ISDA derivatives protocol faces implementation challenges

Author: Gemma Varriale | Published: 18 Aug 2014

Inserting new clauses into derivatives contracts could be the final piece of the solution to the too-big-to-fail conundrum that has vexed regulators since the collapse of Lehman Brothers in 2008.

The industry group for the $700 trillion global swaps market, the International Swaps and Derivatives Association (ISDA), is revising international protocols to impose a temporary pause that would prevent counterparties from terminating swap trades with a failing bank for up to 48 hours.

The revised rules are designed to prevent a repeat of a problem revealed during the 2008 financial crisis, when counterparties all simultaneously unwound derivatives contracts, sparking a panic that triggered the global credit crisis.

"One of the fundamental problems with post-crisis financial legislation has been how to prevent international derivatives portfolios terminating and unwinding," said Michael Voisin, a London-based capital markets specialist with Linklaters. "An English statute cannot amend a New York law contract; likewise the provisions...



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