From June 1, 2016, certain UK financial institutions (defined below) and members of their global group will be restricted from entering into, or materially amending, ‘financial arrangements’ governed by the laws of a ‘third country’ (being a country that is not an EU Member State) unless their counterparties enable them to meet a new, UK-specific, “stay recognition requirement”. The finalised stay recognition requirement will be contained in a new ‘Stay in Resolution’ Part of the PRA Rulebook.
The UK’s stay recognition requirement obliges certain statutory EU resolution measures to be given effect in an ‘enforceable manner’. This requirement seeks to address the problem that, because resolution measures arise under statutory powers, they are not legally effective in contracts governed by third country law. Accordingly, the stay recognition requirement aims to ensure that financial arrangements governed by third country law are able to be subjected to resolution measures in the same way as contracts governed by the laws of an EU Member State.
The particular resolution measures to which the UK’s stay recognition requirement seeks to give effect are statutory ‘stays’ on contractual rights related to resolution (the contractual stays). In resolution, contractual stays override certain contractual terms in order to prevent a resolution action from triggering terms that could further destabilise the UK financial institution and thus undermine the effectiveness of the resolution action itself. Although the contractual stays were introduced into UK law as part of a wider EU package of reforms (the BRRD1), the stay recognition requirement is not a BRRD requirement.
This updater considers the commercial and legal implications of the stay recognition requirement for UK financial institutions, their subsidiaries and counterparties of these entities, addressing the following matters.