Michael Beaton explains some of the recently proposed amendments to articles 1 to 36 in the Directive that establishes the framework for the recovery and resolution of investment firms and credit institutions.
Introduction
On 13 January 2013, the Presidency of the EU Council published a compromise proposal regarding suggested amendments to Articles 1 to 36 of the Directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “RRD”). The most noteworthy amendments are highlighted below.
Early Intervention
Triggers to Early Intervention
Under Article 23 of the original RRD, it was proposed that a competent authority be authorised to take early intervention action when a firm does not meet, or is likely to breach, the requirements of the Banking Consolidation Directive. Under the newly published draft, it is proposed to extend this authority to circumstances whereby the firm in question also no longer meets, or is likely to breach, the authorisation requirements under Title II of the MiFID Directive. Two additional early intervention powers are also granted to competent authorities, being the power to:
• appoint a manager who:
o assumes certain tasks of the management of the institution, or
o monitors the decisions and tasks of the management of the institution, or
o is empowered to veto or authorize certain decisions of the management of the institution (note that this power appears to be separate from the “Special Management” powers granted under Article 24 of the RRD); and
• require changes to the firm strategy or to the legal or operational structures of the institution.
Special Management
Amendments are proposed to Article 24 of the RRD in order to provide clarification that the appointment of a special manager shall not, of itself, make it possible for anyone to exercise any right or power to terminate, accelerate or declare a default or credit event under any agreement to which the institution is a party. In addition, it is specifically noted that any special manager shall have no liability arising from action taken or not taken in discharge of its functions unless guilty of gross negligence or serious misconduct.
Group Recovery and Resolution
Proposed changes to Article 7 of the RRD would mean that group recovery plans would only be required with respect to (a) the group as a whole, and (b) individually for significant entities. Previously, it was the case that all group entities would have been obliged to create a recovery plan. The requirement to update group resolution plans pursuant to Article 12 has also been amended slightly to clarify that plans should be updated at least annually, and after any change to:
• the legal or organisational structure of the parent company or of the group, or
• the business or to the financial situation of the group as a whole or parts of the group that could have a material effect on or require a change to the plans.
Recovery Plan Triggers
A new Article 8a has been proposed under which competent authorities must ensure that each recovery plan includes a trigger framework which identifies the points at which appropriate actions referred to in the plan will or may be taken. These triggers may be both quantitative or qualitative, must be forward looking and capable of being easily monitored, and should relate to the institution’s financial strength. The European Banking Authority is to draft regulatory technical standards regarding these indicators within twelve months from the date of entry into force of the RRD.
Resolution Plans
Contents of Resolution Plans
It is proposed to amend the contents of Resolution Plans, as detailed under Article 9 of the RRD, in order to include the following additional information:
• minimum amount of eligible liabilities required with respect to the exercise of the Bail-In Tool and a deadline to reach that level; and
• a description of the staff who are essential for maintaining the continuous functioning of the institution’s operational processes.
Resolution Objectives
The Resolution Objectives under Article 26 of the RRP remain relatively unchanged except for the fact that the following have ceased to be ‘objectives’ and now appear as ‘general principles governing resolution’ pursuant to Article 29:
• ensuring the continuity of critical functions; and
• avoiding unnecessary destruction of value and seeking to minimise the cost of resolution.
In addition, it was previously the case that all Resolution Objectives were of equal significance. In contrast, were the proposed changes to be adopted, it would be for the authorities to balance the objectives as appropriate to the nature and circumstances of each case.
Principles Governing Resolution
It is a general principle under Article 29 of the RRD that ‘no creditor should be worse off than in insolvency’. However, in the latest draft of the RRD this principle only applies to the extent ‘not otherwise provided in this Directive’. At this stage, the extent to which this principle is truly affected is not clear.
Resolution Tools
Of possible concern to some financial market infrastructures are the amendments to the Sale of Business Tool pursuant to Article 32 and the Bridge Institution Tool detailed under Article 34. Broadly speaking, neither the purchaser of a business nor a bridge institution can be denied access to payment, clearing or settlement systems, stock exchanges or deposit guarantee schemes on account of the fact that they do not possess a particular rating or do not otherwise meet the relevant membership criteria.
http://register.consilium.europa.eu/pdf/en/12/st16/st16258.en12.pdf
*Read more via Michael’s Recovery, Resolutions Plans & Living Wills Blog:
http://recoveryandresolutionplans.wordpress.com/
