HM Treasury Publishes Draft Annex to SRR Code of Practice


On 8 October 2013, HM Treasury published a draft annex on the new bail-in option to the Special Resolution Regime (SRR). The bail-in tool is being introduced through amendments to the Banking Act 2009 by the Banking Reform Bill 2013 for the purpose of offering a new stabilisation option to the Bank of England as lead resolution authority. It will be available to failing banks and investment firms, with necessary modifications to building societies via secondary legislation and under specified conditions to banking group companies.

The draft annex to the Code of Practice supports the legal framework for the SRR and provides guidance as to when and how the bail-in tool may be deployed by authorities in practice.

A summary of the key points include:

General and Specific Conditions for Use of SRR Tools (Section 7)

The conditions for use of the bail-in option are identical to those for the stabilisation options set out in the existing Code :

  • the regulator must determine that the institution is failing or likely to fail;
  • it is not reasonably likely that action will be taken by or in respect of the bank to avoid its failure; and
  • the Bank of England is satisfied that exercising the bail-in power is necessary having regard to the public interest.

When choosing between the original resolution tools, the Bank of England will consider the relative merits of the stabilisation options and the bank insolvency procedure given the circumstances in addition to general considerations . The Bank of England may also choose resolution by way of bail-in for situations where the use of another stabilisation power would threaten financial stability or confidence in the banking systems.

Use of the Bail-in Powers (Section 8)

The bail-in option gives the Bank of England the power to cancel or modify the terms of any contract in a resolution scenario for the purposes of reducing or deferring a liability of the bank (“special bail-in provision”). A conversion power also exists that allows for liabilities to be converted into different forms. Certain liabilities are excluded from the scope of the power to make special bail-in provision including:

  • deposits covered by the Financial Services Compensation Scheme (FSCS) or an equivalent overseas scheme;
  • liabilities to the extent they are secured;
  • client assets, including client money;
  • liabilities with an original maturity of less than seven days which are owed to a credit institution or investment firm (save in relation to credit institutions or investment firms which are banking group companies in relation to the bank);
  • liabilities arising from participation in a designated settlement system and owed to such systems, or to operators or participants in such systems;
  • liabilities owed to central counterparties recognised by the European Securities and Markets Authority (ESMA) in accordance with Article 25 of Regulation (EU) 648/2012;
  • liabilities to employees or former employees in relation to accrued salary or other remuneration (with the exception of variable remuneration);
  • liabilities owed to employees or former employees in relation to rights under a pension scheme (with the exception of discretionary benefits); and
  • liabilities to a creditor arising from the provision of goods or services (other than financial services) that are critical to the daily functioning of the bank’s operations (with the exception of creditors that are companies which are banking group companies in relation to the bank).

Prior to taking resolution action or converting liabilities, resolution authorities are expected to carry out a valuation of the assets and liabilities of the institution as is reasonably practicable.

The UK has chosen to exercise the discretion granted to it under the Recovery and Resolution Directive and has included derivatives in the list of liabilities which can be bailed-in. Specific power to make special bail-in provision to derivatives and similar financial transactions can be found in Sections 8.14 – 8.17 of the Annex. The Bank of England will, where appropriate, exercise its power to close-out contracts before they are bailed in with any applicable close-out netting being taken into account. If a liability is owed, it will be excluded from bail-in so far as it is secured and compensation arrangements will follow the “no creditor worse off” principle. This ensures that no person is worse off as a result of the application of the bail-in option than they would have been had the bank gone into insolvency.

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)

HM Treasury to Extend Special Administration and Resolution Regimes

On 25 April 2013, HM Treasury published a consultation paper on the introduction of a Special Administration Regime (SAR) for inter-bank payment systems (such as Bacs, CHAPS, Continuous Linked Settlement, CREST, LCH Clearnet Ltd, Faster Payments Service and ICE Clear Europe), operators of securities settlement systems (CREST being the only example in the UK) and key service providers to these firms (e.g. IT and telecommunications providers).  Responses are requested by Wednesday 19 June 2013.

The SAR would be a variant of a normal corporate administration and would be modelled on the special administration framework used in the utilities industries and the investment bank SAR.  However, it would be modified to allow the Bank of England to exercise control of the SAR process, to enable a special administrator to transfer all or part of the business to an aquirer on an expedited basis, and to facilitate the enforcement of restrictions on early termination of third party contracts.  Under the SAR, the special administrator would have the overarching objective of maintaining the continuity of critical payment and settlement services in the interest of UK financial stability. “Non-CCP FMI”, such as exchanges and trade repositories, and entities already covered by resolution powers for central counterparties (such as LCH and ICE) would be excluded from the regime.

On 25 April 2013, HM Treasury also published a statement confirming the fact that, before the end of the summer, it will consult on the extension of the special resolution regime (SRR) established under the Banking Act 2009 to group companies, investment firms and UK clearing houses.