- Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms ("BRRD") was implemented in Austria effective 1 January 2015, including write-down / conversion measures and the bail-in tool.
- The bail-in tool allows the resolution authority to apply write-down or conversion measures not only to liabilities under a capital instrument, but also to all other eligible liabilities. These also include liabilities under derivative transactions, as well as repurchase (repos) and securities lending transactions.
- Art 49 of BRRD contains a safeguard for derivatives that aims to prevent resolution authorities – when deciding on a potential bail-in – from "cherry picking" only those derivatives which are "out of the money" from the failing institution's perspective. Art 49 BRRD requires that resolution authorities shall exercise the write-down and conversion powers in relation to a liability arising from a derivative only upon or after closing-out the derivatives. By doing so, the bail-in powers shall only be applied on the net sum resulting from closed-out derivatives. This way, the integrity of contractually agreed netting provisions shall be protected.
- This safeguard was implemented in Austria in § 91 of the Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz – BaSAG).
- From the black letter of the law, both Art 49 BRRD and § 91 BaSAG apply only to "derivatives" but do not specifically make reference to other types of financial contracts, such as repos or securities lending transactions.
- Both in the Austrian market, as well as in other Member States such as Germany, the Netherland and France, it has been a matter of dispute whether the bail-in protection in Art 49 BRRD / national implementation thereof (such as § 91 BaSAG) would apply to repos and securities lending transactions.
Confirmation of bail-in protection for repos and securities lending transactions
- The Austrian legislator has on 26 November 2015 published a new draft bill which contains a specific confirmation that the bail-in protection in § 91 BaSAG does indeed also apply to repos and securities lending transactions.
- The draft bill proposes that § 91 BaSAG be supplemented with a new paragraph stating that § 91 BaSAG also applies to "other financial contracts that are entered into under a framework contract containing a netting agreement. This applies in particular to transactions listed in § 20 (4) item 1 to 4 of the Austrian Insolvency Code (Insolvenzordnung – IO)".
- § 20 (4) IO provides for Austria's netting safe haven for derivatives and certain other financial contracts in case of insolvency proceedings. This protection of netting arrangements in insolvency also covers repos and securities lending transactions.
- The Austrian legislator has by way of the draft bill clarified what could by interpretation already be derived from Art 63(1)(k) BRRD and its Austrian law implementation in § 58 (1) item 11 BaSAG:
- According to these "general powers", a resolution authority was already entitled to "close-out and terminate financial contracts or derivatives contracts for purposes of applying" the bail-in powers.
- Fortunately, the Austrian legislator has nonetheless specifically confirmed that repos and securities lending transactions enjoy the same safeguard as derivatives under § 91 BaSAG.
- The bill needs yet to be passed in the Austrian Parliament. We will follow‑up once the amendment to BaSAG has entered into force.