U.S. Regulators Restrict Default Rights in Certain Contracts, including Derivatives, Repos and Securities Lending Agreements

The Board of Governors of the Federal Reserve System (the “Board”) recently adopted a final rule (the “Final Rule”) imposing restrictions on default rights and transfer restrictions in certain qualified financial contracts (“QFCs”) entered into by global systemically important banking organizations (“GSIBs”) or their affiliates. Under the Final Rule, a QFC includes over-the-counter derivatives, repurchase and reverse repurchase agreements, securities lending and borrowing transactions, commodity contracts and forward agreements entered into by U.S. GSIB bank holding companies and their subsidiaries as well as the U.S. operations of non-U.S. GSIB banks (together, subject to certain exceptions, “Covered Entities”). Substantively identical rules have been issued by the Federal Deposit Insurance Corporation (the “FDIC”) and the Office of the Comptroller of the Currency (the “OCC”) (together, the “Parallel Rules”).

This note analyzes only the Final Rule as promulgated by the Board.