Fed rules demands further securities lending contract safeguards for GSIBs
04 September 2017 Washington DC
Image: Shutterstock
The Federal Reserve Board has adopted a rule requiring US global systemically important banking institutions (GSIBs) to amend qualified financial contracts (QFCs) to prevent their termination if the firm defaults.
The rule, which also affects and the US operations of foreign GSIBs, relates to all QFCs, including securities lending, derivatives and repo transactions.
Under the rule, GSIBs must ensure that US resolution laws providing for a temporary stay to prevent mass terminations apply in all contracts.
A GSIB’s QFCs cannot allow the exercise of default rights that could spread the bankruptcy of one GSIB entity to its solvent affiliates.
A transitional period is to allow GSIBs time to repaper their contracts will begin on 1 January 2019.
QFCs between two GSIBs must conform to the new rule with the next 12 months, while those between a GSIB and most other counterparties have an 18-month deadline.
In a statement on the rule, published 1 September, the Fed said that, given the large volume of these contracts to which GSIBs are a party, the mass termination of QFCs in the event of default “may lead to the disorderly failure of the firm, spark asset fire sales, and transmit financial distress across the US financial system”.
Governor Jerome Powell said: "The final rule will reduce the threat that a disorderly unraveling of QFCs would pose to our financial system and the broader economy.”
The rule, which also affects and the US operations of foreign GSIBs, relates to all QFCs, including securities lending, derivatives and repo transactions.
Under the rule, GSIBs must ensure that US resolution laws providing for a temporary stay to prevent mass terminations apply in all contracts.
A GSIB’s QFCs cannot allow the exercise of default rights that could spread the bankruptcy of one GSIB entity to its solvent affiliates.
A transitional period is to allow GSIBs time to repaper their contracts will begin on 1 January 2019.
QFCs between two GSIBs must conform to the new rule with the next 12 months, while those between a GSIB and most other counterparties have an 18-month deadline.
In a statement on the rule, published 1 September, the Fed said that, given the large volume of these contracts to which GSIBs are a party, the mass termination of QFCs in the event of default “may lead to the disorderly failure of the firm, spark asset fire sales, and transmit financial distress across the US financial system”.
Governor Jerome Powell said: "The final rule will reduce the threat that a disorderly unraveling of QFCs would pose to our financial system and the broader economy.”
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