A stay protocol is a standard form that promises a globally systemically important bank (G-SIB) will, in the event of a default, freeze all relevant assets for a short time in order to avoid exacerbating market stress through a rush to reclaim collateral.
The protocol is signed on a voluntary basis by participants in a few jurisdictions, but any entities wishing to access those markets for securities finance are also required to sign.
One legal expert at the conference in South Korea explained that the issue for lenders that are expected to adhere to these rules is that, in the case of a default of a major investment bank, the counterparty is forced to hold on to collateral whose value might be crashing.
The potential for lenders to take on losses as a result of a stay protocol has led some legal teams that are new to the requirement to attempt to negotiate the terms, or even to advise against signing.
The relative lack of G-SIBS in Asia means that local securities finance participants have so far operated without the use of stay protocols, but that time is nearly over, according panellists.
Currently, only the UK, Switzerland, Germany and Japan have finalised their stay protocol regulations, but the US is expected to catch up in the first half of this year. The EU passed rules requiring member states to publish legislation as of 1 January 2016, but progress still varies from state to state.
The fact that the stay is voluntary puts the onus for education on these rules on the G-SIBs, which are expected to outline the requirements to their counterparties in jurisdictions that may not have equivalent rules, but that are expected to agree to them to have access to markets that do.
Conference panellists advised attendees to seek legal advice on how to approach incorporating stay protocols in order to remain open for trading in these markets.