The Association for Financial Markets in Europe (AFME) has today published model clauses for the contractual recognition of bail-in for the purposes of satisfying the requirements of Article 55 of the EU Bank Recovery and Resolution Directive (BRRD).

The model clauses seek to support cross-border effectiveness of resolution and assist banks with complying with the requirements of Article 55 BRRD by providing model wording for inclusion in debt instruments and other contracts.

Commenting on the publication of the model clauses, Oliver Moullin, Head of Recovery & Resolution and General Counsel at AFME, said:

“AFME’s model clauses for the contractual recognition of bail-in should support cross-border effectiveness of resolution and assist banks in meeting the requirements of Article 55 BRRD. However, very significant challenges remain and the scope of Article 55 should be amended to align it with the international standard, increasing consistency and clarity for the market.”

Continued concerns with the scope of Article 55 BRRD

The scope of Article 55 is very broad and requires banks to include contractual recognition clauses in contracts giving rise to all liabilities governed by non-EEA law, save where these are expressly excluded from bail-in under the BRRD. The requirement gives rise to significant challenges, for example where banks are unable to unilaterally amend contracts, such as in relation to trade finance and membership of financial markets infrastructure.

A number of authorities have acknowledged that in many cases inserting such a clause is impracticable. While several authorities have sought to adopt a pragmatic approach to implementation, there remains uncertainty and potential inconsistency in application. A clear and consistent approach across the European Union is required to provide banks and counterparties with a clear and workable solution.

AFME believes that the scope of Article 55 should be amended to align it with that agreed at the international level through the Financial Stability Board (FSB). These principles propose that the scope should cover instruments eligible for loss absorbing capacity requirements and any other “debt instruments”. This would provide a much clearer scope of liabilities and significantly reduce the impact on firms while meeting the objective of ensuring resolvability. Alignment with the FSB principles is particularly important where inconsistencies in approach could severely impact the competitiveness of European banks operating in global markets.

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