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Taking the Shine off the Silver Bullet – PRA Provides Gentle Warning Against Over-Reliance on ISDA Resolution Stay Protocol

On 13 November the PRA published its policy statement and supervisory statement containing final rules requiring contractual stays in financial contracts governed by third country law (see this blog post for more detail).  The policy statement requires firms to amend “financial arrangements” entered into, or materially amended, after the relevant effective dates.[1]

Whilst the PRA is supportive of industry efforts to comply with its rules – specifically mentioning the ISDA Resolution Stay Protocol – it notes that the PRA rules relate to a broader range of financial arrangements than are currently covered by the ISDA protocol.  It also makes clear that it is for firms to identify which of their contracts are within scope and whether an amendment is “material” (although it does provide some guidance on both of these issues).

In its supervisory statement, the PRA goes on to note that it expects firms to be able to provide information on their financial contracts (including the governing law and whether the contract contains the necessary recognition provision) and be able to demonstrate compliance with PRA rules.  In other words, simply signing the ISDA Resolution Stay Protocol (or its future buy-side equivalent, the ISDA Resolution Stay Jurisdictional Modular Protocol) will not – of itself – guarantee compliance with the PRA rules.

Even where counterparties have adhered to a Resolution Stay Protocol, firms will have to actively manage their protocol data, understanding how it applies to individual counterparties.  Why?  Well, broadly, the ISDA 2015 Universal Resolution Stay Protocol works by allowing adhering parties to ‘opt in’ to certain foreign resolution regimes that enforce statutory stays on cross-default and early termination rights in the event that a bank counterparty enters into resolution.  However, the protocol includes a number of ‘opt-outs’ to the ‘opt-ins’.  Unfortunately, some of the ‘opt-outs’ can automatically become null and void – meaning that parties are automatically ‘opted back in’.  It must be assumed that the ISDA Resolution Stay Jurisdictional Modular Protocol (designed for the buy-side) will work in much the same way.  The net result?  Dynamic data which must be monitored if associated risk is to be managed.  The situation will be even more complicated in relation to counterparties which have not adhered to a Resolution Stay Protocol.  Robust procedures must be in place so that, when faced with the decision of whether or not to trade with such a counterparty, firms understand whether a particular “financial arrangement” is in scope, whether an amendment is “material” and how to track, record and audit relevant information on an ongoing basis.  The message – if it wasn’t already known – is clear.  Protocols are a useful weapon in the struggle to keep documentation up-to-date and compliant, but not one you can simply ‘fire and forget’.

[1] 1 June 2016 in the case of credit institutions and investment firms and 1 January 2017 for all other counterparties

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