Consultation outcome

Secondary legislation for Non-Bank resolution regimes

Updated 9 June 2014

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

1. Introduction

The Special Resolution Regime (SRR) established by the Banking Act 2009 currently extends to most deposit-taking institutions such as banks and building societies. The Financial Services Act 2012 widens the SRR to include undertakings in the same group as a failing entity, investment firms, and central counterparties (CCPs), but the relevant amendments to the Banking Act 2009 have not yet been brought into force. This publication seeks comment on five proposed statutory instruments required to underpin the widened SRR. The five instruments will:

• exclude certain investment firms from the scope of the SRR
• set conditions that group undertakings must satisfy for SRR powers to be used in relation to them
• introduce partial property transfer safeguards relevant to the wider scope of the SRR
• set out the no creditor worse off safeguards
• make relevant amendments to the Bank Administration Procedure (BAP) rules

The first two instruments are new orders which come about as a result of the powers taken in the Financial Services Act 2012. The remaining instruments make relevant amendments to existing legislation to reflect the wider scope of the SRR.

This publication seeks views on the approach being taken. It provides some background on the SRR and then goes through the government’s planned approach on each of the five instruments in turn. Drafts of the relevant orders are included as an annex accompanying this publication. These are the instruments dealing with investment firms, group undertakings, no creditor worse off safeguards and providing partial property safeguards for CCPs. The government wanted to take the opportunity in the final chapter of this consultation to seek industry views on a related topic, the breach of the ‘secured liabilities’ safeguard with respect to floating charges.

1.1 Background

Since the financial crisis of 2007 to 2009, a wide programme of financial sector reform has been underway at a domestic, European and G20 level. The reform has not only focused on banks, but also on investment firms and financial market infrastructure, which also have the potential to cause major wide-spread disruption to the financial system. The Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes – endorsed by the G20 – has recommended that resolution regimes are put in place for all systemically important financial institutions including investment firms and central counterparties.

The European Commission published a draft Recovery and Resolution Directive (RRD) in June 2012. This proposes resolution regimes for investment firms and holding companies, as well as banks. In addition the European Commission has recently consulted on “a possible recovery and resolution framework for financial institutions other than banks”, which included certain types of market infrastructure. However, given the uncertainty around the timetable for introducing any European legislation in this area, the UK government has actively sought to meet the FSB recommendations, by pressing ahead with domestic legislation.

In August 2012, HM Treasury launched a consultation titled Financial Sector resolution: broadening the regime. The consultation proposed implementing resolution powers over institutions other than banks: investment firms; the parent undertakings of banks and investment firms; central counterparties (CCPs); other financial market infrastructures; and insurers. Following this, in the Financial Services Act 2012, the government legislated to extend the special resolution regime to investment firms, group undertakings and central counterparties.

1.2 Next steps

This consultation will be open until 21 November 2013. Responses should either be posted to the Contingency Planning Team, HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ, or emailed to non-bank.resolution@hmtreasury.gsi.gov.uk.

The draft secondary legislation accompanying this document (amended as appropriate following this consultation) will then be laid before Parliament. Once Parliament has approved those instruments that require approval (the instruments dealing with investment firms, with group undertakings and providing partial property safeguards for CCPs), the secondary legislation will be made and the new SRR powers will come into force shortly after.

2. Background on SRR

The SRR provides the Bank of England (the Bank) and Her Majesty’s Treasury (the Treasury) (together the Authorities) with powers to take action in respect of failing institutions to protect financial stability. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are responsible for determining if conditions are met such that resolution powers should be exercised by the Authorities with the exception of the use powers with regard to CCP’s where the Bank of England determines if conditions are met. As explained in the introduction above, the powers are currently only exercisable in respect of deposit-taking institutions but are being extended to investment firms, central counterparties, and group undertakings.

There are currently five resolution objectives which must be considered before the exercise of these powers. These objectives are:

1. to protect and enhance the stability of the financial systems of the UK
2. to protect and enhance public confidence in the stability of the banking systems of the UK
3. to protect depositors
4. to protect public funds

5. to avoid interfering with property rights in contravention with the Human Rights Act 1998

   Two new resolution objectives will be added when the amendments to the Banking Act 2009 made by the Financial Services Act 2012 come into force. They are:

6. to protect client assets
7. to minimise adverse effects on institutions that support the operation of financial markets, such as investment exchanges and clearing houses

The SRR provides three ‘stabilisation options’ that allow the authorities to intervene (subject to the necessary tests being met), at a pre-insolvency stage, to achieve an orderly resolution of a failing institution:

• transfer of the firm or all or part of the firm’s business to a private sector purchaser
• transfer of all or part of the firm’s business to a bridge bank owned by the Bank
• transfer of the firm, or its holding company, into temporary public ownership

The Banking Act 2009 confers ‘stabilisation powers’ which can be used to implement the ‘stabilisation options’. A ‘stabilisation power’ may be exercised, over a deposit–taking institution or investment firm, only if the PRA (or, in relevant cases, the FCA) is satisfied that the following ‘general conditions’ are met:

1. the firm is failing, or is likely to fail, to satisfy the threshold conditions
2. having regard to timing and other relevant circumstances it is not reasonably likely that, ignoring the stabilisation powers, action will be taken that will enable the firm to satisfy the threshold conditions

2.1 Share transfer powers

A share transfer instrument may be made by the Bank for the purpose of transferring a failing bank to a private sector purchaser. A share transfer order is the means by which the Treasury takes a bank into temporary public ownership.

2.2 Property transfer powers

Property transfer instruments (PTI) provide that some or all of the property, rights and liabilities of a bank be transferred to a private sector purchaser or to a bridge bank. The property transfer powers provide the Authorities with the flexibility to split the failing institution. This option is most likely to be used to transfer the ‘good’ part of the failing institution to either a private sector purchaser or a bridge entity. In either case a residual entity would be left behind, with the remaining ‘bad’ assets and liabilities.

2.3 Bank Administration Procedure

The Bank Administration Procedure (BAP) may be required in the event of a partial transfer. Where a partial transfer of property takes place, the residual bank (the part left behind) may be insolvent. Despite being insolvent, it may be vital that the residual bank continues to provide services and facilities to the purchaser or bridge bank where these are required to enable the transferred business to be operated effectively. The bank administration procedure imposes on the bank administrator an objective to ensure the supply of essential services and facilities to the transferee. To this end, the bank administrator will have unique statutory objectives: firstly, to provide support to a private sector purchaser or bridge bank in relation to the transferred business; and secondly to rescue the residual bank as a going concern or wind up its affairs in the best interests of creditors.

The BAP has not been extended to CCPs, as the resolution authority has powers of direction over the administrator of an insolvent CCP, but has been for investment firms. With regard to Investment firms that hold deposit taking permissions, the residual bank can also be placed into special administration (bank administration) as set out in schedule 2 to the Investment Bank Special Administration Regulations 2011. Further background is provided in Chapter 7.

2.4 Modifications made for the application of the SRR to recognised central counterparties

Unlike for investment firms, due to the difference in the business model of a recognised central counterparty (CCP) and existing regulation, in the application of the SRR to recognised CCPs a number of modifications were made including the conferral of the following new powers on the Bank of England:

• the Bank of England can also make provision as to the effect of the transfer of a recognised CCP’s business on the recognised CCPs rules
• the Bank of England has a power of direction over an insolvency practitioner appointed in relation to the clearing house, primarily so the resolution authority is able to ensure the continuity of support services to a resolved firm

A ‘stabilisation power’ may be exercised on a CCP, only if the Bank of England is satisfied that the following modified ‘general conditions’ are met:

1. the firm is failing, or is likely to fail, to satisfy the recognition requirements
2. having regard to timing and other relevant circumstances it is not reasonably likely that, ignoring the stabilisation powers, action will be taken that will enable the firm to maintain the continuity of any critical clearing services it provides while also satisfying the threshold conditions

2.5 Code of practice

Detailed background and guidance as to how, and in what circumstances, the authorities will use the special resolution tools is set out in the code of practice – Special resolution regime: Code of practice. An updated code of practice will be published in the autumn to reflect the amendments to the Banking Act, the orders in this consultation and the approach to resolution of the new firms in scope. We expect to consult the Banking Liaison Panel on the changes to the Code of Practice, before an update Code is brought into force laid before Parliament.

Question 1	Do you have any specific recommendations for required updates in the Code of Practice?
Question 2	Do you have any further comments concerning updating the Code of Practice?

3. Order to exclude certain investment firms

3.1 Introduction

Section 89A and 159A of the Banking Act (inserted by section 101 Financial Services Act 2012), extends the SRR and the Bank Administration Procedure (BAP) to investment firms respectively. (An “investment firm” is firm which is an investment firm for the purposes of the Capital Adequacy Directive, 2006/49/EC.) This allows authorities to exercise stabilisation powers over any investment firm provided relevant tests are satisfied. Where part of the business of an investment firm is transferred to a private sector purchaser or bridge bank, the authorities will be able to put the residual part of the investment firm into the BAP. (Alternatively, the investment firm could be placed into special administration (bank administration) under Schedule 2 to the Investment Bank Special Administration Regulations 2011; this would require the administrator to have regard to the special administration objectives, which include the return of client assets.)

The Treasury may by order (Section 258A of the Banking Act 2009 allows the Treasury, by order, to exclude institutions of a specified class or description from the definition of “investment firm”) define which institutions fall within definition of “investment firm”. This is to provide certainty in relation to which firms are, or are not, eligible for resolution under the SRR.

The government proposes narrowing the scope of the SRR powers to those investment firms that are required to hold initial capital of €730,000 (“€730k investment firms”) as specified in the Capital Adequacy Directive. (As set out in the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU) These are BIPRU 730K firms as set out in BIPRU 1.1.21 R, which in summary is a BIPRU investment firm that is not a UCITS investment firm, a BIPRU 50K firm or a BIPRU 125K firm.)

There are over 2,000 investment firms operating in the UK, but the vast majority are unlikely to threaten the stability of the financial systems of the UK by their failure. There are approximately 250 €730k investment firms. These include the larger and more complex investment firms. Due to the activities they are permitted to undertake, such as trading on their own account and underwriting financial instruments, and the value of assets held on balance sheet, these are the firms whose failure the government considers could threaten financial stability.

The government is aware that a number of the €730k investment firms may, like non-€730k investment firms, be unlikely to threaten financial stability by their failure. If such a firm is failing, or likely to fail, to satisfy its threshold conditions, they could be placed into the special administration regime for investment firms, if they hold client assets, rather than resolved under the special resolution regime. However, if market conditions in a stressed scenario deem that resolution action is required, the authorities have the option, but not the obligation, to use resolution powers on these investment firms.

Non-€730k investment firms will continue to either enter into a normal insolvency procedure, or enter into the special administration regime (SAR) in the event of failure.

This approach is consistent with the draft European Recovery and Resolution Directive.

A draft order that would exclude non-€730k investment firms from the scope of the SRR and the BAP is included in Annex A accompanying this publication.

Question 3	Do you agree with excluding all non-€730k investment firms from scope?
Question 4	Do you feel this is the correct threshold, bearing in mind that the regime will be applied in a proportionate manner to those firms in scope?

4. Banking group companies order

4.1 Introduction

The SRR at present only permits the Bank to exercise stabilisation powers over the failing institution. Section 81B of the Banking Act 2009 (Sections 81B, 81C and 81D are inserted by section 100 of the Financial Services Act 2012) extends these powers to banking group companies (BGCs). Section 81D defines a banking group company as an undertaking which is (or, but for the exercise of a stabilisation power, would be) in the same group as a bank; and relevant definitions in the Companies Act 2006 apply.

By virtue of the application of the SSR to investment firms and CCPs, sections 81B and 81C will also extend the Bank’s SRR powers to undertakings within the same group as a failing investment firm or CCP (though the legislation refers to all such group undertakings as “banking group companies” irrespective of whether they are grouped with a bank, a building society, an investment firm or a CCP). A group undertaking only qualifies as a BGC if it is established in the UK.

These powers will enable the transfer of property, rights or liabilities of the BGC, or the BGC itself to a bridge bank owned by the Bank. They could be used, for example, to ensure that the business of the institution being resolved retains access to key facilities or services that might be at risk were the rest of the group facing insolvency and when the existing continuity provisions in the Banking Act could not be relied on. The Bank must have regard to the need to minimise the effect of the exercise of powers on the rest of the group.

Section 82 enables the Treasury to resolve an institution by taking its holding company into temporary public ownership. But section 81B does not extend the Treasury’s powers to group undertakings where a failing institution is taken into temporary public ownership, and the Financial Services Act 2012 does not otherwise extend the Treasury’s powers to other group undertakings.

4.2 Specification of financial institution relevant to group powers

Sections 81B and 81C extend the Bank’s stabilisation powers to any undertaking in the same group as a failing institution that is being resolved. However, section 81D allows the Treasury to specify, by order, conditions that be met for an undertaking to be BGC; in practice, this will limit the range of group undertakings over which the Bank can exercise stabilisation powers. The draft order at Annex B sets out those conditions.

As explained above, the term “banking group company” encompasses undertakings in the same group as investment firms or CCPs where the firm being resolved is an investment firm or a CCP. For the same reason, where the firm being resolved is an investment firm or CCP, references in the draft order to the “bank” or the “banking group company” are to be interpreted as references to an investment firm or CCP, or an undertaking in the same group as an investment firm or a CCP.

The government proposes that the following undertakings qualify as banking group companies: subsidiaries of the failing institution; parents which are “financial holding companies”; and undertakings which are in the resolution group (i.e. subsidiaries of the “resolution group holding company”).

Subsidiaries do not have to meet any conditions other than the overriding condition set out in section 81B that the subsidiary is established in the UK.

Parent undertakings must be financial holding companies, meaning that its subsidiaries must be exclusively or mainly (i) entities engaged in financial services (deposit-takers, investment firms, insurers, investment exchanges, CCPs etc) and (ii) entities providing services or facilities, or both, exclusively or mainly to group companies. This approach ensures that group powers extend to parent undertakings which are financial in nature, but not to parents that may sit above both financial services and non-financial services sub-groups as part of a mixed conglomerate. For example, where a mixed conglomerate participates in both financial activities and non-financial activities (such as retail) the Bank will only be able to exercise stabilisation powers over parent undertakings of the failing institution that preside over financial sub-groups but not mixed ones.

All the subsidiaries of the resolution group holding company are banking group companies (if established in the UK) unless otherwise excluded. So, by determining which parent undertaking is the resolution group holding company, the Bank will be able to determine which group undertakings are banking group companies. The government intends to ensure that the Bank operates at the lowest necessary level of holding company. The starting point, therefore, is that the resolution group holding company is the first parent up the chain that is a financial holding company (as described above). However, the draft order allows the flexibility to widen the scope of the resolution group, by taking a parent higher up a chain of holding companies to be the resolution group holding company. This can be done if necessary to implement a transfer to a private sector purchaser (for example if the only way to achieve a sale is by exercising powers over a wider range of group undertakings) or to facilitate a transfer to a bridge bank (for example, to ensure continued access to key services provided from elsewhere in the wider group for the period during which the business is likely to remain in the bridge bank). In either case, the Bank would have to act reasonably and proportionately, and it must consult the PRA, the FCA and the Treasury.

4.3 Exclusions for group undertakings in the context of capital market arrangements

The government, in the proposed order, continues to maintain its position concerning the protection of capital market arrangements. Alongside the protection already in place in the existing safeguards order, entities that facilitate capital market arrangements, such as covered bond SPVs, are excluded from being a “banking group company” for the purposes of the stabilisation powers.

A draft order is included at Annex B accompanying this publication to inform responses to this consultation.

Alongside the provisions proposed above, the Special resolution regime: Code of Practice will also be updated to reflect the approach.

Question 5	Do you agree with the proposed specification of firms to be considered banking group companies?
Question 6	If you disagree, how would you prefer the specification to be approached?
Question 7	The definition of ‘financial holding company’ is set in relation to its subsidiaries being exclusively or mainly of a particular type eg entities engaged in financial services and entities exclusively or mainly providing services or facilities to those entities. Do you think the use of ‘exclusively or mainly’ provides adequate clarity in the definition of a financial holding company, and therefore the scope of the SRR in relation to banking group companies?
Question 8	Do you think the capital markets arrangements exemption is required in this order?
Question 9	If this exemption is necessary, are the current provisions framed in a sufficiently powerful but flexible way as to provide legal certainty?
Question 10	Are there other entities you would wish to see excluded? If so, what are they and why should they be excluded?
Question 11	Do you have any views on how the specifications are framed in the draft order?

5. Partial property transfer safeguards

5.1 Introduction

Under sections 47(2) and 48(2) of the Banking Act the Treasury is empowered to make orders restricting the scope of partial property transfers (PPTs) and protecting certain interests in instances where a PPT is made. PPTs are property transfer instruments that transfer of some, but not all, of the property, rights or liabilities of a failing institution to a private sector purchaser or bridge bank.

The Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009 (SI 2009/332) (“the 2009 Order”), made under section 47, sets out a number of safeguards in relation to partial property transfers. These include protection for: set-off arrangements, netting arrangements and title transfer financial collateral arrangements; secured liabilities; capital market arrangements; and financial markets.

We propose to apply safe guards in that order to investment firms and banking group companies. Article 6 of banking group companies order in Annex B applies these safeguards to investment firms and banking group companies.

The government proposes to make a separate order, largely based on the 2009 Order, that will place restrictions on the scope of PPTs made in respect of recognised CCPs.

The decision to make an order that will apply specifically to CCPs reflects the different nature of the business carried on by recognised CCPs, and the complex backdrop of existing regulation of the provision of CCP services. A draft of this new order is included in Annex C.

The policy objectives of the safeguard orders remain the same: to protect certain contractual and market arrangements, thereby mitigating any negative market consequences to creditors and counterparties, while maintaining a flexible regime able to resolve failing institutions effectively.

5.2 Protection provided in the case of PPTs made in respect of investment firms

The government considers that the existing safeguards in the 2009 Order are sufficient for the resolution of investment firms. No additions to the 2009 Order are proposed in respect of investment firms.

Question 12	Do you think extending the existing PPT order, as it stands, to investment firms is sufficient?
Question 13	Are there further safeguards you would like to see in place and why?
Question 14	Do you feel sufficient protection is provided for clients in line with the new client protection objective of the resolution regime?
Question 15	In the 2009 Order the definition of title transfer collateral arrangements requires that both the collateral-provider and collateral-taker are non-natural persons. Should this definition be amended to include title transfer collateral arrangements entered into by real persons?
Question 16	Are there any practical considerations that the government will need to address to ensure these safeguards work as planned?

5.3 Protections provided in the case of PPTs made in respect of Banking Group Companies

The extension of the stabilisation powers to group undertakings as part of the resolution of a failing institution has been outlined in the previous chapter. The government is aware that potential application of such a significant toolkit of powers to group undertakings, that are not the direct target of the resolution, may prompt industry concerns. The government therefore proposes an additional safeguard, in respect of banking group companies, that will protect assets in a BGC that are not used for the business of the failing institution. This safeguard will not apply to parent undertakings of a failing institution: this is in line with the proposals in the RRD.

The proposed additional safeguard is set out at article 6 of the draft order attached at Annex B.

5.4 Breach of the safeguard

The government proposes that if the Authorities are notified that a property transfer is in breach of this safeguard, the authorities must remedy the breach, in line with the provisions in Article 12 of the 2009 Order, by partial property transfer, reverse transfer or other means. (Article 12 of Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009, ‘Contravention of other provisions of the Order’ provides for remedies for contraventions of the provisions of the Order.)

Question 17	Do you agree there should be a broad safeguard to limit PPT powers over the assets of a BGC that are not involved in the business of the failing entity?
Question 18	Are there any other type of assets that you feel should be excluded?
Question 19	Do you agree with the proposed action to be taken following breach of the new safeguards?
Question 20	Do you have any views on how the new safeguard is framed in the draft order?
Question 21	Do you agree with the proposed carve out for banking group companies which are a parent undertaking of the bank?

5.5 Protections provided in the case of PPTs made in respect of CCPs

Central counterparties have been included in scope of the extended SRR powers. Also amendments have been made to the recognition requirements for CCPs to require recognised CCPs to have rules and arrangements in place to allocate losses, that arise as a result of members default or otherwise, that are in excess of the CCP’s available resources to cover such losses. The order making these amendments was laid 31 July 2013, and comes into force on 1 February 2014 with regard to the requirement for a CCP to adopt default loss allocation rules and recovery plans and on 1 May 2014 with regard to the requirement for a CCP to adopt non-default loss allocation arrangements. These steps are in line with the recommendations of the Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions.

It is important to ensure that the relevant domestic and EU requirements, which apply to the conduct of a CCP’s business, are complied with when making a PPT. Therefore, the occasions when the authorities would seek to use PPT powers are limited. To ensure collateral and netting arrangements are protected the only possible partial transfer of a CCP’s clearing business that would be possible, under the current proposal, is where a complete segregated business could be transferred. A “segregated business line” in this context is defined as a product set cleared by a CCP that is covered by a segregated set of default protections (the “segregated default waterfall”). Under the EMIR Regulatory Technical Standards (EMIR L2 Art 27.3), a CCP may not offer portfolio margin offsets across positions held in different segregated business lines. A number of UK CCPs currently operate more than one segregated business line.

Allowing transfers at the segregated business line level would enable the resolution authority to transfer the CCP’s segregated business line or lines (with both the positions and the collateral associated with these positions being transferred) that are still operationally and prudentially viable into a bridge entity. The CCP’s segregated business line that is no longer viable (including its exhausted default waterfall) would remain to be managed in the rump CCP. This continuity of service facilitated by this form of partial transfer could be in the interests of the clearing members and clients that clear business through the CCP and the trading platforms that utilise the CCP’s services. It could also be beneficial to the stability of the broader financial system. The operations of a CCP could also be partially transferred where required to maintain service continuity.

As outlined above, the government proposes to make a new order that will apply solely to PPTs made in respect of recognised CCPs. Whilst this order will be duplicate much of the provision made in the 2009 Order, the Treasury takes the view that in the interests of clarity, it is more helpful to make a separate order as opposed to making complex amendments to the 2009 Order for the purposes of applying its provision to recognised CCPs.

5.6 Protections extended to clearing houses

The government proposes to carry across most of the safeguards from the 2009 Order. These are the protections for set-off and netting; secured liabilities; trusts; and termination rights. The government does not wish to undermine any of these safeguards. Whilst existing legislation, including EMIR, already provides significant limitations as to what action can be taken in respect of CCP business, it does not explicitly prescribe the specific protections of the kind provided for in the 2009 order, hence the government’s proposal to extend these protections in the case of recognised CCPs.

Article 7 of the 2009 Order, protection of financial markets, is to be modified. There may be situations where the Authorities would wish to intervene, using SRR powers, ahead of the CCP completely exhausting its full default procedures. For example, when losses are concentrated in one segregated product line of a CCP, the Authorities may deem it necessary to undertake a PPT ahead of a full contractual “tear-up”. This would not be possible if the protection provided for in Article 7(1)(b) in the 2009 Order were to be applied in respect of recognised CCPs. As contractual “tear-up” may be the final stage of a CCPs default procedures, the existing protection is inappropriate. This article has been modified to allow for the transfer of some or all of a CCPs clearing business while maintaining sufficient protection around market contracts.

The government also envisages extending the new safeguard for Banking Group Companies discussed above in the order to be applied to CCP groups.

5.7 Protections not provided in the new CCP order

Article 6 in the 2009 Order, protection of capital market arrangements, has not been extended to CCPs as it seemed unlikely that this protection would be relevant to the business of CCPs.

Article 9 in the 2009 Order, additional restrictions on reverse transfers, has also not been extended to CCPs. This protection was designed with the resolution of deposit takers in mind. Given the range of PPT options available, in these instances we do not envisage a situation where the Authorities would find it appropriate or would be able to undertake a reverse transfer. Therefore the government feels these protections if applied to CCP resolution would provide an unnecessary complication.

Question 22	Do you agree with the approach of issuing a new order specifically concerning the resolution of CCPs?
Question 23	Is the protection of netting at the level of a CCP’s segregated business lines (and the default waterfall associated with each segregated business line) appropriate?
Question 24	Do you agree with the proposal to modify article 7?
Question 25	Do you agree with the removal of the safeguard around capital markets arrangements?
Question 26	Do you agree with the removal of the safeguard concerning reverse transfers?
Question 27	Are there additional safeguards you would expect to be included that have not been considered, and what are they?
Question 28	Do you feel any of the proposed safeguards are superfluous and why?

6. ‘No creditor worse off’

Section 60 of the Banking Act 2009 permits the Treasury to make regulations about third party compensation arrangements in the case of partial property transfers, often called ‘no creditor worse off’ (NCWO) provisions.

The Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009 (SI 2009/319) sets out the requirement for the appointment of an independent valuer to determine whether pre-transfer creditors should be paid compensation and, if so, what amount, and the principles they must apply when making the valuation.

We propose to apply the NCWO provisions to partial property transfers made in respect investment firms and banking group companies. The draft order is included in Annex D accompanying this publication.

For CCPs individual compensation orders are made under section 89F. It is anticipated that clearing house compensation orders would be made only in exceptional circumstances. That being the case, it is not considered necessary to prescribe provision that should form part of any such order in advance.

Question 29	Do you agree that no changes are required to the NCWO Order?
Question 30	Do you have any concerns over the likely effectiveness of the safeguard Regulations as they are presently framed?
Question 31	Do you agree that there is no need for a NCWO order to specify the terms to be applied when a clearing house compensation order is made under 89F in the case of PPT?

7. Extension of the bank administration procedure rules

7.1 Introduction

The Bank Administration Procedure (BAP), set out in Part 3 of the Banking Act 2009 may be required in the event of a partial transfer of an institution’s business to a bridge bank or private sector purchaser. Where a partial transfer of property takes place, the ‘residual bank’ (the part left behind) may be insolvent. Despite being insolvent, it may be vital that the residual bank continues to provide services and facilities to the purchaser or bridge bank, where these are required to enable the transferred business to be operated effectively. The BAP is largely based on existing insolvency provisions. However, it is designed to ensure that any essential services and facilities that cannot be immediately transferred to a bridge bank or private sector purchaser will continue to be provided, for a period of time. Specifically, the bank administrator has a primary objective of providing support for the private sector purchaser or bridge bank; when that objective is no longer required, the bank administrator’s objective is to rescue the institution as a going concern, else to achieve a better result for the creditors as a whole than would be likely if the institution were wound up without first being in bank administration.

Section 159A of the Banking Act 2009 will extend the BAP to (the residual part of) investment firms. And section 81C will extend the BAP to (the residual part of) banking group companies.

For investment firms – including banks which offer investment services – the authorities also have available the Special Administration Regime. In particular, where part of the business of an investment bank is transferred to a private sector purchaser or bridge bank, the residual bank can be placed into special administration (bank administration) as set out in schedule 2 to the Investment Bank Special Administration Regulations 2011. The primary objective of providing support to the private sector purchaser or bridge bank applies until it is no longer required; the standard special administration objectives then apply.

The special administration (bank administration) procedure was originally created for investment firms that hold deposit taking permissions. It is being extended to all investment firms by an order making consequential amendments pursuant to the Financial Services Act 2012; that order will come into force on 1 September.

7.2 The BAP rules

The rules that govern the procedure for the bank administration process under Part 3 of the Banking Act 2009 are made, like other insolvency rules, under the Insolvency Act 1986. The current rules are the Bank Administration (England and Wales) Rules 2009 (SI 2009/357) and the Bank Administration (Scotland) Rules 2009 (SI 2009/350).

Amendments to the rules are needed to reflect the extended scope of the BAP will be made as soon as practicable, and in accordance with normal insolvency rules procedures.

Question 32	Do you have any specific recommendations for terms that need to be updated for the effective extension of these rules to investment firms? Or to banking group companies?
Question 33	Do you have any further comments?

8. Breach of the ‘secured liabilities’ with respect to floating charges

The extension of the ‘Secured Liabilities’ safeguard, Article 5 in the 2009 Order, continues to protect floating charges. Currently if this safeguard is contravened the authorities must remedy the breach, in line with the provisions in Article 12 of the 2009 Order, by partial property transfer, reverse transfer or other means. The process for remedying this breach is set out in the 2009 Order, the relevant authority must take action to remedy the breach within 60 days of receiving notice which can be extended by, up to, a further 60 days under paragraph 8. We have received feedback that this raises uncertainty around timing of compensation and may damage confidence in market operations that rely on floating charge arrangements. For example, stakeholders have highlighted that CREST settlement banks may be less willing to provide credit to CREST members at existing levels. Given the extended scope of SRR powers to investment firms who hold significant positions with CREST clearing banks they would seek to have this risk mitigated by having contravening transfers made void.

However, the government is confident that the degree of uncertainty should be perceived as small. First, the Bank will always act to adhere to the PPT safeguards in making a transfer; and second, the Authorities have confidence in the compensation mechanism that protects parties affected if the PPT safeguards are broken.

Furthermore, if contraventions were to be made void, the transferee in a partial property transfer resolution would then face uncertainty in instance of a contravention. It is preferable, from a financial stability point of view, for any uncertainty to be on the settlement banks because we need to seek to avoid uncertainty about the ability to perform transfers in resolution in order to find willing transferees. Any uncertainty about the assets and liabilities that are transferred to a transferee will increase the likelihood that a transferee cannot be found and a bridge bank resolution would need to be adopted, which could place risk onto the public balance sheet.

It appears that these concerns, rather than being entirely new with the extension of the special resolution regime, already existed with deposit takers but has now increased with extension of the scope. It is for this reason and the reasons outlined above that the government is proposing not to modify the treatment of contraventions made here. However, the government is very interested to understand more about the perceived risk here. Therefore, we ask CREST clearing members for further information around the perceived risk. It would also be very useful to be provided with any evidence of these effects being observed in relation to deposit takers already in scope of the existing regime.

Question 34

Do CREST clearing members believe there is an increase in perceived risk as a result of the extension of the secured liabilities safeguard with respect to floating charges? If yes and if possible, pleas provide evidence of these effects being observed in relation to deposit takers already in scope of the existing regime.

9. Summary of consultation questions

Question 1	Do you have any specific recommendations for required updates in the Code of Practice?
Question 2	Do you have any further comments concerning updating the Code of Practice?
Question 3	Do you agree with excluding all non-730k investment firms from scope?
Question 4	Do you feel this is the correct threshold, bearing in mind that the regime will be applied in a proportionate manner to those firms in scope?
Question 5	Do you agree with the proposed specification of firms to be considered banking group companies?
Question 6	If you disagree, how would you prefer the specification to be approached?
Question 7	The definition of ‘financial holding company’ is set in relation to its subsidiaries being exclusively or mainly of a particular type eg entities engaged in financial services and entities exclusively or mainly providing services or facilities to those entities. Do you think the use of ‘exclusively or mainly’ provides adequate clarity in the definition of a financial holding company, and therefore the scope of the SRR in relation to banking group companies?
Question 8	Do you think the capital markets arrangements exemption is required in this order?
Question 9	If this exemption is necessary, are the current provisions framed in a sufficiently powerful but flexible way as to provide legal certainty?
Question 10	Are there other entities you would wish to see excluded? If so, what are they and why should they be excluded?
Question 11	Do you have any views on how the specifications are framed in the draft order?
Question 12	Do you think extending the existing PPT order, as it stands, to investment firms is sufficient?
Question 13	Are there further safeguards you would like to see in place and why?
Question 14	Do you feel sufficient protection is provided for clients in line with the new client protection objective of the resolution regime?
Question 15	In the 2009 Order the definition of title transfer collateral arrangements requires that both the collateral-provider and collateral-taker are non-natural persons. Should this definition be amended to include title transfer collateral arrangements entered into by real persons?
Question 16	Are there any practical considerations that the government will need to address to ensure these safeguards work as planned?
Question 17	Do you agree there should be a broad safeguard to limit PPT powers over the assets of a BGC that are not involved in the business of the failing entity?
Question 18	Are there any other type of assets that you feel should be excluded?
Question 19	Do you agree with the proposed action to be taken following breach of the new safeguards?
Question 20	Do you have any views on how the new safeguard is framed in the draft order?
Question 21	Do you agree with the proposed carve out for banking group companies which are a parent undertaking of the bank?
Question 22	Do you agree with the approach of issuing a new order specifically concerning the resolution of CCPs?
Question 23	Is the protection of netting at the level of a CCP’s segregated business lines (and the default waterfall associated with each segregated business line) appropriate?
Question 24	Do you agree with the proposal to modify article 7?
Question 25	Do you agree with the removal of the safeguard around capital markets arrangements?
Question 26	Do you agree with the removal of the safeguard concerning reverse transfers?
Question 27	Are there additional safeguards you would expect to be included that have not been considered, and what are they?
Question 28	Do you feel any of the proposed safeguards are superfluous and why?
Question 29	Do you agree that no changes are required to the NCWO Order?
Question 30	Do you have any concerns over the likely effectiveness of the safeguard Regulations as they are presently framed?
Question 31	Do you agree that there is no need for a NCWO order to specify the terms to be applied when a clearing house compensation order is made under 89F in the case of PPT?
Question 32	Do you have any specific recommendations for terms that need to be updated for the effective extension of these rules to investment firms? Or banking group companies?
Question 33	Do you have any further comments?
Question 34	Do CREST clearing members believe there is an increase in perceived risk as a result of the extension of the secured liabilities safeguard with respect to floating charges? If yes and if possible, pleas provide evidence of these effects being observed in relation to deposit takers already in scope of the existing regime.