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On March 15, 2016, the Prudential Regulation Authority published
proposals to amend its rules on contractual recognition of bail-in.
Under the EU Bank Recovery and Resolution Directive, EU banks and
large investment firms are required to include clauses in certain
contracts with non-EU counterparties by which the creditor agrees
to recognise that the liability may be bailed in by the national
resolution authority. In November 2015, the PRA issued a
Modification by Consent which disapplies the requirement for
unsecured liabilities that are not debt securities (known as
"phase 2 liabilities") where compliance would be
impracticable. The Modification by Consent expires on June 30,
2016. The aim of the PRA's amendment is to make permanent the
Modification by Consent.
A draft PRA Supervisory Statement is
included which is intended to give firms guidance on the meaning of
the term "impracticable." The onus would be on firms to
demonstrate that compliance with the contractual recognition
requirement would be impracticable. Examples of impracticability
are given by the PRA, including where a non-EU authority informs a
firm that it does not permit the inclusion of recognition language
or that their local laws would not permit it, where contracts are
governed by international protocols which a firm has no power to
amend or for liabilities used for trade finance under standard
international documentation. It is thought, for example, that
contracts with non- EU financial infrastructure providers are now
excluded from a requirement for bail-in language under this
guidance.
In addition, the PRA is proposing other amendments to its
rules to take into account the European Banking Authority's
final draft Regulatory Technical Standards on contractual
recognition of bail-in, which the PRA anticipates will soon be
adopted by the European Commission. The amendments to the PRA rules
are: (i) the addition of a requirement to include recognition
language into contracts where liabilities are not fully secured or
are not collateralized on an ongoing basis; (ii) the addition of a
requirement to include recognition language in contracts where
liabilities are created before the date of application of the
contractual recognition requirement if the agreement is materially
amended after June 30, 2016; and (iii) the replacement of the
reference to liabilities "arising" after a certain date
to one of liabilities "created" after that date which
ensures further consistency with the EBA's RTS.
Responses to
the consultation are due by May 16, 2016. The PRA intends to amend
its rules, effective July 1, 2016.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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