The FSB has released a consultation paper on the cross-border recognition of resolution action. The FSB TBTF report previously identified cross-border legal uncertainty as one of the main stumbling-blocks to the effective resolution of a SIFI subject to multiple jurisdictions. Key Attribute (KA) 7.5 mandates the mutual cross-border recognition of resolution authority and action; existing court-mediated insolvency laws are largely unable to satisfy this criterion. The paper is divided into two sections: statutory elements to enable cross-border recognition and contractual approaches to facilitate the same, pending statutory equivalence.
The FSB suggests two related procedures to achieve cross border resolution harmony: recognition and\or supportive measures. Recognition acts to implement one jurisdiction’s resolution measures in another, insofar as they already form part of the “remote” jurisdiction’s legislative horizon. Supportive measures involve the remote jurisdiction essentially mirroring, or implementing of its own accord, the measures taken by the domestic resolution authority. KA 7.5 compliance may be achieved by the institution of an administrative and\or judicial framework enabling recognition, supportive measures or a combination of both. Examples of statutory frameworks giving effect to foreign resolution actions include: FINMA’s powers under Swiss legislation, the Monetary Authority of Singapore Act and the BRRD. A review of these and other examples has identified a set of seven common elements in cross-border frameworks; where appropriate, the paper distinguishes between recognition procedures and supportive mechanisms for each element:
- The framework should confer legal capacity to a domestic to give effect to foreign resolution measures and delineate the limits of such capacity.
- The framework should establish the process and conditions under which it takes effect and whether that effect is automatic or subject to domestic discretion
- The framework should clearly identify the grounds for giving effect for foreign resolution measures, derogation from which should be limited to identified circumstances.
- The process should be guided by the principle of equitable treatment of creditors. (The FSB recognises that this simple principle may become quite complex in cross-border situations, admitting that “ further consideration will be needed”)
- In giving effect to foreign resolution actions, national authorities should take account of the need for speed in resolution.
- The framework should be complemented by protections from liability or judicial action that could constrain or reverse cross-border resolution actions.
- Authorities should require, or incentivise, firms to adopt contractual approaches that reinforce the legal certainty and predictability of statutory frameworks that facilitate cross-border resolution.
As referenced by the last element, while statutory measures are the preferred solution, the FSB recognises that contractual approaches may have to suffice in the short-term and may provide support in the long. Contractual remedy is particularly applicable in two distinct cross-border circumstances: temporary restrictions on rights of early termination in financial contracts and the resolution-triggered bail-in of debt securities which are governed by a jurisdiction foreign to their issuer.
Stay on early termination rights
The FSB recognises that a foreign court imposed stay may not be enacted quickly enough for resolution purposes. They implicitly advise the adoption of the ISDA draft protocol to its Master Agreement. Protocol adherence will be initially limited to G-SIBs and other large dealer banks, the FSB has recommendations for dealing with the remainder. For those banks and firms that are subject to prudential regulation and\or resolvability regimes, the FSB effectively tells national regulators to force the firms to adopt the necessary contractual language with all their counterparties. For those entities that are not subject to prudential regulation, the FSB suggests that regulators keep them under review and consider further measures, including the imposition of contractual language through market conduct legislation.
Contractual recognition of bail-in
The risk that bail-in may be impeded by foreign jurisdictions may be mitigated or removed by contractual recognition clauses supporting cross-border enforceability. Some jurisdictions already require provisions to this effect in capital or debt instruments governed by foreign law; a requirement which may be supported by the obligation to prove the enforceability of bail-in to applicable resolution authorities. The paper notes 5 key principles for the effective “contractualisation” of cross-border bail-in:
- A clear agreement by the debt holder to be bound by the terms of the bail in under the relevant resolution and that such agreement will override other terms and conditions.
- Disclosure of the consequences of a contractually-enforced bail-in must be clear and prominent.
- A clear distinction must be made between other mechanisms for conversion or write-down (eg. capital ratio or ratings triggers) and the application of a statutory bail-in regime.
- The effectiveness and enforceability of contractual bail-in provisions will depend on decisions by “foreign” courts. Firms are therefore advised to obtain specific, independent legal advice from the applicable foreign jurisdictions.
- Firms should be required to demonstrate the enforceability of bail-in to relevant authorities. Such demonstration should include legal opinion as to the enforceability of specific provisions of the instrument and provide a positive endorsement. Insofar as the opinion is qualified, an assessment of such qualification’s impact on bail-in enforceability should be included.
The FSB goes on to recommend that prudential or resolution authorities should require new issuance of debt governed by foreign law to include recognition clauses for statutory bail-in.
The paper concludes by recognising the gap between current arrangements and effective recognition of foreign resolution actions and offers the following timeline sketch:
- End October 2014- 14 G-SIBs and other large banks to commit to adoption of ISDA protocol, effective from 2015
- End 2015- final guidance of key principles for recognition clauses
- End 2015- FSB Members to take official action to promote widespread adoption of contractual clauses
- End 2015- final guidance on core elements of statutory recognition frameworks
Cross-border problems are the wrench in the engine of financial regulatory reform. Failure to resolve these issues will lead to terminal loss of momentum and eventual financial balkanisation. Though this paper is short on detail and only deals with the relatively narrow subject of resolution measures; in the glaring absence of international regulatory amity, the FSB is to be congratulated for outlining a workable solution.
The deadline for response is 1 December 2014.Contact Us