On August 5, MFA filed comments to the Board of Governors of the Federal Reserve System (Board) in response to its request for comments on “Restrictions on Qualified Financial Contracts of Systemically Important U.S. Banking Organizations and the U.S. Operations of Systemically Important Foreign Banking Organizations; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions.”
In the letter, MFA raises strong concerns with the content of the Proposed Rules, and the restrictions contained therein on the ability of end-users and other market participants to exercise certain default rights under qualified financial contracts (QFCs) during the failure of a covered entity (Covered Entity). The letter explains that default rights are critically important to end-users when facing a troubled counterparty and serve important public policy goals of protecting investors and the stability of the financial markets. By depriving end-users of these rights, the Proposed Rules would exacerbate the “run on the bank” problem by encouraging end-users to seek to migrate business away from a Covered Entity as soon as they have any concerns about its stability. MFA also raises the concern that the Board’s proposed restrictions on certain end-user default rights during U.S. bankruptcy proceedings is inconsistent with Congressional intent and is a substantial constraint on a key risk mitigation tool that end-users need to protect themselves and their investors and/or beneficiaries.
Consistent with the views set forth in MFA’s white paper (attached to the letter as Annex A), MFA urges the Board to defer proceeding with the Proposed Rules pending study and assessment of the costs and benefits, as well as the market impact of the Proposed Rules, the proposed Board rules on Clean Holding Company Requirements and the broader FSB initiatives, with specific focus on the retroactive application to existing default rights and the impact on all affected market participants, including end-users.
In the letter, MFA also provides a series of specific recommendations with respect to the Proposed Rules, including a recommendation for a final safe harbor that works for most market participants by permitting compliance with the ISDA Resolution Stay Jurisdictional Modular Protocol and its current adherence mechanics.