EC Rule on Contractual Recognition of Write Down and Conversion Powers
The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers. This regulation supplements the Bank Recovery and Resolution Directive (BRRD or 2014/59/EU) and shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
The regulation stipulates that conditions under which it would be legally or otherwise impracticable for an institution or entity to include the contractual term in certain categories of liabilities should be defined in a way that allows for an appropriate level of convergence, while enabling resolution authorities to take into account differences in relevant markets. As per Article 1 of this regulation, the 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 shall be the following:
- the inclusion of the contractual term would constitute a breach of the laws, regulations or administrative 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 unable to amend
- the liability is governed by contractual terms that the institution or entity has to accept in order to be able to participate in or to utilize the services of a non-Union body, and which the institution or entity is unable to amend
- the liability is owed to a commercial or trade creditor and relates to provision of goods or services that, while not critical, are used for daily operational functioning of the institution or entity and the institution or entity is unable to amend the terms of the agreement
The Article 2 stipulations that conditions for the resolution authority to require the inclusion of the contractual term referred in BRRD in certain categories of liabilities include the following:
- The resolution authority shall require the inclusion in the contractual provisions governing a relevant liability of the contractual term referred to in Article 55(1) of Directive 2014/59/EU where it has concluded, on the basis of the institution’s or entity’s notification, that none of the conditions of impracticability notified and referred to in Article 1 of this Regulation is fulfilled and provided that any of the following conditions is fulfilled: the nominal amount of the liability created by the relevant agreement or instrument is equal to or more than EUR 20 million and the remaining maturity of the agreement or instrument is equal to or longer than six months.
- Where necessary to ensure resolvability, the resolution authority may require the inclusion in the contractual provisions governing a relevant liability of the contractual term referred to in Article 55(1) of Directive 2014/59/EU where it has concluded, on the basis of the institution’s or entity’s notification, that none of the conditions of impracticability notified and referred to in Article 1 of this Regulation is fulfilled and provided that none of the conditions listed in paragraph (1), points (a) and (b) of this Article is fulfilled.
Finally, in Article 3, the regulation sets out the reasonable timeframe for the resolution authority to require the inclusion of a contractual term. The reasonable timeframe referred to in BRRD shall be three months from the day the resolution authority receives the notification referred to in Article 55(2), first subparagraph, of BRRD. Where the notification referred to in BRRD is incomplete, the resolution authority shall indicate to the notifying institution or entity which information is missing. The timeframe shall start when all missing information has been submitted. Until October 06, 2022, where the notification is complex, the resolution authority may extend the timeframe by six months. As from October 07, 2022, where the notification is complex, the resolution authority may extend the timeframe by three months. The resolution authority shall inform the notifying institution or entity of the extension and of the reasons for it.
Effective Date: October 07, 2021
Keywords: Europe, EU, Banking, BRRD, Regulatory Technical Standards, Contractual Recognition, Basel, Resolution Framework, EC
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