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14 November, 2018
Overview
Singapore introduced enhancements to the resolution regime for financial institutions last year.1 Enhanced resolution powers have been given to the Monetary Authority of Singapore (“MAS”) to intervene and manage a within-scope financial institution at the point of non-viability, to facilitate the orderly resolution of such financial institution.
This is so that financial stability and the continuity of critical functions performed by financial institutions and financial market infrastructures can be maintained in the interim. The MAS Amendment Act establishes the legislative framework for recovery and resolution planning of financial institutions, including on statutory bail-in powers, temporary stays on termination rights, cross-border recognition of resolution actions, creditor safeguards and resolution funding.
This legislative framework has been coming into force gradually over the past year, with majority of the provisions on the resolution framework now in operation.
The latest developments include the implementation of the statutory bail-in regime for banks and MAS’ power to temporarily stay termination rights for within-scope financial institutions from 29 October 2018.2 In this alert, we will provide an overview of the application and timing of the statutory bail-in regime for banks, together with a summary of the rules on temporary stays on termination rights. We will also look at the practical implications of the new rules on debt capital market participants.
Overview of the statutory bail-in regime
The statutory bail-in powers of MAS are intended to help recapitalise a failing bank so that it is the shareholders and creditors (rather than taxpayers) that are first in line to meet any losses. Under the statutory bail-in regime, MAS has wide powers to step in and cancel, modify, convert and/or change the form of eligible instruments of a failing bank to facilitate its orderly resolution.3 The bail-in regime gives MAS certain grounds for stepping in when it thinks that the eligible instruments ought to be bailed-in to facilitate the orderly resolution of a failing bank or such bank’s assets do not or are unlikely to support payment of its liabilities as they become due and payable.
Entities subject to the statutory bail-in regime
Currently, MAS’ statutory bail-in regime only applies to Singapore-incorporated banks and Singapore-incorporated bank holding companies (at least one subsidiary which is a Singapore-incorporated bank) (each, a “bail-inable entity”). MAS has stated that this is the prudent approach as international standards like the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions are more advanced for the banking sector. For non-bank financial institutions, MAS will continue to monitor international developments on bail-in regimes.4
Eligible instruments within the scope of bail-in
The following ‘eligible instruments’ are within the scope of bail-in:
- any equity instrument or other instrument that confers or represents a legal or beneficial ownership in the bail-inable entity, except an ordinary share (e.g. eligible Additional Tier 1 capital instruments);
- any unsecured liability or other unsecured debt instrument that is subordinated to unsecured creditors’ claims of the bail-inable entity that are not so subordinated (e.g. eligible Additional Tier 1 capital instruments and Tier 2 capital instruments); and
- any instrument that provides for a right for the instrument to be written down, cancelled modified, changed in form or converted into shares or another instrument of ownership, when a specified event occurs (e.g. contractual bail-in instruments – see “Contractual recognition of the bail-in regime” below).
MAS has confirmed that the following instruments will not be within the scope of bail-in:
- a ‘derivatives contract’5;
- where an eligible instrument is partially secured, such secured portion will not be within the scope of MAS’ bail-in powers; and
- certain senior securities (e.g. vanilla senior (perpetual) securities, senior convertible bonds and senior exchangeable bonds, options and warrants would generally not meet the definition of eligible instruments).6
MAS has previously stated that it does not intend to introduce any additional capital requirements (e.g. total loss absorbing capacity (TLAC) instruments) beyond the higher loss absorbency requirements for domestic systemically important banks (D-SIBs).7 Therefore, the third limb of the definition of eligible instruments is probably not meant to catch such (TLAC) instruments. We hope that MAS will provide guidance on this in due course.
Timing of application of the bail-in regime
An eligible instrument issued by a bail-inable entity on or after 29 November 2018 would be caught by the statutory bail-in regime.
Contractual recognition of the bail-in regime
Where an eligible instrument is not governed by Singapore law, the terms and conditions of the eligible instrument must contain a contractual recognition of the bail-in regime (i.e. specifying that the eligible instrument may be subject to cancellation, modification, conversion, change in form, or have the effect as if a right of modification, conversion, or change of its form had been exercised by MAS under the statutory bail-in regime).
Requirement for an independent legal opinion
Where an eligible instrument is not governed by Singapore law, MAS will also require the bail-inable entity to provide it with a legal opinion from a person qualified to practise law in the jurisdiction of the governing law of the contract. The legal opinion must opine on the enforceability of the contractual recognition provisions and must be delivered to MAS before the eligible instrument is issued.
Due to feedback received from market participants, MAS has stated that it recognises the time sensitivity of issuing capital market instruments.8 Hence, it may allow a grace period of up to 10 business days after the issue date of an eligible instrument for the delivery of the legal opinion. To benefit from this time extension, the bail-inable entity must, prior to the issuance of the eligible instrument, make an application to MAS and be subject to such conditions and restrictions as it may impose.
A legal opinion is also required in any intra-group issuance of an eligible instrument. In addition, where different provisions of the eligible instrument are governed by different laws, MAS has confirmed that a legal opinion would still be required, notwithstanding that the contractual recognition provisions may be governed by Singapore law and only the other provisions are governed by foreign law.9
Upfront disclosure of the bail-in regime in offering documents
The front cover of a prospectus, information memoranda, offering circular or other offering document relating to the issue of an eligible instrument by a bail-inable entity must disclose, at a minimum, that such eligible instrument (or certain eligible instruments issued under the programme, as the case may be) may be subject to cancelation, modification, conversion or change in form under a bail-in certificate.10 The issuer may, if it wishes to, provide a cross-reference to a section within the offering document for further details of the consequences of a bail-in on such eligible instrument. MAS has confirmed that the front cover disclosure requirement will apply to any offer document relating to an eligible instrument, including those issued to intra-group entities.
Temporary stays on termination rights
The new rules also give MAS the power to temporarily stay termination rights included in a contract where one of the parties is a ‘pertinent financial institution’11 subject to a resolution measure.12 Any entity that is part of the same group as a within-scope pertinent financial institution is also caught to the extent the obligation of that entity under the relevant contract is guaranteed by such pertinent financial institution. In the context of a debt capital market transaction, termination rights would typically be early redemption and events of default provisions.
Certain entities have been exempted from the operation of the temporary stays. For example, where the contract is between a within-scope pertinent financial institution and certain financial market infrastructure entities (e.g. a central bank of a country territory outside Singapore, operator or settlement institution of a designated system, approved clearing house etc.), the temporary stay provisions do not apply.
MAS had originally proposed to impose a contractual recognition requirement on any foreign law governed financial contract entered into by a ‘qualifying pertinent financial institution’13 required to perform recovery and resolution planning. In the original proposal, all parties to that financial contract must agree that their exercise of any of the termination rights may be subject to MAS’ temporary stay powers. The same contractual recognition requirement was also proposed to apply to related entities of a qualifying pertinent financial institution where the relevant financial contract is to be guaranteed by such qualifying pertinent financial institution. However, further to feedback from market participants citing the difficulties in complying with the proposed requirement and seeking further clarity, MAS did not promulgate regulations relating to the contractual recognition requirement.
MAS has confirmed that it will engage the industry further on the scope and application of the contractual recognition requirement.
Practical implications for debt capital market participants
With the application date of the statutory bail-in regime fast-approaching at the end of this month, debt capital market participants (whether a bail-inable entity wishing to issue an eligible instrument or an underwriter advising a bail-inable entity on the issue of an eligible instrument) should take note of the upfront offering document disclosure requirement. In addition, where the proposed eligible instrument will not be governed by Singapore law, the contractual recognition and legal opinion requirements relating to the bail-in regime set out above will apply.
Debt capital market participants should also look out for MAS’ further consultation on the scope and application of the proposed contractual recognition requirement of MAS’ temporary stay powers on termination rights in foreign law governed finance contracts of qualifying pertinent financial institutions.
Conclusion
In line with recent global priorities, Singapore has been enhancing its resolution regime for financial institutions. Majority of the statutory framework on the resolution regime is now in operation, including the rules on statutory bail-in and temporary stays on termination rights. Debt capital market participants should take note of the practical implications of the new rules on future issuances of eligible instruments by a within-scope financial institution.
For further information, please contact:
Hyung Ahn, Partner, Linklaters
hyung.ahn@linklaters.com
1 The Monetary Authority of Singapore (Amendment) Act 2017 (the “MAS Amendment Act”) was gazetted on 1 August 2017. As and when the new rules come into operation, the Monetary Authority of Singapore Act (Chapter 186) is amended, as applicable (the “MAS Act”).
2 The Monetary Authority of Singapore (Resolution of Financial Institutions) Regulations 2018 (the “Resolution of FI Regulations”) came into operation on 29 October 2018. The Resolution of FI Regulations also implemented, among others, certain regulations on the creditor compensation framework but they are outside the scope of this alert.
3 See Division 4A of the MAS Act.
4 See MAS’ response 3.3 in the Response to Feedback Received on the Proposed Regulations to Enhance the Resolution Regime for Financial Institutions in Singapore dated 26 October 2018 (“MAS’ Response to Feedback Received”).
5 See definition of ‘derivatives contract’ in Regulation 9(2) of the Resolution of FI Regulations.
6 See MAS’ response 3.6 in MAS’ Response to Feedback Received.
7 See MAS’ response 6.24 in MAS’ response to feedback received on proposed enhancements to resolution regime for financial institutions in Singapore dated 29 April 2016.
8 See MAS’ response 3.13 in MAS’ Response to Feedback Received.
9 See MAS’ responses 3.14 in MAS’ Response to Feedback Received.
10 See Regulation 26 of the Resolution of FI Regulations.
11 See Regulation 5 of the Resolution of FI Regulations for the definition of a ‘pertinent financial institution’, which includes a bank, merchant bank, finance company, financial holding company, operator of a designated payment system, trustee, insurer etc.
12 See Division 4B of the MAS Act.
13 See MAS’ response 2.1 in MAS’ Response to Feedback Received. The proposed definition of a ‘qualifying pertinent financial institution’ includes a bank, financial holding company, operator of a designated payment system, approved exchange, recognised market operator, insurer etc. incorporated in Singapore.
