EBA Finalizes Standards on Contractual Recognition of Stay Powers
EBA published the final draft regulatory technical standards on contractual recognition of stay powers under the Bank Recovery and Resolution Directive (BRRD). The technical standards provide further specification of essential elements to ensure the effectiveness of the resolution regime established by BRRD. These standards are part of EBA's major program of work to implement BRRD and address the problem of too-big-to-fail banks. The draft technical standards will be submitted to EC for endorsement before being published in the Official Journal of the European Union. The technical standards will apply from the twentieth day following that of their publication in the Official Journal of the European Union.
The final draft regulatory technical standards on contractual recognition of stay powers have been developed according to Article 71a(5) of BRRD, which requires EBA to further determine the contents of the term required in paragraph 1 of article 71a of the BRRD, taking into account institutions' and entities' different business models. The regulatory standards aim to ensure the effective application of stay power. Where financial contracts are governed by the law of a third country, BRRD requires these contracts to include a contractual recognition term by which the parties acknowledge that the contract may be subject to these stay powers and agrees to be bound by their effect. The EBA approach is designed to strike a balance between the need for harmonization and the need for flexibility to take account of any issues arising in relation to a specific third-country law and type of financial contract. In the draft standards, EBA has proposed a list of mandatory components that must be present in the contractual term required in the financial contracts. These components include the following:
- Provisions specifying the acknowledgement and acceptance that the contract may be subject to the exercise of the powers by the resolution authority
- A description of the powers in question and the parties’ recognition that they are bound by those powers to suspend certain obligations and restrict some rights and that they are bound by the requirements of Article 68 of the BRRD
- Acknowledgement by parties that no other contractual term impairs the effectiveness and enforceability of this clause
This approach is intended to strike a balance between achieving an appropriate level of convergence and ensuring that differences in the legal systems of third countries and other differences arising from different forms of financial contracts can be taken into account by the resolution authorities, institutions, and relevant entities through the addition of further elements. EBA also acknowledged its awareness of the ongoing international work in relation to statutory and contractual approaches to the recognition of the exercise of resolution powers. In particular, EBA notes the Principles for cross-border effectiveness of resolution actions of FSB, which were published on November 03, 2015, and has sought to align its proposals with the FSB proposals insofar as is compatible with the BRRD and otherwise appropriate.
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Keywords: Europe, EU, Banking, BRRD, Regulatory Technical Standards, Contractual Recognition, Basel, Too Big to Fail, Resolution Framework, Crisis Management Framework, Bail-In, EBA
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