On Wednesday 18 December 2019, the PRA published ‘Letter from Sam Woods: The prudential regulatory framework and Libor transition’. As set out in the letter, the PRA has been considering the issues raised by the Working Group on Sterling Risk-Free Reference Rates, including possible implications of benchmark rate reform for rules related to resolution.
In particular, firms may need to consider whether existing contracts in scope of the Contractual Recognition of Bail-In (CROB) and Stay in Resolution (Stays) Parts of the PRA Rulebook that are changed to reflect the transition away from Libor could be considered materially amended, and thus required to include CROB and Stays terms.
The PRA considers that, where the sole purpose of an amendment to a liability (as defined in CROB) or a financial arrangement (as defined in Stays) is to transition away from Libor, the amendment should not be considered a material amendment as the term applies to either the CROB Part or the Stays Part of the PRA Rulebook.
Nonetheless, firms should consider adding CROB and Stays terms into the documentation for a third-country law governed liability or financial arrangement that is amended for the sole purpose of transitioning away from Libor, as it enhances firm resolvability. CROB and Stays are part of the UK resolution regime, ensuring that firms can fail in an orderly way. Both sets of rules are needed for the effectiveness of UK resolution actions in third-country jurisdictions.
Consistent with paragraph 5.10 of the Bank of England’s minimum requirements for own funds and eligible liabilities (MREL) Statement of Policy, firms should consider whether having non-Common Equity Tier 1 (CET1) own funds instruments governed by third-country law but without statutory or contractual recognition of UK bail-in rules would create difficulties for resolution. The Bank of England could determine that it needs to use its powers under section 3A of the Banking Act 2009 to direct relevant persons to address impediments to resolution, in particular through a direction, to endeavour to renegotiate instruments under section 3A (4–5).