28 July, 2015
The Monetary Authority of Singapore (“MAS”) has issued a Consultation Paper on Proposed Enhancements to Resolution Regime for Financial Institutions in Singapore (“Consultation Paper”). The proposed resolution regime is guided by the Key Attributes of Effective Resolution Regimes for Financial Institutions adopted by the Financial Stability Board in October 2011.
This update sets out an overview of the proposed resolution regime.
Recovery and Resolution Plans
The MAS will be empowered to require a financial institution that has been so notified by it to propose, maintain and submit Recovery and Resolution Plans (“RRPs”). Such plans set out the procedures and establish the systems necessary to restore the financial strength and viability of the financial institution in the event of financial pressure or stress.
Only financial institutions that are systemically important or that maintain critical functions will be required to formulate and submit such plans to the MAS. The MAS may, after reviewing the submitted RRP, require the financial institution to make specific changes to its plan to address any material deficiencies in it or any impediments to its implementation. The MAS will also be empowered to require these financial institutions to implement the recovery measures where necessary.
Financial institutions may also be required to do the following:
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Furnish information or documents required for the purposes of
resolution planning; and
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Take measures to improve resolvability by addressing or
removing impediments to orderly resolution, including requiring changes to the financial institution’s business practices, legal, operational or financial structures or organisation.
Temporary Stays on Early Termination Rights
The entry into resolution of a financial institution may trigger early termination rights. In order to ensure that this does not derail the resolution, the MAS has proposed that such rights be temporarily stayed. Three classes of contracts are proposed to be affected by this temporary stay: financial contracts, insurance contracts, and non-financial contracts for essential services and functions.
The MAS will be empowered to temporarily stay early termination rights of counterparties to financial contracts entered into with a financial institution over which MAS may exercise its resolution powers. Any such stay will be subject to safeguards (which are enumerated in the Consultation Paper).
The Consultation Paper does not state what types of financial contracts should be covered by the regime, but has noted what the equivalent regimes in the US and Canada cover:
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US: securities contracts, commodity contracts, forward contracts,
repurchase agreements, and swap agreements; and
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Canada: specified derivatives agreements; agreements to borrow or lend securities or commodities; agreements to clear or settle securities, futures, options or derivatives transactions; agreements to act as a depository for securities; repurchase agreements; specified margin loans; and specified
master agreements.
The duration of the stay for financial contracts is proposed to be up to two business days or the earlier of the following dates:
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the completion of a transfer of business, shares, or
restructuring of the financial institution in resolution; or
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the receipt of written notice from the MAS to the party that the financial contract will not form part of the business that is to be transferred.
The MAS also proposes to have the flexibility to specify a longer duration when imposing the stay, and is considering the circumstances in which it may be necessary to extend the duration of the stay in order to achieve an effective resolution or to support the stability of the financial system.
It is proposed to empower the MAS:
• To suspend policy owners’ rights to withdraw from their
insurance contracts with an insurer in resolution; and
• To stay the rights of reinsurers to terminate or not reinstate coverage relating to periods after the
commencement of resolution.
The MAS proposes to introduce powers to suspend the termination rights of non-financial contracts of service providers that provide essential services and functions to the entity in resolution. It may also require these contracts to continue to be performed on the same terms and conditions that were in place prior to the resolution.
Statutory Bail-In Regime
The MAS proposes introducing statutory powers to enable it to write down, or convert into equity or other instruments of ownership, all or part of unsecured and uninsured creditor claims. Such a proposed statutory bail-in of liabilities will first be applied to Singapore-incorporated banks and bank holding companies. The MAS will consider later whether it will extend such a regime to non-bank financial institutions.
It is proposed to apply the statutory bail-in regime to unsecured subordinated debt and unsecured subordinated loans, issued or contracted after the statutory bail-in regime comes into effect. It would not be applied to liabilities such as:
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secured liabilities;
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short-term liabilities owed to financial institutions and
payment systems;
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amounts owed to vendors for goods and services that are
critical to the affected bank’s operations;
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senior debt; and
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all deposits.
As the statutory bail-in regime would affect debtholders rights, it is proposed that banks should be required to prominently disclose the consequences of a bail-in of the relevant debt to the debtholders.
Where the debts are governed by the law of a foreign jurisdiction, banks would have to comply with the following requirements:
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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;
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draft the recognition provisions to ensure that these
contractual provisions referred to above do not conflict with how the statutory bail-in regime may be applied in practice;
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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 the exercise of bail-in powers by the MAS would be enforceable; and
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demonstrate to MAS that any statutory bail-in by it will be enforceable, including providing a reasoned independent legal opinion.
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Any costs incurred in resolving a financial institution should first be borne by that financial institution. Losses should also be imposed on its equity holders and unsecured creditors.
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If this is insufficient, the remaining costs may be recovered from the industry, via an ex post recovery mechanism and tapping on prevailing ex ante funds.
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The MAS further proposes that it be empowered to either convert into equity or write down contingent convertible instruments and contractual bail-in instruments (issued after the in-force date of the statutory bail-in regime), whose terms had not been triggered prior to entry into resolution.
Creditor Safeguards
The MAS proposes to establish a framework to compensate creditors who are worse off in resolution as compared to liquidation. It would apply to creditors of banks, merchant banks, finance companies, insurers, capital market infrastructures, designated payment systems (“DPS”) operators and their settlement institutions, and financial holding companies regulated by the MAS. Such a determination would be made by a qualified independent valuation agent. Creditors should be provided with the right to appeal against their determined compensation eligibility or entitlement.
Resolution Funding
The MAS proposes implementing resolution funding arrangements which may be used to support any costs incurred in implementing resolution measures, and to address any creditor compensation claims that may arise. The framework proposed is premised on the following principles:
The MAS proposes expanding the use of the Depositor Insurance (“DI”) Fund to include the implementation of resolution measures, for existing DI Scheme Members. This is subject to the following safeguards:
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The use of the DI Fund in implementing resolution measures should be limited to the resolution of DI Scheme Members only.
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The amount drawn on the DI Fund should be capped at the amount that would have been paid out in a depositor payout situation for that particular DI Scheme Member in resolution (i.e., if the DI Scheme Member had failed).
The DI Fund will, however, not be used to satisfy any creditor compensation claims that may arise.
Ex post levies should be applied on the rest of the banking sector, (i.e., all other banks, merchant banks and finance companies, other than the banking entity in resolution).
Insurers
For insurers, the MAS proposes relying on the PPF Funds, which can already be used to implement resolution measures. Ex post levies may also be imposed and applied by classes of insurers, i.e., direct life insurers, direct general insurers and reinsurers. Captive insurers and Lloyd’s will not be covered under this scheme.
Capital Market Infrastructures and DPS Operators
As there are no ex ante mechanisms for capital market infrastructures and DPS operators, the MAS proposes an ex post recovery mechanism for such market players. It has suggested the imposition of levies, either on participants or on transactions.
The MAS proposes that DPS Settlement Institutions be resolved as banks; this means that the resolution funding arrangements for the banking entities would apply to DPS Settlement Institutions.
Cross-Border Recognition of Resolution Actions
Given the cross-border nature of the financial institutions operating in Singapore, the resolution framework should enable a cooperative solution to be reached with foreign resolution authorities. MAS is evaluating the necessity of a recognition process in view of existing powers to take supportive measures to achieve a cooperative solution with foreign resolution authorities in a group-wide resolution of cross-border financial institutions.
For further information, please contact:
Elaine Chan, Partner, WongPartnership
elaine.chan@wongpartnership.com
