PRA published a statement that outlines its view on the implications of LIBOR transition for contracts in scope of the “Contractual Recognition of Bail-In” and “Stay in Resolution” parts of the PRA Rulebook. PRA considers that, where the sole purpose of an amendment to a liability (as defined in Contractual Recognition of Bail-In Part) or a financial arrangement (as defined in Stay in Resolution Part) is to transition away from LIBOR, the amendment should not be considered a material amendment, as the term applies to either the Contractual Recognition of Bail-In Part or the Stay in Resolution Part of the PRA Rulebook.
The statement mentions that firms should consider adding terms of Contractual Recognition of Bail-In Part and Stay in Resolution Part into the documentation for a third-country law governed liability or financial arrangement that is amended for the sole purpose of transitioning away from LIBOR, as it enhances firm resolvability. These Parts of the PRA Rulebook are part of the UK resolution regime, ensuring that firms can fail in an orderly way. Both sets of rules are needed for the effectiveness of UK resolution actions in third-country jurisdictions. Consistent with paragraph 5.10 of the minimum requirements for own funds and eligible liabilities (MREL) Statement of Policy of BoE, firms should consider whether having non-common equity tier 1 (CET1) own funds instruments governed by third-country law but without statutory or contractual recognition of UK bail-in rules would create difficulties for resolution.
On December 18, 2019, PRA published a letter, from Sam Woods of PRA, on LIBOR transition. As set out in the letter, PRA has been considering the issues raised by the Working Group on Sterling Risk-Free Reference Rates, including possible implications of benchmark rate reform for rules related to resolution. Firms may particularly need to consider whether existing contracts in scope of the Contractual Recognition of Bail-In and Stay in Resolution parts of the PRA Rulebook that are changed to reflect the transition away from LIBOR could be considered materially amended and, thus, required to include terms of Contractual Recognition of Bail-In Part and Stay in Resolution Part of the PRA Rulebook.
Keywords: Europe, UK, Banking, Securities, LIBOR, Bail-In, PRA Rulebook, MREL, Interest Rate Benchmark, Risk-Free Rates, Resolution Framework, BoE, PRA
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