EU Member States and European Parliament, acting as the EU’s co-legislators, are currently negotiating a revision of the BRRD. This forms part of a broader legislative package, notably also reviewing the EU’s CRD/CRR framework.
Amongst other things, the BRRD review focuses on a revision of EU competent authorities’ so-called “moratorium” powers, which allow authorities to suspend all obligations of a bank for a period of time for resolution purposes. This came after Finance Ministers, in June 2016, asked the Commission to consider a revision of these rules.
It can be expected that a deal will be reached by the end of this year, and that the new moratorium rules would be applicable in early 2021 (exact date is TBC).
It is important to note that that under the current BRRD rules in force, the EU moratorium powers are in line with the FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”. Though non-binding, these Key Attributes are highly relevant as they represent a balanced consensus between global regulators, which has been welcomed by industry. In fact, the ISDA resolution stay protocol, containing an Annex for securities lending master agreements that ISLA helped develop, is based on these Key Attributes. The most important elements are:
The application of the suspension needs to be strictly limited in time (the key attributes refer to two business day)
- Only to be used when a bank enters into resolution or in context of the use of a resolution power
- Below we outline our main concerns with the EU proposals currently being considered and outline the state of play of the negotiations.
EUROPEAN COMMISSION PROPOSAL
Our main concerns with the moratorium tool emerged from the November 2016 European Commission’s legislative proposal, as this very significantly moved away from the FSB Key Attributes, particularly as it proposed to:
- Significantly increase the maximum time of the suspension
- Introducing a 5-day supervisory moratorium, which could be applied before resolution and could be followed by:
- A prolonged in-resolution moratorium of 5 days
- This is 10 days in total (i.e. 5 days before resolution + 5 days in-resolution)
- The proposed pre-resolution (‘supervisory’) moratorium goes against to the FSB Key
Attributes as those prescribe moratoria to be used only in-resolution.
In October 2017, we have suggested in a letter to EU policy-makers that this would have significant impact on the financial markets as it would fundamentally change the treatment of EU banks as counterparties, not only in the securities lending market, but notably also in derivatives and repo markets. In summary we raised concerns over:
- Impact on netting recognition – we understand it is likely that regulatory recognition of netting would be impossible in certain jurisdictions (likely including the US).
- Possible opt out triggers from the ISDA protocol, including for securities lending master agreements, mainly due to the lack of clarity over timing.
- Competitiveness of EU counterparties – for the reasons outlined above, securities lending being a discretionary activity, EU counterparties would have a competitive disadvantage.
- EU Market Liquidity – an increasing amount of EU securities on-loan come from non-EU entities who would no longer be incentivized to lend to EU counterparties.
The ECB/SSM and the Single Resolution Board strongly support the European Commission approach, as they see a prolonged moratorium as a useful tool to give them more time to assess a situation when banks get in trouble.
CURRENT STATE OF PLAY IN COUNCIL AND PARLIAMENT
The moratorium issue has featured highly in Council discussions, and multiple suggestions and designs have been discussed over the past year.
Today, it looks increasingly likely that the Council position goes into a positive direction, as it has gradually moved closer to the FSB’s key attributes. The key features of the approach that is today considered a consensus (though it cannot be excluded that it can still be changed) are:
- The supervisory moratorium was removed but replaced by a tool that could be used when a bank is considered “failing or likely to fail”, which is before resolution.
- This moratorium is strictly limited in time, i.e. 2 days
- The in-resolution moratorium is kept (2 days max), but importantly, it can no longer be used if the pre-resolution moratorium has already been used. We understand this means the max time is limited to two days, as per the current BRRD regime.
- The main divergence from the FSB’s key attributes is now that the moratorium can still be used before a bank is placed in resolution.
- One other additional clause brought in by Council is that it mandates contractual recognition of the moratorium powers in all contracts under 3rd country law.
The European Parliament is much less advanced than the Council in developing its position on this particular issue. However, a similar move closer to the Key Attributes can also be detected there. In the latest draft compromise approach (still subject to change), the following approach is suggested:
- Removal of the supervisory moratorium, replaced by the “failing or likely to fail” moratorium that is also in the Council text.
- Two-day max stay period, but extendable by one day if the determination that institution need to be placed in resolution (so 2 days + 1 day = 3 day max)
NEXT STEPS (ALL ESTIMATIONS)
- 15/16 May: Vote on Parliament’s Negotiation Position
- 25 May: Agreement on Council’s Negotiation Position (i.e. EU Member States)
- June – Dec 2018: Negotiations between European Parliament and Council
- End 2018 – Political deal
- Early 2021 – Application of new moratorium rules (EU Member states must transpose new rules into national law by [entry into force (most likely in Q2 2019) + 18 months]