The Banking Act 2009 (the Act) gives the Bank of England (BoE), as resolution authority, the power to suspend (or stay) temporarily the termination rights of a party to a contract with a firm in resolution, provided that the UK institution continues to perform its payment and other substantive obligations under the contract (the temporary stay). It further provides that a resolution action (or pre-resolution action) by the BoE, the PRA or the FCA cannot give rise to a counterparty’s right to terminate a contract with a UK credit institution or investment firm or to exercise rights over collateral.

The Bank Recovery and Resolution Directive ensures that a UK stay would automatically be recognised and given effect throughout the EU. However, the position is unclear where the contract is governed by the law of a non-EU jurisdiction.

The PRA has now published Consultation Paper 19/15: Contractual stays in financial contracts governed by third-country law (CP19/15).

In CP19/15 the PRA sets out a proposal for a rule that would apply to PRA authorised UK banks, building societies and PRA designated UK investment firms, as well as their qualifying parent undertakings (firms) in respect of financial contracts governed by third country law. The proposed rule would prohibit firms from creating new obligations or materially amending an existing obligation under such a financial contract without the required counterparty agreement. The prohibition would apply unless the counterparty has agreed in writing to be subject to similar restrictions on early termination and close-out to those that would apply as a result of the firm’s entry into resolution (or the write down or conversion of the firm’s regulatory capital at the point of non-viability) if the financial contract were governed by the laws of the UK. In addition, relevant firms that are parent undertakings would be obliged to ensure that their subsidiaries that are credit institutions, investment firms or financial institutions also trade on this basis.

The deadline for comments on CP19/15 is 26 August 2015.

View Contractual stays in financial contracts governed by third-country law, 26 May 2015