Harmonizing European Union Bank Resolution: Central Clearing of OTC Derivative Contracts Maintaining the Status Quo of Safe Harbors

This Article argues that safe harbors for financial contracts should not be expanded in Europe, but instead should be repealed, as suggested by some commentators in the United States. At the very minimum, credit derivatives, swaps, and repurchasing agreements should be subject to a stay, and the resolution authorities in the Member States should have the power to assume beneficial contracts and to reject other unfavorable contracts. Also, the power of resolution authorities to transfer derivative positions in full or in part should not be sanctioned in favor of a full transfer. Rather, resolution authorities should have the power to cherry pick individual contracts for transfers after determining any potential systemic risk involved. In addition, it is essential to grant resolution authorities clear avoidance powers, specifically the power to avoid preferential transfer prior to bankruptcy. A pre-bankruptcy transfer could be exempted if made in the ordinary course of business. Without the extension of the avoidance powers, counterparties will simply move for contract termination, set off, and close-out at a time prior to bankruptcy