In a change to current practice but consistent with the intent of the US Bankruptcy Code, a group of major banks have agreed to a standardized documentary revision that will honor the automatic stay as it applies to derivatives contracts in the case of a bank failure. While this is one step toward the solution, we believe many related issues need to be solved.
The International Swaps and Derivatives Association, Inc. (ISDA) today announced that 18 major global banks (G-18) have agreed to sign a new ISDA Resolution Stay Protocol, which has been developed in coordination with the Financial Stability Board to support cross-border resolution and reduce systemic risk. This represents a major step in strengthening systemic stability and reducing the risk that banks are considered ‘too big to fail’. The Protocol will impose a stay on cross-default and early termination rights within standard ISDA derivatives contracts between G-18 firms in the event one of them is subject to resolution action in its jurisdiction. The stay is intended to give regulators time to facilitate an orderly resolution of a troubled bank.