ISDA Proposes To "Suspend" Default Reality When Big Banks Fail

Tyler Durden's picture

With global financial company stock prices soaring, analysts proclaiming holding bank shares is a win-win on rates, NIM, growth, and "fortress balance sheets", and a European stress-test forthcoming that will 'prove' how great banks really are; the question one is forced to ask, given the ruling below, is "Why is ISDA so worried about derivatives-based systemic risk?"

 

As DailyLead reports,

...regulators from the U.S., U.K., Germany and Switzerland have asked ISDA to include a short-term suspension of early-termination rights in its master agreement when it comes to bank resolutions. Many derivatives market participants oppose the move.

 

The regulators say the suspension, preferably no more than 48 hours, gives resolution officials time to switch derivatives contracts to a third party or bridging entity, when necessary.

 

We are sure that creditors will be 'fine' with this.. and that banks will not use this loophole to hive off all their 'assets' into a derivative vehicle protected 'temporarily' from the effects of a bankruptcy...

So the question is - what are they so worried about?

ISDA Statement on Letter from Major Resolution Authorities

NEW YORK, November 6, 2013 – The International Swaps and Derivatives Association, Inc. (ISDA) today issued the following statement:

 

ISDA supports efforts to create a more robust financial system and reduce systemic risk.  Toward that end, we have, over the course of 2013, discussed with policymakers and OTC derivatives market participants issues related to the early termination of OTC derivatives contracts following the commencement of an insolvency or resolution action. We have developed and shared papers that explore several alternatives for achieving a suspension of early termination rights in such situations.

 

"One of those alternatives, which is supported by a number of key global policymakers and regulatory authorities, would be to amend ISDA derivatives documentation to include a standard provision in which counterparties agree to a short-term suspension.  Developing such a provision that could be used by counterparties will continue to be a primary focus of our efforts in this important area of regulatory reform.  We are committed to working with supervisors and regulators around the world to achieve an appropriate solution that will contribute to safe, efficient markets.”