1535Finance and Accountancy Briefings

Finance and Accountancy Briefing

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Top regulators put forward post-crunch proposals to suspend swap termination rights

Overview

It is unlikely a letter from Mark Carney, the Governor of the Bank of England, to the International Swaps and Derivatives Association (ISDA), countersigned by senior regulators from the US, Germany and Switzerland, would pass under the radar of the derivatives markets.


The letter in question was based on a pessimistic, but realistic, appraisal of the financial markets that systemically significant investment banks can run into trouble and as a result may need capitalising.


The letter, which focused on the "risk of disorderly termination of derivatives contracts, particularly in the cross-border resolution context, arising out of the exercise of termination rights following the commencement of an insolvency or resolution action," concluded: "We believe that it is essential for standard [ISDA] documentation to provide for a short-term suspension of early termination rights and other remedies on the basis of the commencement of an insolvency or resolution proceeding or exercise of a resolution power...".


The letter has already prompted discussion in the market and, as a result, end-users of derivatives are expected to be canvassed for their views on the substantive contents of the letter.


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