested both at the time a resolution regime is designated as eligible for opt-in under the Protocol and upon its implementation during a resolution proceeding.
Am I opting in to BRRD?
BRRD provides a framework for bank recovery and resolution that will be implemented by each individual EU member state through its own resolution regime. So, you are not opting in to BRRD; rather, you are opting in to each individual EU member state’s implementation of BRRD, through its resolution regime, assuming such resolution regime is in a Home Authority jurisdiction or another FSB jurisdiction that satisfies the criteria for inclusion as an SRR under the Protocol.
What about in cases where resolution regimes don’t yet exist? Are counterparties expected to opt in to those regimes in advance of the rules being finalised?
As mentioned above, the resolution regimes of the Home Authorities pre-qualify for inclusion in the Protocol, subject to certain limited conditions. Resolution regimes of other FSB jurisdictions would only qualify if they meet certain creditor protection safeguards (e.g., a stay period of no more than two business days and protection of netting) and, in those circumstances, a party that has adhered to the Protocol is considered to have opted in to that new regime.
What if regulations aren’t put in place?
If an Adhering Party does not become subject to regulation that has the effect of restricting the ability of its counterparties to exercise certain default rights against it during resolution in (i) one of the six Home Authority regimes by January 1, 2018 or (ii) a qualifying FSB jurisdiction regime by the later of January 1, 2018 or 18 months following the initial effective date of that FSB regime, then any other Adhering Party can opt out of Section 1 with respect to a resolution of such Adhering Party under such regime or regimes.
What if a resolution regime is amended to make it worse for creditors – am I still bound by it?
Section 1 includes several opt-out provisions, including a provision that permits an Adhering Party to choose to opt out of future resolutions under that SRR if that SRR is amended in a way that negatively affects the enforceability of certain creditors’ default rights.
Are cleared transactions subject to Section 1?
Cleared transactions that are documented under an ISDA Master Agreement are subject to Section 1 and are not treated any differently than any other OTC derivative transaction that is within the scope of Section 1.
What if adhering to the protocol violates the rules of a clearinghouse of which I am a member or which clears my transactions?
The terms of the Protocol do not apply to a Protocol Covered Agreement if the terms of the Protocol violate the rules of an applicable clearinghouse.
By adhering to the Protocol, what is the maximum length of stay that I can be subject to under an SRR?
It depends. Under Section 1, Adhering Parties essentially opt in to the foreign resolution regimes of their counterparties and their counterparties’ related entities. Some of those regimes impose a 48-hour stay; others implement a stay until the end of the following business day. Where the resolution is successful, the stay may become permanent.
If my counterparty or a related entity enters resolution, can I suspend performance?
When a party opts in to an SRR, its rights to take actions with respect to a particular agreement, including to suspend performance as a result of an event of default or a potential event of default, are governed by that SRR. For example, in the United States, a counterparty to an institution subject to proceedings under OLA can suspend performance during the one-business-day stay period; however, a counterparty to a subsidiary or affiliate of the party in resolution would be required to continue to perform. Parties opting in to OLA via the Protocol would generally be able (or not), upon a resolution of their counterparty or an affiliate of their counterparty under OLA, to suspend performance in accordance with these rules.
What if I have specified that Automatic Early Termination (AET) applies to my counterparty to an ISDA Master Agreement?
Under the Protocol, the automatic termination of transactions under an ISDA Master Agreement is treated the same as the exercise of any default right that would terminate a transaction. Therefore, the opt in under Section 1 and the overrides in Section 2 would both apply to the operation of AET. In other words, if a party is stayed from exercising its default rights as a result of the Protocol, the operation of AET would also be stayed.
What happens under Section 1 if I enter resolution proceedings under a particular SRR and am required to transfer my Protocol Covered Agreement to a successor, but my Protocol Covered Agreement contains restrictions on such transfers?
Under Section 1, an Adhering Party’s ability to transfer a Protocol Covered Agreement is governed by the SRR that it has opted into. Although a Protocol Covered Agreement may include provisions that prohibit or restrict transfers to successors, if an entity becomes subject to resolution proceedings under a particular SRR, a transfer will be effective to the same extent that it would be if the Protocol Covered Agreement were governed by the laws of the jurisdiction of the SRR. In other qualifying FSB jurisdictions, unlike in the six Home Authority jurisdictions, this override of transfer restrictions will apply only if the exercise of authority under that regime complies with certain creditor safeguards.
Section 2: US Insolvency Proceedings Provisions
Why has Section 2 been included? Why isn’t the US Bankruptcy Code covered by Section 1?
The US Bankruptcy Code does not provide for statutory stays on the exercise of cross-default rights or the exercise of related default rights under swaps and other derivatives contracts, which means that there are no provisions for a counterparty to opt in to, as there would be under an SRR under Section 1. Similarly, the FDIA does not provide for a statutory stay on the exercise of cross-default rights. The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have identified this as a common obstacle to orderly resolution and have directed certain SIFIs, as part of their required resolution planning efforts under the Dodd-Frank Act, to address this issue.
As a result, Section 2 establishes a contractual limitation on the exercise of certain rights that would otherwise be triggered if an affiliate of the counterparty were to enter proceedings under certain US insolvency regimes, including Chapter 7 and Chapter 11 of the US Bankruptcy Code and the FDIA, subject to conditions designed to protect the interest of counterparties. For example, if the affiliate is a Credit Support Provider, the Protocol requires that the credit support be transferred to a newly-formed bridge company or third party, or alternatively that the claims under the credit support be elevated to priority status in the affiliate’s Chapter 11 proceedings. In addition, the Protocol requires that the direct counterparty continue to meet all of its payment and delivery obligations under the relevant ISDA Master Agreement.
When Section 2 becomes effective, will all of my ISDA Master Agreements and Credit Enhancements with all other Adhering Parties be subject to Section 2?
Your Protocol Covered Agreement with another Adhering Party will only become subject to Section 2 if the other party to the agreement is the kind of entity required by the US regulations described above to have its counterparties give up certain default rights. If the other party to your Protocol Covered Agreement is not subject to such US regulations, your agreements will not be subject to the terms of Section 2.
Why does Section 2 cover only cross defaults to a failing affiliate and certain direct defaults related to such failure?
The provisions of Section 2 are intended to support a “single point of entry”-style resolution (i.e., resolution with only a top-tier parent company entering proceedings, rather than a troubled operating company subsidiary entering proceedings) of a parent entity of a financial group pursuant to which the rights of creditors are preserved against their direct operating subsidiary counterparties. As a result, Section 2 generally only limits the exercise of default rights related to the entry of an affiliate of a direct counterparty into US insolvency proceedings. Direct default rights based on the insolvency of a direct counterparty are always exercisable, unless overridden by an SRR.
Isn’t this extending the reach of US bankruptcy laws?
No. Just as under the US Bankruptcy Code, Section 2 preserves a counterparty’s right to close out an ISDA Master Agreement if the other party enters into bankruptcy proceedings.
Does Section 2 override the US Bankruptcy Code safe harbors relating to close-out rights or my right to terminate based on a counterparty’s insolvency or failure to pay or perform?
No. Under Section 2, a counterparty can always close out an ISDA Master Agreement if the other party fails to pay it, fails to deliver margin to it or enters insolvency proceedings (other than an SRR that overrides such rights).
If an affiliate of my counterparty or a Credit Support Provider to my ISDA Master Agreement enters into US insolvency proceedings, can I suspend performance?
If an affiliate of your counterparty enters US insolvency proceedings or a Credit Support Provider enters into Chapter 11 proceedings, both parties to the relevant ISDA Master Agreement must continue to perform so long as the conditions set forth in Section 2 are satisfied.
How do the rights that are overridden in Section 2 compare to the rights that are overridden under OLA?
With respect to cross-default rights, Section 2 aims to track the application of section 210(c)(16) of the Dodd-Frank Act and the FDIC’s Final Rule implementing section 210(c)(16); however, there may be instances where Section 2 and OLA diverge with respect to the override of cross-default rights.
Section 2 does not attempt to track OLA’s provisions relating to the financial condition or receivership of a direct counterparty to an ISDA Master Agreement. Section 2 does not override such direct-default rights, although such rights may be stayed under OLA.
Under Section 2, can a Credit Support Provider that has entered insolvency proceedings in the United States opt to transfer the credit support to a successor, even if the credit support agreement contains restrictions on such transfers?
Section 2 allows a party in proceedings to transfer credit support with respect to an ISDA Master Agreement to a transferee. Section 2 overrides any restrictions on such transfer, assuming certain creditor protections are satisfied.
What happens if a Credit Support Provider enters proceedings under a regime other than Chapter 11 or FDIA (e.g., under SIPA or Chapter 7)?
Section 2 overrides default rights that arise in respect of a Credit Support Provider if the Credit Support Provider enters into proceedings under Chapter 11 or FDIA and certain conditions are satisfied. As a result, Section 2 does not override any default rights arising as a result of a Credit Support Provider’s entry into proceedings under other legal frameworks, including Chapter 7 and SIPA. However, Section 2 overrides Specified Entity cross defaults to an affiliate that is subject to proceedings under Chapter 7, Chapter 11, FDIA or SIPA.
Are cleared transactions subject to Section 2?
Just as under Section 1, cleared transactions that are documented under an ISDA Master Agreement are subject to Section 2, with certain exceptions to preserve the operation of provisions in documentation for client cleared transactions that provide for termination of the cleared client transaction in the event the clearing house terminates the corresponding transaction with the clearing member.
What if adhering to the protocol violates the rules of a clearinghouse of which I am a member or which clears my transactions?
Just as under Section 1, the terms of the Protocol do not apply to a Protocol Covered Agreement if the terms of the Protocol violate the rules of an applicable clearinghouse.
By adhering to the Protocol, what is the maximum length of stay that I can be subject to under US insolvency proceedings?
Under Section 2 of the Protocol, the stay generally lasts the longer of one business day or 48 hours following the commencement of proceedings. A stay may become permanent upon satisfaction of certain criteria.
Can I use ISDA Amend for this Protocol?
Not currently. As of the time of publication, ISDA Amend is not available for use in respect of this Protocol.
Does ISDA maintain a database of “opt-out” notices as provided under Section 4(b) of the Protocol?
No. Notices would need to be sent bilaterally to your counterparty in accordance with the terms of Section 4(b).