RRP Directive to be Amended?

In a press release published on 19 September, the Economic and Monetary Affairs Committee of the EU Parliament opened the debate on the RRP Directive by stating its opinion that the Directive would need to be amended to take account of the initiative towards full EU banking union.

Bank of England Provides its Take on Bail-In


The Bank of England (BoE) has published a speech given by Andrew Gracie, Director of the BoE’s Special Resolution Unit, to the British Bankers’ Association on 17 September 2012 entitled “A practical process for implementing a bail-in resolution power”, a summary of which is provided below.

By way of introduction, Mr Gracie noted that bail-in was only one among a suite of resolution tools, but that it may be of particular use in resolving G-SIFI’s whose operations are too large, complex or interconnected to resolve without threatening critical functions (although he also recognised that there may be cases where the failure of a firm is so comprehensive as to mean that it would need to be wound down instead of being bailed-in).  Nonetheless, Mr Gracie warned that, whilst it can be valuable in restoring a firm’s solvency and so allowing critical functions to continue during a reorganisation, bail-in alone cannot restore a firm’s viability.

Principles behind the exercise of the bail-in tool

Any exercise of the bail-in tool would have to:

  • respect creditor hierarchies;
  • protect secured claims and netting arrangements;
  • be proportionate (in order to minimise the risk of compensation claims);
  • be clear and transparent to creditors; and
  • satisfy clearly defined public interest objectives (e.g. the maintenance of financial stability and the protection of depositors).

The trigger for bail-in

Bail-in would only be used if a firm had reached the point of non-viability i.e. where a supervisory authority identifies that the institution is:

  • failing or likely to fail, and
  • no other solution, absent the use of resolution tools, would restore the institution to viability within a reasonable timeframe.

Bail-in in practice

Assuming that the pre-resolution efforts of a firm to restore its own viability had failed, Mr Gracie identified four stages in the application of the bail-in tool.

1. Stabilisation

Stabilisation of a firm would include some or all of the following steps:

  • suspension of the listing and trading of the firm’s shares and debt;
  • Communication with all stakeholders, confirming:
    • that the firm had reached the point of non-viability and had met the conditions for resolution;
    • the broad resolution strategy for the firm;
    • the range of liabilities that would be completely written down without conversion;
    • the range of liabilities that would be subject to potential write-down and/or fully or partially converted into equity;
    • that the firm would be restructured;
    • that all of the firm’s core functions would continue without disruption;
    • that any insured depositors would be fully protected; and
    • the proposed timing for the announcement of the final terms for the bail-in (including the final extent of creditor write-downs, and rates of conversion to equity).

2. Valuation and exchange

Immediately following the stabilisation phase, a valuation exercise would need to be carried out in order to determine the extent of losses incurred or likely to be incurred by the firm.  In turn, this would be used to calculate the appropriate terms of the bail-in.  Subsequently, the creditors identified in the stabilisation announcement would be subject to write-downs in an aggregate amount sufficient to cover all of the firm’s losses.  Next, the authorities would determine the amount of capital that would be necessary to help restore the firm to viability. This amount would likely exceed minimum prudential capital requirements in order to ensure market confidence in the firm.  The actual recapitalisation would be effected by the conversion of eligible liabilities into equity.

In passing, Mr Gracie confirmed the BoE’s objection to the principle enshrined within the RRP Directive requiring, at all times, the pari passu treatment of creditors within the same class.  Rather, the BoE believes that it is important for resolution authorities to retain some discretion in deciding which liabilities to bail-in, to take account of any potential adverse impact on the stability of the financial system.

3. Relaunch

Once the valuation had been completed, and creditors written-down as appropriate, equity would need to be transferred to affected creditors as a quid pro quo for the recapitalisation. This could be effected by the issuance of new shares or by the transfer of existing de-listed shares from shareholders who had been fully written down.  At this point, trading of the firm’s equity and debt in the primary market could resume.  In the event that it was subsequently found that any bailed-in creditor or shareholder had suffered a loss greater than that which would have occurred on the insolvency of the firm, an ex-post adjustment mechanism would be applied to the capital structure of the firm in favour of the affected party by way of compensation.

4. Restructuring

Any relaunch would be accompanied by a “concrete and effective” restructuring strategy.  In the simplest cases this strategy may take a matter of months to implement, but may take much longer in relation to more complex failures.  Any strategy would be designed to prevent disruption to critical economic functions while also addressing the causes of the firm’s failure.  In all instances, culpable management would be replaced.


European Parliament Timetable for RRP and Banking Union

On 19 September the EU Parliament published procedure files indicating that it would consider the proposals:

Proposal for RRP for FMI by early 2013


On 18 September 2012, the European Commission published issue 4 of DG Internal Market and Services’ (DGIM) Info Letter on Post-Trading.

In general, the Info Letter is a very useful summary regarding the background and current status of a number of global and EU financial services initiatives, including:

  • a regulatory framework for CSDs;
  • the status of EMIR; and
  • the continuing work of the International Institute for the Unification of Private Law (UNIDROIT) to finalise the “Draft principles regarding the enforceability of close-out netting provisions”.

Crisis Management of Financial Market Infrastructures (FMI)

With respect to RRP, DGIM noted that the creation of the right tools to allow for the orderly resolution of systemically important FMIs is a priority for the EU Commission.  The focus will be on Central Counterparties and Central Securities Depositories.  It is hoped that a legislative proposal in this area will be presented early in 2013.

CASS Resolution Pack Seminar

I will be presenting a half-day workshop on CASS Resolution Packs on 29 November 2012 as part of the Infoline Client Assets & Client Money Protection Conference.  The workshop will address a number of topics, including:

  • The background to CASS RP;
  • The CASS RP regulations;
  • Implementing a CASS RP;
  • The form of a CASS RP;
  • Future FSA initiatives and their effect on CASS RP planning; and
  • The extension of CASS RP regulations to insurance intermediaries.

Finally, we will also be demonstrating a CASS RP database, and discussing the advantages of this solution over more manual forms of CASS RP.

As a speaker, I am entitled to offer a 20% discount to contacts, colleagues and clients.  Please just drop me a line at michael.beaton@drsllp.com if you would like to take advantage of this.

Hope to see you there.


EU Parliament adopts Resolution Approving Single EU Banking Supervisor


On 13 September 2012, the EU Parliament published a press release announcing that it has adopted a resolution relating to the establishment of a single EU banking supervisor.  The resolution was adopted the day following the publication by the EU Commission of two legislative proposals on EU banking union.

In passing the resolution, the EU Parliament warned that EU banking supervision rules must be of “good quality”, transparent and accountable, noting that the current preferences of certain Member States “risk sending the wrong message, as well as perpetuating inefficiencies”.  Presumably, this is a reference to German objections to the establishment of a single deposit guarantee scheme, seen as one of the next necessary steps on the road to full banking union, which led to this aspect of the project being shelved, as reported in the Financial Times.  The EU Parliament also seem aware of the need to protect the functioning of the EU single market, an issue preying on the minds of non-eurozone EU countries, as highlighted in this FT article.

EU Council Proposal regarding a Single Supervisory Mechanism (SSM) for credit institutions

ECB Powers

After a transitional period (see below for more details), the European Central Bank’s (ECB) powers will apply to all credit institutions, regardless of their business model or size.  Member States that have not adopted the Euro will be able to participate in the SSM provided that they abide by and implement relevant ECB decisions.   The EU Commission proposals give responsibility to the ECB in a number of areas regarding the supervision of Eurozone EU credit institutions, including:

  • authorisation and withdrawal of authorisation;
  • the assessment of acquisitions and disposals of holdings in credit institutions;
  • the removal of a member of a credit institution’s management board;
  • capital requirements as well as exposure, leverage and liquidity limits;
  • the conducting of stress-tests;
  • the initiation of early intervention measures to restore institutions which are in danger of breaching regulatory capital requirements (this is to be done in co-ordination with national resolution authorities pending the conferral of resolution powers on a European body);
  • assumption of the role of host supervisor for credit institutions established in non-participating Member States which establish a branch or provide cross-border services in a participating Member State;
  • assumption of the role of both home and host supervisor for credit institutions exercising the right of establishment in other participating Member States;
  • assumption of the roles currently held by all participating Member States within colleges of supervisors set up to consider cross-border banking groups;
  • the ability to require information from, and conduct investigations (including on-site inspections) of, credit institutions, their group companies, persons involved in or otherwise connected to their activities and national competent authorities; and
  • the imposition of sanctions for breach of regulations in an amount of up to twice the profit gained or loss avoided because of the breach (where this can be determined), or up to 10% of the total annual turnover of the relevant institution in the preceding business year.

Role of National Supervisors

All tasks not specifically conferred on the ECB will remain with national supervisors.  This will include responsibility for consumer protection, anti-money laundering, and the supervision of third country credit institutions establishing branches or providing cross-border services within a Member State.  In addition, the day-to-day activities necessary to implement ECB decisions appear likely to be performed by national supervisors.  Applications for authorisation as a credit institution within a participating Member State will also initially be administered by national competent authorities, which shall propose to the ECB whether the conditions of authorisation have been met and therefore whether the ECB should grant the authorisation.

Role of the EBA

The ECB would not take over any tasks of the European Banking Authority (EBA).  Specifically, the EBA would retain responsibility for the development of a single rulebook and ensure convergence and consistency of supervisory practice.

Independence and Accountability

The ECB must maintain independence when carrying out its banking supervision role and will be accountable to the European Parliament and to the EU Council.  Monetary policy tasks will be strictly separated from supervisory tasks to eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision.

Entry into force and Transition Period

The regulation creating the SSM will enter into force on 1 January 2013 (although this FT article would suggest that this deadline may be missed), and will adopt a phased approach.  Although, by way of notification to an institution and its national regulator, the ECB could choose to apply its powers to any bank from the outset, it is envisaged that it will initially apply to those banks which have received or requested public financial assistance, following which it will be extend to the most systemically important banks.  The ECB shall make public a list of those institutions over which it has a supervisory role before 1 March 2013.  Remaining banks will fall under the ECB remit by 1 January 2014 at the latest.

Supervisory fees

The ECB shall levy fees directly on credit institutions in order to cover the costs of the SSM.  The level of fees will be proportionate to the  importance and risk profile of the credit institution concerned.

Recent Developments Highlight the Importance of the CASS Resolution Pack


The FSA regards the protection of client money and assets (CASS) as one of the fundamental issues facing the financial services industry.  The failure of Lehman Brothers and MF Global served only to force the subject of CASS compliance yet higher up the FSA’s list of priorities.  Two recent events have brought CASS issues back into the news and highlighted the importance of creating a robust and scalable solution to the issue of CASS Resolution Pack (CASS RP) maintenance, as well as the role which the CASS RP can play in ensuring general CASS compliance.

CP12/22: Client assets regime

On 6 September 2012, the FSA published CP12/22, a combined Consultation Paper and Discussion Paper on changes to the CASS regime necessary to comply with the segregation and porting requirements of EMIR as well as the wider review of the CASS regime which is currently under way.

Under current CASS rules, the failure of a firm triggers a “primary pooling event”, following which all client money held by that firm is pooled pending distribution.  In an effort to comply with the requirements of Article 48 of EMIR, which requires segregation of client assets so as to facilitate porting, the FSA intends to allow firms to operate multiple legally and operationally separate client money pools and sub-pools.  In the event of insolvency, each pool would be distributed rateably to its particular beneficiaries.  All client money not held in a pool would form part of a general client money pool, in accordance with current CASS rules.

The FSA believes that multiple pools would allow firms to insulate clients from other clients with a greater risk appetite, or from the risks associated with more complex business lines.  As such, clients could be protected from exposure to delays in the return of client money and the potential for shortfalls in the general client money pool.

It is intended that there should be a great amount of flexibility in the way in which the pools are created.  So, for example, a firm could establish pools by reference to a business unit, such as Prime Brokerage.  Alternatively, a clearing member could operate separate pools of client money comprising (i) the margin held for a client in a client account at a CCP, and (ii) the client money held for that client by the clearing member itself.  If the clearing member subsequently became insolvent, the pooling would allow an insolvency practitioner to make the margin held by the clearing member available in order to facilitate porting.

BlackRock Fined for Breaches of CASS Rules

On 11 September 2012, the FSA published a final notice relating to the £9,533,1000 fine it had imposed on BlackRock Investment Management (UK) Ltd for failure to adequately protect client money in the period between October 2006 and March 2010.  This fine included a 30% discount for early settlement by BlackRock.

The specific failings of BlackRock related to the requirement to provide notification and obtain acknowledge of the trust status of client money placed on deposit.  The net result was that an average daily balance of approximately £1.36 billion had been at risk with the banks at which deposits had been made.


It is anticipated that the pooling arrangements proposed within CP12/22 will be finalised early in 2013.  Thereafter, it is expected that there will be a strong demand for segregated pooling from clients.  A rapid and large increase in the number of client money pools implies a degree of cost and administrative burden on firms providing this service due to the fact that they will be required to ensure that the segregation provisions of CASS 7.4 and the record keeping and reconciliation (both internal and external) requirements of CASS 7.6 apply to the general pool and to each sub-pool created.  Given that these requirements also track into a firm’s CASS RP, and the aggressive deadlines which apply to the updating of the information contained within a CASS RP, it is important to implement a robust and scalable solution to the initial form of a CASS RP and ensure that an appropriate amount of resource is committed to its maintenance.

The FSA press release accompanying the publication of the BlackRock fine reiterated that the identification and protection of client money should be at the top of every firm’s agenda.  In this regard, a CASS RP represents both a risk and a benefit to firms.  Risk arises from the fact that a CASS RP provides a convenient snap-shot of the state of a firm’s CASS compliance, which can be requested by the FSA at any time.  As such, in future, it will become far easier for the FSA to identify failings such as those affecting BlackRock and levy fines accordingly.  However, benefits arise if firms view the CASS RP as an internal risk management tool, highlighting areas of weakness or non-compliance with respect to CASS issues.  Being relatively self-contained, the CASS RP regulations are fairly easy to implement and yet provide good protection with respect to both client assets and a firm’s reputation.  In an environment of shrinking budgets, it is tempting to view the CASS RP as being of secondary importance.  However, if the BlackRock affair highlights anything, it is the price that can be paid for failing to heed the repeated warnings of the FSA regarding the importance of client money issues and the need to implement robust procedures with respect to all aspects of the client money process.

EU Parliament to vote on Banking Union on 13 September 2012

On 10 September 2012, the EU Parliament published a new procedure file indicating that it intends to debate the legislative proposal for EU banking union on 12 September, the same day on which it is published by the EU Commission.  The EU Parliament will vote on the proposals on 13 September 2012.

EU Banks to face Vickers Style Ringfence?

This is a link to an article in today’s Financial Times (subscription required) regarding the progress of an on-going review into the structure of EU banking.

The Liikanen Review was established in November 2011 by Michel Barnier, the EU single market commissioner.  It ‘s remit was to examine the need for structural reform of the banking sector within the EU and it is due to report in October 2012.  Early indications are that it may recommend that any bank which exceeds a specified threshold of trading assets, calculated as a proportion of total assets, should be obliged to establish a separately capitalised subsidiary to house those assets, along this lines recommended by the Vickers Report in the UK.  It is thought that this percentage could be as low as 5%.

However, the members of the committee conducting the review do not appear to be unanimous in their support of this recommendation and it is thought that a compromise proposal may yet emerge.  Under this compromise, a bank may be required to create a ringfenced entity only if it came close to failure.  The trigger for ringfencing would be documented within the bank’s Living Will.  Quite how this compromise would work in practice is difficult to see.

First Steps Towards EU Banking Union to be Finalised by End of 2012

The EU Commission has published a speech given on 3 September 2012 by Olli Rehn, Vice-President of the European Commission and member responsible for Economic and Monetary Affairs and the Euro on EU banking union entitled “Towards a Genuine Economic and Monetary Union”.

The EU Commission sees banking union as a top priority and proposes a two-stage process.  The first stage involves the establishment of a Single Supervisory Mechanism (“SSM”) for Eurozone banks under the authority of the European Central Bank (“ECB”).  Note, however, that this press release from the European Parliament would suggest that the authority to supervise non-Eurozone banks would remain with the European Banking Authority.

 The legislative proposal for the SSM will be presented by the EU Commission within two weeks, with a view to it being finalised by the end of 2012.  The SSM will apply to all Euro area Member States, but other Member States will be free to participate if they so choose.  As even small banks can represent a source of systemic risk, the SSM will apply to all Eurozone banks.  Whilst the ECB will have prime responsibility for the administration of the SSM, national supervisors will continue to play an important role.

The second stage of banking union will involve the creation of a common deposit guarantee scheme as well as for a single European recovery and resolution framework.