QFC (Quality Food Centers) is a retail chain founded in Seattle in 1948. The supermarkets, owned by Kroger Company, are well known for their quality fresh produce, meat and fish departments, full-service delis, flower departments and comprehensive wine departments with knowledgeable stewards who suggest food/wine pairings. They also offer pharmacies and home delivery of prescription drugs. The stores are renowned for their cleanliness and competitive prices.
The grocery chain is especially well-known for its wide selection of packaged beer from the Pacific Northwest and beyond, which it carries alongside its conventional grocery products. Its U Village location is a favorite of ours for its large selection of beers and reasonable prices.
In the aftermath of the Lehman Brothers collapse, regulators implemented a host of regulations to account for the potential ripple effects that could be triggered by any systemically important financial institution’s failure (Monticello Consulting has an excellent overview). One such regulation is the requirement that all covered entities amend a broad variety of qualified financial contracts (“QFCs”) in order to ensure that contractual restrictions on transfer and exercise of default rights are automatically recognized in the event of an FDIC receivership.
It turns out, however, that the term “QFC” is defined broadly enough to encompass many agreements that would not be customarily thought of as derivatives. For instance, the rules include credit enhancements (e.g., letters of credit) relating to a QFC, and they apply even if such an agreement is not governed by an ISDA master agreement. As such, it is important for buy-side participants to carefully examine their entire portfolio of agreements to determine whether any need to be amended pursuant to the QFC rules.
Another thing to keep in mind is that the new QFC rules require all GSIBs to bring all of their non-financial counterparties into compliance by January 1, 2020. As a result, corporate counterparties and issuers can expect to start receiving proposals for bilateral amendments that are designed to address the requirements of the new rules.
Adherents to the ISDA 2018 protocol will “opt-in” not only to limitations on the exercise of default rights imposed by the new rule, but also to those imposed by the special resolution regimes of France, Germany, Japan and Switzerland (collectively, the identified regimes). As such, it is a good idea for parties considering adhering to the protocol to understand the implications of opting-in to these other regimes. Finally, it is worth noting that the safe harbor provided for complying with the QFC rules by entering into bilateral amendments does not extend to those rights imposed by the identified regimes. This is a limitation of the option, but something that should be considered prior to taking any action. QFC