The topic comes up when checking how trades are treated if a counterparty enters resolution, and when bringing existing qualified financial contracts into line with the US rule (adhering to the protocol, or amending clauses).

Why simultaneous early termination obstructs resolution

Standard contracts for derivatives and similar products can give a counterparty the right to terminate the contract, accelerate it, and close out the trades. The right can arise because the other party has entered resolution or because resolution powers have been used. The FSB calls these rights, taken together, early termination rights. When a large financial institution (an SIFI, in the FSB's wording) has a large volume of contracts terminated at once, a disorderly rush for the exit can unsettle the market. It can also obstruct resolution measures aimed at continuity of the business1.

In the preamble to its final rule, published in the Federal Register in September 2017, the Federal Reserve Board stated that counterparties' exercise of termination rights was a major factor in the disruption when Lehman Brothers failed in 20082.

A measure that, for a short period, prevents counterparties from exercising early termination rights based solely on entry into resolution is called a resolution stay. This page calls it a stay for short. The preamble to the US rule describes the purpose of the stay under Title II of the Dodd-Frank Act as giving the FDIC (Federal Deposit Insurance Corporation) time to transfer contracts to another company3.

Close-out netting in insolvency is covered in Close-Out Netting.

International standard and national bases

The Key Attributes are a document in which the FSB sets out the main features of an effective resolution regime for financial institutions. FSB documents do not create legal rights or obligations4. In the United States, the United Kingdom, and Japan, the basis for the stay is in domestic law. Key Attribute 4.2 calls for entry into resolution or the exercise of resolution powers alone not to trigger rights such as set-off or termination, as long as the substantive obligations under a contract, such as payment and delivery, continue to be performed. Key Attribute 4.3 calls for the authority to have the power, where termination rights can still be exercised, to stay them temporarily, subject to the following conditions5.

  • The period is strictly limited (for example, not exceeding 2 business days).
  • There are sufficient safeguards to protect the contracts and give certainty to the counterparty.
  • Termination rights based on events of default unrelated to resolution (such as failure to pay or return collateral) are not affected.

I-Annex 5 to the Key Attributes (conditions for the temporary stay of early termination rights) adds further conditions. The authority may not select only some of the contracts under the same netting agreement with the same counterparty for transfer (the so-called ban on cherry-picking). The counterparty can terminate immediately when the stay ends or when the authority gives notice that the contracts will not be transferred6.

The following table shows the basis in each country and region.

Country or region Basis for the stay Who holds the power
International standard Key Attribute 4.3 and I-Annex 5 Stated as a power that the resolution authority should have
United States Section 11(e) of the Federal Deposit Insurance Act and section 210(c) of Title II of the Dodd-Frank Act. For building the stay into contracts, a Federal Reserve Board rule The FDIC (as receiver). The rule on building the stay into contracts is the Federal Reserve Board's7
United Kingdom Section 70C of the Banking Act 2009 The Bank of England8
Japan Article 137-3 of the Deposit Insurance Act The Prime Minister9

Length of the stay, and rights that are not stayed

The period differs by country and by basis. The following table shows the periods in the provisions, as of October 2026.

Provision Length of the stay
Key Attributes (international standard) Not exceeding 2 business days, as an example10
US Federal Deposit Insurance Act Until 5 p.m. Eastern Time on the business day after the day the FDIC is appointed receiver11
US Dodd-Frank Act, Title II Generally until 5 p.m. Eastern Time on the business day after the day the FDIC is appointed receiver12
US Federal Reserve Board rule (additional protections on contracts with credit enhancement such as a guarantee) From the start of the proceeding, until the later of 5 p.m. Eastern Time on the next business day and 48 hours after the start13
UK Banking Act, section 70C The stay is made by a provision in an instrument and starts when the instrument is published. It cannot end later than the end of the next business day after the day of publication (midnight)14
Japan Deposit Insurance Act, Article 137-3 The period set by the Prime Minister (the measure implementation period). The act does not set a length15

In the Federal Reserve Board's rule, a "business day" is a day on which commercial banks are open for general business in the jurisdiction where the proceeding begins16.

In the US rule, the period of the additional protection is set by the later of two times. In the United Kingdom, the end of the next business day after publication is the upper limit. The following figures arrange this in time order.

Start of theproceedingThe proceeding starts. Two timesare counted from hereEarliertimeThe earlier of 5 p.m. Eastern Timeon the next business day and 48hours after the startLatertimeThe later of the two. The stay endshere
Figure 1End of the stay under the US rule (additional protections on contracts with credit enhancement such as a guarantee)
Figure description

The timeline shows the period set by the US Federal Reserve Board's rule for the additional protections on contracts with credit enhancement such as a guarantee. When the proceeding starts, two times are determined, 5 p.m. Eastern Time on the next business day and 48 hours after the start, and the stay ends at the later of the two. Which comes first depends on the day of the week and the time of the start.

InstrumentpublishedThe stay startsDuring theperiodA person told the rights will not betransferred or otherwise affectedcan terminateEnd of nextbusiness dayEnd of the next business day afterpublication (midnight). The staycannot end later
Figure 2Start and upper limit of the stay under section 70C of the UK Banking Act
Figure description

The timeline shows the stay under section 70C of the UK Banking Act in time order. The stay is imposed by a provision in an instrument and starts when the instrument is published. Even during the period, a person who receives a notice from the Bank of England can exercise a termination right. The stay cannot end later than the end of the next business day after the day of publication (midnight). The provision sets only the upper limit and does not state the length within it.

Consider a hypothetical example in which J Corporation, a subsidiary of a large US banking group, has over-the-counter derivatives with a counterparty that are guaranteed by its holding company, and holidays are ignored. Suppose the holding company enters a proceeding, no company takes over its guarantee, and the guarantor no longer bears the same scope of obligations as before the proceeding. In that case the rule allows the contract to give a termination right based on the guarantor's entry into a proceeding only after the period has ended17.

Start of the holding company's proceeding (Eastern Time) 5 p.m. on the next business day 48 hours after the start End of the stay
Wednesday, October 2, 2030, 10 a.m. Thursday, October 3, 5 p.m. (31 hours later) Friday, October 4, 10 a.m. Friday, October 4, 10 a.m.
Friday, October 4, 2030, 10 a.m. Monday, October 7, 5 p.m. (79 hours later) Sunday, October 6, 10 a.m. Monday, October 7, 5 p.m.

For a start on Wednesday, 48 hours after the start is the later time. For a start on Friday, the next business day is Monday, so 5 p.m. on the next business day is the later time.

From the counterparty's side, the value of the trades keeps moving in the market while termination is stayed. Suppose, for example, that when the proceeding starts J Corporation owes the counterparty a net 1 billion yen. If the net amount at termination after the period is 1.2 billion yen, the counterparty's claim rises. If it is 800 million yen, the claim falls. A rise is a gain for the counterparty and a fall is a loss, and it works the other way for J Corporation.

Provision Rights that are not stayed
Key Attributes and I-Annex 5 Termination rights based on reasons unrelated to resolution (such as failure to pay or return collateral) are to be preserved before, during, and after the stay18
US rule A contract may include termination rights based on the contracting party's own entry into insolvency or similar proceedings, or its failure to perform payment or delivery obligations19
UK Banking Act, section 70C A person who receives notice from the Bank of England can exercise termination rights even during the period20

The UK notice says that the rights and liabilities of the bank in resolution will not be transferred and will not be subject to a mandatory reduction instrument or a resolution instrument. Under Article 137-3 of the Japanese Deposit Insurance Act, what is stayed is a termination provision that a decision covers and that is triggered by a measure having been taken21.

What US rules require of qualified financial contracts

The US Federal Reserve Board's rule, 12 CFR Part 252 Subpart I, requires the qualified financial contracts (QFCs) of covered large banking groups to include two kinds of provisions. One builds in the stay of the US special resolution regimes. The other restricts termination rights based on the failure of an affiliate. QFC is defined in section 210(c)(8)(D) of Title II of the Dodd-Frank Act, and the rule uses it in the same sense22. The preamble explains that QFCs include derivatives, repurchase agreements, reverse repos, and securities lending agreements23.

The rule covers US bank holding companies identified as G-SIBs (global systemically important banks), their subsidiaries, and the US subsidiaries, branches, and agencies of foreign G-SIBs. National banks, federal savings associations and similar institutions are excluded, and the contracts of those banks can be subject to the rules in 12 CFR Part 47 and Part 38224. A covered contract is one that explicitly restricts the transfer of the contract by a covered entity, or that explicitly gives a default right that can be exercised against a covered entity25. Contracts with a central counterparty (CCP) and similar contracts are excluded.

The following figure is a decision flow that arranges, in the order of the conditions so far, whether a contract is one that must include the rule's provisions.

YesNoIs a US G-SIB, itssubsidiary, or a foreignG-SIB's US unit a party?Outside thisruleNoYesIs it an excluded bank(such as a national bankor federal savingsassociation)?Outside thisrule(another rulemay apply)YesNoIs the contract aqualified financialcontract (QFC)?Outside thisruleYesNoDoes it explicitlyrestrict transfer orgrant an exercisabledefault right?Outside thisruleNoYesIs a CCP a party?Outside thisruleYesNoIs there a party otherthan the covered entitythat is not a financialmarket utility (FMU)?Outside thisruleIn principle, a contractthat must include therule's provisions
Figure 3Deciding whether a contract must include the rule's provisions
Figure description

For questions 1, 3, 4, and 6, "yes" leads to the next question and "no" ends outside this rule. Questions 2 and 5 run the other way: "yes" ends outside this rule and "no" leads to the next question. A "yes" at question 2 also shows that the contracts of national banks and similar institutions can be subject to the rules in 12 CFR Part 47 and Part 382. If questions 2 and 5 are answered "no" and the other four "yes", the contract is, in principle, one that needs the provisions the rule requires.

Consider a hypothetical example in which three trades are tested against the conditions above. The actual decision depends on the terms of the trade and on how the authorities apply the rule. Suppose J Corporation is a subsidiary of a US bank holding company identified as a G-SIB, and is neither a national bank nor a federal savings association.

Case Condition that applied Decision
J Corporation has an over-the-counter derivatives contract that explicitly gives a default right, with a counterparty that is not a CCP (the counterparty is not a financial market utility) The contract explicitly gives a default right, and the counterparty is neither a CCP nor a financial market utility In principle, a contract that must include the provisions (the governing-law exception and the deadline are separate conditions)
J Corporation clears derivatives with a CCP as its counterparty A CCP is a party Outside this rule
A national bank that is a subsidiary of the same holding company has a contract with a counterparty A national bank is an excluded bank Outside this rule. The contract can be subject to the rules in 12 CFR Part 47 and Part 382

The required provisions are as follows.

Provision Content Section
Building in the US special resolution regimes (transfer) When a covered entity enters a proceeding, a transfer of the contract is effective to the same extent as under US law 252.83(b)
Building in the US special resolution regimes (termination rights) When a covered entity or its affiliate enters a proceeding, a default right cannot be exercised more broadly than under US law 252.83(b)
Ban on termination rights based on the failure of an affiliate The contract may not allow, directly or indirectly, a termination right based on a direct party's affiliate entering resolution or a similar proceeding 252.84(b)
Ban on restricting the transfer of credit enhancement The contract may not prohibit the transfer of credit enhancement, such as a guarantee, provided by an affiliate (with an exception) 252.84(b)
Burden of proof for termination rights After an affiliate enters resolution or a similar proceeding, the party that exercises a termination right must prove, by clear and convincing evidence, that the contract permits the exercise 252.84(i)

The ban on restricting the transfer of credit enhancement covers transfers upon or following the affiliate's entry into a proceeding. It does not apply where the transfer would make the supported party a beneficiary in violation of law.

If a contract designates the US special resolution regimes as part of its governing law and all counterparties are US persons, it may not need to be rewritten into the stay provisions. The provisions on affiliates apply separately. Termination rights based on a contracting party's own proceeding, or on failure to pay or deliver, are exceptions that a contract may include. For contracts with credit enhancement such as a guarantee, a contract may include termination rights only on certain conditions, such as after the period has ended26.

The deadline for bringing contracts into line with the rule differs by the type of counterparty.

Contracting parties Deadline (for entities that were covered entities on November 13, 2017)
Covered entities, or excluded banks, on both sides January 1, 2019
The counterparty is neither a covered entity nor an excluded bank, and is a financial counterparty under the rule July 1, 2019
A counterparty that is none of the above (including small financial institutions) January 1, 2020

The deadline applies to contracts entered into on or after January 1, 2019, and also to contracts entered into before that date where a new contract is entered into on or after that date with the same counterparty or its consolidated affiliates27.

Reaching contracts abroad

A stay under law has effect only within the country's borders. For contracts governed by foreign law, the same content is brought in through contract clauses or protocols. In an announcement in October 2014, the FSB welcomed an agreement on an ISDA protocol and called on large banks and others to adhere to it by the end of 201528. The protocol mechanism itself is covered in ISDA Protocols.

The US rule also allows a covered entity to comply by adhering to a protocol instead of putting clauses into individual contracts. The rule defines the "ISDA 2015 Universal Resolution Stay Protocol," as of May 3, 2016 and including minor amendments, as the Universal Protocol. A contract amended by it is deemed to comply with the rule unless the Federal Reserve Board determines otherwise. Adherence to the U.S. Protocol, a version limited in scope to match the US rule, is treated the same way29.

The United Kingdom also has rules on bringing a stay into contracts governed by the law of a third country. The Prudential Regulation Authority (PRA) supervisory statement SS42/15 applies these rules to banks and building societies authorized by the PRA, and investment firms designated by the PRA, and to the holding companies that are their parents31. The prohibition does not apply if the counterparty has agreed, in an enforceable manner, to limit its termination rights and its rights to enforce security as the rules provide. The rules do not automatically require a legal opinion. The PRA expects the firm to be able to demonstrate that it complies32.

Relationship with contracts with central counterparties

Contracts with a central counterparty (CCP) are outside the scope of the US rule. A contract to which a CCP is a party, and a contract in which every party other than the covered entity is a financial market utility (FMU), are excluded33. The preamble states that the proposed rule had excluded contracts cleared through a CCP from the start34.

The international standard also preserves the rights of financial market infrastructures (FMIs) such as CCPs. When a participant in resolution fails to meet its margin, collateral, or settlement obligations, the FMI continues to hold the termination rights arising from that failure. The power to impose a stay also reaches an FMI's termination rights based solely on a participant's resolution, but it is used with care not to undermine the safe and orderly operation of the FMI35.

Practical implications

A contract covered by the rule has to be brought into line either by including the provisions in the contract or by adhering to the protocol, unless the governing-law exception applies. The deadline differs by the type of counterparty, and adherence to the protocol brings a contract into line only if the counterparty has also adhered. A contract with a CCP is outside the rule.

What this article does not cover

This page does not cover the EU regime, definitions of QFC in other countries, any Japanese rule requiring stays to be brought into contracts abroad, or how a decision under Article 137-3 of the Deposit Insurance Act reaches termination rights based on reasons other than a measure.

Notes

  1. Financial Stability Board, "Key Attributes of Effective Resolution Regimes for Financial Institutions" (revised version, April 25, 2024), I-Annex 5, 1.1 (page 48). ↩

  2. Board of Governors of the Federal Reserve System, 82 Federal Register 42882 (September 12, 2017), "I. Introduction" and "A. Background" (the paragraph on Lehman). ↩

  3. The same Federal Register notice (82 Federal Register 42882), "A. Background", text and notes 34 and 35. The purpose of the Title II stay is stated as "To give the FDIC time to effect this transfer". ↩

  4. Financial Stability Board, "Key Attributes of Effective Resolution Regimes for Financial Institutions" (revised version, April 25, 2024), the note on page 2. ↩

  5. The same document, Key Attributes 4.2 and 4.3 (page 11). Conditions (i) to (iii) are 4.3 (i) to (iii). ↩

  6. The same document, I-Annex 5, 2.1 (iii) (no cherry-picking) and (vii) (page 49). ↩

  7. Section 11(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)) and section 210(c) of Title II of the Dodd-Frank Act (12 U.S.C. 5390(c)), as cited in the notes to the preamble in the Federal Register notice (82 Federal Register 42882). ↩

  8. Banking Act 2009, section 70C(1). ↩

  9. "預金保険法" (Deposit Insurance Act, Act No. 34 of 1971; in Japanese), Article 137-3, paragraph 1. The English terms here are unofficial translations of the act. ↩

  10. Key Attribute 4.3 (i) (page 11). ↩

  11. 82 Federal Register 42882, "E. Prohibited Cross-Default Rights", note 198 (12 U.S.C. 1821(e)(10)(B)(I)). ↩

  12. 82 Federal Register 42882, "A. Background", note 35 (12 U.S.C. 5390(c)(10)(B)(i)(I)). The note says "generally lasts". ↩

  13. 12 CFR 252.84(g)(1). ↩

  14. Banking Act 2009, section 70C(5) and (6). Subsection (5) provides that the power is exercised through a provision in a transfer instrument or similar. Subsection (6)(a) provides that it starts on publication of the instrument, and (b) that the end is an upper limit, "no later than". The provision sets only the upper limit. ↩

  15. Deposit Insurance Act (in Japanese), Article 137-3, paragraph 1. The length is "the period set by the Prime Minister" (our translation). Paragraph 4 provides for public notice in the Official Gazette, and notification, when a decision is made. ↩

  16. 12 CFR 252.84(g)(2). ↩

  17. 12 CFR 252.84(f)(3) and (g). Paragraph (f) covers a termination right after the period ends where one of (1) to (4) applies. This example is a case under (3) (a case in which the guarantor, or the company that takes over, does not bear the same or substantially the same scope of obligations). ↩

  18. Key Attribute 4.3 (iii) (page 11) and I-Annex 5, 2.1 (v) (page 49). ↩

  19. 12 CFR 252.84(d). ↩

  20. Banking Act 2009, section 70C(2)(a), (2)(b), (3) and (7). The provision applies to contracts of the bank in resolution under (2)(a) in which all obligations to pay, deliver, or provide collateral continue to be performed, and to contracts of a subsidiary under (2)(b) that meet the conditions in (3). Subsection (7) covers a person who receives notice and can exercise the termination right even during the period. ↩

  21. Deposit Insurance Act (in Japanese), Article 137-3, paragraph 1. The English terms for the statutory terms (such as "measure implementation period" and "specified cancellation or similar action") are unofficial translations. When a certification or specified certification is made, the Prime Minister, after deliberation by the Financial Crisis Response Council, can decide that such provisions, in contracts relating to transactions that are related to the financial system and specified by Cabinet Office and Ministry of Finance order, are of no effect, to the extent necessary, during the measure implementation period, where the provisions stipulate that such an action takes effect because a measure has been taken. ↩

  22. 12 CFR 252.81, definition of "Qualified financial contract (QFC)". ↩

  23. 82 Federal Register 42882, "A. Background", "Qualified financial contracts, default rights, and financial stability." ↩

  24. 12 CFR 252.82(b). ↩

  25. 12 CFR 252.82(c) and (d). ↩

  26. 12 CFR 252.83(a) (governing-law exception), 252.84(b), (d) (exception for a party's own proceeding and similar), (f) (termination rights after the period where one of (1) to (4) applies), (h) (under (h)(2), exercise during the FDI Act stay period is allowed only in a form in which the supported party stops performing its own obligations) and (i). ↩

  27. 12 CFR 252.82(c) and (f)(1). The definition of financial counterparty is in 252.81. ↩

  28. Financial Stability Board, "FSB welcomes industry initiative to remove cross-border close-out risk" (October 11, 2014), first and second paragraphs. ↩

  29. 12 CFR 252.85(a). The definition includes the annex for securities financing transactions and the annex for other agreements. ↩

  30. 82 Federal Register 42882, "A. Background", the description of the "Industry-developed protocol", and 12 CFR 252.85(a)(3)(iii). ↩

  31. Prudential Regulation Authority, "SS42/15 – Contractual stays in financial contracts governed by third-country law", 1.3 (a paragraph dated June 1, 2016). ↩

  32. The same document, 3.1 and 3.2. ↩

  33. 12 CFR 252.88(a). ↩

  34. 82 Federal Register 42882, "II. Restrictions on QFCs of GSIBs", "B. Covered QFCs", the paragraph on CCPs. ↩

  35. Key Attributes, II-Annex 1, 3.1 and 3.2, and I-Annex 5, 1.3 (page 48). ↩