QFC Resolution Stay Regulations: Not Just For Derivatives

In Short

The Situation: Banking regulators in the United States have issued the so-called "Resolution Stay Regulations," which require "global, systemically-important banks" ("GSIBs") to amend a broad variety of "qualified financial contracts" ("QFCs"), including spot and forward physical commodity contracts, securities underwritings, and other offerings.

The Result: GSIBs are required to bring all QFCs transacted on or after January 1, 2019 with "financial" counterparties into compliance by July 1, 2019 and with corporate clients by January 1, 2020.

Looking Ahead: Although often equated with derivatives, corporate counterparties and issuers of securities are starting to see "QFC resolution stay" provisions being proposed for insertion into QFCs in potentially unexpected circumstances, including in overseas offerings that have no connection with the U.S.

The Resolution Stay Regulations require GSIBs to amend or otherwise remediate a wide range of financial contracts and are reaching into potentially unexpected corners of the markets. QFCs are often equated with derivatives and "repo" agreements, but they also include spot and forward physical commodity contracts and "contract[s] for the purchase, sale, or loan of a security" and accordingly capture ordinary capital markets activities in which securities are purchased directly from the issuer for the purpose of re-sale to investors. Corporate clients in the U.S. and overseas are seeing "resolution stay" provisions being proposed for insertion into derivatives, physical commodity contracts and syndication agreements.

The resolution stay regulations are complex, and this short introduction must necessarily omit many important details and qualifications. Corporate counterparties and issuers are urged to seek detailed and individualized advice from competent counsel concerning the applicability of the Resolution Stay Regulations to their own circumstances.

What Are the QFC Provisions?

Regulatory Background: United States GSIBs are prohibited by the Resolution Stay Regulations from entering into QFCs that lack certain features ("QFC Provisions") designed to facilitate an "orderly resolution" in the event of the failure of the GSIB.

Failed banks (insured depository institutions) and GSIBs (non-insured holding companies and affiliates of insured banks and other financial companies) are subject to receivership under the Federal Deposit Insurance Act (the "FDIA") and the "orderly liquidation...