BRRD 2 Brexited

It’s still early (if seemingly interminable) days, but Brexit bonuses seem to be thin on the ground. At least for UK banks, the disavowal of BRRD 2 may be of some comfort.  A recent article (paywalled) in Risk Magazine highlights upcoming UK-EU divergence around BRRD 2. The BRRD sequel comes into force on 28 December 2020; while the EBA is finalising the RTS, the BoE has stated that the requirements will have a brief life, ending with the Brexit transition period on 31 December 2020. The UK will then revert to “BRRD 1.0”, while the EU will be subject to the differing national implementations of BRRD 2. This is not the first major regulatory divergence- that honour goes to the UK’s signalling that it will not implement the third phase settlement and discipline regime of the CSDR, but it is a significant step on a different path.

Article 71a BRRD 2 requires financial institutions to include language in new and legacy contracts, recognising the powers granted by Articles 33a, 69, 70 and 71 for competent authorities to suspend payment obligations for an entity in pre-resolution. The initial BRRD’s statutory revision of existing contracts was controversial, BRRD 2’s temporal extension of the suspension into pre-resolution has proven a step too far for the UK. In the EU, questions remain as to the extent of implementation- a European Commission 29 September Q&A states that national regulators are free to extend the scope from purely financial contracts “to cover all other contracts”.  

The article makes the interesting point that the moratorium could be applied to electronically confirmed trades such as cash equities- a market for which the settlement infrastructure is currently incapable of recognising or incorporating a stay mechanism. Whatever the scope of national/local implementation turns out to be, at least for EU entities and their counterparties, it will be yet another repapering item added to an already overspilling 2021 calendar. Following publication of the RTS and national implementations, it is likely that there will be a protocol to facilitate amendment. Despite its theoretically heavy hand, ranging from fines to withdrawal of a banking licence, BRRD has not been at the top of Regulators’ enforcement agenda.

Given the imminent IM Phase 5, LIBOR, CSDR, Brexit 2021 onslaught burden, it may be understandable if the new BRRD requirements drop to the bottom of the “to do” list. Probably a mistake for EU entities- even with minimal national implementation- the obligations represent a significant repapering exercise. For UK firms facing EU entities it’s a few more straws on the strained 2020 camel back.

Eagle-eyed readers may have spotted Nick discussing this issue (amongst others) with Risk.net a few days ago – read the full text of that article here (registration required).

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