On October 11, 2014, ISDA® announced that 18 major global banks (referred to as the "G-18") have agreed to sign the new ISDA Resolution Stay Protocol, which has been developed in coordination with the Financial Stability Board (FSB) to support the orderly cross-border resolution of global financial institutions in the event of a failure of one or more of these institutions. The measure is designed to reduce systemic risk associated with banks that are considered too big to fail. Under the protocol, early termination rights under the ISDA Master Agreements of a failed institution will be stayed for up to 48 hours after a bankruptcy filing or other equivalent domestic or overseas proceeding.

The early termination provisions of the ISDA Master allow immediate termination, acceleration and liquidation of collateral upon the occurrence of certain bankruptcy or insolvency events with respect to a counterparty to the agreement (see Practice Note, The ISDA Master Agreement: Early Termination). When multiple counterparties attempt to exercise these rights at once, it can create market panic and a rush to drain the bank's assets, as occurred with Lehman in 2008. The protocol will impose a stay on cross-default and early termination rights within standard ISDA derivatives contracts between G-18 firms in the event one of them is subject to resolution action in its jurisdiction. The stay is intended to give regulators time to facilitate an orderly resolution of a troubled bank and to reduce the risk of a disorderly unwind of derivatives portfolios under the early termination provisions of the ISDA Master.

The protocol is scheduled for implementation in early November 2014 and will take effect on January 1, 2015. The protocol will govern both new and existing trades between adhering parties. By adhering to the protocol, the G-18 banks incorporate the stays to more than 90% of their outstanding derivatives contracts, measured by notional value.

The protocol essentially enables adhering counterparties to opt into certain overseas resolution regimes via a change to their derivatives contracts. While many existing national resolution frameworks impose stays on early termination rights following the start of resolution proceedings, these stays might only apply to domestic counterparties trading under domestic law agreements, and so might not capture cross-border trades. According to ISDA, global regulators have committed to develop new regulations in their jurisdictions that will promote broader adoption of the stay provisions beyond the G-18 banks by the end of 2015.

Banks have also committed through the protocol to expand coverage once such regulations are enacted to include a stay that could be used when a US financial holding company becomes subject to proceedings under the US Bankruptcy Code. Those regulations will be made under the rule-making process in each jurisdiction.

The first wave of adhering parties are:

Background information on the ISDA Resolution Stay Protocol is available on the ISDA website.

For further information, see Legal Update, FSB: 14 Global Banks to Adopt ISDA "Crisis Clause" for OTC Derivatives Contracts by November and Early Termination Rights May Be Eliminated in Swaps with Largest US Banks.