On May 5, 2016, ISDA® announced the launch of the ISDA Resolution Stay Jurisdictional Modular Protocol (RSJMP). The RSJMP is a multilateral amendment vehicle which is intended to enable market participants to comply with regulations designed to reinforce the cross-border enforceability of stays on termination rights in certain financial contracts with a failing global financial institution.

To do this, the RSJMP amends financial agreements, such as repo, securities lending and derivatives contracts, including ISDA Master Agreements, to ensure that stays under rules limiting termination rights under these agreements are effective with respect to all counterparties, regardless of the governing law of the agreement. The RSJMP amends agreements to permit adhering parties to comply with the stay regulations of their choice.

Statutory stays in a particular jurisdiction are intended to apply to all contracts with all counterparties governed under the law of that jurisdiction in the event a bank or covered financial institution enters into resolution proceedings. However, due to uncertainty over whether a stay would be enforceable on a cross-border basis if outstanding trades are governed by overseas law, the protocol is necessary to incorporate these provisions into the parties' agreements.

The RSJMP features separate "jurisdictional modules," each designed to closely reflect the requirements of a particular jurisdiction. The RSJMP has been designed to provide flexibility to allow adhering parties to choose the specific jurisdictional modules it wishes to opt into.

To this end, the RSJMP allows for dealer-by-dealer adherence to allow an adhering party to either adhere for:

An entity may adhere to a jurisdictional module as:

Adhering parties that choose to adhere to the resolution regimes that one or more regulated entities are subject to must notify the regulated entity in order for the adherence to be effective. Notification can be accomplished either through a bilateral notice or through ISDA Amend (see Legal Update, ISDA and IHS Markit Launch ISDA Amend 2.0 to Assist with Margin Compliance and Resolution Stay).

The specific operative provisions in a jurisdictional module are determined by regulatory requirements in the elected jurisdiction(s). Differences in how each jurisdictional module amends a covered agreement depend on the requirements of the applicable stay regulation.

The UK has published its own jurisdictional module as part of the Prudential Regulatory Authority Rulebook (PRA rule), which enables firms to comply with the UK Prudential Regulation Authority's resolution requirements. ISDA plans to launch additional jurisdictional modules to meet other national regulations, including Germany, Japan, Switzerland, and the US, once these resolution regimes are finalized.

The US regime is currently in the proposal stage (see Legal Update, Fed Proposes Limit on Termination Rights in G-SIB Derivatives Contracts). Once the US stay regulations have been finalized and adopted, they will be reflected in the US Module of the RSJMP.

The mechanics of the RSJMP are relatively straightforward. Using the PRA rule jurisdictional model as an example, counterparties to a banking organization wishing to adhere to the PRA rule may do so using the UK module of the RSJMP. In turn, the UK module amends covered agreements, effectively inserting a choice of law provision in the covered agreements between the parties in order to comply with the relevant PRA requirements. The covered agreements are then enforceable to the same degree as if the contracts were already governed under UK law.

Differences between jurisdictional modules may include:

In addition to adhering as a principal, the RSJMP allows for agency adherence. Parties can adhere either as an agent on behalf of all principals it represents, or only some. If adhering on behalf of some principals, the agent must provide its counterparties with a list of applicable principals either through a bilateral notice or ISDA Amend.

In November, ISDA launched the 2015 Universal Resolution Stay Protocol, which enabled adhering parties to opt in to multiple existing and forthcoming special resolution regimes (see Legal Update, ISDA Expands Resolution Stay Protocol to Include Securities Lending and Repo Transactions). Twenty-one large global banks voluntarily adhered to this protocol at launch.

Jurisdictional modules, informational documents, and webinars are available on ISDA's website.

For more information on the RSJMP, see the ISDA FAQs.

The RSJMP is intended for broad use by all market participants. However, the challenge of course remains the same as with prior ISDA resolution stay protocols – convincing buy-side (non-dealer) counterparties to adhere and relinquish termination and liquidation rights that they have bargained for in their agreements often at significant cost.