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ICC - International Chamber of Commerce

As the concept of contractual recognition of a bail-in is quite recent it’s unlikely that at this moment there would exist in third countries any jurisdiction or an explicit, direct prohibition against such recognition.
However, in most countries outside the EU a general mandatory legal principle applies prohibiting that foreign jurisdiction, laws and regulations could affect the national interest of the country. National sovereignty in most countries is reflected in its basic principles of national law. Certainly, public entities (or semi-public) are subject to local laws protecting their full rights or prohibiting in general terms to make them subject to the authority of a foreign country. (Semi-) public entities have their own statutory by-laws which imply that such entities may not accept or even negotiate clauses which would affect their lawful rights. This principle is translated also in many facts: e.g. guarantees in favor of public entities are normally imposed via mandatory templates, which are non-negotiable. Insertion of a bail-in clause in a guarantee would most probably result in a full rejection of the guarantee. It goes even so far that public entities are obliged by their local law to reject any deviation from their templates (for reason to keep all their counterparts at the same level). We believe that it doesn’t matter which authority exactly rejects the bail-in clause as any such rejection/prohibition of any authority would always be an obvious impediment. We therefore believe that the EBA should reflect this matter of fact into its proposals on “Conditions for Impracticability - CfI ” by accepting all authorities which state directly or indirectly that they are not allowed to accept the recognition.

As an illustration, the Saudi Arabia Monetary Agency (SAMA), issued, as Saudi regulator, several years ago templates for the different types of commercial bank guarantees like Performance bond, Advance Payment bond,…. Saudi contractors only accept guarantees reissued by Saudi banks and the Saudi bank will re-issue the guarantees using the SAMA templates. These templates insist that the foreign bank has to honor a claim without any deduction, as stated in condition b)
Any payment made hereunder shall be made free and clear of, and without deduction for or on account of, any present of future taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature whatsoever and by whomsoever imposed.
If a foreign bank tries to impose a bail-in clause, its request will be turned-down and its client who will be not able to submit the expected guarantee will lose a business opportunity.
We should point out that many banks would use the term Trade Finance for a wide range of commercial transactions that support the manufacturing, building or purchase of products, including capital goods and the rendering of services. The main characteristics of off-balance sheet Trade Finance instruments such as guarantees or letters of credit are:
• These instruments are used to support commercial contracts negotiated by a seller and its customer with little if any room for discussions on their text.
For example, for guarantees, if an EU institution issues a tender to buy equipment or services, it will ask the selected provider to submit a performance security which will have to be submitted in the form contained in a Model Contract (cf EIB – Terms of Reference for Procurements – Page 14). In most cases, the buyer refuses to negotiate the terms of his model contract and reserves the right to decline without further comment any offer that doesn’t accept its model (cf EIB General Clauses – Procurements - Pages 9 & 10). This is the situation in many countries including Algeria, Iran, most countries in the Middle east, China, India.
As a consequence, the bank is normally requested by its customer to issue the guarantee without any amending the proposed text. If the bank were to try to amend the text, its customer (typically the supplier/seller) is likely to lose the bid or transaction without any explanation. Often there is little or no time for negotiations.
• The objective of these instruments is to secure a payment to be made by a bank on behalf of its:
o Through the confirmation of a letter of credit, a bank commits to pay to the seller the amount of its contract against the presentation of pre-agreed compliant documents. Once the compliance of these documents is established by the confirming bank, the seller is certain to be paid in full and without recourse.
o Through the issuance of a technical guarantee like a Performance Guarantee the bank commits to pay the beneficiary a pre-agreed amount if the conditions for the payment (usually performance defaults of the supplier) are met
• The commitments made by the bank are secured by other commitments made by
o The issuing bank in the case of a LC
o Its customer (the supplier) in the case of a Performance Guarantee
• Most of these instruments are governed by international rules such as UCP 600 for letters of credit or URDG 758 for technical guarantees for those promoted by the ICC. These set of rules do not include any reference to a bail-in clause. These instruments are often documented through SWIFT communication which do not include any field for bail-in clauses, as they are not considered in the set of rules.
In its draft RTS, the EBA lists 5 different conditions of impracticability:
1. the inclusion of the contractual term would be in breach of the law of the third country governing the liability;
2. the inclusion of the contractual term would be contrary to an explicit and binding instruction from a relevant third country authority of the third country the law of which governs the liability;
3. the liability arises out of instruments or agreements concluded in accordance with and governed by internationally standardised terms or protocols which the institution or entity is unable to amend;
4. the liability is governed by contractual terms to which the institution or entity is bound pursuant to its membership of, or participation in, a non-Union body, including financial market infrastructures, and which the institution or entity is in practice unable to amend;
5. the liability is owed either to a commercial or trade creditor and relates to goods or services that, while not critical, are used for daily operational functioning and where the institution or entity is in practice unable to amend the terms of the agreement concluded on standard terms.
Trade Finance instruments clearly relate to the third condition as the institutions are in most cases unable to amend the terms of their liabilities as their standardized terms are governed by international rules (such as ICC UCP or URDG) then used as a reference by SWIFT for standardized messages.
The Consultation lists 6 categories of liabilities which might meet or not the definition of impracticability for the purpose of Article 55(6)a):

The first category (Request of the counterparty to renegotiate the contract and / or an increase in pricing or a refusal by the counterparty to agree to be bound by a contractual bail-in recognition clause) refers to the incapacity of the institution to agree with its counterparty on the inclusion of a bail-in clause.
For guarantees, the non-EU beneficiary will never consider the recognition of a bail-in clause where it would up-front agree to the possibility that it will not be entitled to the full amount of the guarantee. As mentioned above, an attempt by the institution to insert a bail-in will in many cases result in a loss of the underlying transaction for the institution’s customer. The institution will simply not be able to include such clause as the counterparty which often has no relation with the institution, simply does not accept it and often is in the position that it refuses to negotiate the text of the guarantee it asked for.

For Import LCs, a non-EU seller, or its bank, will most probably not accept an LC issued by an EU institution on behalf of its EU customer (the buyer) with a bail-in clause, as it means that the commitment of the EU bank might not cover the whole amount to be paid by the buyer. In addition, the inclusion of a bail-in clause is not provided for in the UCP rules and SWIFT means of communication.

For these practical reasons, we consider that for Trade Finance instruments governed by internationally recognized set of rules and used with non-EU entities the first category should be a condition of impracticability.

For these reasons, the inclusion of a bail-in clause might only be considered for new commitments and not for portfolio of existing ones.
Yes. These are at least two more important conditions of impracticability.
1. Request of the counterparty to renegotiate the contract and / or an increase in pricing or a refusal by the counterparty to agree to be bound by a contractual bail-in recognition clause.
2. If the relevant liability arises out of an existing agreement which the entity acquired and for which the entity has no power to amend the terms

Re 1 supra
As mentioned above this is probably most important condition missing in the draft RTS. Where the bank’s counterparty refuses to accept a bail-in clause and the EU bank has no power to ensure such clause is included, it is simply impossible to include the bail-in clause. We fully agree that we need a prudent approach when it comes to bail-in clauses but that should not go as far as an obligation to insert a bail-in clause where it simply is not possible and that does not undermine the resolvability. For most Trade Finance instruments no bail-in of the bank’s liability would indeed have no negative effect on a bank’s resolvability.

Bank Guarantees issued in favor of non-EU beneficiaries on behalf of their customer (exporters/ sellers) can be divided in 2 types:
i)“direct” bank guarantee whereby the EU-bank has a direct liability towards that beneficiary:
a) if the latter is a public or semi-public entity the wording of the Bank Guarantee will always be imposed or mandatory and such wording will never allow any bail-in clause ; any deviation results in a rejection of the bank guarantee ( cf our reply on question 1).
b) if the beneficiary is a private company the result will be similar for more than 90% of the cases as it is often in a strong negotiation position as a buyer
ii)“indirect” Bank Guarantee whereby the EU bank needs the intervention and cooperation of a local correspondent (which is the most common procedure). The reason for this intervention by another bank is that the beneficiary doesn’t know or feel that it sufficiently trusts the EU-bank, or that local regulations and practices only allow Bank Guarantee issued by local banks. In such case the EU-bank has to issue a counter-bank guarantee to its correspondent which counter-guarantee is the basis on which it issues the actual bank guarantee to the beneficiary. Although the Bank Guarantee and counter Bank Guarantee are legally independent, they are of course linked. The text of the counter Bank Guarantee must as much as possible mirror the bank guarantee so that the local guarantor can be sure that it has full recourse to the EU-counter-guarantor in case it has to pay out under its bank Guarantee. Therefore, the local bank will insist that the counter Bank Guarantee is unconditional and contains no terms allowing it to “escape” or reduce its liability towards the local bank. Hence a bail-in clause will for 100% sure be rejected by the local bank while we need his cooperation! This is a fact of life in these trade finance transactions which an EU bank cannot avoid, remedy or negotiate out of.
Besides, the issuing bank is always obliged to issue the Bank Guarantee as instructed by its customer / applicant and it has no mandate to unilaterally amend that wording by inserting a bail-in clause. If the customer doesn’t accept such amendment the bank has no other option than to decline the request, leaving the customer without any support and the risk of loss of business.
We should that more often than not nowadays Bank Guarantee’s must be issued within 24 or 48 hours, which leaves no time at all to:
1) explain the concept of bail-in to our customer
2) explain it to the local bank or beneficiary
3) negotiate it and reach an agreement (which we’re convinced will be always negative), cfr also practical example
4) adapt the wording etc.
None of these actions are possible. Any delay can result in a loss of the transaction for the institution and more importantly for its customer, the seller.

Above describes the reality in international trade for which we cannot close our eyes. EU banks will have to face this reality but it is important that they will continue to be in a position in which they can continue to support the export transactions of their customer. Article 55 should not be counter-productive in its effect on EU bank in trade finance. Some customers which are in relationships with non-EU banks may find alternative solutions through these non-EU banks but most SME’s which only have banking relationships with EU banks will be negatively affected.

The practical experience of EU banks in 2019 when they tried to impose bail-in clause before the adoption of Article 55 demonstrates the problem:
• Attempts by Spanish banks which tried to do include a bail-in clause upon the insistence of their NRA were unsuccessful
• Turkish banks which were requested to re-issue guarantees with a bail-in clause on behalf of an EU bank acting for an EU exporter refused the inclusion as the beneficiary refused it.

The proposal to allow notification of categories of liabilities that meet conditions of impracticability makes sense; it would open up the opportunity to follow a coherent and realistic approach for off-balance sheet Trade Finance instruments.
A delay of 3 months to submit for the first time to the relevant RA the information specified in the templates is considered much too short, as it will be difficult to extract the detailed data from banks’ data systems. And there is the added complication that many Trade Finance instruments do not have an express governing law clause. In those cases, the governing law would have to be determined on the basis of conflicts of law rules which often differ per jurisdiction. To determine the instruments in scope would be an Herculean task.
The draft RTS includes in its Article 1.1.c) a reference to a "liability which arises out of instruments or agreements concluded in accordance with and governed by internationally standardised terms or protocols which the institution or entity is unable to amend".
In our opinion, this clearly refers to Letter of Credits governed by the UCP 600 published by the ICC or to guarantees governed by the URDG 758 published by the ICC but that should be made clearer in the text.
We refer to the examples provided before on Saudi rules (Q 1) , EIB procedures (Q 2), Spanish and Turkish banks (Q 4).

Yes except for 1.1 (c) and (d) where it should be clearer that off-balance sheet Trade Finance instruments are captured.

Please also refer to Q 7
A bank’s right to immediate recourse in case it pays out under a Trade Finance instrument (basically the creation of an asset) is missing. This is an important condition as it prevents that a payment by the bank will negatively affect its resolvability. In fact, it will the bail-in that will cause a negative effect on resolvability because the bank would no longer be accepted as an international trade bank. The bank will suffer as a result but also its customers, certainly the smaller ones.
Article 2 of the draft RTS fails to mention that the resolution authority's conclusion as to impracticability to include the bail-in clause will have to take into account "the need to ensure the resolvability of the institution or entity, ", as per Article 55 (2) third paragraph.
This is relevant because it links impracticability of inclusion of the bail-in clause with the effect of such a clause on resolvability. In many situations it may not be impracticable to include a bail-in clause under the strict terms as set out by the EBA above, but where at the same time such a clause can have no real effect on the institution's resolvability, it is impracticable to insert a bail-in clause. Good examples are contingent liabilities and liabilities that upon discharge result in an immediate recourse claim on another party.
• The thresholds in Article 2 do not appear to be in line with Article 55 (2).
Paragraphs 5 and 6 say: "amounts to more than 10 % of that class, it shall immediately assess the impact of that particular fact on the resolvability of that institution or entity, including the impact on the resolvability resulting from the risk of breaching the creditor safeguards provided in Article 73 when applying write-down and conversion powers to eligible liabilities." "Where the resolution authority concludes, on the basis of the assessment referred to in the fifth subparagraph of this paragraph, that the liabilities which, in accordance with the first subparagraph, do not include the contractual term referred to in paragraph 1, create a substantive impediment to resolvability, it shall apply the powers provided in Article 17 as appropriate to remove that impediment to resolvability." These thresholds and the related requirement to require inclusion of the bail-in clause do not feature in the BRRD. In setting these thresholds in this way, it looks like the EBA is going beyond its mandate.
• According to 3.4.2 when it comes to the need to ensure resolvability the RA might consider characteristics such as hierarchy of the liability, its maturity and/or its value.
As said, the RA should also consider the consequence of the institution discharging its liability, e.g. whether or not it has recourse to another party for what it has paid under the relevant contract (cf recourse letter when an institution issues a performance guarantee). This should be added to Article 2 (a) to (e).
Amounts and durations should be determined by the relevant RA according to the need to ensure the resolvability of the affected institution.
A delay of 3 months might be too short for off-balance sheet Trade Finance instruments because as argued above, such an inclusion clashes with business practices.
More than 3 months.
Individual banks are better placed to respond to this so we are referring to those responses.
Individual banks are better placed to respond to this so we are referring to those responses.
Individual banks are better placed to respond to this so we are referring to those responses.
Individual banks are better placed to respond to this so we are referring to those responses.
Individual banks are better placed to respond to this so we are referring to those responses.
ICC - International Chamber of Commerce