September 2011

LSEG Response to the FSB Consultation on Effective Resolution of Systemically Important Financial Institutions

LSEG has provided a response to the Financial Stability Board’s consultation on the effective resolution of systemically important financial institutions. We comment on the discussion notes regarding conditions for imposing temporary stays on early termination rights (Section II.2 and Annex 8 of the Consultation), in particular the suspension of close out netting.

• Whilst the ability to suspend obligations under contracts to which a failing institution is a party and to temporarily suspend close-out netting may be desirable in order to maintain the position of that failing institution, the implications for unsettled market contracts that may be subject to the default rules of a regulated market or a CCP must not be overlooked;
• Nor should the rights of non-failing counterparties to treat a failing party as in default under a bi-laterally negotiated contract.  Often, the right to treat a party or member of an exchange or clearing house as being in default does not depend on a technical act of insolvency but may simply be a failure to pay for, or deliver, securities (or the likelihood that such an event will occur);
• We therefore agree with the FSB’s argument that a stay should not extend to all payment and delivery obligations and would not prevent close-out for reasons of failure to pay or deliver;
• Nevertheless, any rules allowing the effective freezing of financial markets contracts must be carefully designed so as not to frustrate the operation of any default rules and custom and practice in various financial markets.

LSEG Response to FSB Consultation(file pdf - 59 KB)