February 4, 2016 New ISDA Resolution Stay Protocols Presented by Miki Navazio, Partner, Sidley Austin LLP
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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
2015 Protocol (cont.) 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
Jurisdictional Modular Protocol (cont.) 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
Jurisdictional Modular Protocol (cont.) 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
Jurisdictional Modular Protocol (cont.) 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
Jurisdictional Modular Protocol (cont.) 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
Jurisdictional Modular Protocol (cont.) 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 Barclays Citigroup Credit Suisse Goldman Sachs JPMorgan Chase Morgan Stanley Royal Bank of Scotland Sumitomo Mitsui Financial Group Bank of Tokyo-Mitsubishi BNP Paribas Credit Agricole Deutsche Bank HSBC Mizuho Financial Group Nomura Société Générale UBS Additional 2015 Protocol Adherents (initial) ING Bank Unicredit Wells Fargo 26
Other GSIBs Agricultural Bank of China Bank of New York Mellon BPCE Group Nordea Bank of China China Construction Bank Industrial and Commercial Bank of China Santander State Street 27
Contact Miki Navazio Partner mnavazio@sidley.com +1 212 839 5310 William Shirley Counsel wshirley@sidley.com +1 212 839 5965 28
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