|
|
Eighteen global banks have agreed to swaps contract changes designed to work with government rules for unwinding failed firms, a step that may help end the view that some financial companies are “too big to fail.”
Counterparties of banks involved in resolution proceedings will delay contract termination rights and collateral demands under the plan announced by the International Swaps and Derivatives Association (ISDA). The change is intended to give regulators more time to arrange orderly resolutions, ISDA said in a statement released in Washington on Saturday.
“This is a major industry initiative to address the too-big-to-fail issue and reduce systemic risk,” Scott O’Malia, ISDA’s chief executive officer, said in the statement. The agreement will “facilitate cross-border resolution efforts and reduce the risk of a disorderly wind-down,” he said.
Statement by ISDA: Major Banks Agree to Sign ISDA Resolution Stay Protocol
Global regulators are preparing to impose new restrictions on banks, asset managers and others who use swaps to help hedge risks and speculate on market moves.
The Federal Reserve and banking authorities around the world are developing new rules that would prevent banks from entering into swaps agreements with certain customers unless their contracts include measures to help protect the financial system in the event of a big bank’s failure, according to people familiar with the matter.
The rules would both cement and expand a voluntary agreement that 18 of the largest lenders in the U.S., Europe and Japan adopted. The planned rules would extend the reach of that agreement beyond banks to large asset managers, hedge funds and others that enter into swaps by barring big banks from striking deals that don’t include the targeted protections, these people said. The rules are expected to apply to both existing and new contracts.
In a closed-door meeting in Washington, global banks agreed to wait up to 48 hours before seeking to terminate swaps contracts in the event the bank on the other end of a swaps transaction runs into financial difficulty. The voluntary delay or “holds,” which become effective in January, should give supervisors more time to arrange for an orderly dismantling of the troubled bank.
The new rules would, in effect, force the same delay on hedge funds and other investors, broadening the reach of the new measures beyond just swaps traded between banks. Extending the reach would give regulators more comfort about their plan for unwinding a troubled bank without the worry of large swaps payments flying out the door, said the people familiar with regulators’ plans. Regulators are eyeing the new rules in part because several asset-management firms signaled they couldn’t voluntarily agree to the changes, according to people familiar with the matter.
Their fiduciary duty to clients restricts asset managers from giving up contractual protections, such as the right to terminate a swap early, for a less favorable position. Voluntarily agreeing to do so might land the asset managers in lawsuits with their own clients, according to people familiar with the firms’ thinking.
Full article on Wall Street Journal (subscription required)