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Financial Planning > Behavioral Finance

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

By Elizabeth D. Festa

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Globally systemic insurer? If Western regulators have their way, you may be able to fail, but the market can keep the derivatives contracts going for awhile. 

The Federal Deposit Insurance Corporation (FDIC), together with the Bank of England, the German Federal Financial Supervisory Authority (BaFin) and the Swiss Financial Market Supervisory Authority (FINMA), wrote a joint letter to encourage the global trade association chair, Stephen O’Connor of the International Swaps and Derivatives Association, Inc. (ISDA), to help adopt language in derivatives contracts to delay the early termination of those instruments should a globally systemic important financial institution (G-SIFI) fail.

Because derivatives oversight is still largely unmoored from straight regulation, the industry is the tail wagging the dog of the banking authorities.

U.S. insurers deemed GSIFIs by the G-20′s Financial Stability Oversight Council (FSOC) are Prudential Financial, MetLife and AIG. Foreign insurance companies with holdings in the U.S. include Aviva Plc, AXA and the UK’s Prudential PLC.

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. 

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