On September 29, 2014, the Financial Stability Board (FSB) published a consultative document announcing that ISDA® is expected to launch a protocol in the near future that will incorporate a temporary stay of up to 48 hours on early termination rights under the new and existing ISDA Master Agreements of adhering parties. The FSB expects 14 unidentified global systemically important banks (G-SIBs) and other large dealer banks to adhere to the protocol prior to November 2014, ahead of the upcoming meeting of the G-20, as part of an initiative designed to facilitate orderly cross-border resolution of failed G-SIBs and other large global banks.

If the protocol is adopted by these institutions as expected, it will apply to new and existing over-the-counter (OTC) derivatives among the adopting banks from the beginning of 2015. The set of trades not covered through the initial voluntary adoption process would include OTC swaps between the adopting banks and non-adopting counterparties.

The protocol could ultimately impact much of the global derivatives market, since most OTC derivatives contracts are entered into by and among a handful of international banks and financial institutions, many of which will be included on the FSB list. The FSB document does not identify the institutions from which they have obtained this commitment, so it is not clear to what extent the list includes banks included on the list circulated recently by the Federal Reserve Board (FRB) and the FDIC identifying the 11 US institutions that are being asked to adopt the so-called "crisis clause" amendment (see Legal Update, Early Termination Rights May Be Eliminated in Swaps with Largest US Banks). It is expected that there is significant overlap between these lists.

The protocol will provide for a number of mechanisms by which the effect of the stay provisions would be supported in different jurisdictions. The home authorities for these institutions will monitor progress through regular status meetings with the banks.

Early termination is a key feature of the ISDA Master Agreement, which is used globally to document most OTC derivatives (or swaps) transactions. Early termination allows a party to the agreement to immediately terminate the agreement and demand a settlement payment from its counterparty if the counterparty to the agreement files for bankruptcy or if certain other insolvency events occur with respect to the counterparty (see Practice Note, The ISDA Master Agreement: Early Termination). Regulators believe that early termination rights are a major impediment to the orderly liquidation of the largest financial institutions.

For information on ISDA protocols, see Practice Note, ISDA Documents: Overview (US): ISDA Protocols.