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What does the policy statement from the Prudential Regulation Authority (PRA) on contractual stays mean in practice? Christopher Leonard, partner at Akin Gump Strauss Hauer and Feld, comments on the final proposals related to contractual stays in financial contracts governed by third-country law.

Original news

PRA rules on contractual stays in financial contracts governed by third-country law, LNB News 16/11/2015 110

A policy statement from the Prudential Regulation Authority (PRA) sets out final rules aimed at reducing the risk of contagion from the failure of a relevant firm and supporting its orderly resolution. The rules ensure resolution action taken in relation to a firm would not immediately lead to the early termination of its financial arrangements (or those of its subsidiaries) governed by third-country law while similar financial arrangements governed by the UK laws, or those of another European Economic Area jurisdiction, are stayed.

What is the background to final rules?

In the summer of 2008 you would have been hard-pressed to find many people outside central banks, university economics departments and a small number of hedge fund managers with exceptional foresight who spent much time thinking about ‘financial contagion risk’ or who even really understood what it meant. When Lehman Brothers collapsed in September of that year the dominoes began to fall—the collapse triggered a series of contractual defaults and cross-defaults that quickly spread from Lehman through its counterparties and into the ‘real economy’—and all of a sudden the term was observed in action and widely understood.

In the aftermath of the financial crisis there has been a great deal of work—both within the UK and at international level—to provide governments, central banks and financial regulators with an enhanced ‘toolkit’ of powers which are intended to help them manage and mitigate the consequences of a significant financial institution suffering an insolvency event.

One of those tools is the EU Bank Recovery and Resolution Directive 2014/59/EU (BRRD) which establishes a harmonised framework for the recovery and resolution

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