Update: U.S. Resolution Stay Final Rules and the Impact on Special Purpose Vehicles used in Securitizations, Repackagings and other Structured Products

In September 2017, the Board of Governors of the Federal Reserve System (the “Board”) adopted a final rule (the “Final Rule”) imposing restrictions on default rights and transfer restrictions in certain qualified financial contracts entered into by global systemically important banking organizations or some of their affiliates. This note analyzes the Final Rule as promulgated by the Board as it applies to Special Purpose Vehicles used in securitizations, repackagings and other structured products. 

Key Takeaways:
  • By specified compliance dates, Covered Entities will be required to amend their existing Covered QFCs under the Final Rule to include appropriate
    limitations on counterparty default rights, and transfer restrictions that arise in connection with bankruptcy or insolvency proceedings of such Covered Entities and their affiliates.
  • On July 31, 2018, ISDA published the 2018 U.S. Resolution Stay Protocol, prepared in conformity with requirements of the U.S. Protocol contemplated under the Final Rule, providing market participants with an alternative to (i) implementing the restrictions of the Final Rule on a counterparty-by-counterparty basis, or (ii) adhering to the less tailored Universal Protocol.
  • Notwithstanding the 2018 U.S. Resolution Stay Protocol, SPVs that are multi-series issuers may face burdensome amendment requirements for existing QFCs due to a lack of grandfathering treatment for existing QFCs that do not comply with the requirements of the Final Rule.
  • Both the CFTC and the Prudential Regulators have proposed rules that Non-Cleared Swaps which are Covered QFCs that are amended in light of the Final Rule should not lose their legacy exemption from compliance with the U.S. Margin Rules as a result of such amendment.
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