In this paper, I compare the development of cross-border solutions for multinational default of commercial entities to those solutions available for financial institutions, and argue for the development of a uniform framework for cross-border resolution.
The international legal architecture supporting cross-border insolvency and cross-border resolution is not complete. UNCITRAL in 1997 promulgated its Model Law on Cross-Border Insolvency (the Model Law), a framework for global insolvency and restructuring of international commercial enterprises. The Model Law does not, however, specifically address the cross-border resolution of international financial institutions. More recently, in 2011, an international standard for the resolution of Significantly Important Financial Institutions (SIFIs)—the Key Attributes of Effective Resolution Regimes for Financial Institutions (the Key Attributes)—was promulgated by the Financial Stability Board (FSB). This resolution standard identifies domestic best practices and includes specific principles concerning the cross-border aspects of resolution regimes. However, it does not set forth a detailed cross-border resolution framework with legislative provisions that can be enacted uniformly across countries’ legal systems.
Since the financial crisis of 2007/9, there have been urgent calls for action, including by standard-setting institutions, to develop a framework for cross-border resolution, and key elements have been proposed by international organizations. Importantly, a recent initiative of the FSB introduced contractual solutions to enhance cross-border recognition of resolution measures, while also emphasizing the need for statutory solutions going forward and delineating principles that can guide legal systems as they develop statutory frameworks. However, the international community and standard-setters have not yet undertaken a project to develop a comprehensive legal framework with legislative provisions for cross-border resolution.
I analyze in this paper both possible reasons and concerns that may have slowed the development of a cross-border resolution framework with regard to financial institutions. In the process, I highlight the importance of the most recent initiatives to enhance certainty in the application of resolution measures across borders: the International Swaps and Derivatives Association (ISDA) Resolution Stay Protocol (the Protocol) and the FSB cross-border resolution project.
In particular, I argue that these initiatives contribute to the development and harmonization of the international standard for the treatment of financial contracts in insolvency and resolution. Prior to the FSB initiative and the Protocol, the prevailing insolvency standard had aimed to promote certainty of financial transactions according to the contractual terms (transaction certainty). This standard allowed financial contracts to remain “bankruptcy remote” through the inclusion of early termination and close-out netting provisions, often at the expense of the failing firm. Later developments regarding bank and SIFIs resolution, including the Protocol, stress the certainty of effective resolution measures (resolution certainty) that can briefly stay the termination and close-out netting rights in financial contracts.
These developments in the bank and SIFI resolution context have contributed to the rethinking about the underlying goals of the insolvency standard on the treatment of financial contracts, and the strengthening of its rationale by considering goals beyond transaction certainty. Indeed, the different uses and applications of the certainty objective highlighted its elusiveness and limitation as a sole rationale for policy choices in this area. This recognition of the limitation of certainty as a key policy objective has resulted in an emerging standard on the treatment of financial contracts in insolvency that reflects a balance between a wider range of interests that is more consistent across insolvency and resolution regimes. I argue that a broad approach and broader goal baseline, beyond the pursuance of certainty—either transaction certainty or resolution certainty—is also required for addressing the cross-border gap.
A focus on resolution certainty alone might constrain further development of a global model for cross-border resolution, since a consideration of a range of interests is required in that context to both ensure stability and contain losses. Other constraints may stem from concerns that the Model Law for commercial entities, from which inspiration could be drawn, is perhaps not sufficiently relevant, as it is arguably based on narrower objectives and different types of enterprise structures. Additionally, there may also be concerns regarding the feasibility of formulating and adhering to a framework solution in the near future. The recognition of the Key Attributes as the standard for resolution regimes may also raise concerns regarding the legitimacy of developing a more rigid international instrument for the cross-border aspects of the regime. In this paper, I examine these constraints and address possible concerns regarding the development of a model framework for cross-border resolution.
Irit Mevorach is Associate Professor in Law at the University of Nottingham.