On 24 September 2015, the Association for Financial Markets in Europe (AFME) published a “Model clause for the contractual recognition of bail-in under Article 55 of the BRRD” (a “Write-Down Clause”). The model clause is designed for use by UK issuers of New York law governed debt securities.
In its “Draft Regulatory Technical Standards on the contractual recognition of write-down and conversion powers under Article 55(3) of Directive 2014/59/EU” published on 3 July 2015, the European Banking Authority (EBA) did not specify an actual form of Write-Down Clause for use by firms. Instead, it merely defined the key elements that any contractual provision must include if it is to be regarded as a valid Write-Down Clause and to qualify as “minimum requirement for own funds and eligible liabilities” (MREL) under Article 45(5) of the BRRD.
The lack of detailed regulatory guidance, coupled with the impending regulatory deadline (1 January 2016) makes the AFME model clause a very welcome addition. AFME has also confirmed that it is in the process of developing a similar model clause for EU issuers of New York law governed debt securities, as well as model clauses for UK and EU issuers or debt instruments governed by third-country laws other than New York law.
At three pages, the first thing that strikes any reader of the model clause is its length. Despite this, it is not actually certain that all of the requirements specified by the EBA have been met. For example, Article 3(d) of the RTS requires that a valid Write-Down clause includes an “acknowledgement and acceptance by the entity’s counterparty that the contractual term is exhaustive on the matters described therein to the exclusion of any other agreements, arrangements or understandings between the counterparties relating to the subject matter of the relevant agreement”. However good the model clause is (and it seems very good), it is difficult to spot where this requirement has been met – unless a standard ‘entire agreement’ clause is regarded as being sufficient (which would seem to be, at best, debatable).
In addition, whilst an excellent start, the model clause inevitably only takes the market so far. AFME accepts that the model clause will require adaptation and specifically makes clear that it is not intended for use with master agreements, such as the ISDA Master Agreement, GMRA or GMSLA – a set of documents which present a far bigger practical challenge than debt issuances given the sheer numbers in existence and the continuous process by which new trades are executed under such umbrella structures. Transactions executed under such master agreements are clearly in-scope given the wide definition of “liability” under the BRRD – a definition which the EBA declined to clarify in its ‘responses to the consultation’ which accompanied the final report into contractual write-down clauses on the basis that it was considered to be a “Level 1 matter” and therefore a subject on which they were not empowered to opine. This leaves firms reliant on the definition of “liability” contained within the “Contractual Recognition of Bail-In” chapter of the PRA Handbook – a wide and circular definition which does not provide much in the way of practical guidance.
One also can’t help but wonder whether the reference in the RTS to “acknowledgement and acceptance” as a ‘key element’ of any Write-Down Clause raises the prospect that the approach seemingly assumed by the model clause – that notification/negative affirmation will suffice – may not be enough. Presumably, this obvious potential pitfall has already been checked with regulators. However, clarification within the AFME model clause would be helpful.
If other model clauses adhere to this basic formula and are of similar length, a significant amount of client education – and an even larger amount of client negotiation – seem the inevitable end result. However, we should recognise that this is a function of the legal requirements of Write-Down Clauses as specified within the EBA’s RTS, rather than a criticism of AFME’s model clause itself. All in all though, let’s not knock what is a great first attempt by the industry to promote compliance – one that should be welcomed by the market and regulators alike.