HM Treasury Consults on Non-Bank Resolution


On 26 September 2013, HM Treasury published a consultation paper regarding secondary legislation for non-bank resolution regimes.  The consultation will remain open until 21 November 2013.

As currently drafted, the Special Resolution Regime (SRR) established by the Banking Act 2009 applies to most deposit-taking institutions such as banks and building societies. The Financial Services Act 2012 widened the SRR to include undertakings in the same group as a failing entity, investment firms, and central counterparties (CCPs).  However, these provisions have not yet been brought into force.  The consultation seeks comment on a number of proposed statutory instruments required to underpin the widened SRR as detailed below:

Broadly, the issues discussed include:

Exclusion of certain investment firms from the scope of the SRR

The government is proposing to narrow the scope of the SRR so that it applies only to those investment firms that are required to hold initial capital of €730,000 (“€730k investment firms”) as specified in the Capital Adequacy Directive.  The government believes that there are approximately 2,000 investment firms in the UK, about 250 of which are €730k investment firms.  Non-€730k investment firms which fail will continue to be dealt with under normal insolvency procedure, or enter into the special administration regime (SAR).

Extension of stabilisation powers to “banking group companies”

At present, the SRR only permits the Bank to exercise stabilisation powers over a failing institution.  However, these powers are to be extended to cover banking group companies (“BGCs”), being:

  • subsidiaries of the failing institution;
  • parents which are “financial holding companies”; and
  • undertakings which are in the resolution group (i.e. subsidiaries of the “resolution group holding company”).

By virtue of the application of the SSR to investment firms and CCPs, the Bank’s SRR powers will also extend to undertakings within the same group as a failing investment firm or CCP (though the legislation refers to all such group undertakings as “banking group companies” irrespective of whether they are grouped with a bank, a building society, an investment firm or a CCP).

Introduction of further partial property transfer (“PPT”) safeguards

PPTs transfer some, but not all, of the property, rights or liabilities of a failing institution to a private sector purchaser or bridge bank.  A number of safeguards currently exist in relation to PPTs.  These safeguards are designed to protect contractual and market arrangements (and so provide clarity to, and bolster the confidence of, the market) within the context of a flexible regime which is able to resolve failing institutions effectively.  Specifically the safeguards include protection for set-off arrangements, netting arrangements and title transfer financial collateral arrangements; secured liabilities; capital market arrangements; and financial markets.[1]  The government proposes to extend these safeguards to investment firms and banking group companies.  It also proposes to make a separate statutory order to enact PPT protections with respect to recognised CCPs.  These would protect collateral and netting arrangements by only making a PPT possible with respect to a complete segregated business line of a CCP (i.e. a product set cleared by a CCP that is covered by a segregated set of default protections).

Introduction of further ‘no creditor worse off’ safeguards

Section 60 of the Banking Act 2009 permits the Treasury to make regulations about third party compensation arrangements in the case of PPTs, often called ‘no creditor worse off’ (“NCWO”) provisions.  As an example, an independent valuer is required to be appointed to determine whether pre-transfer creditors should be paid compensation and, if so, what amount, and the principles they must apply when making the valuation[2].  The government proposes to extend the NCWO provisions to PPTs made in respect investment firms and banking group companies.

Extension of the Bank Administration Procedure (BAP) rules

The government is proposing to amend insolvency rules to extend the bank administration procedure to (the residual part of) investment firms and banking group companies.  However, the BAP has not been extended to CCPs, as the resolution authority has powers of direction over the administrator of an insolvent CCP.


[1] The Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009 (SI 2009/332)

[2] The Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009 (SI 2009/319)

RRD Pushed Back Yet Again

On 20 September 2013, the EU Parliament updated its procedure file on the Recovery and Resolution Directive (RRD).  It seems that the RRD proposal will now be considered at the Parliament’s plenary session scheduled for 3 to 6 February 2014, rather than the session scheduled for 18 to 21 November 2013, as was previously the case.

EBF Position Paper on SRM

On 17 September 2013, the European Banking Federation (EBF) published a position paper entitled “EBF Positioning on the Principles underlying the Single Resolution Mechanism”.  The paper includes a high-level discussion on the European Commission’s recent announcement of a Single Resolution Mechanism (SRM) as a complement to the Single Supervisory Mechanism (SSM) within the project of the Banking Union.  Two concerns worth noting are:

  • the EBF believe that the target fund should be built up over 15 years rather than 10 ten years as proposed which appeared far too long to begin with; and
  • the EBF do not agree that member states should have the flexibility to apply exclusions from bail-in for any eligible liabilities – this would include the ability to exclude derivatives from bail-in.  This does seem to be a good idea as it helps create a level playing field and avoids a race to the bottom.

Too Physical to Fail? Regulators Turn Attention to Commodities Houses

This is a link to an article in Risk Magazine discussing the systemic risk posed by commodity houses such as Cargill, Noble Group, Glencore Xstrata, Trafigura and Vitol.

The FSB has commissioned a study into the potential systemic risk posed by commodity trading houses, citing their involvement in  ‘shadow banking’ activities, such as lending and securitisation, as a cause for concern.  In addition, by the end of 2013, it is also due to publish guidelines for identifying non-bank, non-insurance Global Systemically Important Financial Institutions.

Whilst ‘prepayment transactions’, in which commodities houses pay cash upfront for a commodity to be delivered over time, do act as a source of financing it is generally thought that these deals are designed to provide access to additional commodity flows and do not represent lending for the sake of lending.  In addition, whilst some commodities houses, such as Trafigura, have a programme for the securitisation of trade finance receivables, the scale of these activities is currently very limited compared to those of banks.  Furthermore, in contrast to bank securitisations, it seems that commodity house securitisations tend not to involve a potentially dangerous maturity mismatch, whereby long term assets are financed by short-term money.

The article also makes reference to the joint report issued on 9 July 2013 by the Centre for European Policy Studies and the European Capital Markets Institute (ECMI), which concluded that larger commodity trading houses had grown to the point where their sheer size and importance in physical markets meant that they would have to be bailed out if they went bankrupt in order to avoid widespread disruption to commodity markets.  However, the structure of commodities markets, in which producers can go directly to consumers, would suggest that the failure of a commodity trading house would not have such a significant impact on supply security.  Furthermore, this view is supported by history, with the bankruptcy of Enron and Andre & Cie in 2001, Amaranth Advisors in 2006 and Petroplus in 2012 suggesting that disruption to markets may be limited.

ECOFIN Meet to Discuss SRM

On 14 September 2013, the Lithuanian Presidency of the Council of the EU published a press release and a note (synopsis) on the informal meeting of the European Economic and Financial Affairs Council (ECOFIN) in Vilnius.  EU Finance Ministers and Central Bank Governors discussed the proposal for a Regulation for a single resolution mechanism (SRM).

The SRM is one of the key elements of the European banking union.  Lithuanian Finance Minister and Chair of the ECOFIN Council, Rimantas Šadžius, stated that “Swift progress towards the Banking Union is essential to ensure financial stability and growth in the internal market, as well as sound framework of financial system.  In the light of this, the Single Resolution Mechanism must be agreed as soon as possible”.  The Presidency is concentrating its efforts on reaching a general approach on the proposal for the implementation of the SRM in November 2013.

Bob Diamond shines a light on TBTF

Bob Diamond, ex–chief of Barclays writes about the TBTF problem in today’s FT, bemoaning the lack of progress in dealing with this elephant in the financial reform room. He fully supports the consensus opinion that the problem requires: a global resolution system, a level playing field with respect to capital and leverage, and international consistency and coordination. Of greater interest is the FT’s front page article about the article. It quotes Sheila Bair, Chairman of the FDIC, who makes the salient point that TBTF is as much a problem of perception as tangible reality. As long as financial institutions and their counterparties believe that they benefit from an implicit (supra?) sovereign guarantee, the problem will persist. The article quotes Jim Millstein, who led the effort to initially disentangle the AIG can of worms. Despite all the reforms of the past five years, he believes that it would take “10 to 15 years” to identify and unwind the myriad interconnections between large financial institutions.  As a legion of commentators has pointed out since 2008, the problem is not “Too Big to Fail”, it’s more akin to “Too Interconnected to Let Fail”.

European Parliament Votes to Adopt SSM

On 12 September 2013, the European Parliament published a press release announcing the adoption of a package of legislative acts to set up a Single Supervisory Mechanism (SSM) for the Eurozone.  The SSM legislation was adopted with very large majorities and will bring the EU’s largest banks under the direct oversight of the European Central Bank (ECB) from September 2014.

The SSM legislation consists of a proposed regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposed regulation amending Regulation 1093/2010 (see this blog post for more details).  The European Parliament has also published a document containing the provisional texts adopted which can be found on pages 105 and 50 respectively.

The Regulations will come into force following approval by the EU Council and publication in the Official Journal of the EU.  The ECB will assume its supervisory role 12 months later.

FCA Fines Aberdeen £7.2m for Client Money Breaches

On 3 September 2013, the Financial Conduct Authority (FCA) published a press release announcing the final notice it has issued to Aberdeen Asset Managers Limited and Aberdeen Fund Management Limited (“Aberdeen”), fining the firm £7,192,500 for breaches of the FCA’s client money rules.  This fine included a 30% discount for early settlement by Aberdeen.

Over a three year period from 31 August 2008 to 31 August 2011, Aberdeen breached Principle 3 (management and control) and Principle 10 (protection of client assets) of the FCA’s Principles for Businesses.  The firm failed to recognise that money held on behalf of clients in Money Market Deposits (MMDs) with third party banks were subject to the FCA’s client money requirements set out in Chapter 7 of the Client Assets Sourcebook (CASS).  As a result, Aberdeen breached rules 7.3.1R, 7.3.2R, 7.6.1R, 7.6.2R and 7.8.1R in CASS.

Under the client money requirements, firms are required to protect money held on behalf of its clients in the event of firm failure.  Aberdeen failed to:

  • Provide appropriate trust letter notifications to the banks and did not obtain acknowledgements confirming the client money trust status of the deposited monies from those banks;
  • Provide consistent account naming conventions when setting up accounts, creating uncertainty over ownership of those accounts.

The net result was that an average daily balance of approximately £685 million had been at risk but no actual loss of client money was suffered.  However had the firm become insolvent, severe delays and complications in the distribution of client money would have resulted.

Aberdeen’s failings highlight the importance of identifying and protecting client money.  In this regard, a CASS Resolution Pack (CASS RP) represents a useful and readily available compliance tool.  In providing a convenient snap shot of the state of a firm’s CASS compliance, not only does it assist an Insolvency Practitioner in locating and returning client money, but it also highlights immediate and ongoing deficiencies in a firm’s CASS procedures.  Implementing prompt remedial action with respect to CASS deficiencies highlighted during the creation and maintenance of a CASS RP will help avoid the high price, both in terms of monetary fines and reputational damage, that was experienced by Aberdeen in this case.

FSB Publishes Assessment Methodology for the Key Attributes of Effective Resolution Regimes

On 28 August 2013, the Financial Stability Board (FSB) published a press release announcing the launch of a proposed Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial Institutions.  The Key Attributes of Effective Resolution Regimes for Financial Institutions (‘the Key Attributes’) were endorsed by G20 Leaders at the Cannes Summit in November 2011 as the international standard for resolution regimes. The Key Attributes sets out the core elements that the FSB considers to be necessary for an effective resolution regime.

The FSB developed the draft methodology to facilitate the objective and consistent assessment of a jurisdiction’s compliance with the Key Attributes and to assist jurisdictions in the implementation of legislative reforms.  The methodology proposes a set of assessment criteria for each Key Attribute and includes examples and explanatory notes to guide their interpretation.  The FSB welcomes comments on the draft methodology by 31 October 2013.