Shearman & Sterling LLP | FinReg | EU Consultation on Requirements for Contractual Provisions for Recognition of Stay Powers
Financial Regulatory Developments Focus
This links to the home page
Financial Regulatory Developments Focus
  • EU Consultation on Requirements for Contractual Provisions for Recognition of Stay Powers

    The European Banking Authority has opened a consultation on proposed Regulatory Technical Standards on the contractual recognition of stay powers under the Bank Recovery and Resolution Directive. Revisions to the BRRD were published in June 2019. EU Member States are required to transpose the amending Directive into their national laws and to apply the provisions by no later than December 28, 2020, except for provisions relating to the minimum requirement for own funds and eligible liabilities (MREL), which apply from January 1, 2024. The consultation closes on August 15, 2020.

    The BRRD provides resolution authorities with powers to stay the contractual rights of parties in financial contracts. These powers allow resolution authorities, for a limited period of time, to suspend contractual payment or delivery obligations due under a contract with a firm under resolution. In certain circumstances before resolution, a resolution authority may also restrict the enforcement of security interests and suspend certain rights of counterparties, such as rights of close-out, netting, accelerating future payments or terminating financial contracts.

    The revisions to BRRD introduced a requirement for contractual recognition of resolution stay powers. Financial contracts entered into by EU banks that are governed by the laws of a non-EU country will need to include a clause with contractual recognition of the resolution stay powers. The requirement will apply to new obligations created and to material amendments to existing obligations.

    Consistent with the EU approach to contractual recognition of bail-in, the EBA is proposing the mandatory factors that must be present in the contractual term required in the financial contracts. The EBA is proposing contractual provisions that provide for:
    1. the acknowledgement and acceptance by the parties that the contract may be subject to the exercise of certain powers by a resolution authority to suspend or restrict rights and obligations arising from such a contract;
    2. a description of the resolution stay powers (as transposed under national laws) and of Article 68 of BRRD, which provides that crisis prevention measures or crisis management measures should not be deemed enforcement events nor insolvency proceedings and that such measures should not entitle contracting counterparties to exercise certain contractual rights as a result of the application of such measures, provided that the substantive obligations under the contract continue to be performed;
    3. the recognition by the parties that they are bound by the powers as described in point 2 above;
    4. the acknowledgement and acceptance by the parties that no other contractual term impairs the effectiveness or enforceability of the contractual term as specified in the provisions described above, and that the contractual term is exhaustive on the matters described therein notwithstanding any other agreements, arrangements or understandings between the counterparties relating to the subject matter of the relevant agreement; and
    5. the acknowledgement by the parties that such contractual term is subject to the law of a Member State.

    View the EBA's consultation paper on draft RTS on contractual recognition of stay powers.

    View details of BRRD2.

    Return to main website.