Summary
On 15 May 2020, the European Banking Authority (the "EBA") published this consultation on new rules under the EU Bank Recovery and Resolution Directive (the "BRRD").
The consultation sets out draft regulatory technical standards ("RTS") on the new requirement to include a provision in non-EEA law governed contracts explicitly recognising the possibility that EEA institutions in resolution may become subject to the exercise of stay powers under the BRRD (a "Contractual Recognition of Stay Powers Clause").
In the consultation, the EBA proposes a list of mandatory components to be included in Contractual Recognition of Stay Powers Clauses, including:
- a description of the stay powers as implemented in the relevant jurisdiction(s);
- recognition by the parties that they are bound by such powers;
- acknowledgement that no other contractual term impairs the enforceability of such clause; and
- acknowledgement that the clause is subject to the law of an EEA member state.
The EBA is seeking feedback on its proposals by 15 August 2020.
Stay powers under the BRRD
The BRRD, as amended by EU Directive 2019/879 ("BRRD II"), affords EEA regulators wide-ranging powers to facilitate the rescue of a failing EEA financial institution, including:
- bail-in powers to write down and/or convert into equity certain liabilities of an institution under resolution ("Bail-in Powers");
- the ability to temporarily suspend certain payment and delivery obligations of an institution under resolution;
- the ability to temporarily restrict the enforcement of security by secured creditors of an institution under resolution; and
- the power to temporarily suspend the termination rights of any party to a contract with an institution under resolution in certain circumstances.
The powers described in 2, 3 and 4 above are collectively referred to in this briefing as the "Stay Powers".
As the provisions of the BRRD have largely been transposed into EEA member states' ("Member States") domestic legislation already, any exercise of a Stay Power in respect of an EEA institution in resolution would be recognised under a contract governed by EEA law. However, any such exercise could be subject to challenge under a contract governed by a non-EEA law.
In order to reduce the risk of challenge, BRRD II amends the BRRD by introducing new requirements for Member States to introduce into their domestic legislation obligations for in-scope entities to incorporate Contractual Recognition of Stay Powers Clauses into financial contracts governed by a non-EEA law. The clauses must include:
- an acknowledgement that the contract may become subject to the exercise of Stay Powers by a relevant resolution authority; and
- an acknowledgement that crisis prevention measures and crisis management measures undertaken in respect of an EEA institution in resolution neither constitute enforcement events or insolvency proceedings under the contract, nor permit the exercise of certain contractual rights solely as a result of their application.
Member States must apply the new rules by 28 December 2020.
In-scope contracts
The requirement to include a Contractual Recognition of Stay Powers Clause applies to any financial contract which:
- creates a new obligation, or materially amends an existing obligation, after the entry into force of the relevant domestic legislation; and
- provides 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 laws of a 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 would therefore include most derivatives, repo and securities lending master agreements if governed by a non-EEA law. After the end of the Brexit transition period, which is scheduled for 31 December 2020, master agreements and other contracts governed by English law could fall within scope of this requirement if entered into by in-scope EEA entities, assuming that no relevant mutual recognition arrangement is agreed between the EU and UK.
Proposed clause components
BRRD II mandates the development by the EBA of RTS setting out the required contents of Contractual Recognition of Stay Powers Clauses. The EBA's view is that it would not be appropriate to prescribe specific wording, or an entire clause, as it may not be effective in all jurisdictions or capture the various Member States' transposition of the Stay Powers. Instead, the EBA is proposing that the final RTS will include a list of mandatory components which must be present in a Contractual Recognition of Stay Powers Clause.
The components proposed in the draft RTS are, broadly:
- acknowledgement and acceptance by the parties that the contract may be subject to the exercise of certain powers by a resolution authority to suspend or restrict rights and obligations arising from the contract;
- a description of the relevant powers of the applicable resolution authority;
- recognition by the parties that they are bound by the effect of any application of such powers, and that they will endeavour to ensure the effective application of the powers;
- recognition by the parties that they are bound by the requirements of Article 68 of the BRRD (which provides that crisis prevention measures and crisis management measures should not be deemed enforcement events or insolvency proceedings, or entitle counterparties to exercise contractual rights solely as a result of the application of such measures), as transposed by national law;
- acknowledgement and acceptance by the parties that no other contractual term impairs the effectiveness and enforceability of the Contractual Recognition of Stay Powers Clause; and
- acknowledgement by the parties that the Contractual Recognition of Stay Powers Clause is subject to the law of a Member State.
After the end of the Brexit transition period, the requirement set out in 6 above would, in the case of in-scope English law agreements, require the relevant provision(s) in the agreement to be governed by the law of a Member State and not English law, assuming that there is no relevant mutual recognition arrangement entered into between the EU and UK.
Consultation respondents are invited to comment in particular on:
- whether they agree with the EBA's proposed approach for further determining the new requirement;
- whether they agree with the EBA's approach with regard to the proposed components of Contractual Recognition of Stay Powers Clauses; and
- whether requiring such clauses to be governed by an EEA law would improve their likelihood of being effective and enforceable in the courts of the relevant third-country jurisdiction.
Respondents are also asked to provide details of the standard clauses that they are likely to use to satisfy the new requirement and explain whether the clause will differ for various types of financial contracts.
A word on BRRD II and changes to Article 55
Provisions requiring the inclusion in non-EEA law governed financial contracts of an acknowledgement that the liabilities of a relevant EEA institution may become subject to Bail-in Powers ("Contractual Recognition of Bail-in Clauses") are already in place across the EEA, through the operation of Article 55 of the BRRD.
Article 55 of the BRRD has been amended by BRRD II so that in certain cases in-scope entities are exempted from the requirement to include Contractual Recognition of Bail-in Clauses where the entity decides that it is legally or otherwise impracticable to do so. In such case, the relevant resolution authority must be notified of the decision, and justification for the decision must be given. If the resolution authority does not agree with the decision, a Contractual Recognition of Bail-in Clause will need to be included in the relevant contract within a reasonable time. The entity in question may also be required to amend its practices concerning its application of the exemption.
The EBA was mandated to develop draft RTS regarding this amendment for submission to the European Commission by 28 June 2020, although we understand that these are now expected to be submitted in December 2020.
Authors: Jonathan Haines, Kirsty McAllister-Jones and Jean Tan.
