LMA clarifications for changes to the Bail-in clause

Overview of the Bank Resolution and Recovery Directive

The Bank Resolution and Recovery Directive (EU Directive 2014/59) (BRRD) contains wide ranging recovery and resolution powers for EEA regulators to facilitate the rescue of a failing EEA financial institution. The EEA consists of members states of the European Union, Iceland, Liechtenstein and Norway. The powers include the ability for a regulator (amongst others) to write down the liabilities of a failing financial institution and/or to convert such liabilities into equity (Write Down and Conversion Powers). A regulator’s exercise of the Write Down and Conversion Powers will be effective in respect of any liabilities under a document governed by the law of an EEA country regardless of the term of that document.

Article 55 of the BRRD

1. Article 55 of the BRRD address documents which are governed by the law of a non-EEA country and requires EEA financial institutions to include a “Bail-in Clause” in such documents that they are party to (the Bail-in Clause) (Article 55 Requirements)
2. By including a Bail-in Power in such documents, the financial institution’s counterparty acknowledges/agree that the financial institution’s obligations are subject to the Write Down and Conversion Powers. By including a Bail-in Clause, it is thought that any exercise of any Write Down and Conversion Powers will be less susceptible to a challenge by the counterparty if the counterparty had expressly agreed to the potential exercise of those powers.

Mandatory features of a Bail-in Clause

Each Bail-in Clause must contain the following:

1. A description of the Write Down and Conversion Powers as set out in the applicable national implementing legislation.
2. Acknowledgment and acceptance by the financial institution’s counterparty that:
   • the financial institution’s liabilities may be subject to the exercise of Write Down and Conversion Powers by the relevant regulator;
   • the counterparty is bound by the effect of a regulator’s application of those Write Down Powers and Conversion Powers including (i) any reduction in the principal amount or outstanding amount due; and (ii) conversion of the relevant liability to equity;
   • the terms of the relevant document may be varied to give effect to the Write Down and Conversion Powers;
   • equity may be issued to the counterparty;
   • the Bail-in Clause is exhaustive and will supersede any other term or agreement

Amendments to the recommended form of Bail-in Clause with effect from 15 April 2021 (for use in the UK)

1. The LMA published the latest form of the LMA Bail-in Clause in the document titled “The LMA Recommended Form of Bail-in Clause and Users Guide” on 15 April 2021.
2. The following points should be noted in relation to the recommended form:
   • It will apply to all liabilities under all ‘Finance Documents’.
   • It will apply to all parties and is not confined to just the finance parties.

Paragraph (c) of the definitions of the “Bail-in Legislation” and “Write Down and Conversion Powers” captures future bail in legislation. This is optional and not a requirement to comply with the Article 55 Requirement.