BRRD- the other shoe drops

The BRRD includes broad contractual stay powers enabling EEA Regulators to temporarily:  suspend payment/delivery obligations, restrict the enforcement of security interests and suspend termination rights. Affected financial contracts comprise the majority of English law derivatives, repo and securities lending contracts as well as relevant master agreements.

On 22 April 2021 the Commission adopted a delegated regulation implementing Art. 71a of the BRRD. Art 71a stipulates that parties include recognition and acceptance of contractual stays in financial contracts governed by third-country law, specifically:

1. the acknowledgement and acceptance by the parties that the contract may be subject to the exercise of powers by a resolution authority to suspend or restrict rights and obligations arising from such a contract
2. a description of, or a reference to, the powers of the resolution authority as set out in Articles 33a, 69, 70 and 71 of the BRRD
3. the acknowledgement and acceptance by the parties:

 (a) that they are bound by the effect of an application of the following powers:

– the suspension of any payment or delivery obligation in accordance with Article 33a BRRD;

 – the suspension of any payment or delivery obligation in accordance with Article 69 BRRD;

 – the restriction of enforcement of any security interest in accordance with Article 70 BRRD;

 – the suspension of any termination right under the contract in accordance with Article 71 BRRD;

 (b) that they are bound by the provisions of Article 68 BRRD

4.   the acknowledgement and acceptance by the parties that the contractual recognition terms are exhaustive on the matters described therein to the exclusion of any other agreements, arrangements or understandings between the counterparties relating to the subject matter of the relevant agreement

As usual, the Regulation will enter into force on the twentieth day following publication in the OJ and will be fully binding and directly applicable in all Member States. Art. 55 BRRD mandating  the contractual recognition of Bail-In resulted in a large repapering exercise; at least for EU entities Art. 71a will require similar effort and expenditure.

Occurring after the end of the Brexit transition period, Art. 71a will not be onshored into English Law, leaving UK entities subject to the existing Stay provisions in the PRA Rulebook. It is not clear whether the UK will unilaterally implement the new 71a requirements either in part or in full. Complete transcription of the rules would require an extension of the existing PRA stay rules to FCA-solo-regulated firms that are subject to the BRRD, as well as imposing a significant repapering exercise on UK-domiciled entities. The Art 71a reference to “any financial contract” is broader than the existing PRA Rules which allow for the exclusion of certain counterparties as “excluded persons”. UK objections are also likely to be raised over the Art 71a requirement that stay recognition clauses must be governed by the law of a Member State, potentially introducing a confusing and inelegant split of contractual governing law. At least on paper, there is nothing to prevent the UK and EU Resolution Authorities from entering a mutual cooperation agreement, in which they agree to recognise and enforce each other’s authority and decisions. A rationalist might argue that wider financial stability should not be subject to political wrangling over future trade; a realist would accept that that UK-EU cooperation is currently unlikely. It may be further argued that the insertion of largely descriptive clauses into contracts does very little aid to legal clarity and enforcement and certainly does not justify the expense and time involved in outreach and amendment. The UK signalled its intention to ignore the pre-Brexit (4 day) period in which it was obliged to implement Art 71a; against an increasingly divergent background (CSDR, MiFID 2 STO), it would be surprising to see a sudden outbreak of convergence on the already controversial topic of contractual stays. Accordingly, UK entities should do little except to prepare for amendment requests from their EU counterparties. EU counterparties should add Art. 71a repapering to the already-long list of regulatory requirements coming due in 2021.

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