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PRA finalises 3rd country stay

On 13 November 2015 the PRA published a Policy Statement containing the final rules for contractual stays in financial contracts governed by third-country law. The rules are the offspring of Consultation paper CP 19/15; their intention is to suspend the 3rd country termination and close-out rights of counterparties to a UK entity that has entered resolution. Their scope is wide, the stay mechanism will potentially affect the following:

  • PRA-authorised banks/building societies
  • PRA-designated investment firms and their qualifying parents
  • Subsidiaries of the above which enter financial contracts containing termination rights or security interests
  • Counterparties to the above which enter financial contracts with covered entities governed by non-EEA law

The final rules contain some amendments to the May 2015 CP 19/15 proposal- a short summary of the changes follows:

  • The phase-in schedule has been compressed and delayed. The obligation will be effective 1 June 2016 for credit institutions/investment firms and 1 January 2017 for all other entities, subsuming the previous asset manager/agency category
  • The rules’ scope is restricted to those 3rd country financial arrangements which, if they were in the UK, would be subject to the Special Resolution Regime under the Banking Act. This slightly torturous amendment effectively excludes those who arrangements which contain neither termination rights or security interests or are entered into by subsidiaries which are not guaranteed or supported by their UK parent
  • The definition of “excluded person” is expanded to include all 3rd country financial infrastructure and central governments
  • The requirement that the counterparty agree to contractual stay in writing is replaced by the requirement that it agrees in an enforceable manner

Aside from the above modifications and some clarifications of minor effect, the final rules are substantially the same as the proposal, having failed to address any of the questions posed by DRS’ Michael Beaton and the wider market. In the absence of one world government or international mutual recognition of resolution regimes, the PRA has little choice but to resort to expedient, “sticking-plaster” legislation whose retroactive effect violates certainty of contract.

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