On February 22, the European Banking Authority (“EBA“) published its handbook on valuation for purposes of resolution under the Bank Recovery and Resolution Directive (2014/59/EU) (“BRRD“). READ MORE
BRRD
BRRD and CRR Legislation come into Force
Following publication in the Official Journal of the EU on December 27, 2017, Directive (EU) 2017/2399 and Regulation (EU) 2017/2395, amending the Bank Recovery and Resolution Directive (“BRRD“) and the Capital Requirements Regulation (“CRR“) respectively, came into force on 28 December 2017.
The directive amending the BRRD relates to the ranking of debt following an insolvency whereas the CRR amendment is focused on the necessary transitional arrangements for mitigating the introduction of IFRS 9. The BRRD Directive must be brought into force by the EU Member States by December 29, 2018, whereas the CRR amendment became applicable to EU Member States on January 1, 2018.
EBA Report on Appropriate Reference Point for Target Level of Resolution Financing Arrangements Under BRRD
On October 31, 2016, the EBA published a report (“EBA-OP-2016-18“) on the appropriate point for the target level for resolution financing arrangements. The EBA produced the report under Article 102(4) of the Bank Recovery and Resolution Directive (“BRRD“) (2014/59/EU).
In the report, dated October 28, 2016, the EBA recommends changing the basis from covered deposits to a total liabilities‑based measure and, in particular, “total liabilities excluding own funds less covered deposits.” Following a qualitative and quantitative assessment of various criteria, the EBA believes that this is the most appropriate target level basis for resolution financing arrangements. It considers this basis to be simple and transparent, and also consistent with the regulatory framework and calculation methodology for individual contributions.
A further recommendation in the report is that if the European Commission issues a legislative proposal on amending the target level basis for national resolution financing arrangements, it should also consider adjusting:
- The percentage of the target level.
- The target level basis for the single resolution fund (“SRF“).
The European Commission will consider the EBA’s recommendations, and decide whether to submit a legislative proposal to amend the target level basis for resolution financing arrangements, by December 31, 2016.
Association for Financial Markets in Europe Publishes Model Clauses for the Contractual Recognition of Bail-In under Article 55 of BRRD
On August 1, 2016, the Association for Financial Markets in Europe (AFME) published model clauses for the contractual recognition of bail-in for the purpose of satisfying the requirements of Article 55 of the EU Bank Recovery and Resolution Directive (BRRD).
Article 55 requires financial institutions in the EU to include clauses in a range of contracts to give contractual effect to a bail-in of the relevant liability in a resolution of the institution. The package contains model contractual terms that market participants can use to comply with Article 55 when issuing debt instruments and certain other contracts governed by the law of a jurisdiction outside the EU. There are two types of model clause contained within the package: one for use with debt liabilities and one for use with “other liabilities.”
The model clauses are designed to be compliant with the BRRD and with certain relevant EU member state legislation implementing the BRRD, as well as with the BRRD Delegated Regulation. The model clauses therefore seek to support cross-border effectiveness of resolution and assist banks with complying with the requirements of Article 55 BRRD.
AFME has stressed that the model clauses are a starting point only. Users are strongly encouraged to consult counsel in the relevant non-EU jurisdiction to ensure that the clause is appropriately modified to reflect any requirements of that non-EU law, and is both effective and enforceable in that jurisdiction.
In an associated press release, AFME expressed its continued concerns with the scope of Article 55 BRRD which is very broad, and requires banks to include contractual recognition clauses in contracts giving rise to all liabilities governed by non-EEA law, save where these are expressly excluded from bail-in under the BRRD. The requirement gives rise to significant challenges, such as where banks are unable to unilaterally amend contracts, as in relation to trade finance and membership of financial market infrastructures. A number of authorities have acknowledged that, in many cases, inserting such a clause is impracticable. However, while several authorities have sought to adopt a pragmatic approach to implementation, there remains some uncertainty and potential inconsistency in application.
AFME therefore believes that a clear and consistent approach across the EU is required to provide banks and counterparties with a clear and workable solution. It considers that the scope of Article 55 should be amended to align it with that agreed at the international level through the Financial Stability Board (FSB). The FSB’s Principles for Cross-border Effectiveness of Resolution Actions propose that the scope should cover instruments eligible for loss-absorbing capacity requirements and any other “debt instruments.” AFME considers that this would provide a much clearer scope of liabilities and significantly reduce the impact on firms, while meeting the objective of ensuring resolvability. It believes that alignment with the FSB’s key attributes is particularly important where inconsistencies in approach could severely impact on the competitiveness of EU banks operating in global markets.
EBA Publishes Interim Report on MREL
The European Banking Authority (EBA) has published an interim report on the minimum requirement for own funds and eligible liabilities (MREL). Under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) the EBA is required to submit a report to the European Commission on the implementation of MREL by October 31, 2016. This report will assist the Commission in its work on a legislative proposal on the harmonized application of MREL as well as a legislative proposal to review MREL and implement the total loss absorbing capacity standard in the EU.
The EBA’s interim report is intended to provide input into the Commission’s deliberations ahead of the preparations of the EBA’s final report and contains a number of provisional recommendations. Preliminary quantitative findings on the financing capacity and needs of EU banking groups are also available in the interim report, although these are subject to several methodological caveats. In the absence of MREL decisions for institutions to date, and given the limited information related to the resolution authorities’ MREL policy approach, the EBA was required to make assumptions on the likely scope and calibration of MREL. These assumptions are by definition different from the actual levels of MREL which will ultimately be determined by resolution authorities in relation to each institution and group.
The interim report is available here.
Delegated Regulation on Recovery and Resolution Planning under BRRD Published in OJ
On July 8, 2016, the Commission Delegated Regulation ((EU) 2016/1075) supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (“BRRD”) on recovery and resolution planning, was published in the Official Journal of the EU (“OJ”). The Delegated Regulation details regulatory technical standards (“RTS’) outlining the following:
- the content of recovery plans, resolution plans and group resolution plans;
- the minimum criteria that the competent authority is to assess regarding recovery plans and group recovery plans;
- the conditions for group financial support;
- the requirements for independent valuers;
- the contractual recognition of write-down and conversion powers; and
- the procedures and contents of notification requirements and of notice of suspension and the operational functioning of the resolution colleges.
It is hoped that the above RTS will be included in a single Delegated Regulation to ensure coherence between the provisions dealing with the resolution framework laid down in the BRRD.
The Delegated Regulation was adopted by the Commission on March 23, 2016. It comes into force twenty days after publication in the OJ and as such on July 28, 2016.
European Commission Adopts Delegated Regulation on RTS on Detailed Records of Financial Contracts under BRRD
On June 7, 2016, the European Commission adopted a Delegated Regulation supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD). The Delegated Regulation deals with the regulatory technical standards (RTS) on a minimum set of the information on financial contracts that should be contained in the detailed records, together with the circumstances in which the requirement should be imposed (C(2016) 3356 final).
Following submission of draft RTS by the EBA in December 2015, the Commission is entitled, under Article 71 of the BRRD, to adopt delegated regulations which highlight the methodology for assessing the value of assets and liabilities of institutions or entities. The draft RTS state that, should the relevant conditions for resolution be satisfied, an institution must maintain detailed records of financial contracts where it is foreseen that resolution actions would be applied to the institution concerned. The Annex accompanying the Delegated Regulation highlights the minimum list of information on financial contracts.
It is now for the Council of the EU and the European Parliament to consider the Delegated Regulation. Subject to any objection, it will enter into force 20 days after its publication in the Official Journal of the EU (OJ).
ESMA Reminds Firms of their Responsibilities when Selling Bail-In Securities
On June 2, 2016, ESMA issued a statement (ESMA/2016/902) reminding banks and investment firms of their responsibility to act in their clients’ best interests when selling bail-in-able financial instruments. The statement clarifies how credit institutions and investment firms should apply the requirements under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) governing the distribution to clients of financial instruments subject to the BRRD resolution regime under the Bank Recovery and Resolution Directive (2014/59/EU).
The statement stresses that firms must comply with their obligations under MiFID and the importance of:
- Providing investors with up-to-date, complete information drafted under the supervision of the compliance function.
- Managing potential conflicts of interest, in particular, when a firm sells its own bail-in financial instruments directly to its customers (self-placement).
- Ensuring the product is suitable and appropriate for the investor, which may entail collecting more in-depth information about the client than usual to reflect the fact a client could lose money without the firm entering into insolvency.
In an accompanying press release, ESMA explained that under the BRRD rules, which came into force in January 2016, firms are likely to issue a significant amount of potentially loss-bearing instruments to fulfil their obligations and raised its concern that investors (in particular retail investors) are unaware of the risks they may face when buying these instruments.
Bank Recovery and Resolution Directive; Exceptions to “Bail-In” of Liabilities
On February 4, 2016, the European Commission adopted a Delegated Regulation (C(2016) 379) which (taking into account advice given by the European Banking Authority in March 2015) specifies where exclusion from the application of write-down or conversion powers is allowed under Article 44(3) of the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD).
The BRRD’s bail-in tool gives a resolution authority the power to bail in all the liabilities of a firm in resolution, subject to exclusions specified in Article 44 of the BRRD. In exceptional circumstances, Article 44(3) permits the resolution authority to exclude certain liabilities from the scope of the bail-in tool, if certain conditions are met. The Commission has the power under Article 44(11) to adopt a delegated act specifying the circumstances in which exclusions from the bail-in tool are necessary under Article 44(3).
The Delegated Regulation:
- Lays down common rules to be applied whenever a resolution authority considers excluding a liability from the application of the bail-in tool under Article 44(3).
- Clarifies when a liability can be excluded from bail-in based on the impossibility of bailing-in that liability within a reasonable timeframe.
- Lays down the elements to determine the reasonable time after which a liability can be excluded from bail-in.
- Clarifies when a liability can be excluded from bail-in based on the need to preserve certain critical functions and core business lines, to avoid widespread contagion or to avoid value destruction.
The Council of the EU and the European Parliament are now considering the Delegated Regulation. If neither of them objects to it, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU.
EBA Consults on RTS on Contractual Recognition of Write-Down and Conversion Powers under BRRD
On November 5, the European Banking Authority (EBA) published a consultation paper on draft regulatory technical standards (RTS) on the contractual recognition of bail-in under the Bank Recovery and Resolution Directive (BRRD).
Under the BRRD, firms and other entities to whom the BRRD applies are required to include in relevant agreements a contractual term by which the creditor or party to the agreement creating a relevant liability recognizes that the liability may be subject to the write-down and conversion powers specified in the BRRD. In the proposed draft RTS, the EBA seeks to determine the cases in which the requirement to include the contractual term does not apply.
The deadline for responses is February 5, 2015. The EBA is required to submit the draft RTS to the European Commission by July 3, 2015. Consultation Paper.