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September 01, 2017

FED adopted the final rule requiring U.S. global systemically important banking institutions (G-SIBs) and the U.S. operations of foreign G-SIBs to amend qualified financial contracts (QFCs) to prevent their immediate cancellation or termination if the firm enters bankruptcy or resolution process. The final rule is intended to enhance financial stability and will be effective 60 days after its publication in the Federal Register.

The final rule contains the following two key requirements:

The rule requires QFCs of G-SIBs, including those with foreign counterparties, to clarify that U.S. resolution laws providing for a temporary stay to prevent mass terminations apply to the contracts.

The rule prohibits the QFCs of G-SIBs from allowing the exercise of default rights that could spread the bankruptcy of a G-SIB to its solvent affiliates.

 

FED has tailored the transition period based on the type of counterparty. The final rule requires G-SIBs to conform their QFCs with other G-SIBs within one year and within 18 months for QFCs with most other financial counterparties. Additionally, G-SIBs would have two years to conform QFCs with community banks and all other counterparties. The final rule also excludes QFCs that do not contain default rights or restrictions that could undermine the orderly resolution of a G-SIB. Compliance will phase in beginning on January 01, 2019. As per the FED Governor Jerome H. Powell, "The final rule will reduce the threat that a disorderly unraveling of QFCs would pose to our financial system and the broader economy." 


QFCs include derivatives, securities lending, and short-term funding transactions such as repurchase agreements. Given the large volume of QFCs to which G-SIBs are a party, the mass termination of QFCs in the event of financial distress or failure of a G-SIB may lead to the disorderly failure of the firm, spark asset fire sales, and transmit financial distress across the U.S. financial system. 


Related Link: Final Rule (PDF)

Keywords: Americas, United States of America, Banking, Financial Stability, G-SIB, QFC, Dodd Frank Act, Regulation Q/WW/YY, FED

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