Cross-Border Recognition of Resolution Actions: Financial Stability Board’s Consultative Document Regarding Cross-Border Recognition of Resolution Actions Represents an Important Step Towards Removal of Impediments to Resolution

Sullivan & Cromwell LLP - October 2, 2014
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On September 29, 2014, the Financial Stability Board (the “FSB”) published a consultative document concerning cross-border recognition of resolution actions and the removal of impediments to the resolution of globally active, systemically important financial institutions (the “Consultative Document”).  The Consultative Document encourages jurisdictions to include in their statutory frameworks seven elements that would enable prompt effect to be given to foreign resolution actions.  In addition, due to a recognized gap between the various national legal resolution regimes that are currently in place and those recommended by the FSB, the Consultative Document sets forth two “contractual solutions” – that is, resolution-related arrangements to be implemented as a matter of contract among the private parties involved – to address two underlying substantive issues that the FSB considers critical for orderly cross-border resolution, namely:
 

  • temporary restrictions or stays on early termination rights, including with respect to cross-defaults, in financial contracts (for example, derivatives and repos); and
  • write-down or conversion of debt instruments in resolution – so-called “bail-in” provisions – where the instruments are governed by the laws of a jurisdiction other than that of the issuing entity.

According to the FSB, “significant progress” can be made by adopting these proposed contractual solutions even before the necessary statutory frameworks are adopted and fully implemented.  To that end, the Consultative Document includes an implementation timeline that applies to both authorities and firms under which the FSB will finalize guidance on key principles for recognition clauses in debt instruments that are intended to be eligible for “bail-in,” FSB member governments are to take official action to promote adoption of the two contractual solutions proposed in the Consultative Document, and the FSB is to finalize guidance on core elements of statutory recognition frameworks by the end of 2015.  In addition, the Consultative Document states that, by the end of October 2014, 14 G-SIBs and other large banks that engage in significant cross-border trading activities are to commit to adopt the ISDA protocol or equivalent contractual clauses as to temporary restrictions on early termination rights, to have effect from 2015. In addition, certain jurisdictions, most notably the United Kingdom, have adopted requirements for contractual provisions regarding bail-in. 

The next Group of 20 (the “G-20”) leaders’ summit will be held on November 15 and 16, 2014, in Brisbane, Queensland.
 
The FSB invites comments on the Consultative Document by December 1, 2014.