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In a financial crisis the most valuable asset is time. It is the reason for cure periods and stays. Revision to capital requirements for banks under Basel, or insurers under Solvency II or national equivalents, try to put a value on co-variances to arrive at low risk reserved capital and liquidity base for net exposure at stressed tested levels. These are financial regimes so they do not address freedom to contract across different jurisdictions. While offset is limited by mutuality under common law, other law permit group or cut-through offsets. Parties are free to define default, acceleration and other clauses that present the risk of contagion, which in a crisis require agreed standstills. The question is, for those financial entities deemed to big too fail, would it be wiser to mandate cure periods in these companies’ financial contracts, incepting at a regulatorily designated measure of economic crisis (e.g.,  that which precipates supervisory authority by the Federal Reserve and foreign equivalents). While supervision could yield such a cure period, wouldn’t there be an added benefit if it was embedded in the contracts that such authorities are inheriting rather than being potentially embroiled in jurisdictional differences?

The same might be required for financial institutions that are not classified as too big to fail, since crises can develop through a cascade of failing smaller institutions precipitating cross-defaults, special terminations, accelerations, increased security and the like.  Solvency is best judge by the financial condition of your counterparty’s significant counterparties. Unfortunately, the latter is not always known, may be too difficult to value, or both. China’s approach, allowing for direct action against such a third party is interesting. It creates the potential for more transparency, partly in recognition that culturally relationships trump law.

I would welcome other points of view, as I am sure there are many.

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