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The
two-day pause is meant to prevent a chaotic unraveling of
investments like what was seen during the 2008 financial crisis
and failure of Lehman Brothers Holdings Inc.
At the time, desperate investors tried to void ties to Lehman
after it sought bankruptcy protection, helping to spread panic
in global financial markets.
The scene of derivatives investors desperate to unwind contracts
could spur a modern-day run on a bank, Federal Reserve Chair
Janet Yellen said on Tuesday, leading to "asset fire sales that
may consume many firms."
Tuesday's proposal envisions a cooling-off period that could
give banks time to transfer securities like derivatives to a
healthy bank before bankruptcy, Yellen said.
Derivatives investors would have to acknowledge the 48-hour
cooling off period in new financial contracts, according to the
proposal, and existing contracts would also have to comply with
the rule if the investment fund and bank continue to do
business.
The Managed Funds Association, a voice for the hedge fund
industry, expressed misgivings about the proposal.
"We ... remain concerned that reducing investors’ rights under
the U.S. Bankruptcy Code would ultimately reverse decades of
precedent designed to protect investors and the financial
system, and would impair the fair and efficient functioning of
capital markets," the association's chief executive officer,
Richard H. Baker, said in a statement.
He said the group looked forward to continuing its dialogue with
Federal Reserve officials.
Wall Street has until Aug. 5 to comment on the plan.
The new rule was envisioned as part of the Dodd Frank reform
legislation and has backing from the Financial Stability Board,
a global standard-setting panel for financial markets.
(Reporting by Patrick Rucker; Editing by James Dalgleish and Tom
Brown)
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