On 23 June 2015, the Monetary Authority of Singapore (MAS) published its “Proposed Enhancements to Resolution Regime for Financial Institutions in Singapore”. With the consultation period closing on 22 July 2015, the consultation paper seeks rapid feedback on a number of issues affecting firms in Singapore which have been notified as being systemically important or which maintain critical functions. It serves as another timely reminder of the scale of the documentation challenge facing firms in the next 2 years, with RRP amendments vying for budget against the likes of the non-cleared margin rules and MiFID II.
Early Termination Rights
MAS is still considering the final scope of financial contracts that will be subject to a stay on early termination rights, but the suggestion is that this will mirror that implemented in other jurisdictions. Although MAS will have some flexibility to enforce an extension of the stay, as a default it is proposed to last until the earlier to occur of:
- Two business days from implementation, or
- The completion of a transfer of the business, shares or restructuring of the financial institution in resolution, or
- The receipt of written notice from MAS that a particular financial contract will not form part of the business that is to be transferred.
As with other jurisdictions, there are a number of safeguards in relation to stays of early termination rights, including that:
- The stay will only apply to early termination rights that arise by reason of entry into resolution or in connection with the use resolution powers,
- “Cherry picking” is not permitted when transferring eligible contracts of a particular counterparty to a new financial institution, and
- The transferee of contracts will be obliged to assume all rights and obligations associated with the financial contracts transferred.
In the context of the resolution of insurance companies, the imposition of a temporary stay on the termination rights of holders of insurance policies and reinsurers is also proposed. In addition, MAS discusses the introduction of a power to suspend the termination rights of parties to non-financial contracts, or to require that non-financial contracts continue to be performed on the same terms and conditions that were in place prior to resolution, where this is necessary in order to ensure the continuity of essential services or functions.
Contractual Recognition of Bail-In
To complement the statutory bail-in regime, MAS proposes that for liabilities governed by the laws of a foreign jurisdiction which nevertheless fall within the scope of Singaporean statutory bail-in powers, banks would have to:
- include a contractual term which states that the liability may be subject to write-down or conversion by MAS under Singapore’s statutory bail-in regime;
- draft recognition provisions to ensure that the contractual provisions referred to in (a) do not conflict with how the statutory bail-in regime may be applied in practice;
- seek independent legal advice from the jurisdiction of the governing law to ensure that the drafting of the contractual provision fully takes into account any relevant legal issues under that law so that MAS’ exercise of bail-in powers would be enforceable;
- demonstrate to MAS that any statutory bail-in by MAS will be enforceable, including providing a reasoned independent legal opinion; and
- prominently disclose the consequences of a bail-in of the relevant debt to the debtholders.
Contractual recognition measures are, in the main, regarded as a short-term tactical fix, pending the enactment of a comprehensive statutory cross-border recognition framework such as that recommended by the Financial Stability Board. Early termination provisions represent a greater concern. It is by no means certain that interference with termination rights will actually succeed in promoting market stability during resolution. Counterparties may simply be incentivised to terminate before a stay could be imposed. In particular, the fact that termination rights subject to a stay under MAS rules may be reanimated at different times for different counterparties will only reinforce the likelihood of an itchy trigger finger in a time of stress, fatally damaging attempts to reinforce market stability and defeating the whole object of the stay. Unfortunately, in this regard at least, the legitimate concerns of the market continue to fall on stony ground.