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ISDA publishes expanded replacement Stay Resolution Protocol

ISDA publishes expanded replacement Stay Resolution Protocol
  • United Kingdom
  • Financial services


The International Swaps and Derivatives Association (ISDA) published a revised Stay Resolution Protocol on 4 November 2015. The ISDA 2015 Universal Resolution Stay Protocol (the 2015 Universal Protocol) has replaced the previous ISDA 2014 Resolution Stay Protocol, effective 1 January 2016.

The Stay Resolution Protocol ensures that cross-border derivatives and securities finance transactions are subject to statutory stays on cross-default and early termination rights in the event a bank counterparty enters into resolution. Statutory stays are a key feature of certain existing and forthcoming special resolution regimes designed to address the too-big-to-fail issue by providing regulators with adequate time to facilitate an orderly resolution of a troubled bank.

Changes to the Stay Resolution Protocol

The 2015 Universal Protocol contains a new Securities Financing Transaction Annex that extends the scope of the initial version of the protocol to cover transactions entered pursuant to securities financing master agreements. The new Securities Finance Transaction Annex was developed jointly by ISDA, the Securities Industry and Financial Markets Association (SIFMA), International Capital Markets Association (ICMA) and International Securities Lending Association (ISLA).

In addition to the changes to the provisions protocol it was also announced that four additional global systemically important banks (G-SIBs) have adhered to the new 2015 Universal Protocol.

Buy-side perspective

Many buy-side firms have expressed concerns that changes to derivative contracts may result in the loss of a right to terminate transactions with bank counterparties which enter resolution. Buy-side firms often owe a fiduciary duty to their clients that prevents them voluntarily signing away advantageous contractual rights. Given these concerns, the contractual framework that is proposed for adherence by the buy-side is different to that which banks will be compelled to adhere.  

The 2015 Universal Protocol was not developed with the expectation of adherence buy-side institutions. Although buy-side firms are free to adhere to the 2015 Universal Protocol if they wish, they should consult with regulators and/or take legal advice before doing so.

Regulators are expected to compel buy-side counterparties of G-SIBs to adhere to an alternative framework, under applicable regulations over the course of 2016. It is contemplated that the buy-side will adhere to the proposed ISDA Resolution Stay Jurisdictional Modular Protocol (the 2015 Jurisdictional Modular Protocol) which is currently being developed by an ISDA working group. The 2015 Jurisdictional Modular Protocol will facilitate compliance with the specific legislative or regulatory requirements applicable in different jurisdictions.

Regulations requiring financial contracts to incorporate contractual stays are expected to be implemented in early 2016. ISDA will only be in a position to finalise each jurisdictional module following final publication of rules of the relevant jurisdiction. In the UK, the Prudential Regulation Authority published its final rules in November 2015.

Other banks and building societies

Regulators are expected to oblige banks outside the G-SIBs (but subject to national resolution regimes) to adhere to a form of Stay Resolution Protocol prior to June 2016 as a condition of continuing to enter transactions governed by trading agreements.