On December 12, MFA submitted a comment letter to the Federal Deposit Insurance Corporation (FDIC) on its proposed rule on “Restrictions on Qualified Financial Contracts of Certain FDIC-Supervised Institutions; Revisions to the Definition of Qualifying Master Netting Agreement and Related Definitions”.
In our letter, MFA expressed our 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 FDIC-supervised institution. In particular, MFA reiterated its strong objections to the U.S. banking regulators’ contemplated initiatives to restrict end-users’ cross-default rights as well as the broader Financial Stability Board initiative on cross-border recognition of resolution actions. MFA cited recent changes to market behavior related to credit risk, and market activity related to the instability of a global financial institution as evidence of the systemic and market harm that the proposed rules would cause. MFA also attached its 2015 white paper setting forth our views on these initiatives, and urged the FDIC to defer proceeding with the proposed rules pending further study and assessment of the costs and benefits as well as the market impact of the proposed rules. In addition, understanding that, notwithstanding MFA’s objections, FDIC may determine to proceed with the proposed rules, MFA provided substantive comments on the proposed rules, in which, among other comments:
- MFA requested that the FDIC incorporate language providing that, upon a payment or delivery default by the insolvent institution, all contractual notice, cure, dispute resolution, or other periods will be deemed immediately satisfied such that end-users’ default rights crystallize and can be exercised;
- MFA urged the FDIC to eliminate proposed restrictions on end-users’ exercise of their default rights during U.S. and foreign insolvency proceedings;
- MFA urged the FDIC to expand the proposed safe harbor for compliance with the proposed rules to apply not only to the ISDA 2015 Universal Dealer Protocol, but also to the ISDA Resolution Stay Jurisdictional Modular Protocol, including the creditor protections contained therein and the mechanics that allow jurisdiction-by-jurisdiction and dealer-by-dealer adherence; and
- MFA strongly recommended that the FDIC eliminate the retroactive application of the proposed rules, and apply the rules solely prospectively, to align the proposed rules with the final rules of the U.K. Prudential Regulation Authority, and the statutory requirements adopted in Germany.