In a joint letter to the International Swaps and Derivatives Association (ISDA), the supervisory authorities call for a revision of the master agreements for derivatives transactions that are in common use worldwide.

The aim of the initiative is to ensure that possible supervisory measures aimed at ensuring the orderly resolution of an institution do not give counterparties the right to no longer meet obligations arising from existing derivatives agreements with the institution. To date, master agreements may, for example, provide an institution’s counterparties with termination rights in the event of an orderly resolution. If a counterparty were to make use of such termination rights, positions that the institution had previously hedged using derivatives could become unhedged, further impairing the institution’s position. “Our joint initiative with three other supervisory authorities from key financial centres shows how serious we are in our efforts to facilitate the resolution of even large, heavily interconnected banks without damage to society at large”, said BaFin President Dr Elke König. Part of this effort also involves finding an appropriate contract design for OTC derivatives transactions.

The Financial Stability Board (FSB) will also address this issue in the Steering Group on Resolution (ReSG), which is headed by Dr König.

ISDA is an organisation established under private law offering a range of services primarily relating to the over-the-counter derivatives business. This includes providing master agreements.