FSB Welcomes Initiative to Remove Cross-border Close-out Risk

The Financial Stability Board (FSB) has welcomed the announcement by the International Swaps and Derivatives Association (ISDA) of the agreement of a protocol to the ISDA Master Agreement as an important step to improve the effectiveness of cross-border resolution actions. Under the protocol, counterparties agree to the cross-border enforceability of temporary stays on early termination and cross-default rights in over-the-counter (OTC) bilateral derivatives contracts.

As part of this announcement, an initial set of 18 global systemically important banks (G-SIBs) and other large dealer banks have committed to execute the protocol by the time of the Brisbane G20 Summit in November. Once enacted, the protocol should help to reduce the risk that resolution of a bank with significant cross-border operations triggers a cascade of termination events in bilateral OTC derivatives contracts. This could lead to disruption in the wider market and undermine the measures that the authorities are taking to maintain financial stability and to prevent costs to the taxpayer.

The FSB has called on all G-SIBs and other firms with significant derivatives exposures to adhere to the protocol by the end of 2015 and ensure that the derivatives and similar financial contracts that they enter into include appropriate contractual language that gives effect to stays in resolution on a cross-border basis. FSB members have committed to support this adoption process through the necessary regulatory or supervisory action.

Mark Carney, chairman of the FSB, commented: “today’s announcement marks another important step towards completion of our comprehensive global reform agenda to end ‘too big to fail’. The global financial crisis exposed critical cross-border obstacles to resolution that contributed to substantial public funds being put at risk to save multiple private entities. When the protocol goes live in November, it will close off much of the cross-border close-out risk that statutory stays have not been able to eliminate because their reach is limited to national borders. This is a major achievement, by the industry. We now need to extend this process to other financial market participants, and to other financial contracts that pose cross-border close-out risk in resolution.”

With the adoption of the protocol by the top 18 dealer G-SIBs in November, over 90% of their OTC bilateral trading activity will be covered by stays of either a contractual or statutory nature.

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