In a new consultation paper, global policymakers continue to grapple with the challenge of how to handle the possible failure of a large, global financial firm, involving multiple countries, and regulatory regimes.
The Financial Stability Board (FSB) launched a new public consultation Monday on a set of proposals designed to remove certain impediments to possible cross-border resolution. It proposes a set of policy measures and guidance including policies that jurisdictions should consider including in their regulatory frameworks to facilitate effective cross-border resolution; and, contractual approaches to cross-border recognition in particular cases where this is a critical prerequisite for an orderly resolution (temporary restrictions on the early termination and cross-default rights in financial contracts; and, the ‘bail-in’ of debt instruments).
The proposals follow a commitment made by the G20 at the St. Petersburg Summit in 2013 to work at removing obstacles to cross-border resolution. And, to that end, the G20 asked the FSB to develop policy proposals on enhancing legal certainty in these sorts of situations.
The FSB notes that its proposals come alongside important industry efforts, including work by the International Swaps and Derivatives Association, Inc. (ISDA) on a protocol that deals with the enforceability of most over-the-counter (OTC) bilateral derivatives contracts. The FSB says that it is looking forward to the completion of this work over the coming weeks, with an initial set of global systemically important banks (G-SIBs) and other large firms adhering to the new ISDA protocol by the time of the upcoming Brisbane Summit.
“The finalization of the protocol and its broad adoption will be an important step towards addressing the risk that resolution triggers a cascade of termination events in derivatives contracts that lead to disruption in the wider market and undermine the stability measures that the authorities are taking,” the FSB says. “Together with the FSB’s proposed policy measures they will enhance the predictability and likely success of executing a resolution of a cross-border institution, thereby improving systemic stability and moving the international community ever closer to ending ‘too big to fail’.”
The FSB says that its members have given their commitment to support this process and will seek to provide for the necessary regulatory action so that derivatives and similar financial contracts entered into by G-SIBs and other firms with significant derivatives exposures include appropriate contractual language that gives effect to stays in resolution on a cross-border basis by the end of 2015.