By Erika D. White and Donald S. Bernstein of Davis Polk & Wardwell LLP.
The U.S. banking agencies have issued rules that require U.S. G-SIBs and the U.S. operations of foreign G-SIBs to amend their swaps, repurchase agreements and other qualified financial contracts (QFCs) to include certain provisions designed to mitigate the risk of destabilizing close-outs of QFCs in the event the G-SIB enters resolution. The rules are part of a package of reforms implemented by the industry, Congress and the U.S. banking agencies since the financial crisis in an attempt to ensure that the largest financial institutions can be resolved in an orderly manner. Specifically, the rules seek to (1) mitigate the risk that the FDIC’s stay-and-transfer powers with respect to QFCs under Title II of the Dodd-Frank Act and the Federal Deposit Insurance Act may not be recognized and given effect outside of the United States and (2) improve the likelihood of success of a single-point-of entry resolution strategy under the Bankruptcy Code by limiting the ability of counterparties to terminate their QFCs with a solvent and performing operating entity based on cross-defaults triggered by the bankruptcy of the operating entity’s parent or other affiliate. The QFC Stay Rules do not, however, affect the rights of counterparties to terminate QFCs under the safe harbor provisions of the Bankruptcy Code in the event the operating subsidiary itself were to enter bankruptcy proceedings.
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