FDIC, int'l authorities call for extension to certain derivatives contracts

In the letter, the banking authorities express support for changes to provide for short-term suspension of early termination rights and other remedies in the event of a G-SIFI resolution. The adoption of such changes would allow derivatives contracts to remain in effect throughout the resolution process following the implementation of a number of potential resolution strategies, the FDIC stated. 

By minimizing the disorderly unwinding of such contracts, these changes would place resolution authorities in a better position to resolve G-SIFIs in a manner that promotes financial stability while providing market certainty and transparency.

The FDIC has a seat on the FSOC and is one of the three national banking regulators involved with Basel III rules for minimum capital standards for insurers under the Federal Reserve Board's oversight, which is where the global insurers now are — by domestic FSOC decree — or will be. 

"Uniform contractual language that limits termination rights with respect to derivatives transactions will greatly enhance the success of a resolution of a global systemically important financial institution, which, by its nature, will have significant cross-border operations," said FDIC Chairman Martin J. Gruenberg. "Continued efforts among international regulators to cooperate on cross-border resolution issues such as this will reduce the risk of global financial instability and minimize moral hazard in the event of a G-SIFI resolution," he stated.