Proposed U.S. Federal Reserve Board Rule’s Impact on Buy-Side Remedies in QFCs with Global Systemically Important Banking Organizations and their Affiliates

June 15, 2016

The Board of Governors of the U.S. Federal Reserve System (Board) recently proposed a rule (Proposed Rule) that will impact parties to any “qualified financial contract” (QFC), as described below, with a global systemically important banking organization (GSIB) or a GSIB affiliate (together, a covered entity). The Proposed Rule will eliminate certain contractual rights with respect to the QFC when:

  • the covered entity counterparty is placed in a Federal Deposit Insurance Corporation (FDIC) receivership; or
  • an affiliate of the covered entity counterparty is placed in a receivership, insolvency, liquidation, resolution or similar proceeding.

The contractual rights impacted under the Proposed Rule are standard contractual provisions that permit a party facing an insolvent covered entity counterparty, or benefiting from credit support provided by an insolvent affiliate of the covered entity counterparty, to immediately: (i) terminate the transaction; (ii) set off and net payment obligations owed between the parties; and (iii) liquidate the counterparty’s collateral.

If the Proposed Rule is adopted, such buy-side QFC parties – including many registered investment companies (registered funds) as well as hedge funds and other private funds (together with registered funds, funds) – will be required by their counterparties to amend existing and new QFCs to reflect the requirements of the Proposed Rule. Accordingly, these buy-side QFC parties will need to consider how they will be impacted from a credit risk and regulatory compliance perspective if the Proposed Rule is adopted.

This OnPoint describes the scope of the Proposed Rule, provides an overview of the applicable bankruptcy and receivership regimes and the impact of the proposed changes on buy-side parties, summarizes the key components of the Proposed Rule, and discusses certain issues under the Proposed Rule that buy-side QFC parties may wish to consider.

Comments on the Proposed Rule must be submitted by August 5, 2016.

Read "Proposed U.S. Federal Reserve Board Rule’s Impact on Buy-Side Remedies in QFCs with Global Systemically Important Banking Organizations and their Affiliates."