Review on November 30th 2017 FSB Principles on Bail-in Execution Consultation Paper
Background:
FSB set out rules to require G-SIBs to have minimum capital in place in the event of resolution in 2011. However, the publishing of Key Attributes of Effective Resolution Regimes for Financial Institutions and the FSB’s standard on Total Loss-absorbing Capacity did not address the issue regarding operational readiness with regard to executing a bail-in transaction. This newly published consultation paper proposes a set of principles to assist regulators to develop bail-in resolution strategies and make resolution operational for G-SIBs.
Introduction:
G-SIB resolution strategies are generally based on two distinct approaches:
i) Open bank bail-in: may require the write-down and/or conversion into equity of the instruments and liabilities subject to bail-in under a shorter time frame. Recapitalizing the failed legal entity may simplify the process of issuing securities and obtaining regulatory approvals, as existing documentation could be used as a basis to help meeting relevant requirements.
ii) Closed bank bail-in: a bridge institution is utilized in this case to absorb the liabilities subject to bail-in from the failed legal entity. This may take regulator a greater amount of time. Additional work may also be required when re-registering the legal entity to exchange.
Summary:
The principles will cover six aspects of bail-in execution:
i) Bail-in scope: Provides guidance on transparency of bail-in power; discretionary exclusions from bail-in; and information required to support bail-in and disclosure on bail-in.
ii) Valuation: Establishes a framework for valuation covers timing and allocation of responsibilities; information system capability; and valuation methodologies.
iii) Exchange mechanics: This covers the suspension, cancellation or discontinuation from trading of relevant securities; the notification of creditors; the write-down of liabilities and issuance of equity; the documentation and track of creditors' claims; and compensation to creditors.
iv) Securities law and securities exchange requirements: Provides guidance on identifying securities laws; planning for compliance and disclosure; planning for the listing and trading status; and planning for securities law and exchange requirement with regards to a bail-in transaction.
v) Governance: This covers whether shareholders' right of vote will be terminated depending on the jurisdiction's approach to bail-in; and the change of control due to resolution.
vi) Communication: Focuses on the development of a coordinated strategy to manage market and creditor communications during the bail-in period.
Comments:
The consultation paper focused on providing guidance of how G-SIBs could potentially conducting a bail-in practice. Principles are general, but realistic. Response to this consultative document will be published soon. Nice to see any improvements on this proposal.
FSB set out rules to require G-SIBs to have minimum capital in place in the event of resolution in 2011. However, the publishing of Key Attributes of Effective Resolution Regimes for Financial Institutions and the FSB’s standard on Total Loss-absorbing Capacity did not address the issue regarding operational readiness with regard to executing a bail-in transaction. This newly published consultation paper proposes a set of principles to assist regulators to develop bail-in resolution strategies and make resolution operational for G-SIBs.
Introduction:
G-SIB resolution strategies are generally based on two distinct approaches:
i) Open bank bail-in: may require the write-down and/or conversion into equity of the instruments and liabilities subject to bail-in under a shorter time frame. Recapitalizing the failed legal entity may simplify the process of issuing securities and obtaining regulatory approvals, as existing documentation could be used as a basis to help meeting relevant requirements.
ii) Closed bank bail-in: a bridge institution is utilized in this case to absorb the liabilities subject to bail-in from the failed legal entity. This may take regulator a greater amount of time. Additional work may also be required when re-registering the legal entity to exchange.
Summary:
The principles will cover six aspects of bail-in execution:
i) Bail-in scope: Provides guidance on transparency of bail-in power; discretionary exclusions from bail-in; and information required to support bail-in and disclosure on bail-in.
ii) Valuation: Establishes a framework for valuation covers timing and allocation of responsibilities; information system capability; and valuation methodologies.
iii) Exchange mechanics: This covers the suspension, cancellation or discontinuation from trading of relevant securities; the notification of creditors; the write-down of liabilities and issuance of equity; the documentation and track of creditors' claims; and compensation to creditors.
iv) Securities law and securities exchange requirements: Provides guidance on identifying securities laws; planning for compliance and disclosure; planning for the listing and trading status; and planning for securities law and exchange requirement with regards to a bail-in transaction.
v) Governance: This covers whether shareholders' right of vote will be terminated depending on the jurisdiction's approach to bail-in; and the change of control due to resolution.
vi) Communication: Focuses on the development of a coordinated strategy to manage market and creditor communications during the bail-in period.
Comments:
The consultation paper focused on providing guidance of how G-SIBs could potentially conducting a bail-in practice. Principles are general, but realistic. Response to this consultative document will be published soon. Nice to see any improvements on this proposal.
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