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    EBA Publishes Contractual Recognition Standards for Bail-In Under BRRD

    December 23, 2020

    EBA published the final draft regulatory and implementing technical standards on impracticability of contractual recognition of bail-in powers under the Bank Recovery and Resolution Directive (BRRD). The regulatory standards determine the conditions of impracticability, the conditions for the resolution authority to require its inclusion, and the timeframe for the resolution authority to require the inclusion of a contractual term. The implementing standards specify uniform formats and templates for notifying resolution authorities about determinations of impracticability to achieve contractual recognition. The draft templates and instructions for impracticability notifications have been also published.

    Where contracts are governed by the law of a third country, BRRD requires that contracts include a contractual recognition term by which the parties acknowledge that the contract may be subject to bail-in powers and agree to be bound by their effect. In certain situations, it might be legally, or otherwise, impracticable to achieve contractual recognition of the bail-in powers. The recently published regulatory standards deal with liabilities for which it is impracticable to include the bail‐in recognition clause in a contract. These standards recognize a practical impediment to the contractual inclusion of the term but, importantly, they do not exclude such liabilities from the scope of bail‐in. The regulatory standards set out the following five conditions under which it would be impracticable to include the contractual term referred to in Article 55(1) of BRRD in certain categories of liabilities: 

    • the inclusion of the contractual term would be in breach of the law or regulatory provisions of the third country governing the liability 
    • the inclusion of the contractual term would be contrary to an explicit and binding instruction from a third country authority
    • the liability arises from instruments or agreements concluded in accordance with international standardized terms or protocols that the institution or entity is in practice unable to amend
    • the liability is governed by contractual terms that the institution or entity has to accept to be able to participate in or to utilize the services of a non-Union body, including financial market infrastructures or other similar service providers, and which the institution or entity is in practice unable to amend
    • the liability is owed to a commercial or trade creditor and relates to goods or services that, while not critical, are used for daily operational functioning and the institution or entity is in practice unable to amend the terms of the agreement

    In the implementing standards, EBA specifies the data required in a notification and gives specifications for these data points. While EBA also provides a table (in Excel) and a data point model (taxonomy) for these information points, it is up to the resolution authority to determine the actual system to be used at national level for submitting these notifications. This is because there may be instances where certain systems are already in place and it will be easier to use them. Consistency at EU level will be achieved, as the data required are consistent; moreover, if the data point definitions are not altered, transformations from one system to another should be easy to perform. Considering the existing approaches to managing big data, where information is not stored in a specific format, EBA favors this approach of ensuring consistent data point definitions. The implementing standards require institutions and entities making notifications to distinguish between contracts creating new liabilities and contracts amending existing liabilities. Furthermore, the implementing standards allow the possibility of notifying categories of liabilities that meet the conditions of impracticability. However, this option is to be used only if the relevant resolution authority deems it necessary. 

    The final draft regulatory and implementing 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.

     

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    Keywords: Europe, EU, Banking, BRRD, Regulatory Technical Standards, Implementing Technical Standards, Contractual Recognition, Bail-In, Resolution Framework, MREL, Basel, EBA

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