Resolution Stay Protocol

What is it?

ISDA 2014 RESOLUTION STAY PROTOCOL is an ISDA protocol allowing a stay of close out of transactions against strategically important financial institutions (SIFIs) in financial distress as a result of applicable "special resolution regimes (SRRs) which purport to stay or override the exercise of certain defaults and cross default rights arising in the context of resolution. However, the enforceability of such stays in foreign jurisdictions is not certain, and recognition in foreign resolution actions is permissive, not mandatory.

What does it do?

In short, it prevents adhering counterparties from immediately terminating outstanding derivatives contracts, giving regulators time to resolve the troubled institution in an orderly way.

• Adhering Parties “opt in” to the resolution regime applicable to their counterparty, and each of its “related entities” (Credit Support Providers, Specified Entities and certain parent entities).

Who adheres?

The Protocol is open to anyone to adhere. However, the first phase is expected to involve 18 major banks and certain of their affiliates. They are expected to adhere to the Protocol on a voluntary basis in November 2014. Buy-side firms are not expected by regulators to adhere prior to regulatory requirements

What of BRRD or Dodd Frank?

Title II of the Dodd-Frank Act imposes stays and overrides of direct-default and cross-default rights in the event of a resolution. So does the EU Bank Recovery and Resolution Directive (BRRD).

However, an issue arises with respect to cross-border trades, where a certain national resolution regime may not be recognized in a foreign jurisdiction by a foreign court.

For instance, a UK bank holding company enters into resolution, and its US subsidiary has outstanding derivatives trades in place with a US counterparty under New York law. The stay and overrides under BRRD may not be recognized under New York law in a New York court, potentially enabling the US counterparty to exercise cross-default clauses and terminate the outstanding trades with the subsidiary. Adherence to the Protocol would, in this instance, mean that the US counterparty had opted in to UK-implementation of BRRD – and would be bound by the requirements thereunder.