On 15 May 2020, the European Banking Authority (“EBA”) published a Consultation Paper regarding draft Regulatory Technical Standards (“RTS”) on the contractual recognition of stay powers under Article 71(a)5 of the Bank Recovery and Resolution Directive (2014/59/EU) (the “BRRD”).
Broadly, under the BRRD, financial contracts (essentially, contracts documenting derivatives and securities financing transactions) which are governed by EU law are subject to the exercise by EU resolution authorities of various resolution powers. These include the power to suspend or restrict payment obligations, the power to suspend the enforcement of security interests and the power to suspend the exercise of termination rights (“Stay Powers”).
Of course, the risk remains that EU resolution authorities’ Stay Powers might not be effective when applied to financial contracts governed by third-country (i.e. non-EU) law (“Third-Country Contracts”). Put simply, a third country court could simply choose not to recognise EU Stay Powers in a particular jurisdiction.
To mitigate this risk, Article 71a(1) of the BRRD requires EU banks and certain systemically important EU investment firms to include a provisions (a “Stay Provision”) in all of their Third-Country Contracts. The Stay Provision requires counterparties to recognise, as a matter of contract rather than law, the enforceability of EU resolution authority Stay Powers. Article 71a(5) of the BRRD also requires the EBA to develop draft RTS in order to further determine the contents of a regulatory compliant Stay Provision.
- An acknowledgement and acceptance by the parties that the financial contract may be subject to the exercise of Stay Powers;
- A description of the powers of the relevant resolution authority set out in the BRRD under:
- Articles 33a (suspension of payment or delivery obligations);
- Article 69 (suspension of payment or delivery obligations);
- Article 70 (restriction on enforcement of security interests); and
- Article 71 (suspension of termination rights);
- A description of the requirements of Article 68 of the BRRD (crisis prevention measures or crisis management measures taken by EU resolution authorities are not deemed to constitute enforcement events or insolvency proceedings under financial contracts entered into by entities subject to the BRRD);
- A recognition that the parties are bound by the terms of the provisions mentioned in points 2 and 3 above;
- An acknowledgement and acceptance by the parties that no other contractual term impairs the effectiveness and enforceability of the Stay Provision, and that the Stay Provision 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
- An acknowledgement by the parties that the Stay Provision is subject to the law of an EU Member State.
English law has long been the dominant choice of law in relation to ‘financial contracts’. As such, the EBA consultation is particularly relevant in light of Brexit. By virtue of the transition period in the Withdrawal Agreement, EU law will continue to apply in relation to the UK, but only until 31 December 2020. At that point, from an EU perspective, English law will become ‘third country law’.
The deadline for submission of comments is 15 August 2020. Assuming that it takes a couple of months thereafter for the EBA to finalise the RTS, that leaves the industry with – at best – three months to blow the dust off its financial contracts in order to make sure that they conform to the EBA’s requirements. If you think that you might need some help doing this, or you just need some additional information, drop us a line – we’re here to help.