Cleary Gottlieb Assists Development of AFME’s New Model Clause for Contractual Recognition of Bail-In

September 24, 2015

The Association for Financial Markets in Europe (AFME) today published its model clause for contractual recognition of bail-in. This provides model wording designed to assist banks in complying with obligations under Article 55 of the European Union’s Bank Recovery and Resolution Directive (BRRD). The Directive requires banks to insert clauses in contracts to give effect to bail-in in a very broad range of liabilities governed by non-EU law.

AFME’s new model clause is part of efforts to ensure the cross-border effectiveness of resolution and provide banks and counterparties with model drafting to assist with the significant challenges of implementation. The model clause is aimed at inclusion in debt instruments and is supported by a legal opinion.

The model clause has been developed with assistance from Cleary Gottlieb and input from AFME’s members. Bail-in provisions, which come into force in most EU jurisdictions from 1 January 2016, allow a resolution authority the power to cancel, reduce, or convert into another form of security an amount owed to a creditor. The UK, Germany and France have already transposed these bail-in requirements.

The clause was introduced in Brussels today during a discussion forum chaired by AFME and hosted by Cleary Gottlieb. The event included a keynote speech by the European Commission’s Patrick Pearson, Head of Unit, Resolution and Crisis Management, Directorate General Financial Stability, and panel discussions on the implementation of Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and Total Loss-Absorbing Capacity (TLAC), as well as the challenges of applying Article 55 to various liabilities.

Commenting on the publication, Oliver Moullin, Director, Recovery and Resolution at AFME, said: “AFME’s model clause for contractual recognition of bail-in should assist banks and counterparties with meeting the requirements of Article 55 BRRD in relation to debt instruments and support cross-border resolution. While AFME is very supportive of the objectives of ensuring that cross-border resolution is effective and the model clause should support this, we continue to have concerns regarding the breadth of the scope of Article 55 and have proposed changes that should be made to address this.”

David Gottlieb, Partner, Cleary Gottlieb, said: “Cleary Gottlieb is pleased to have assisted AFME and its members in the development of a model bail-in clause for use by issuers of debt securities and capital instruments organized in the United Kingdom that are subject to the requirements of Article 55 in their liabilities governed by New York law. It is also adaptable for issuers subject to the laws of other EU Member States and for liabilities governed by the laws of other non-EU jurisdictions. The model clause is intended to be a simple and straightforward means of addressing the requirements of the BBRD as transposed in the UK and the Final Draft RTS published by the European Banking Authority in July. It also satisfies the requirements for public issuances in the United States and provides the basis for a legal opinion as to the enforceability and effectiveness of the provision under New York law, as required by the BRRD.

“Aside from transferable debt instruments, it is a mammoth administrative task for banks to think about adding the bail-in clause to every single contract or agreement that creates a liability under non-EU law since it is largely what they do. The general consensus of the industry is that further legislation is going to be required to narrow the scope of eligible liabilities under Article 55.”