Further update on the contractual recognition of a stay on termination rights
ISDA has launched the Swiss Module to the ISDA Resolution Stay Jurisdictional Modular Protocol
The International Swaps and Derivatives Association, Inc. (ISDA) has launched a Swiss Jurisdictional Module (Swiss Module) to the ISDA Resolution Stay Jurisdictional Modular Protocol (Protocol). It provides Swiss banks and their counterparties with an efficient mechanism to implement the contractual recognition requirement set forth in art. 12 para. 2bis of the Banking Ordinance. This is the fourth jurisdictional module launched by ISDA since it published the Protocol in May 2016.
The purpose of the Protocol is to allow market participants to comply with stay regulations in different jurisdictions. The Protocol consists of boilerplate provisions and individual jurisdictional modules. Such jurisdictional modules amend relevant contracts between entities that are subject to a stay regulation and their counterparties by supplementing the contracts with additional terms.
Why is the Swiss Module necessary? Swiss banks must ensure that the counterparties of certain financial contracts contractually recognize, in advance, a possible temporary stay on the termination of contracts imposed by FINMA. Since FINMA can only impose a stay on termination rights (directly or indirectly) related to insolvency measures it has imposed, the stay only needs to be contractually recognized with respect to such termination rights. The recognition requirement applies to contracts that are subject to foreign law or provide for a foreign place of jurisdiction. The relevant types of contracts in particular include individual and master agreements regarding derivative transactions, securities lending, and repurchase transactions. For more background information on the stay regulation, see our previous blog articles on this topic: Contractual recognition of a stay on termination rights and Update on the contractual recognition of a stay on termination rights.
How does the Swiss Module work? The Swiss Module covers the contracts which are subject to the recognition requirement under the Swiss stay regulation (Covered Agreements).
A party may adhere to the Swiss Module as a bank that is subject to the Swiss stay regulation (Regulated Entity), as a counterparty of a Regulated Entity under a Covered Agreement (Module Adhering Party) or in both capacities. A Regulated Entity adhering to the Swiss Module agrees that the Swiss Module shall apply to all Covered Agreements between itself and each Module Adhering Party that identifies such Regulated Entity as a chosen counterparty. A Module Adhering Party, on the other hand, can chose the Regulated Entity/Entities it would like to amend the Covered Agreements with. By adhering to the Swiss Module, the Module Adhering Party agrees to accept a stay on termination rights imposed by FINMA with respect to each Covered Agreement with a Regulated Entity it has chosen.
A recognition made with respect to Covered Agreements will apply to existing transactions ("retrospectively") and to new transactions under such agreements ("prospectively"). The recognition will apply to Covered Agreements entered into as of the parties' adherence to the Swiss Module, but not to any agreements entered into by the parties thereafter. A new agreement that would be a Covered Agreement under the Swiss Module would need to incorporate the Swiss Module by reference.
Until when is action required? The Swiss stay regulation sets forth the following compliance deadlines:
The recognition requirement applies to contracts with a counterparty that is a bank or a securities dealer, or would be a bank or a securities dealer if it was domiciled in Switzerland, which are concluded or amended after 1 April 2018.
Contracts with any other counterparty will only need to meet the recognition requirement if they are concluded or amended after 1 October 2018.
FINMA deems a relevant amendment of an ISDA Master Agreement to be already given if a new individual transaction is concluded thereunder. Since it is not predictable when new transactions will be concluded, and it is not uncommon for such transactions to be concluded on short notice, we recommend that banks already begin with the adjustment of the ISDA Master Agreements and similar agreements. Even if a party adheres to the Swiss Module prior to the applicable compliance deadline, Covered Agreements will only be amended by the Swiss Module as of the applicable deadline.
The Swiss Module is open to ISDA members and non-members. It can be used not only in relation to ISDA Master Agreements, but also for any other agreements which are considered to be Covered Agreements. Further information on the Swiss Module can be found on the ISDA website.