Earlier this year, ISDA created and 18 major banks supported a change to existing and future swaps contracts to protect their validity in the case of a bank failure. This legal change is intended to foster a more orderly future unwind process for a failed bank and reduce the need for future bank bailouts. Previously, derivatives contracts were exempt from the "automatic stay" provision of the US bankruptcy code, rendering them terminable in the case of a bank failure. Today's rules issued by the Fed and OCC were minor implementing changes, intended to support the broad contract change.
U.S. bank regulators on Tuesday issued a rule to allow a stay in terminating derivative contracts if a bank lands in trouble, a provision needed to help them wind down failed banks without causing market mayhem. The rule by the Federal Reserve and the Office of the Comptroller of the Currency reflected changes to the standard contract made by the International Swaps and Derivatives Association (ISDA) and 18 major banks. The rule is a technical change to make sure that existing requirements for bank capital and liquidity are not affected by the change in derivative contracts, the regulators said.