For an in-depth overview of the FSOC’s QFC Recordkeeping and Reporting Rules, take a look at our explainer presentation here.

Why are these regulations necessary?

The U.S. Resolution Stay Rule and the U.S. Resolution Stay Protocol are regulatory reforms introduced post financial crisis.  They were part of the initiative to improve financial stability in the event that a U.S. global systemically important bank (G-SIB) entered resolution or filed for bankruptcy.

Before the collapse of Lehman Brothers, Lehman’s parent company acted as a guarantor on its subsidiaries’ financial contracts. When the parent filed for bankruptcy, counterparties on those existing financial contracts were permitted to exercise their rights to terminate their agreements.  These “cross-default rights” terminated contracts and resulted in great losses. Subsidiaries attempted to quickly meet contractual obligations by selling assets to produce cash and selling collateral that secured the now-terminated contracts.  This compromised the viability and stability of Lehman and its subsidiaries, creating a ripple effect throughout the global economy.

Currently, many financial contracts at G-SIBs contain similar cross-default clauses, allowing counterparties to exercise their default rights if a G-SIB or its subsidiaries file for bankruptcy or require resolution.  To mitigate risk and ensure that the global financial system is not thrown into chaos once again, international and domestic regulatory bodies introduced the U.S. Resolution Stay Rule and Protocol.


Who is affected by the new regulations?

The Rule and the Protocol apply to the following entities (referred to as “Covered Entities”):

  • The 17 U.S. G-SIBs and their subsidiaries (U.S. and non-U.S.)
  • The U.S. subsidiaries, branches, and agencies of the 18 non-U.S. G-SIBs


Which regulators are involved?

  • U.S. Resolution Stay Protocol (“the Protocol”): ISDA (International Swaps & Derivatives Association)
  • U.S. Resolution Stay Rule (“the Rule”): The Federal Reserve, FDIC (Federal Deposit Insurance Corporation), Office of the Comptroller of Currency (OCC)

It is important to note that there is a distinction between the “Rule” and the “Protocol.”


What is the difference between the Protocol and the Rule?

In 2015, the original ISDA Protocol came into effect as a suggestion by regulators. Covered Entities agreed to comply with the new resolution protocols, however, buy-side entities were not able to come to agreeable terms with regulators.  After years of negotiation, the 2018 version of the ISDA Protocol included terms that affected buy-side entities, Covered Entities must have their buy-side counterparties agree to new resolution protocols.


The Rule, when implemented, is the governing regulation which G-SIBs must comply with as it relates to their existing and new financial contracts.  The Protocol refers to the actions that are required of G-SIBs in amending existing contracts.


What type of financial contracts are subject to the new regulations?

Covered Qualified Financial Contracts (QFCs) are agreements pertaining to derivatives, securities lending, and short-term funding transactions.  A QFC is within the scope of the Rule and Protocol if it meets any of the following criteria:

  • It contains one or more “default rights” that may be exercised against a Covered Entity. Default rights include:
    • Direct default rights: right to terminate the QFC or exercise other default rights based on its direct counterparty becoming subject to an insolvency proceeding
    • Cross-default rights: right to terminate the QFC or exercise other default rights based on a parent or other affiliate of the direct counterparty becoming subject to an insolvency proceeding
  • It explicitly restricts the transfer of the contract from a Covered Entity
  • It was entered into on or after January 1, 2019, by a Covered Entity


What are the deadlines for compliance?

  • January 1, 2019: for covered QFCs between two Covered Entities
  • July 1, 2019: for covered QFCs, between a Covered Entity and a counterparty (excluding small financial institutions), entered into in order to apply the final U.S. margin rules applicable to swaps
  • January 1, 2020: for covered QFCs between a Covered Entity and any other counterparty (including small financial institutions)


What are the requirements of the new regulations?

Covered Entities must add two amendments to existing QFCs:

  1. Buy-side counterparties must “opt in” to certain resolution protocols that would be followed should the Covered Entity require resolution or file for bankruptcy. These resolution protocols contain requirements related to the exercise of default rights that buy-side counterparties must follow.
  2. Buy-side counterparties must be restricted from exercising cross-default rights to terminate contracts immediately, through a 48 hour stay.