The implementation of post-financial crisis regulatory reforms – in particular, new bank resolution regimes and the mandatory exchange of collateral, have made the process for terminating derivatives portfolios significantly more complex. The banking failures of 2023 (Signature Bank, SVB, Credit Suisse) brought these complexities into sharp focus for market participants. To help market participants prepare for a potential close out, ISDA has published a Close-out Framework, an interactive digital reference tool offering high-level analysis of the default mechanics and collateral enforcement provisions in ISDA documentation, along with additional commentary on bank resolution legislation in the US and Europe.

As a related initiative, ISDA will launch a new series of close-out exercises in March 2025, in which participants will consider the close-out of a hypothetical derivatives portfolio against a hypothetical global institution. Participation will be by firm and each participant will provide a representative to attend from each of their legal, credit, risk and, operations functions (and recovery and resolution planning if applicable), who will actively contribute to group discussions on the practical and technical issues that arise in connection with a close-out.   These representatives should have a sufficient level of expertise on the derivatives close-out process so they can actively participate in the discussions.

ISDA will lead the exercises with support from legal counsel (Clifford Chance) and a consultant expert on the related non-legal aspects (to be announced).

This in-person course will equip professionals with a deep, cross-functional practical knowledge of the close-out process, including collateral enforcement and the impacts of various resolution regimes. Participants will enhance their understanding of a potential default and close-out of a derivatives portfolio.

ISDA expects to subsequently publish a whitepaper setting out the key takeaways from the exercises.

ISDA is consulting with anti-trust and litigation counsel. A Guide to Participants document will be circulated that will set out parameters and limitations to ensure the exercise is conducted appropriately.

The session is expected to cover high-level considerations relating to pre-default monitoring, contractual and operational issues that may be relevant to triggering a default and progressing through to close-out, the potential imposition of an intervening stay on termination rights and remedies, collateral enforcement and practical issues in determining a close-out amount.

Detailed materials for this course will be distributed electronically to all participating institutions no later than three (3) weeks prior to the date on which the institution will attend the course.  Participants should plan to review these materials in advance of the course.