BRRD - contractual recognition of stay powers clauses

What has happened?

On 16 August 2021, the European Commission published its final rules on the contractual recognition of stay powers in non-EEA law governed contracts. The final rules are the same as those proposed by the European Banking Authority in December last year (covered in this briefing) and will apply from 5 September 2021.

The rules are set out in Commission Delegated Regulation (EU) 2021/1340, which supplements the EU Bank Recovery and Resolution Directive, or BRRD¹.

CROS clauses

Under the BRRD, EEA regulators have broad powers to facilitate the rescue of a failing EEA financial institution. These powers include, under certain circumstances and in relation to contracts entered into by an EEA institution under resolution, temporary abilities to:

• suspend payment or delivery obligations;
• restrict the enforcement of security interests; and
• suspend termination rights under the contract (together, the Stay Powers).

Under Article 71a of the BRRD, EEA member states are required to transpose into their domestic legislation an obligation requiring in-scope entities to incorporate into certain non-EEA law governed financial contracts a clause through which the parties explicitly acknowledge the potential application and effects of the Stay Powers (a Contractual Recognition of Stays Clause, or CROS Clause). Since 1 January 2021, this has included English law governed contracts.

The new rules add an additional layer to this requirement by prescribing the elements that will need to feature in such clauses from 5 September 2021.

In-scope contracts

For CROS purposes, financial contracts are in scope if they:

• create a new obligation, or materially amend an existing obligation, after the entry into force of the relevant domestic legislation; and
• provide for the exercise of one or more termination rights or rights to enforce security interests to which the Stay Powers would apply if the financial contract were governed by the law of an EEA member state.

Financial contracts include securities contracts, commodities contracts, futures and forwards, swap agreements, inter-bank borrowing agreements for three months or less, and master agreements for any of these. This therefore includes most English law derivatives, repo and securities lending master agreements.

Mandatory elements

Under the new rules, the mandatory elements are:

• acknowledgement and acceptance by the parties that the contract may be subject to the exercise of Stay Powers;
• a description of or a reference to the applicable Stay Powers (as implemented in the national law of the relevant member state);
• recognition by the parties that they would be bound by the effects of the application of the Stay Powers;
• recognition by the parties that certain measures taken in respect of an EEA institution in resolution would neither constitute an enforcement event or insolvency proceedings under the contract, nor permit the exercise of certain contractual rights solely as a result of their application, where they otherwise would; and
• acknowledgement and acceptance by the parties that the clause is exhaustive on the matter, to the exclusion of any other agreement or arrangement between the parties.

There has been little change to the elements originally proposed by the EBA in its initial consultation (discussed here), but market participants will welcome the absence of the proposed requirement for CROS Clauses to be governed by the law of an EEA member state (notwithstanding that the EBA final report "encourages" in-scope institutions to consider adopting this approach).

Industry standard language

ISDA has previously published the ISDA Resolution Stay Jurisdictional Modular Protocol, a multilateral amendment mechanism that enables adhering counterparties to incorporate CROS Clauses into in-scope derivative contracts. However, these existing CROS Clauses do not comply with the new requirements.

ISDA now intends to develop and publish additional documentation to facilitate market participants' compliance with the new rules. Given their imminent application, the intention is to make the new documentation available in relatively short order.

In addition, there are currently a number of industry standard forms of contractual recognition of bail-in (CROB) clauses, recommended by bodies such as ICMA, AFME and the LMA, which are widely used in the market. It remains to be seen whether these industry bodies will now also develop recommended standard forms of CROS Clauses for non-EEA law governed contracts in their respective markets.

UK position

The new rules will not apply to UK-incorporated entities. The UK already has its own equivalent requirements, which are set out in the Stay in Resolution Part of the PRA Rulebook. These are similar to the new EU rules, but apply in respect of contracts that are governed by the law of any country other than the United Kingdom, as opposed to those governed by the law of any non-EEA country.

^{1Directive 2014/59/EU}

Authors: Kirsty McAllister-Jones and Tim Morris

Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the EU Prospectus Regulation, EU PRIIPs/KID, EU EMIR and LIBOR transition.