“Commercially reasonable” is a common law legal concept which may not always be easily transferable into legal concepts of other jurisdictions. The references in the definition to “market practice” and “best efforts” are intended to address this to some extent. However, “best efforts” itself is again a common law legal concept. In view of the fact that the results of any valuations made in accordance with the RTS may be reviewed by local courts and against the background of locally applicable insolvency laws it will be necessary to find a more neutral definition.
According to the current definition of “Commercially reasonable replacement trade” the counterparty which is closed-out has to make “best efforts “to obtain the “best value for money”. The definition thereby effectively sets an extremely and potentially unreasonably high standard (in any event a significantly higher standard than indicated by the term “commercially reasonable”). The more appropriate and realistic standard would be to require “commercially reasonable efforts” and a “price that is commercially reasonable”.
As to our general concerns regarding the reliance on actual replacement transactions in order to determine the close-out amount, see our response to Questions 3 and 4.
• Lack of a definition for “collateral”
We note that the term “collateral” remains undefined and suggest to add such a definition. Our understanding is that “collateral” also includes amounts equal to the value of the collateral transferred under a credit support annex (as calculated pursuant to Paragraph 6 of the ISDA Credit Support Annex (Bilateral Form – Transfer) subject to English Law and No. 9 of the Collateral Addendum to the German Master Agreement for Financial Derivatives Transactions (“Besicherungsanhang zum Rahmenvertrag für Finanztermingeschäfte”)) and that such amounts will be considered in the early termination amount calculation pursuant to Article 4 (1) lit a. of the RTS."
Yes: For one, the notice should clearly specify the netting agreement/transactions which should be closed-out and the specific time and date of such close-out (close-out date) and/or the time by which counterparties have to produce information on the replacement trades (or other valuation data, see our responses to Questions 3 and 4).
Moreover, the period between the notification and the relevant close-out date needs to be pre- defined or at least subject to a pre-defined - and necessarily short - time limit. The resolution authority cannot have complete discretion in setting the close-out date because such complete discretion could effectively undermine the purpose of the strict limitation of the resolution stay and impair the rights of the counterparty.
Furthermore, to ensure that the close-out is accomplished as smoothly as possible and also to reduce the risk of legal challenges, i.e. based on breaches of the no creditor worse off-principle (NCWO-principle), it will be important that all necessary notifications are made in the contractually agreed form and addressed to contractually agreed addressees. This should be expressly clarified.
As to the general concerns regarding reliance on actual (commercially reasonable) replacement trades, see our response to Questions 3 and 4 below.
In order to avoid uncertainty and potential legal challenges on the basis of the NCWO-principle, the close-out amount needs to be calculated and valued in accordance with the terms agreed in the relevant master agreement:
Article 49(3) BRRD states that, where bail-in applies to liabilities arising from derivatives contracts, the valuation of derivatives under a netting agreement must be carried out in accordance with the terms of that agreement. The approach proposed in the draft RTS contains a number of elements which are not consistent with the terms and concepts of standard netting agreements and thus deviates from market practice and the principle set out in Art. 49 (3) BRRD.
For one, as currently drafted, the RTS only allow closed-out counterparties to contribute to the valuation conducted by the resolution authority or the valuer if they have entered into actual replacement trades before the given deadline. However, pursuant to the terms of standard netting agreements for OTC-derivatives such as ISDA Master Agreements or the German Master Agreement for Financial Derivatives Transactions (Deutscher Rahmenvertrag für Finanztermingeschäfte), the party which determines the relevant close-out amount is not required to enter into actual replacement transactions and can rely on other data than the price of actual replacement trades to determine the close-out amount, such as quotations.
Moreover, under most standard agreements the non-defaulting party (that is the party other than the party in relation to which the termination event exists) calculates the close-out amount. This is also consistent with the concept applicable in many jurisdictions that the party which has suffered damages is the one which is entitled to determine the potential claim, if any. This of course does not preclude the defaulting-party to question the amount so determined and/or require a substantiation of the claim.
No. As already mentioned above in our response to Question 1 (regarding the definition of “Commercially Reasonable Replacement Trade”) the concept of commercial reasonableness as it is currently defined raises some concerns and the reliance on actual replacement transactions is inconsistent with market practice.
In view of the concerns raised in our response to Question 3, we propose to amend the RTS so that the counterparties can calculate the close-out amount in accordance with the terms of the relevant netting agreement which means that they can make use of other data than the price of actual replacement trades.
As already mentioned above in our response to Questions 3 and 4 above, we believe the calculations have to be made in accordance with the terms specified in the relevant agreement.
See our response to Question 5.
We believe that transactions cleared via a CCP (cleared transactions) should be excluded as such from any bail-in. Cleared transactions, in particular with EMIR-authorized or recognized CCPs, can and should generally be qualified as secured liabilities and as such be exempted from a bail-in. A CCP is required to collateralise any trades in accordance with the requirements under EMIR (or pursuant to equivalent third country rules) in order to qualify as an authorised (recognised) CCP. Therefore centrally cleared derivative contracts should fall within the secured liabilities definition of Article 44 (2) b) BRRD. In this context it should also be assumed (and clarified) that this not only applies to transactions between CCP and clearing member but also to the directly connected transaction between clearing member and client (client clearing).
No. In some cases it may take too long until pricing is available. Thus, it may be necessary to provide for alternatives in the event pricing does not become available within an adequate period of time.