By   On September 20, 2017
Swap Termination Provisions

On September 1, 2017, the Federal Reserve Board adopted a rule (the “Rule”) that will require banks that are deemed “global systemically important banking organizations” (“GSIBs”) and the United States operations of foreign GSIBs to amend their hedging agreements and certain other agreements (known as “qualified financial contracts” or “QFCs”) to add limitations on the ability of the counterparties (“Counterparties”) to those agreements to exercise termination rights and cross-default rights against GSIBs.

In general, the limitations impose a 48-hour stay on the exercise of termination rights against GSIBs and prohibit QFCs from containing cross-default rights against the GSIB and its affiliates.

The Rule becomes affective 60 days after its publication in the Federal Register and has a phased-in compliance schedule that begins in January, 2019.

There are eight U.S. GSIBs: Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp. and Wells Fargo & Co. There are also a number of foreign GSIBs that have operations in the United States that also are covered by the rule.

In light of this rule Counterparties to QFCs should anticipate that their GSIB-counterparties will be approaching them over the next 15 months to take steps to amend their QFCs to comply with the Rule.

An ISDA protocol, the 2015 Universal Resolution Stay Protocol, addresses the concerns dealt with by the Rule. As a result, the Rule indicates that adherence to that 2015 Protocol will constitute compliance with the Rule.

For most Counterparties, there’s nothing to do about this now. However, when more details are needed, please feel free to get in touch with your contacts at Martin LLP.

For your reference, click here to see the Federal Reserve press release announcing the Rule and click here to see the Federal Register discussion of the rule.

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