01 March 2017

Contractual recognition of a stay on termination rights

Swiss banks and securities dealers (hereinafter for the sake of simplicity "banks") must make sure that the counterparties of certain contracts contractually recognize, in advance, a possible temporary stay on the termination of contracts imposed by FINMA. This should ensure that FINMA's insolvency measures are internationally enforceable (on this subject, see our article). Existing uncertainties are now to be clarified through a revision of the law.

Stay on termination rights
Pursuant to art. 30a Banking Act (BA), FINMA can, together with the ordering or approval of insolvency measures, temporarily stay the termination of contracts. This rule arises from the financial crisis and should ensure that important contractual relationships can be maintained in the event of a bank restructuring. The stay not only relates to termination rights, but also to any set-off, realization and transfer rights.

The stay imposed by FINMA can last up to two business days. If, after the stay has lapsed, the bank is in compliance with the applicable legal prerequisites of the banking license and other statutory provisions, the contract will continue in force. Termination rights that arose during the stay cannot be exercised thereafter.

Why does a stay need to be contractually recognized?
If a contract is governed by Swiss law and provides for a Swiss place of jurisdiction, a con-tractual recognition of a possible imposition of a stay on termination rights by FINMA is not required. If a contract is governed by foreign law or provides for a foreign place of jurisdiction, there is a risk that a stay would not actually be enforceable or at least that such a claim would be made by the counterparty. Pursuant to art. 12 para. 2bis Banking Ordinance (BO), Swiss banks therefore have to agree with their counterparties in contracts that are governed by foreign law or provide for a foreign place of jurisdiction, that a possible stay imposed by FINMA will be recognized.

No obligation to amend existing contracts
There is no obligation on Swiss banks to review and amend all existing contracts.

Obligation applies to new contracts and amendments to existing contracts
New contracts that are governed by foreign law or provide for a foreign place of jurisdiction must include a contractual recognition of a possible stay.

Further, if an existing contract is amended, the Swiss bank must ensure that a clause regarding the contractual recognition of a stay is included. It will need to be examined on a case-by-case basis whether a change in a contract qualifies as an amendment for which the contractual recognition requirement applies (for example questionable in the case of an amendment to an annex of a contract).

For automatic modifications to contracts, which occur without any further action of a party, there is no obligation to adjust the contract.

For which types of contracts does the stay have to be contractually recognized?
The current art. 12 para. 2bis BO in connection with art. 30a BA does not define the types of contracts for which a stay must be contractually recognized. The purpose of the provision suggests that the relevant contracts must be essential for the central functions of the bank. It was, and currently still is, unclear which contracts this pertains to in practice.

Partial revision of the BIO-FINMA is to clarify uncertainties
At the end of 2016, FINMA carried out a consultation on the partial revision of the FINMA Banking Insolvency Ordinance (BIO-FINMA). The revision (new art. 56 BIO-FINMA) should clarify uncertainties and thereby, in particular, determine for which contracts the contractual recognition requirement applies.

Relevant contracts pursuant to the draft ordinance
The new art. 56 BIO-FINMA is to include an exhaustive list of relevant types of contracts, which has been harmonized and coordinated with the EU Directive on the recovery and resolutions of banks.

The list, in particular, includes individual and master agreements regarding:

  • Derivative transactions
  • Securities lending
  • Repurchase transactions.

Credit agreements in the interbank market are also included, i.e. in the case of a bank receiving a loan from another bank. However, credit agreements are not included, if a bank only acquires a sub-participation in a credit financing of a company from the lending bank.

In addition, the scope of application of the provision is to be limited by a catalogue of exemp-tions. In particular, contracts with financial market infrastructures, such as central counter-parties, would not be included.

Outlook
It remains to be seen at the entry into force of the revision, which may be delayed until April 2017, which of the clarifications and implementation deadlines of the draft ordinance will be included in the final version.

  • The law currently does not set forth any implementation deadlines. The planned revision of the BIO-FINMA (new art. 61a BIO-FINMA) is to explicitly set forth as of when the contractual recognition requirement of a stay on termination applies. Two implementation deadlines are contemplated:
    The requirement applies to contracts with banks and securities dealers as counterparties which are concluded or amended later than three months after the entry into force of the revised BIO-FINMA.

  • Contracts with all other counterparties will only need to meet the new requirement if they are concluded or amended later than six months after the entry into force of the revised BIO-FINMA.

Autoren: Jana Essebier, Seraina Tsering, Dominic A. Wyss

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