contracts

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.

Court Grants HSBC’s Motion to Dismiss Trustee Repurchase Action

On October 17, Justice Marcy S. Friedman of the Supreme Court of the State of New York granted HSBC’s motion to dismiss a repurchase suit brought by Deutsche Bank, as Trustee for HSI Asset Securitization Corp. Trust 2007-NC1.  The Trustee asserted two causes of action:  one for breach of the cure and repurchase obligation in the agreement governing the trust, and one for failure to notify the Trustee of alleged underlying breaches of representations and warranties.  Following several of her prior decisions, Justice Friedman dismissed both of the Trustee’s claims because non-compliance with the repurchase protocol—a remedial provision in the contract—does not give rise to an actionable breach separate from the underlying breach of the representations and warranties.  Justice Friedman granted the Trustee leave to amend to assert a claim for breach of representations and warranties.  Order.

FDIC Proposed Rule on Receivership Powers

On March 20, the FDIC proposed a rule, pursuant to section 210(c)(16) of the Dodd-Frank Act, that would permit the FDIC as receiver for a failed systemically important financial institution to enforce and prevent termination of the contracts of the institution’s subsidiaries or affiliates.  Comments must be submitted within 60 days of publication in the Federal Register.  FDIC Release. FDIC Rule on Receivership.