What has happened?
On 16 December 2020, the European Banking Authority (EBA) published its final report (the Report) on the new contractual recognition of stay powers (CROS) requirement introduced by Article 71a of EU Directive 2014/59 (the EU Bank Recovery and Resolution Directive, or BRRD). The Report contains draft regulatory technical standards (RTS) that list the elements that the EBA considers should be mandatory in CROS clauses.
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 new Article 71a of the BRRD, by 28 December 2020, EEA member states were required to transpose into their domestic legislation an obligation requiring in-scope entities to incorporate into in-scope non-EEA law governed financial contracts a clause through which the parties explicitly acknowledge the potential application and effects of the Stay Powers (a CROS Clause). Since 1 January 2021, this has included English law governed contracts.
In-scope contracts
For CROS purposes, in-scope financial contracts are any financial contracts which:
- 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 EU 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.
Proposed mandatory elements
The draft RTS list the elements that the EBA considers should be mandatory in CROS clauses. These 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 (which vary across jurisdictions);
- 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 proposed by the EBA in its earlier consultation (discussed here), but market participants will welcome the removal of the requirement for CROS Clauses to be governed by the law of an EEA member state (notwithstanding that the Final Report "encourages" in-scope institutions to consider adopting this approach).
Until the CROS Clause requirements are finalised, in-scope EU entities must comply with the Article 71a requirement as best they can in light of the EBA guidance available.
Next steps
The draft RTS need to be endorsed by the European Commission before being published in the Official Journal of the European Union. The rules will come into effect 20 days after publication.
As the RTS were not applicable by the end of the Brexit transition period on 31 December 2020, they have not been onshored into English law as part of the wider onshoring process; the existing rules set out in the Stay in Resolution Part of the PRA Rulebook therefore remain largely unchanged, aside from the necessary expansion of scope to (among other things) encompass contracts which are governed by the law of any country other than the UK, as opposed to those governed by the law of any non-EEA country, as was the case before the end of the Brexit transition period.
Authors: Jonathan Haines, Kirsty McAllister-Jones and Jean Tan.
