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The Fed Wants To Hold Trading Partners Responsible If A Bank Collapses

The Eccles Building, which houses the U.S. Federal Reserve in Washington, D.C.

Hedge funds, insurers and other businesses partners with Wall Street banks are going to pay a price to help ensure any future collapse of a giant lender doesn’t pull down the entire finance system with it.

The Fed proposed “stays” be included in contracts for derivatives, among other financial instruments, to prevent parties from immediately pulling collateral from a failed bank, Bloomberg reports.

The plan aims to give authorities enough time to unwind a firm in order to avoid the panic that spread through markets in 2008 after Lehman Brothers folded and its partners sought instant payment on their terminated contracts.

Industry leaders have resisted such efforts to rewrite contracts, asserting it abuses investor rights and will encourage trading partners to pull away from a bank at the first sign of trouble, long before a full failure. [Bloomberg]