Search Keywords
Financial Times Wall Street Journal Economist
News Period From   To
News: 60885    Funds: $437    Pays: $524

Go Back to
News List
This News on
Daily Paywall
  Rated 44 | Views 300
Rate it | Share it 

Markets Regulation
Banks agree to new crisis derivatives rules
From the Financial Times of Sat, 11 Oct 2014 21:20:07 GMT
The exterior of the world headquarters for Lehman Brothers can be seen in New York, May 19, 2008. Citigroup slashed its earnings outlook for Wall Street investment banks, Goldman Sachs Group Inc, Lehman Brothers Holdings Inc and Morgan Stanley on Monday, citing a tough operating environment. REUTERS/Lucas Jackson (UNITED STATES)©Reuters

The world's largest banks have agreed to give up their rights to immediately end derivatives contracts with crisis-hit rivals after global regulators pressed for an industry cross-border agreement to stop counterparties terminating deals with troubled institutions.

Regulators have been concerned that demands from around the world to settle deals could accelerate a bank's demise and destabilise the financial system: a fate that befell Lehman Brothers and which lawyers have spent years untangling.

According to the International Swaps and Derivatives Association, a trade group that brokered months of negotiations between regulators and 18 global banks, the deal that was formalised on Saturday will cover more than 90 per cent of the over-the-counter derivatives market, which has a notional outstanding value of $710tn.

The protocol will place a brief to halt rights within Isda's standard contracts, the legal paperwork that underpins most swaps trading. Many national regulators, including in the US and Europe, have already created domestic legal halts but most do not apply to cross-border trades.

Scott O'Malia, chief executive of Isda, said the agreement was "a key development" in helping the over-the-counter derivatives market.

Others were more sceptical about the impact of the Isda-led reform efforts and how the changes to derivatives contracts would work in practice. Many fund managers are concerned that those choosing not to amend their contracts could enjoy significant advantage over other market participants.

"You could try to fix that through regulation or legislation, but then you’re sure to have protests about violating the ‘sanctity of contract’. But even more importantly, the type of amendment that’s being discussed doesn't seem to really fix the practical problems that arose in Lehman," said Anne Beaumont, a partner at law firm Friedman Kaplan Seiler & Adelman LLP.

Mr O'Malia recognised many institutional investors had a fiduciary duty to end their contracts if a counterparty was in default. "I'm very sympathetic to their concerns and responsibilities. We have to make sure this works for everyone. There is a lot of education that needs to be done. This is about safety and soundness and ending 'Too Big To Fail’."

Ms Beaumont said there was also the thorny issue of the US bankruptcy code, which still provides a safe harbour exemption for termination of derivatives contracts.

National regulators have also committed to implementing new regulations that will include the halt, Isda said. Some US politicians, notably Democratic Senator Elizabeth Warren, have discussed amending the code but there appears to be little appetite in Washington to tackle the complex legal framework for US bankruptcies.

"They're effectively trying to do away with or suspend the safe harbour through contract because Congress isn't going to do anything to change the bankruptcy code in the near term," Ms Beaumont said.

The banks will adopt the protocol before the meeting of G20 economies in Brisbane, Australia next month and it will become effective on January 1, 2015, except for the US bankruptcy related provisions, which only become effective when the new domestic rules come into effect.

The banks that have agreed to implement the protocol are: Bank of America Merrill Lynch; Bank of Tokyo-Mitsubishi UFJ; Barclays; BNP Paribas; Citigroup; Crédit Agricole; Credit Suisse; Deutsche Bank; Goldman Sachs; HSBC; JPMorgan Chase; Mizuho Financial Group; Morgan Stanley; Nomura; Royal Bank of Scotland; Société Générale; Sumitomo Mitsui Financial Group; and UBS.

This article is provided by, which is published and distributed by Paolo Cirio Ltd., registered in England, number 8188080. Registered Office: Suite 36, 88-90 Hatton Garden, City of London, EC1 N8PG, United Kingdom. Paolo Cirio Ltd. alone is responsible and liable for information and services provided through Daily Paywall’s newspaper and website.

The most relevant news can also help with your daily little expenses!

Earn Money
Offer Money
Buy Advertising
Buy Artwork Article

Similar Articles
Daily Paywall pays for reading these newspapers’ news!