The FSB issued a report on Monday, ahead of the St. Petersburg G20 meeting, assessing progress on the problem of Too Big To Fail financial institutions. Aside from important judgements as to whether they should actually be called Too Interconnected etc., a valid answer to the TBTF question has the potential to render much of the current and proposed regulatory reform somewhat pointless. Without the im/explicit national and supra-national guarantees conferred by their size and global interconnection, some argue that banks would never “rationally” act to imperil themselves or, by extension, their counterparties. Leaving aside questions as to rationality, the reports recommendations are as follows:
- Enact reforms to implement the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’. To include systemically important insurers and financial market infrastructures such as CCP’s.
- Empower domestic authorities to cooperate.
- Legislate to make cross-border resolution effective.
- Address resolvability problems that arise from complexity. E.g. the imposition of LEI will aid resolution of intricate financial/legal structures.
- Consider complementary domestic structural measures that help promote financial stability and improve the resolvability of FI’s without constraining global financial integration or creating opportunities for regulatory arbitrage.
- Implement domestic policy measures for systemically important banks. Eg. Vickers in the UK, Liikanen in the EC.
- Ensure that supervisors have sufficient resources and independence.
All laudable aims (the report has 29 pages of them), although perhaps lacking in specific detail. The report does include one intriguing element in its “to do” section, which is worth quoting in full:
“By end 2014, the FSB will develop proposals for contractual or statutory approaches to prevent large-scale early termination of financial contracts in resolution. Large-scale close-out of financial contracts based on early termination and cross-default rights when firms enter resolution can hinder the effective implementation of resolution strategies. G-20 authorities can encourage ISDA and other industry bodies to review contract provisions to prevent large-scale early termination of financial contracts. “
Clearly aimed at S. 5/6 of the ISDA Master Agreement, does the FSB propose to remove one of the keystones of derivative documentation architecture? The implication is that prevention of financial contagion is to be (statutorily) preferred over basic contract law. Given that a prime purpose of the ISDA Master Agreement is to limit the direct, distinct and immediate effects of default, this proposed change would be fundamental. As of now, it’s a rather vague recommendation, but one that may deserve watching.Contact Us