A key element of restructuring banks in connection with resolution and recovery planning is the ability to protect financial institutions from an acceleration and termination of ongoing contracts upon the commencement of formal proceedings. Therefore, following the global financial crisis, bank resolution regimes were amended to allow regulators to stay the termination of contracts. However, the reach of domestic insolvency law is limited: 'banks live globally, but die locally', as Mervyn King once said. This aphorism was repeated as regulators realised the limited reach of domestic insolvency laws. The solution to this problem, which was offered first by the industry and then mandated by regulations, was to provide in contracts for a stay of termination rights mirroring the statutory one.
Since January 1 2016, Switzerland has also followed this approach to ensure the effectiveness of the 48-hours stay of termination rights in connection with the commencement of restructuring proceedings provided for by article 30a of the Banking Act. Thus, since the beginning of the year, article 12 (2bis) of the Banking Ordinance requires banks to ensure, both at entity and group level, that they enter into new contracts or amend existing contracts governed by foreign law or subject to the jurisdiction of a foreign court, only if the counterparty recognises the resolution stay provided for by article 30a of the Banking Act.
Although, in principle, this approach seems similar to the approach pursued in other jurisdictions such as the European Union under The Bank Recovery and Resolution Directive (BRRD), it presents several specific challenges. First, it applies to all contracts, not only financial contracts or material agreements. Therefore, all contracts providing for an event of default in case of insolvency should also include a carve-out for the resolution stay. Theoretically, if a Swiss bank enters into a mundane contract to rent a car in a foreign jurisdiction, it should ensure that the agreement would benefit from the resolution stay.
Second, this provision reaches beyond Swiss financial institutions, to include all entities, which are part of the group they control. Thus, foreign subsidiaries are also in scope and are required to ensure that they comply with this requirement. This being said, this requirement does not apply to parent companies and other affiliates, unless they are subject to the Swiss Financial Market Supervisory Authority's (FINMA) insolvency jurisdiction for bank holding companies or key affiliates.