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Too Big To Default: Restricting End-Users’ Default Rights Against Big Banks

Too Big To Default: Restricting End-Users' Default Rights Against Big Banks by Managed Funds Association

Executive Summary

Managed Funds Association has prepared this white paper to present the views of its members on stays of early termination rights for consideration by public policymakers and regulators. MFA represents the global alternative investment industry and its investors by advocating for public policies that foster efficient, transparent, and fair capital markets.

As a general matter, MFA supports public and private sector efforts to facilitate the orderly liquidation of troubled financial institutions and improve the stability of the financial markets. Given that many MFA members’ investors incurred significant losses resulting from the collapse of Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ), MFA has been a strong supporter of legislative and regulatory efforts to strengthen the financial system.

However, MFA members have serious objections to the rapidly advancing initiatives of certain bank regulators to restrict or “stay” the Default Rights of end-users against a distressed financial institution (the Regulators’ Stay Initiatives). As explained further in this white paper, bank regulators in the United States, Europe, and Asia are seeking to require end-users to relinquish several of their contractual Default Rights against big banks in response to recommendations made by the Financial Stability Board (the FSB), an organization that is dominated by central bankers and finance ministers.

Although the FSB’s decisions are not legally binding on members’ jurisdictions, several of...