The US Stay Regulations and How they Impact South African Entities
Regulations issued by the FRB, the FDIC and the OCC (‘US Stay Regulations’) require US global systemically important banks (‘GSIBs’) and US branches and subsidiaries of foreign GSIBs to amend certain qualified financial contracts (‘QFCs’) with their clients, regardless of the jurisdiction of the clients. As a result, this regulatory requirement will impact on any South African entity that has, for example, an ISDA, GMRA or GMSLA with a US GSIB.
What is the purpose of the US Stay Regulations?
Part of the strategy undertaken by the US regulators has been to help ensure that a US insolvency proceeding of a GSIB is as orderly as possible, in an effort to help mitigate the destabilizing effects on the financial system.
The US Stay Regulations form part of this strategy by limiting disruptions to a failed GSIB, by restricting counterparties to certain specified financial contracts (QFCs) from exercising certain specified insolvency-related default and cross-default rights against GSIBs, by requiring the insertion of restrictions and prohibitions directly into such financial contracts.
What are QFCs?
QFCs are agreements to transact in certain types of financial products including swaps, FX transactions, repurchase agreements, securities lending transactions, securities contracts and commodities contracts, including certain futures activity. So the ISDA, GMRA (repo trading) and GMSLA (securities lending) agreements will need to be amended.
When is compliance required by?
The US Stay Regulations provide three compliance dates:
January 1, 2019 for covered GSIBs
July 1, 2019 for financial entities, and
January 1, 2020 for other counterparties.
Failure to comply with the US Stay Regulations within these timeframes will generally mean that the US GSIB will no longer be able to transact with you under the QFC contracts.
How to comply?
Clients of GSIBs can efficiently amend their in-scope QFCs to comply with US Stay Regulations by adhering to the ISDA 2018 US Resolution Stay Protocol ('US Stay Protocol'). This modifies your in-scope QFCs with your GSIB counterparties and provides enhanced creditor protections otherwise not available. Alternatively you could enter into bilateral amendments to provide for the US Stay Regulations, but this is considered a less desireable way to proceed, as this may mean that not all counterparties are subject to the same terms, and will not benefit from certain creditor protections which are only offered in the US Stay Protocol.