On 29 April 2016, the Monetary Authority of Singapore (MAS) issued a Consultation Paper on Proposed Legislative Amendments to Enhance the Resolution Regime for Financial Institutions in Singapore (the 2016 Consultation Paper). This follows on from an earlier consultation issued on 23 June 2015, Consultation Paper on Proposed Enhancements to Resolution Regime for Financial Institutions in Singapore (the 2015 Consultation Paper). The MAS also issued its response (Response) to feedback on that earlier consultation.

The 2015 Consultation Paper had set out a proposed recovery and resolution planning (RRP) regime on a broad policy basis. Following the feedback, the MAS has in its Response fleshed out and provided greater detail as to the scope and ambit of the various policies proposed. As the draft legislation, notice and guidelines contained in the 2016 Consultation Paper primarily set out the scope of the MAS’s powers to introduce directions on the various RRP policies, it is likely that there will be further consultations on directions on the additional matters to be issued later.

In this update, we will deal with some of the more significant aspects of the additional details provided.

Who the RRP Procedures Will Be Applied to

For the initial implementation of the RRP requirements, the MAS has indicated that they will only apply to the following financial institutions:

• domestic systemically important banks, and where necessary, applied on a proportionate basis to other banks that are assessed to have systemic impact or that maintain critical functions;
• systemically important financial market infrastructure, ie approved clearing houses, depositories, licensed trade repositories and systemically important payment systems in Singapore;
• approved exchanges and approved holding companies that are notified by the MAS; and
• operators and settlement institutions of Designated Payment Systems.

As for other financial institutions, the MAS has indicated that it will continue to monitor international developments for domestic systemically important insurers and insurers that maintain critical functions, and domestic non-bank non-insurance systemically important financial institutions. It will consult on any developments that it may consider implementing once these developments have become clearer.

Primary liability for contravention of the RRP requirements will lie with the financial institution. The board and executive officers will bear secondary liability if the offence was committed with their consent or connivance or if the offence was attributable to their neglect. The MAS will not be proceeding with its original proposal to impose imprisonment as a punishment for the offence and will specify a fine only as penalty.

Temporary Stays on Early Termination Rights

The MAS has stated in its Response that the scope of the proposed power to stay the rights of counterparties to a contract of a financial institution in resolution will be as follows: 

• It will be applied to financial contracts (eg, contracts for repurchasing, borrowing or lending securities or commodities, derivatives contracts and futures contracts) and contracts for essential services and functions of a financial institution. 
• Financial contracts with central banks, payment systems, approved clearing houses, recognised clearing houses and depositories will be excluded from the operation of the stay.
• The length of the stay will be limited to a maximum of two business days.

Statutory Bail-In Regime

The MAS had proposed a statutory bail-in regime in the 2015 Consultation Paper. In its Response, it has confirmed that it will be applying the statutory bail-in powers only to Singapore-incorporated banks and bank holding companies for the time being, and only to unsecured subordinated debt and unsecured subordinated loans.

The 2016 Consultation Paper contains, among other drafts, a draft Division 4A, Part IVB to the Monetary Authority of Singapore Act that empowers the MAS to exercise the bail-in powers and sets out the circumstances under which the MAS may do so. Under the new Division 4A, the MAS may determine that an eligible instrument (ie, unsecured subordinated debt and unsecured subordinated loans, for the time being) is to be bailed-in by any of the following:

• Cancelling the instrument;
• Modifying, converting or changing the form of the instrument; or
• The instrument having effect as if a right of modification, conversion or change of form had been exercised under it.

The 2016 Consultation Paper does not contain a draft notice as to the MAS’s proposed requirements for banks and bank holding companies entering into instruments governed by the statutory bail-in regime. However, in its Response, the MAS has confirmed that it will be proceeding with its requirements for mandatory contractual provisions to be included in such instruments if they are governed by foreign law, and for the bank or bank holding company to obtain a legal opinion as to the enforceability of these provisions.

The instrument will therefore need to state that the liability may be subject to write-down or conversion by the MAS under Singapore’s bail-in regime and the terms of the bail-in under the contract will be determined by the MAS. If the instrument contains contractual mechanisms for conversion or write-down upon certain defined triggers outside of resolution (eg, where the bank’s capital ratio falls below a particular level), it must also state that these contractual triggers are distinct from the exercise of bail-in by the MAS and there may be circumstances where both could be applied consecutively.

The required legal opinion must address the following:

• the enforceability of the specific contractual provisions under the specific governing law;
• the validity of specific consents or waivers of legislative provisions under the foreign governing law, where these are required to give effect to the bail-in;
• the materiality and likely effect of any qualifications or limitations (eg, on policy grounds) on the enforceability of any bail-in action; and
• compliance with applicable disclosure requirements, to the extent that breaches might compromise the enforceability of the contractual recognition provisions under the instruments.

Creditor Compensation Framework

The 2015 Consultation Paper proposed to establish a creditor compensation framework that will grant creditors and shareholders a right to compensation where they do not receive under resolution at least what they would have received in a liquidation of the financial institution under the applicable insolvency regime.

The creditor compensation framework will apply when the MAS exercises its resolution powers in the Monetary Authority of Singapore Act that directly affect creditors’ or shareholders’ rights. The framework will not cover losses incurred by members or clients of central counterparties arising from actions taken by the central counterparties.

The framework will also apply where the MAS has recognised or supported resolution measures undertaken by a foreign resolution authority in a group-wide resolution in respect of a subsidiary or branch of a foreign financial institution operating in Singapore. It will however not apply where there is a separate arrangement to allow affected creditors or shareholders of the financial institution to claim creditor compensation under an arrangement in the jurisdiction of the foreign resolution authority.

To assess if any creditor or shareholder of the financial institution was made worse off under the resolution, the framework will allow for the Minister for Finance to appoint a valuer based on the following criteria:

• independence from both the MAS and any other relevant public authority, and the financial institution in resolution; and
• the capacity of the valuer, based on whether the valuer has relevant experience and expertise, knowledge of the insolvency framework and adequate technical and human resources to carry out the valuation, commensurate with the nature, size and complexity of the financial institution.

The creditor compensation framework will allow creditors and shareholders to appeal to the courts on their awarded compensation amount or non-award of compensation as decided by the valuer. This will allow for an appeal process which is independent of the MAS as the resolution authority.