The resolution of a large complex financial organization (LCFO) presents numerous
problems, including organizational complexity, opacity of positions, and conflicting legal
jurisdictions. Of particular concern is the potential impact of large derivatives books.
Widespread adoption of laws permitting close-out of derivatives contracts exempts these
contracts from the usual stays that provide time for the orderly resolution of claims by the
courts. Thus, a potentially significant part of the LCFO’s assets and liabilities are
exempted from normal bankruptcy procedures, creating the potential for a disorderly
dismemberment of an insolvent LCFO. Nonetheless, however inconvenient they may be
for bankruptcy administrators, the closeout netting privileges enjoyed by derivatives are
essential to reducing legal uncertainty, increasing liquidity, and minimizing the systemic
impact of large failures. The solution advocated in this paper is for regulators to provide
“facilitated private resolution” for dealing with systemically important financial
institutions, along the lines of the Long-Term Capital Management workout and the
“London Approach” practiced in the last century. To make this early intervention
effective, consolidated supervision is needed to ensure that comprehensive information is
available and intervention takes place while the firm is still solvent.