ISDA: Proposed moratoria under the BRRD and the impact on the Universal Stay Protocol

28 September 2017

New moratoria powers under the Bank Recovery and Resolution Directive proposed by the European Commission could trigger opt-out rights for entities that have adhered to the ISDA 2015 Universal Resolution Stay Protocol. This paper considers the implications for European Union financial institutions.

The Universal Stay Protocol, which ISDA published on November 12, 2015, effectuates amendments to covered master agreements, including ISDA Master Agreements, to contractually recognize stays and other limitations on termination rights and certain other remedies under special resolution regimes applicable to their counterparties in a number of jurisdictions. The recognition ensures that counterparties to foreign-law-governed agreements are on equal footing with counterparties to local-law-governed agreements, and addresses one of the key impediments to an effective cross-border resolution identified after the financial crisis. To date, 26 global systemically important banks (G-SIBs) and their affiliates have adhered to the Universal Stay Protocol.

The new moratoria proposed by the EC on November 23, 2016, as part of amendments to the EU Bank Recovery and Resolution Directive (BRRD II), may amount to an adverse change to applicable legislation that would trigger adhering parties’ rights to opt out of the Universal Stay Protocol with respect to counterparties that could be subject to the proposed moratoria. Exercise of opt-out rights would be problematic for several reasons:

• Such exercise could negatively impact the efficacy of the arrangements agreed by the FSB, global regulators and market participants in order to ensure effective recognition of stays in a crossborder resolution.
• It could result in an uneven playing field with respect to the exercise of default rights against an EU G-SIB in resolution under the BRRD, with counterparties to non-EU-law agreements standing to benefit at the expense of counterparties to agreements governed by the law of an EU jurisdiction.
• Due to the one-way nature of the opt-out rights, their exercise would negatively impact the resolvability of G-SIBs in EU jurisdictions without having any effect on the resolvability of G-SIBs in the US, Japan and Switzerland (ie, the other jurisdictions covered by the Universal Stay Protocol).
• As the opt-out rights are exercisable on a counterparty-by-counterparty basis, adherents would be able to selectively opt out with respect to some but not all EU G-SIBs, which could disproportionally affect EU G-SIBs viewed as ‘weaker’ and/or G-SIBs in certain EU jurisdictions.
• Enactment of the proposed moratoria would result in uncertainty for resolution planning efforts in the EU because adherents would be free to opt out with respect to EU G-SIBs at any time after enactment of the proposed moratoria (subject to any limitations under applicable law).

In this paper, ISDA provides background on the Universal Stay Protocol and global efforts to address impediments to cross-border resolution. ISDA then analyses the opt-out provisions in the Universal Stay Protocol and explain how they would interact with the proposed moratoria. Finally, ISDA elaborates on the potential effects of adherents opting out of the Universal Stay Protocol. ISDA concludes that the only way to avoid these results is to ensure that the BRRD remains consistent with global standards.

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