On December 30, 2014, the Federal Reserve Board and the Office of the Comptroller of the Currency (OCC) published in the Federal Register interim final rules amending their capital, lending limit and liquidity regulations to ensure that they are not affected by the implementation of special resolution regulations in jurisdictions outside the United States and by the adoption of the ISDA Resolution Stay protocol discussed in an October 17, 2014 blog post. On December 15, 2014, the Federal Deposit Insurance Corporation (FDIC) issued a press release stating that it was deferring discussion of a similar interim final rule that had been scheduled for discussion at its December 16, 2014, meeting. The interim final rule was effective January 1, 2015. Comments must be received on or before March 3, 2015.
As noted in the previous post, the ISDA resolution stay protocol imposes a stay on the cross-default and early termination rights contained in standard ISDA derivatives contracts between the signatories to the protocol. This stay will give regulators time to resolve a troubled institution in a manner less likely to provoke systemic risk. In addition, the European Union (EU) finalized its Bank Recovery and Dissolution Directive (BRRD) in April 2014, which required member nations to adopt a special resolution regime for insolvent financial companies. This new resolution regime is to include a stay on early termination rights similar to those contained in the ISDA protocol and US legislation on receiverships of banking organizations and financial companies.
The early termination provision of the ISDA resolution stay protocol was effective January 1, 2015. In addition, the new BRRD regime was expected to take effect the same day in several EU member countries. As a result, the US regulators went with issuance of an interim final rule effective January 1, 2015, rather than issuance of only a proposed rule for comment.
The interim final rule amends definitions in the OCC and the Federal Reserve capital adequacy, liquidity cover ratio and lending limits regulations to ensure that the temporary stay provision would not prevent certain collateral and netting agreements, loans and transactions entered into by national banks, federal savings associations, bank holding companies and savings and loan holding companies from continuing to be able to measure exposure from these agreements, loans and transactions on a net basis.
Without these changes in the definitions, these banking organizations would not be able to net their exposures, which in turn would lead to their having to maintain additional capital and liquidity against those exposures on a gross basis. This is not the intention of the regulators. If the banking organizations cannot continue to net exposures, they may be reluctant to join in the ISDA resolution stay protocol or engage in transactions under a new BRRD special resolution regime.