Update on the contractual recognition of a stay on termination rights
Swiss banks and securities dealers (hereinafter together the "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 here)
The partial revision of the FINMA Banking Insolvency Ordinance (BIO-FINMA), which entered into force on 1 April 2017, clarifies previously existing uncertainties. For more background information on the regulation, see our blog article on the consultation draft.
Which termination rights are affected? Due to the position papers which were submitted during the consultation phase, FINMA has reiterated in the consultation report that it can only impose a stay on termination rights which (directly or indirectly) are related to insolvency measures of FINMA. The stay only needs to be contractually recognized with respect to these termination rights. The obligation to adjust contracts therefore applies neither to contracts which are to be fulfilled immediately and fixed-term contracts without a termination right, nor to contracts with a termination right that can be exercised at any time or is triggered by other subjective elements.
For which types of contracts does the stay have to be contractually recognized? The relevant types of contracts, in particular, include individual and master agreements regarding:
Securities lending, and
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.
Compared to the consultation draft it has now been clarified that the obligation to adjust contracts also applies if a Swiss bank secures the fulfilment of the relevant types of contracts for a foreign group company. The reasoning for this is that in such cases the taking of insolvency measures by FINMA leads to a direct claim against a Swiss bank and FINMA therefore can impose a stay.
The relevant types of contracts, in particular, do not include:
Contracts with financial market infrastructures, such as central counterparties,
Contracts with group companies that do not operate in the area of finance,
Contracts with individuals, and
Contracts regarding the placement of financial instruments in the market (i.e. in particular subscription and underwriting agreements).
It should be noted that limiting the obligation to adjust contracts to certain types of contracts does not lead to a restriction of FINMA's competency to stay the termination of contracts. A larger group of contracts is therefore affected by a potential stay on the termination of contracts.
There is need for action The relatively long implementation deadlines should not distract from the fact that banks should proceed to implement the regulation swiftly.
The new art. 61a BIO-FINMA sets forth the following implementation deadlines:
The requirement applies to contracts with banks and securities dealers as counterparties which are concluded or amended later than 12 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 18 months after the entry into force of the revised BIO-FINMA.
The consultation report of FINMA sets forth FINMA's view that e.g. a relevant amendment of an ISDA Master Agreement is already given if a new individual transaction is concluded under such ISDA Master Agreement. 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.