PRA has published its policy and final rules (the PRA Rulebook: CRR Firms and Non-Authorised Persons: Stay in Resolution Instrument 2015) to ensure that resolution action taken in relation to a relevant firm will not immediately lead to the early termination of its financial arrangements (or those of its subsidiaries) governed by third-country law while similar financial arrangements governed by the laws of the UK or another European Economic Area (EEA) jurisdiction are stayed. The intention is to both reduce the risk of contagion from the failure of a relevant firm and support its orderly resolution. The rules prohibit firms within their scope from creating new obligations or materially amending existing obligations under certain financial arrangements unless the counterparty has agreed in an enforceable manner to be subject to stays on early termination and close-out to those that would apply as a result of a UK firm’s entry into resolution, or the write-down or conversion of a UK firm’s regulatory capital at the point of non-viability, if the financial arrangement were governed by the laws of any part of the UK.
PRA made several changes following consultation. Key changes included:
- restricting the scope of the rules to apply only to third-country law financial arrangements containing termination rights or rights to enforce security interest that could be subject to the Special Resolution Regime (SRR) if the contract were governed by the laws of a part of the United Kingdom;
- delaying the effective dates of the rules until 1 June 2016 in respect of counterparties that are credit institutions or investment firms and until 1 January 2017 in respect of all other counterparties;
- expanding the definition of “excluded person” to cover all third-country financial market infrastructure (including central counterparties and payments systems), regardless of designation, and to clarify that any agency or branch of a central government is also excluded;
- replacing the requirement for the counterparty to agree in writing with a requirement for the counterparty to agree in an enforceable manner;
- clarifying that qualified parent undertakings are only in-scope to the extent they have a registered office or head office in the UK;
- clarifying that the rules apply in relation to third-country law financial arrangements that contain security interests or default event provisions, the enforcement of which could be suspended, prevented or would be disregarded under the SRR;
- clarifying that a reference to securities should be interpreted as a reference to “transferable securities”; and
- amending the definition of “financial arrangement” to make clear that it is an exclusive list, and creating a new term “third-country law financial arrangement” for the sake of clarity.
PRA has also published a supervisory statement setting out its expectations of relevant firms. (Source: PRA Finalises Contractual Stays Rules)