Kristian Rouz – As international finance has become increasingly volatile during the past six months, with global turbulence stemming from Greek debt crisis to Chinese stock market turmoil to commodity market fever, several largest US banks on Thursday rearranged their transaction rules.
As outlined in the ISDA statement, a new rendition of the Resolution Stay Protocol will cover securities financial transactions (SFT), allowing financial institutions to pay their liabilities after they collapse, thus preventing a ‘domino effect’ in case a major financial turmoil unravels on a global scale.
Representatives of twenty-one major banks have thus far signed the new protocol.
The decision was motivated by the major US banks’ concern of a systemic financial crash possible in the US. The banks are especially eager to hedge their risks after the Financial Stability Board (FSB), an international financial watchdog, announced last week their new ‘total loss-absorbing capacity rules’. According to the new consensus between national regulative bodies, national governments are abandoning the too-big-to-fail (TBTF) approach, meaning no bailouts at the taxpayers’ expense for the financial sector. The FSB also said it would take some $1.2 trln for the banks to keep in reserves as safety net for a possible crash similar in pattern to the 2008 events.
The new ISDA protocol will allow the financial institutions to crash without bringing down the entire industry, thus diminishing the overall risk in the financial sector. The protocol covers both regular financial transactions and derivatives trade.
“The relaunched ISDA Universal Resolution Stay Protocol captures a wider universe of financial contracts, further reducing the risk that a bank resolution triggers a chaotic unwind of financial contracts. ISDA has worked hand in hand with other trade associations and market participants to meet the regulatory objective of broadening contractual stays to support cross-border resolution and strengthen systemic stability,” the Scott O’Malia, ISDA’s Chief Executive said.
The Lehman collapse of 2008 was one of the biggest reasons for the global financial and economic crisis that plagued the world economy for several subsequent years.
The ISDA’s actions might seem as measures aimed to protect global financial corporations against an across-the-board collapse in an environment where the national governments have firmly rebuffed even a hypothetic possibility of massive bailouts in the future. However, the Protocol will also provide some crisis insurance to smaller market participants over time, allowing financial institutions of any size to cease their existence without damaging their partners’ interests. A bankrupt institution will pay off their debt after they fail even to smaller company.
“The ISDA Resolution Stay Protocol Working Group is developing a separate Protocol for other market participants, including buy-side and end-user firms and other banks, providing them with a tool to comply with forthcoming regulations requiring the inclusion of stays within financial contracts,” the ISDA statement reads.
The fact that major financials are taking precautionary measures facing an explicit lack of guarantees from national governments and a necessity to keep unrealistically enormous reserves, was taken as a threat of a massive financial crash in the nearest future.
The Bloomberg Europe Banks and Financial Services Index slumped 0.6% in the few morning hours on Thursday, with the likes of Deutsche Bank, Royal Bank of Scotland, and UBS Group all affected.
The new ISDA protocol is estimated to ensure the timely payment on liabilities worth a total of roughly $560 bln –liabilities likely written off otherwise in case of a financial crisis. The Protocol also ensures international trans-border liabilities will be served properly: previously, national borders prevented an efficient debt recovery in cases of bank failures.
