Qualified Financial Contract (QFC) Stay Rules

Overview

The US Banking Agencies1 have issued the final Qualified Financial Contract ("QFC") Resolution Stay Regulations2 ("US QFC Stay Rules") that are designed to improve the resolvability and resilience of US global systemically important organizations ("G-SIBs") and the US operations of foreign G-SIBs by mitigating the risk of destabilizing closeouts of QFCs upon an event of a G-SIBs insolvency. The US QFC Stay Rules require G-SIBs to amend QFCs in order to recognize the stay and transfer powers of US special resolution regimes upon the insolvency of a US G-SIB or a US subsidiary of a foreign G-SIB (each, a "Covered Entity"), and to prohibit counterparties from exercising cross-default and transfer restriction rights based on the failure of a G-SIB parent or affiliate.

Under the US QFC Stay Rules, a "Covered QFC" which must be made rule-compliant is defined very broadly to cover a wide variety of financial transactions including without limitation;

  • swaps and other derivatives; repo and reverse repo transactions; securities lending and borrowing;
  • transactions; contracts for the purchase and sale of securities, CDs or mortgage loans; commodity contracts; forward contracts; certain spot transactions; master agreements for any of the forgoing transactions, and guarantees of or credit enhancements related to the foregoing, which have default rights triggered by the insolvency of the Covered Entity and;
    • where either the transaction is subject to non-US law or the counterparty resides outside of the US, and/or
    • which have direct or indirect cross default rights against the Covered Entity, and/or
    • which have restrictions on the transfer of credit support provided by an affiliate to an insolvent G-SIB.

The effective date of these rules is January 1, 2019. All new QFCs entered into with a Covered Entity after January 1, 2019 must be compliant with the US QFC Stay Rules. In addition, if a Covered Entity enters into a new QFC with an existing counterparty or a consolidated affiliate of the existing counterparty on or after January 1, 2019, then all existing Covered QFCs between the Covered Entity and that same counterparty and its consolidated affiliates must be remediated to become rule compliant.

Further Information

For information regarding the US Stay Protocol together with FAQs, please click on the below links:

If you are unfamiliar with the ISDA protocol functionality please contact us at the address below to discuss.

If you have additional questions regarding this outreach, or are not the appropriate recipient for this communication, please contact our dedicated HSBC Stay Rule Team or your HSBC Client Service Representative.

 

References

1 The US Banking Agencies are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
2 Federal Reserve System, Federal Deposit Insurance Corporation, Department Of The Treasury
3 Although the US QFC Stay Rules stagger compliance deadline based on counterparty type, entry into a new Covered QFC after January 1, 2019 will trigger the Rules' remediation requirements immediately for any existing Covered QFCs with such counterparty and its consolidate affiliates.

 

 

Last updated: 27 February 2019