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 PRA consultation paper is available at: http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp816.pdf and the modification by consent is available at: http://www.bankofengland.co.uk/pra/Documents/authorisations/waiverscrr/modbyconbailin.pdf.
You may wish to view our client note, "BRRD: Contractual Recognition of Bail-in and Resolution Stays," February 26, 2016: http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/02/BRRD-Contractual-Recognition-of-Bailin-and-Resolution-Stays-FIAFR-022216.pdf.
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