TLAC and Bail-in

Transcription

TLAC and Bail-in

GesKR 2
2015
Benjamin Leisinger / Lee Saladino*
225
Extending the Capital Market Alphabet
and Legal Thoughts on an Implementation
by Swiss Issuers
Table of contents
I.Introduction
II. The Swiss Bank Resolution Regime – An Overview
1. Scope of Application
2. Initiation of Resolution Proceedings with Respect to Swiss
Banks
2.1 Criteria for Assessing the Point of N
on-Viability
2.2 Liquidation vs. Restructuring Proceedings
2.3 The Well-being of the Consolidated Group as an
Important Element
3. Restructuring Proceedings under the B
IO-FINMA
4. Bail-in as a Restructuring Tool
4.1 Scope of Bail-in
4.2 Respecting the Hierarchy of Claims
4.3 Bail-in as an Essential Tool in FINMA’s O
verall
Resolution Strategy
III. The FSB Proposal: Eligibility of Non-Regulatory Capital Debt
Instruments as External TLAC
1.Objective
2. Eligible Issuer
2.1 Resolution Entity
2.2 Swiss Withholding Tax Issues
2.3 Potential Issuance Structures
3.Unsecured
4. Minimum Maturity
5. Excluded Liabilities
6.Ranking
7. Waiver of Set off
8. Redemption Restrictions
9. Governing law
10.Triggers
IV. The Credit Suisse Notes
V. Concluding Remarks
I.Introduction
On 10 November 2014, the Financial Stability Board
(the «FSB») published a proposal (the «FSB Proposal»)
developed at the request of G-20 leaders to enhance the
loss-absorbing capacity of global systemically relevant
banks («G-SIBs») in resolution.1 The FSB Proposal recommends, among other things, requiring G-SIBs to meet
a minimum requirement for «total loss-absorbing capacity» or «TLAC», and includes specific criteria that liabilities must meet in order to be eligible to fulfill a G-SIB’s
TLAC requirement.
The FSB’s stated objective of the minimum TLAC requirement is «to ensure that G-SIBs have the loss-absorbing and recapitalization capacity necessary to help
ensure that, in and immediately following a resolution,
critical functions can be continued without taxpayers’
funds (public funds) or financial stability being put at
risk».2 In view of this, the FSB Proposal envisages a two
pillar approach, with a minimum TLAC requirement
applicable to all G-SIBs (the «Pillar 1 TLAC Requirement»), which would be set as a percentage of a G-SIB’s
consolidated risk-weighted assets and a multiple of the
capital required to meet its leverage ratio requirement,3
and an additional firm-specific TLAC requirement that
may be applicable to individual G-SIBs (the «Pillar 2
TLAC Requirement» and, together with the Pillar 1
TLAC Requirement, the «Minimum TLAC Requirement»),4 the amount of which would be determined by
taking into account the G-SIB’s recovery and resolution
plan, its systemic footprint, business model, risk profile
and organizational structure. Although the Minimum
TLAC Requirement could be in part satisfied by common equity tier 1 capital that is not already being used
to meet minimum regulatory capital requirements, the
FSB Proposal states that at least 33 % of the requirement would need to be satisfied by additional tier 1 and
tier 2 capital instruments in the form of debt plus other
TLAC-eligible liabilities that do not constitute regulatory capital. In addition, the FSB Proposal distinguishes
between «external» TLAC, which would consist of liabilities of the relevant G-SIB owed to persons outside
1
*
Dr. iur. Benjamin K. Leisinger, LL.M., associate with Homburger
AG Zurich. Lee H. Saladino, B.A., J.D., counsel with Homburger
AG in Zurich.
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TLAC and Bail-in
2
3
4
See FSB, Adequacy of loss-absorbing capacity of global systemically important banks in resolution, 10 November 2014, online
at: http://www.financialstabilityboard.org/wp-content/uploads/
TLAC-Condoc-6-Nov-2014-FINAL.pdf (12 April 2015).
See FSB (FN 1), Section 3, 13.
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of the G-SIB’s financial group and count towards the
G-SIB’s Minimum TLAC Requirement, and «internal»
TLAC, which would consist of liabilities of certain material subsidiaries of the relevant G-SIB owed to other
members of the G-SIB’s financial group. The consultation period for the FSB Proposal ended on 2 February
2015, and the FSB has indicated that it will submit a final version of the FSB Proposal to the G-20 by the 2015
Summit in November, with the TLAC requirement not
expected to become applicable before 1 January 2019.5
According to the most recently published list of G-SIBs
prepared by the FSB and the Basel Committee on Banking Supervision,6 the two largest Swiss banks, Credit Suisse AG and UBS AG, are categorized as G-SIBs and, as
a result, the FSB Proposal if and when implemented in
Switzerland would apply to both banks.
Furthermore, on 1 December 2014, shortly after the FSB
Proposal was published, a group of experts appointed
by the Swiss Federal Council to produce a set of recommendations on further development of Switzerland’s
financial market strategy released their final report (the
so-called «Brunetti Report»).7 The Brunetti Report explicitly recommended that Switzerland should implement a minimum TLAC requirement for its systemically
important financial institutions («SIFIs»), irrespective of
whether the FSB is able to agree on a standard for the
requirement.8 Following these recommendations, in its
recently adopted 18 February 2015 evaluation report on
Switzerland’s too-big-to-fail («TBTF») provisions,9 the
Swiss Federal Council indicated that it is considering
subjecting SIFIs in Switzerland10 (as opposed to only
Swiss G-SIBs) to a minimum TLAC requirement when
implementing the FSB Proposal on a national level.11
Application to all SIFIs in Switzerland would broad-
5
See FSB (FN 1), Section 19, 18. Also see Reto Schiltknecht/
Christopher McHale, Entwicklungen des regulatorischen Bankenkapitals, GesKR 2015, 8–27, 15.
6
See online at: http://www.financialstabilityboard.org/wp-content/
uploads/r_141106b.pdf (12 April 2015), the next update is planned
for November 2015.
7
See Expertengruppe zur Weiterentwicklung der Finanzmarktstrategie, Schlussbericht, 1 December 2014, online at: http://www.news.
admin.ch/NSBSubscriber/message/attachments/37585.pdf (12 April 2015).
8
See Expertengruppe zur Weiterentwicklung der Finanzmarktstrategie (FN 7), Recommendation no. 6, 48 f.
9
See Swiss Federal Council, Bericht des Bundesrates «Too big to
fail» (TBTF) – Evaluation gemäss Artikel 52 Bankengesetz und in
Beantwortung der Postulate 11.4185 und 14.3002, online at: http://
www.news.admin.ch/NSBSubscriber/message/attachments/38319.
pdf (12 April 2015).
10 At the time of this article, Credit Suisse, UBS, Zürcher Kantonal
bank and Raiffeisen have been designated as SIFIs by the Swiss
National Bank based on article 8 para. 3 of the Swiss Federal Act
on Banks and Savings Banks of 8 November 1934, as amended (the
«Banking Act»).
11 Swiss Federal Council (FN 9), 14. Cf. Schiltknecht/McHale
(FN 5), 15.
Benjamin Leisinger / Lee Saladino – TLAC and Bail-in
2015
en the impact of a potential TLAC requirement on the
Swiss banking sector.12
In view of the above, it is clear that Credit Suisse and
UBS and, potentially, any other SIFI in Switzerland will
eventually need to comply with a TLAC requirement
in whatever form it is implemented in Switzerland. Although Swiss banks have already developed structures
for, and have issued, debt instruments that qualify as additional tier 1 or tier 2 capital under Basel III, which we
expect they will be able to use to satisfy any applicable
TLAC requirement, it appears highly likely that they
will also need to develop and issue a new class of capital market debt instruments to fully comply with their
external TLAC requirements and to safeguard recapitalization exclusively in a gone concern.13 Accordingly,
the focus of this contribution is on how a Swiss G-SIB
(or other Swiss SIFI) could potentially structure this
new class of non-regulatory capital debt instruments to
both satisfy the FSB Proposal’s requirement for external
TLAC and comply with Swiss law. In particular, it takes
into account Credit Suisse’s inaugural series of senior
unsecured bonds that were issued on 26 March 2015,14
and designed to meet the external TLAC requirements of
the FSB Proposal.
II. The Swiss Bank Resolution Regime –
An Overview
To assist the reader in better understanding how the requirements of the FSB Proposal could be met by Swiss
G-SIBs, we start with an overview of Swiss restructuring
and liquidation proceedings applicable to Swiss banks.
The nature of the Swiss bank restructuring regime and
the statutory bail-in power that it grants FINMA are
essential to being able to develop a class of debt instruments that would both be external TLAC-eligible in
accordance with the requirements set forth in the FSB
Proposal and look more like a senior unsecured debt instrument than regulatory capital.15 Were the Swiss bank
12
Applying the TLAC requirement also to domestic systemically important financial institutions is not excluded by the FSB Proposal.
Cf. Schiltknecht/McHale (FN 5), 14 (fn. 41).
13 Because of their contractual triggers for write-down or conversion
into equity, additional tier 1 or tier 2 instruments would (or should)
bear losses already in a going concern or at the point of non viability (for an explanation of the point of non-viability, see at II. 2.1)
and, therefore, might no longer exist to contribute to a recapitalization in a gone concern scenario. For the distinction between going concern and gone concern loss absorbency, see Schiltknecht/
McHale (FN 5), 14. For the relevance to have gone concern loss
absorbing capacity, also see Hüpkes (FN 13), 491 ff.
14
See the senior bonds issued by Credit Suisse Group Funding (Guernsey) Ltd at: https://www.credit-suisse.com/pl/en/about-us/investorrelations/bondholders/info-bondholder.html (12 April 2015).
15Cf. René Bösch, Grossbankenregulierung: Status – Quo Vadis?,
in: Reutter/Werlen (eds.), Kapitalmarkttransaktionen VIII, Zurich 2014, 295. TLAC might even make the concept of the Swiss
low-trigger convertible or write-down instruments currently re-
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restructuring regime to be different (e.g. if FINMA had
no statutory bail-in power or if it provided for a different
hierarchy of creditors), it is unlikely that Swiss G-SIBs
would be able to satisfy the eligibility requirements for
external TLAC other than by issuing regulatory capital
instruments or issuing debt instruments that had substantially the same contractual features as regulatory
capital instruments that trigger their conversion into equity or write-down.
2015
qualified by the reality that FINMA’s powers over assets
located abroad are, as a practical matter, subject to recognition by the courts or authorities of the relevant host jurisdictions, an issue we will later focus on in more detail.
As used herein, bank restructuring proceedings and bank
liquidation proceedings as presently regulated in Section
11 (restructuring) and Section 12 (liquidation) of the
Banking Act are together referred to generally as «resolution proceedings» or the «resolution regime».
Due to the international nature of resolution proceedings with respect to internationally active Swiss banks,
the Banking Act requires FINMA to coordinate (to the
extent possible) any resolution proceedings that it may
open with any relevant foreign authorities and governing bodies.20 If it is in the interest of the troubled bank’s
creditors, FINMA is permitted to recognize the bankruptcy decrees and resolution measures of other countries21 with respect to such bank, irrespective of whether
such other countries reciprocate.22
1.
2.
Scope of Application
To date, only duly licensed Swiss banks, securities dealers and mortgage bond institutions and Swiss branches
of foreign banks and securities dealers are subject to the
Swiss resolution regime and the resolution powers of the
Swiss regulator, the Swiss Financial Market Supervisory
Authority FINMA («FINMA»). However, on 13 December 2013, the Swiss Federal Council launched a consultation for an amendment of the Banking Act, which
would extend the scope of the (bank) resolution regime
to Swiss-domiciled parent companies (Konzernobergesellschaften, i.e., non-bank top tier holding companies)
of financial groups or conglomerates. On 3 September
2014, the Swiss Federal Council submitted the proposal
to the Swiss Parliament by adopting the related dispatch.
If the proposed new article 2bis of the Banking Act is enacted,16 Credit Suisse Group AG and UBS Group AG,
the top tier (non-bank) holding companies of the two
Swiss G-SIBs, would become subject to the resolution
regime under the Banking Act, including the resolution
powers of FINMA.17
In line with the principle of universality governing Swiss
insolvency law,18 Swiss resolution proceedings principally apply to all assets held by the relevant regulated entity,
irrespective of whether such assets are located in Switzerland or abroad.19 However, this statement must be
16
17
18
19
quired for the progressive component set forth in article 130 of the
Swiss Federal Ordinance of 1 June 2012 on Capital Adequacy and
Risk Diversification for Banks and Securities Dealers («CAO») for
SIFIs unnecessary or be a substitute for them. See Schiltknecht/
McHale (FN 5), 15.
At the time of this article, this proposed new article has already
passed through the National Council without any changes thereto.
See the relevant draft article 2bis Banking Act in the annex to the
draft Federal Act on Financial Market Infrastructures and Market
Conduct in Securities and Derivatives Trading, online at: http://
www.news.admin.ch/NSBSubscriber/message/attachments/38013.
pdf (12 April 2015).
See article 197 para. 1 of the Swiss Debt Enforcement and Bankruptcy Act («DEBA»).
Article 25 para. 4 Banking Act and article 3 BIO-FINMA.
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Initiation of Resolution Proceedings with
Respect to Swiss Banks
2.1 Criteria for Assessing the Point of
N on-Viability
Under article 25 of the Banking Act and the Ordinance
of the Swiss Financial Market Supervisory Authority
on the Insolvency of Banks and Securities Dealers of 1
November 2012 («BIO-FINMA»), FINMA may take
protective measures, open restructuring proceedings, or
liquidate a bank if there is justified concern that the bank
is over-indebted, has serious liquidity problems or no
longer fulfills applicable capital adequacy requirements
after the expiry of a deadline set by F
INMA.23
However, in the authors’ view, there are many reasons
why FINMA should still wait to open resolution proceedings (i.e., restructuring or liquidation proceedings)24
with respect to a bank until there is the threat of imminent insolvency (i.e., if the bank is not yet insolvent, but
insolvency can reasonably be expected to occur imminently and the bank is no longer or will likely no longer
be in a position to avoid insolvency by its own efforts in a
sustainable way), not the least of which is the principle of
20
Article 37f Banking Act and article 9 BIO-FINMA.
Other jurisdictions have also introduced new legislation to give
their resolution authorities bail-in power, e.g., the European Union
has done so by implementing the Bank Recovery and Resolution
Directive. Cf. Rupert Schaefer/Esther Widmer, Aktuelle Entwicklungen in der EU-Finanzmarktregulierung, in: Epiney/Diezig
(eds.), Schweizerisches Jahrbuch für Europarecht/Annuaire suisse
de droit européen 2013/2014, , Zurich 2014, 427–444, 439; Fabio
Andrea Andreotti, «Die heilige Kuh soll geschlachtet werden» –
zum bankenrechtlichen bail-in von Kundeneinlagen – Analyse des
neuen Paradigmas im Bankensanierungsrecht, in: Fahrländer/Heizmann (eds.), Europäisierung der schweizerischem Rechtsordnung,
Analysen und Perspektiven von Assistierenden des Rechtswissenschaftlichen Instituts der Universität Zürich, Dike Verlag AG 2013,
443–478, 452 f.
22 Article 37g Banking Act and article 10 BIO-FINMA. Cf. Urs Zulauf et al., Finanzmarktenforcement Verfahren zur Durchsetzung
des Schweizer Finanzmarktrechts, 2nd ed., Bern 2014, 370 f.
23 Article 25 Banking Act.
24 Cf. article 28 Banking Act and article 33 Banking Act.
21
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proportionality.25 This state of the bank that we believe
should be a condition to the opening of resolution proceedings is referred to as the «Point of Non-Viability»
(«PONV»).26 In addition, article 63 para. 2 of the revised
Swiss Federal Ordinance of 30 April 2014 on Banks and
Savings Banks, as amended (the «Banking Ordinance»),
empowers FINMA to open resolution proceedings if
FINMA has a justified concern that the bank no longer
fulfils applicable capital adequacy requirements after the
bank’s capital constituting low-triggering convertible or
write-down bonds (i.e., bonds that convert into equity
or write-down at the latest when the bank’s ratio of common equity tier 1 to risk-weighted assets falls below 5 %)
convert or write-down, as applicable, in accordance with
their terms. It is implicit that such a conversion or writedown event with respect to a bank’s low-triggering convertible or write-down bonds would constitute an objective indicator that the bank may have reached the PONV.
There is, however, no such automatism in the law.27
FINMA has substantial discretion in deciding whether
the requirements for initiating resolution proceedings
have been met and whether it must intervene in order
to protect the bank’s creditors and financial stability.28
The basis of FINMA’s assessment can be information
provided by the bank itself, the bank’s auditor and/or
other sources, such as foreign regulators or investigating
agents.29
2.2 Liquidation vs. Restructuring Proceedings
Notwithstanding the foregoing, FINMA may only initiate restructuring proceedings rather than liquidation
proceedings if (i) restructuring proceedings are likely to
result in the recovery of, or the continued provision of
individual banking services by, the relevant bank and (ii)
the creditors of the relevant bank are likely to fare better
in restructuring proceedings than in liquidation proceedings (the «no creditor worse-off test» or «NCWO»).30
25
26
27
28
29
30
See also BSK BankG-Bauer, Art. 28 N 7; BSK BankG-Haas/Bauer, Art. 25 N 6; BSK BankG-Hess, Art. 26 N 32; Hans Kuhn, Der
gesetzliche Bail-in als Instrument zur Abwicklung von Banken
nach schweizerischem Recht, GesKR 2014, 443–462, 449; decision
of the Swiss Supreme Court of 29 June 2011, 2C_898/2010, consideration 3 (regarding proportionality in financial market supervision).
Cf. FINMA position paper on Resolution of G-SIBs, 9, online at:
http://www.finma.ch/e/finma/publikationen/Documents/possanierung-abwicklung-20130807-e.pdf (12 April 2015); Kuhn
(FN 25), 449.
Cf. FINMA (FN 26), 9 at 6.3.
See BSK BankG-Haas/Bauer, Art. 25 N 3, N 20; Zulauf (FN 22),
345; François Rayroux/Christelle Conti, New Ordinance of
FINMA on the Insolvency of Banks, CapLaw-2012–31; Swiss Supreme Court, decision of 14 April 2011, 2C_565/2010, consideration 4.1.
See BSK BankG-Haas/Bauer, Art. 25 N 30.
Articles 28 in connection with 33 para. 1 of the Banking Act. Also
see FINMA (FN 26), 9 f. at 6.4.; Bösch (FN 15), 281 f.
2015
2.3 The Well-being of the Consolidated Group as
an Important Element
When exercising its discretion with respect to its assessment of whether the requirements for resolution
proceedings in general and restructuring proceedings in
particular are met, FINMA must primarily focus on the
individual bank, including its branches. Nevertheless, if
a Swiss bank is part of a large financial group, FINMA
must also take into account crucial group aspects, such as
the risk of intra-group contagion and whether there is a
need to assist other group members. One of the reasons
FINMA must do this can be found in Art. 3c para. 1 lit. c
of the Banking Act, which states that one of the defining
features of a financial group is that its members are or
may be legally obligated and/or «factually» forced to assist other members of the group in certain circumstances
(the so-called «faktischer Beistandszwang» or «faktische
Beistandspflicht»). According to article 12 of the Banking Ordinance, a personal or financial interconnection
(such as via a central treasury concept), the common use
of a particular brand or acting in the market as a single
company are all factors that may contribute to establishing the duty of financial group companies to assist one
another, irrespective of whether the assisting financial
group company holds the majority of voting rights of the
troubled group company or controls it in another way.31
3.
Restructuring Proceedings under the
B IO-FINMA
Instead of prescribing a particular restructuring concept,
the Banking Act and BIO-FINMA provide for various
resolution tools from which FINMA, in its discretion,32
may choose in any given case.
Once FINMA has made the determination that restructuring proceedings should be opened, those proceedings
are subject to the following main requirements and may
feature the following aspects:
• Restructuring proceedings may only be opened if the
«no creditor worse-off test» is satisfied.33
• If FINMA opens restructuring proceedings with respect to any bank, it has discretion to take decisive action, including, among other things: (i) transferring the
bank’s assets or a portion thereof (including any claims
it may hold), together with some or all of its debt and
31
It is worth noting that the reasoning underlying the Swiss Supreme
Court’s decision DFC 116 Ib 331 that triggered the inclusion of
article 3c para. 1 lit. c in the Banking Act (i.e., the provision that
mentions this duty to assist exists) suggests that this duty to assist
would only apply to a parent entity’s assistance of a subsidiary or to
a group entity’s assistance of a sister company in the same financial
group.
32See Andreotti (FN 21), 469.
33 Article 40 para. 1 lit. a BIO-FINMA. This is a general principle that
does not only apply in the case of a conversion into equity and/or
write-down. Cf. Kuhn (FN 25), 448; Andreotti (FN 21), 465.
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other liabilities and contracts, to another entity;34 (ii)
in the case of such a transfer of assets and liabilities,
staying (for a maximum of 48 hours – see below for
more information) the termination of, and the exercise
of a counterparty’s rights to terminate relating to, financial35 contracts to which the bank is a party;36 (iii)
converting the bank’s debt into equity of the bank (a
«debt-to-equity swap»);37 and/or (iv) partially or fully writing-down (certain of) the bank’s obligations (a
«haircut»).38 For a more detailed description of the
measures under (iii) and (iv), see at II. 4. below.
• The core element and basis of any restructuring is the
restructuring plan. The restructuring plan must set out
how the restructuring will work, which measures shall
be implemented, what the bank’s future capital structure will look like and what the bank’s future business
model will be. FINMA may only approve a restructuring plan if essential safeguards are met: (i) it must be
likely that creditors of the bank will be better off under the terms of the plan than in liquidation (NCWO),
(ii) the interests of the bank’s creditors must take precedence over the interest of its equity holders, (iii) the
bank’s assets must have been valued with caution, and
(iv) the legal and economic connections between certain of the bank’s assets, liabilities and contractual relationships must be preserved.39 Once it has approved
the restructuring plan, FINMA is required to publish
notice of its approval and a description of the basic features of the restructuring plan.40
• In the case of SIFIs, FINMA’s approval of the restructuring plan is final; in all other cases, the relevant
bank’s creditors have the right to vote on and reject
the plan.41 Swiss courts may still also play a role insofar as the bank’s creditors may challenge FINMA’s
restructuring decisions in court. If the court were to
find that any principles of the Swiss restructuring law
have not been met, it could require the relevant creditors to be compensated ex post.42 However, any such
challenge would not suspend, or result in the suspension of, the implementation of the restructuring plan.
• The so-called «capital measures» (Kapitalmassnahmen) that may be contained in the restructuring
34
35
36
37
38
39
40
41
42
Article 30 para. 2 Banking Act.
In the current draft of the proposed amendment of the Banking Act,
the limitation on this power that allows it only to be used in the case
of «financial» contracts (rather than contracts generally) has been
eliminated. See the dispatch to the draft Financial Market Infrastructure Act, BBl 2014 7483 ff., 7605.
Article 56 ff. BIO-FINMA.
Article 31 para. 3 Banking Act.
Article 50 BIO-FINMA.
Article 31 Banking Act.
Article 45 para. 2 BIO-FINMA.
Article 31a para. 3 Banking Act. Cf. Kuhn (FN 25), 455.
Article 24 para. 4 Banking Act. For a discussion on the question of
who would have to compensate the creditors, see Kuhn (FN 25),
460, BSK BankG-Poledna/Jermini, Art. 24 N 16, and Andreotti
(FN 21), 471.
2015
plan43 are a core feature of any bank’s restructuring.
Any measures seeking to recapitalize a bank must
give the interests of the bank’s creditors precedence
over those of its equity holders, while also generating a sufficient amount of new capital for the bank so
that, following restructuring, the bank meets applicable capital adequacy requirements.44
• The BIO-FINMA permits the continuation of certain banking services by a troubled bank even if a
restructuring of the bank is not feasible.45 In such a
case, the BIO-FINMA requires the bank to transfer
the relevant services and related assets to a new entity
or pre-established independent bridge bank. Which
banking services are to be transferred, what corporate
actions are to be taken, and how the assets are to be
shared between the bank and the new legal entity (or
a pre-established independent bridge bank) must be
determined by FINMA and set forth in the restructuring plan. The restructuring plan must also ensure
that a bank’s normal business operations can be continued after restructuring.46
• Because some time may be necessary to enable the
transfer of assets, liabilities, contracts or services
from a bank in restructuring proceedings to a new
legal entity or a pre-established independent bridge
bank, the BIO-FINMA permits FINMA to stay the
termination of any financial47 contracts to which the
bank in restructuring is a party for a maximum of 48
hours.48 However, once the stay has expired, counterparties may make use of any contractual (termination) rights that they may have.
4.
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Bail-in as a Restructuring Tool
The BIO-FINMA explicitly provides FINMA with the
power to order a debt-to-equity swap49 and/or50 a haircut – generally referred to as a «bail-in»51 – in order to
re-capitalize a bank (i.e., its balance sheet) in restructur-
43
Article 47–50 BIO-FINMA.
FINMA (FN 26), 10.
45 Article 51 and 52 BIO-FINMA.
46 See article 48 para. 1 lit. a BIO-FINMA.
47 In the current draft of the proposed amendment of the Banking Act,
the limitation on this power that allows it only to be used in the case
of «financial» contracts (rather than contracts generally) has been
eliminated. See the dispatch to the draft Financial Market Infrastructure Act, BBl 2014 7483 ff., 7605.
48 See article 56 and 57 BIO-FINMA.
49 The conversion into equity is done based on the Banking Act and
does not require sufficient authorized, contingent, conversion or
reserve capital to be available for such purpose. Cf. Schiltknecht
(FN 49), 80; Kuhn (FN 25), 454.
50 A conversion into equity and a write-down may be ordered alternatively or cumulatively. Cf. Seraina Grünewald/Rolf H. Weber,
Bail-in: Zaubertrank oder Pandorabüchse der Bankensanierung,
SZW 2013, 554–562, 556.
51See Kuhn (FN 25), 444. For the sub-categories existing for bail-in
generally, i.e., statutory bail-in and contractual bail-in, see Bösch
(FN 15), 279.
44
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ing proceedings.52 Any such bail-in would be part of, and
based on, the restructuring plan prepared by FINMA,
or a restructuring agent appointed by FINMA. As explained above, the restructuring plan must specify all relevant elements of the restructuring, including the bank’s
future capital structure and business model. Moreover,
the plan must explain how the Swiss statutory requirements applicable to the restructuring plan, including the
«no creditor worse-off test», are met.53
The purpose of the restructuring plan (and any
FINMA-ordered bail-in included in such plan) is to provide the basis for the full recovery of the bank or, at a
minimum, for the continuation of (certain) banking services.54
4.1 Scope of Bail-in
Swiss law only permits a bail-in to be exercised with respect to the liabilities of the relevant entity in restructuring proceedings.55 Besides the fact that the Banking Act
and BIO-FINMA only speak of «liabilities» and «debt»,
respectively, a conversion into equity and/or write-down
of the contingent liabilities of an entity in restructuring
proceedings would not contribute to the recapitalization
of its balance sheet.56 This is because contingent liabilities are «off-balance sheet» and only appear in the notes
to statutory financial accounts of a Swiss entity prepared
in accordance with Swiss law.57
Generally, all (non-contingent) liabilities of an entity in
restructuring proceedings may be bailed-in.58 Notwithstanding this general rule, certain liabilities are explicitly
excluded as a matter of law:59 First, privileged claims that
are categorized as «class 1» or «class 2» claims pursuant to article 219 para 4 DEBA60 and privileged deposits within the meaning of article 37a paras. 1–5 Banking
Act are excluded from bail-in to the extent that they are
classified as preferential; second, secured claims61 up to
the value of the collateral by which they are secured and
offsettable claims to the extent that they are offsettable
are excluded from bail-in, in either case if the creditor
can credibly demonstrate the existence and amount of
the claim and that the claim is so secured or offsettable,
respectively, or this is evident from the bank’s books.
52
For more information on bail-in, see Grünewald/Weber (FN 50),
554–562; Kuhn (FN 25).
53 Article 31 Banking Act.
54 Article 48 para. 1 lit. a BIO-FINMA. See also Bösch (FN 15), 285.
55 Article 31 para. 3 Banking Act and article 49 para. 1 BIO-FINMA.
Also see Kuhn (FN 25), 451.
56Cf. Kuhn (FN 25), 451.
57 Article 959c para. 2 No. 10 of the Swiss Code of Obligations.
58 Article 49 para. 1 BIO-FINMA. Cf. Kuhn (FN 25), 451.
59 Article 49 para. 1 lit. a and lit. b BIO-FINMA.
60 Such privileged claims include certain claims of employees, claims
related to accident insurance, claims relating to pension plans, and
claims of pension funds for premiums against employers.
61 Such secured claims include covered bonds. See Bösch (FN 15),
287.
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4.2 Respecting the Hierarchy of Claims
When exercising a bail-in, the BIO-FINMA commands
FINMA to respect the hierarchy of creditors as determined in accordance with the principles of Swiss insolvency law.62 This means that the troubled bank’s outstanding equity capital must be fully written-down and
the regulatory capital instruments that the bank issued
(i.e., additional tier 1 or tier 2 capital) must be completely
converted into equity and/or written-down, as applicable, pursuant to their terms (all Swiss Basel III-compliant
regulatory capital instruments must contain a contractual PONV clause), before the bank’s other debt may be
bailed-in. Only after such conversion or write-down has
occurred, may all (other) subordinated debt of the bank
be converted into equity or written-down, followed by
its unsubordinated liabilities and, if necessary thereafter,
by deposits.
4.3 Bail-in as an Essential Tool in FINMA’s
O verall Resolution Strategy
In its position paper on resolution of global systemically important banks of 7 August 2013, FINMA declared
that its preferred resolution strategy for global systemically important financial groups consists of central resolution proceedings led by the bank’s «home» supervisory
and resolution authorities and focuses on the top-level
group company.63 Due to the non-bank holding company structure of the two Swiss G-SIBs, this so-called
«single-point-of-entry» («SPoE») resolution strategy64 would ensure that creditors of the top-level holding company bear the losses (rather than those of the
G-SIB), and allows the entire financial group to be recapitalized top-down. This is intended to «buy time» to
financially restructure the affected G-SIB, including all
of its branches, without affecting its operating liabilities,
so that it (and its branches and subsidiaries) can return to
viability, ideally without interruption and without formal restructuring proceedings being opened with respect
to the G-SIB itself.
A SPoE resolution strategy is in line with the Banking
Act’s notion of the duty of each company within a financial group to support other group companies (see above
at II. 2.3). If a bank’s subsidiary or one of its branches
in a host country faces substantial losses, FINMA must
have the opportunity to intervene early on by opening
restructuring proceedings with respect to the top-tier
holding company and ordering a bail-in if there is justified concern that in the near future such losses could
impact the G-SIB and, ultimately, the top-level hold-
62
Article 31 para. 1 lit. c Banking Act and article 48 BIO-FINMA.
FINMA (FN 26).
64 For more information on SPoE, see René Bösch, FINMA favours Single Point of Entry Bail-in as Optimal Resolution Strategy,
CapLaw-2014-4.
63
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ing company.65 Rather than waiting until the losses are
passed on «up the chain» to the top-level holding company, FINMA could intervene and require or execute a
top-down recapitalization in order to avoid further contagion within the financial group.
struments and how certain requirements can be reconciled (or not) with Swiss law.72
In its position paper on resolution of global systemically important banks, FINMA stated that it believes that a
SPoE resolution strategy is in line with the bail-in concept outlined in the joint paper66 published in 2012 on
this topic by the Federal Deposit Insurance Corporation
(FDIC) and the Bank of England.67 An important aspect
of a SPoE resolution strategy is that, while shareholders
and creditors of the top-level holding company of the
financial group (which are typically long-term creditors
of financing liabilities rather than short-term creditors of
operating liabilities) bear losses, the financial group (and
each bank within it) is able to continue its business operations uninterrupted.68 During a restructuring, a bank
and its branches should ideally be able to operate in a
«business-as-usual» mode, thereby taking away the incentive to «run» from depositors and other short-term
creditors and restoring market and creditor confidence.69
FINMA also believes that a SPoE resolution strategy
is the best solution for the current group structure and
business model of Switzerland’s two global systemically important financial groups.70 These financial groups
operate with a central treasury concept, i.e., the primary
bank in the group covers almost the entire internal financing needs of each group. Consequently, stabilizing
the primary bank would allow for stabilization of the
whole group.71
The FSB’s stated objective of the (external) Minimum
TLAC Requirement is to ensure that G-SIBs «have the
loss absorbing and recapitalization capacity necessary to
help ensure that, in and immediately following a resolution, critical functions can be continued without taxpayer’s funds (public funds) or financial stability being
put at risk».73 In the authors’ view, as the FSB Proposal
is a relatively short document that is at times limited in
certain details and tries to address both a multi-point-ofentry74 resolution strategy and a SPoE resolution strategy,75 keeping this objective in mind is essential when
interpreting the various requirements and parameters
applicable to external TLAC set out therein.
III. The FSB Proposal: Eligibility of NonRegulatory Capital Debt Instruments
as External TLAC
After introducing the reader to the Swiss bank restructuring framework and its bail-in tool, we now turn to the
more specific details in the FSB Proposal on the Minimum TLAC Requirement, with a particular focus on
how this requirement might be fulfilled by Swiss G-SIBs
through the issuance of non-regulatory capital debt in-
2.
66
67
68
69
70
71
Eligible Issuer
2.1 Resolution Entity
The FSB Proposal requires external TLAC to be issued
and maintained by «resolution entities».76 Although the
FSB does not include a precise definition for «resolution
entity», it does indicate that identification of the resolution entity or entities within a G-SIB’s group structure is dependent upon the preferred resolution strategy
of the home regulator (as agreed with the relevant host
regulators in the applicable G-SIB’s Crisis Management
Group («CMG»), if need be).77 It specifically notes that,
as a result, resolution entities may be the top-tier parent
or holding company, intermediate holding companies or
subsidiary operating companies.
In the case of Switzerland, FINMA has declared that it
prefers a SPoE resolution strategy for Swiss G-SIBs (see
72
74
For the desirability of such an approach that takes forward-looking factors into account and allows for pro-active action, see Henry Peter/Illias Pnevmonidis, Triggering events for recovery and
resolution plans: towards better financial crisis management, SZW
2013, 536–553, 547.
Federal Deposit Insurance Corporation and the Bank of England,
resolving globally active, systemically important, financial institutions, 10 December 2012.
FINMA (FN 26), 6.
FINMA (FN 26), 6.
FINMA (FN 26), 10.
FINMA (FN 26), 7.
FINMA (FN 26), 7.
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1.Objective
73
65
231
75
76
77
Readers interested in a detailed discussion of all features of the FSB
Proposal should consult the Institute of International Finance’s
and the Global Financial Markets Association’s «IIF-GFMS Joints
Comments» to the FSB Proposal, available online at: https://www.
iif.com/publication/regulatory-comment-letter/iif-gfma-joint-response-tlac-consultation (12 April 2015).
FSB (FN 1), 13.
In a multi-point-of-entry resolution strategy, several entities within a G-SIB’s group would be subject to resolution and, potentially,
a bail-in (which strategy, depending on the global presence of the
G-SIB, might be carried out in multiple jurisdictions through the
efforts of multiple resolution authorities), while in a single-pointof-entry resolution strategy, resolution and any bail-in would
be led centrally by the home supervisory and resolution authority, focusing on the top-level group company. See Bösch (FN 50);
FINMA, FINMA position paper on Resolution of G-SIBs, 9, online at: http://www.finma.ch/e/finma/publikationen/Documents/
pos-sanierung-abwicklung-20130807-e.pdf (12 April 2015); Hüpkes (FN 13), 490.
Cf. FSB (FN 1), 7.
FSB (FN 1), 15.
FSB (FN 1), 7.
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above at II.4.3.). Accordingly, for purposes of the FSB
Proposal, we would expect the resolution entities for
Swiss G-SIBs to be limited to the top-tier Swiss parent or Swiss holding company within the G-SIB group
structure.78 As will be discussed in more detail below
(see III. 10.), in the case of instruments issued by a Swiss
resolution entity that do not qualify as regulatory capital, FINMA’s statutory ability to convert into equity
and/or write-down the entity’s liabilities thereunder in
restructuring proceedings is essential to ensuring the instrument’s eligibility as external TLAC. Although the
top-tier (non-bank) holding companies of the two Swiss
G-SIBs are not yet subject to the Swiss bank resolution
regime and, consequently, FINMA may not at this time
open restructuring proceedings with respect to either
entity and bail-in its liabilities, it is expected that they
will become subject to the regime towards the end of this
year or in the beginning of 2016 (see above at II.1.) and,
in any event, prior to such time as a TLAC requirement
is implemented in Switzerland or the conformance period mentioned in the FSB Proposal79 has ended. Consequently, we believe that any instrument issued to satisfy
a Swiss G-SIB’s (external) Minimum TLAC Requirement should be structured with a focus on the G-SIB’s
top-tier Swiss parent, which, ideally, would be a nonbank holding company.
2.2 Swiss Withholding Tax Issues
In addition to taking FINMA’s preferred SPoE resolution strategy into consideration when determining the
resolution entity that will issue external TLAC, the peculiarities of current Swiss tax laws will also play a role
in the case of external TLAC debt instruments that do
not qualify as regulatory capital exempted80 from Swiss
withholding tax.81 Although legally permissible, it is not
currently commercially feasible for Swiss issuers to directly issue capital markets debt instruments that do not
qualify as exempted regulatory capital to investors outside of Switzerland. Pursuant to current Swiss tax laws82,
any Swiss issuer of a «bond» (Anleihensobligation), a
«debenture» (Kassenobligation) or a «deposit» (Kundenguthaben) must deduct a Swiss withholding tax of 35 %
on interest payments made thereunder for payment to
the Swiss Federal Tax Administration. While the relevant
bondholder or creditor may reclaim the Swiss withhold-
Schiltknecht/McHale (FN 5), 15 (fn. 47); Grünewald/Weber (FN 50), 559.
79 The Proposal of the FSB mentions 1 January 2019 as a possible date.
Cf. FSB (FN 1), 9.
80 See article 5 para. 1 lit. g of the Swiss Withholding Tax Act.
81Cf. Schiltknecht/McHale (FN 5), 16.
82 There is a proposal by the Swiss government of 17 December 2014
to replace the current withholding tax on interest payments by a
new paying agent tax system. For an overview of this proposal, see
Stefan Oesterhelt, Withholding Tax on Interest to be Replaced
by Paying Agent Tax System, CapLaw-2015-5. Also see Schiltknecht/McHale (FN 5), 16.
ing tax from the Swiss Federal Tax Administration under
Swiss tax law, if it is a Swiss resident person, or pursuant
to a double taxation treaty, if it is resident in a jurisdiction with which Switzerland has entered into a double
taxation treaty,83 the fact that action is required on the
part of the bondholder or creditor to reclaim this not insignificant tax (and the consequent administrative burden that accompanies it) makes the placement of these
types of instruments in international capital markets
deals a difficult (if not impossible) task.84 It is for this
reason that the well-known «indirect» issuance structure
has been developed in Switzerland for (non-regulatory
capital) debt instruments that would otherwise be issued
directly by a Swiss entity if it were not for the tax withholding issue described above. More specifically, these
(non-regulatory capital) debt instruments are typically
issued by a non-Swiss special purpose vehicle («SPV»)
that is a member of the group to which the Swiss entity belongs, with a guarantee of the SPV’s obligations
thereunder for the benefit of the investors issued by the
Swiss entity.85 An additional requirement of this structure is that the use of proceeds from the sale of the instruments must be received by the non-Swiss issuer outside of Switzerland and, for the life of the instruments,
used outside of Switzerland. Given the expected size of
the external TLAC requirement86 and proposed limitations on eligible investors87, Swiss G-SIBs will need to
access the international capital markets in order to fulfill their external TLAC requirement. Consequently, so
long as the current Swiss tax regime remains in effect,88
an alternative structure for non-regulatory capital debt
instruments that addresses both the Swiss withholding
tax issue and the FSB Proposal requirement that external
TLAC be issued and maintained by the resolution entity
must be developed.
83
84
85
78Cf.
86
87
88
Oesterhelt (FN 82).
See the Swiss Federal Council’s dispatch regarding the exception
of certain contingent convertible bonds or write-down bonds from
the Swiss withholding tax regime, BBl 2011 6615 ff., 6617, acknowledging this fact.
For the sake of completeness: A direct issuance by an eligible nonSwiss banking branch of a Swiss bank would also work for Swiss
withholding tax purposes as long as the use of proceeds are not used
in Switzerland. However, such a structure in the context of external TLAC eligibility would require (1) opening restructuring proceedings with respect to the Swiss bank itself, which could trigger
ring-fencing by foreign regulators in a worst case and potentially
lead to the liquidation of the assets located in such jurisdiction and
would not be in line with FINMA’s SPoE resolution strategy, and
(2) the instrument would have to be contractually subordinated to
all of the Swiss bank’s (i.e., the issuer’s) operating liabilities.
The FSB has proposed that the Pillar 1 TLAC Requirement be set
a percentage between 16 % and 20 % of the relevant G-SIB’s consolidated risk-weighted assets, as well as a multiple of the capital
required for the G-SIB’s leverage ratio requirement. See FSB’s Proposal on page 6.
For the proposed change to the paying agency system and a limited
exemption of TLAC instruments from Swiss withholding tax, see
online at: http://www.news.admin.ch/NSBSubscriber/message/attachments/37777.pdf (12 April 2015).
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2.3 Potential Issuance Structures
We are of the view that a (non-regulatory capital) debt
instrument issued by a direct or indirect subsidiary of the
Swiss resolution entity should still be eligible external
TLAC, so long as the Swiss resolution entity automatically (either by operation of contract or law) becomes
the primary obligor under the instrument (or otherwise obligated for the entire aggregate principal amount
thereof and any other amounts due thereunder) no later than the time at which restructuring proceedings are
opened with respect to the resolution entity. This would
ensure that, despite being issued by another entity, the
debt instrument could still be converted into equity and/
or written down as part of any restructuring proceedings
opened with respect to the Swiss resolution entity and
contribute to the Swiss resolution entity’s recapitalization, which effect would be in line with the FSB’s stated
objective of the Minimum TLAC Requirement. We see
two ways in which this desired effect could be achieved
by contract for Swiss G-SIBs, each of which would have
a slightly different impact on the nature of any bail-in of
the instruments by FINMA during the Swiss resolution
entity’s restructuring proceedings.
First Option: Guarantee with no Automatic
Substitution Feature
The first option would be to employ the standard Swiss
market solution of issuing the debt instruments out of a
non-Swiss SPV that is a member of the Swiss resolution
entity’s group, with a guarantee of the SPV’s obligations
thereunder issued by the resolution entity for the benefit
of investors.
However, as discussed above, a guarantee in and of itself would not qualify as a liability eligible for bail-in in
restructuring proceedings until such time as the obligation to make a payment thereunder has been triggered
in accordance with its terms (and even then, only up to
the amount of such payment obligation) (see above at
II.4.1.). Consequently, in order for this structure to satisfy the stated objective of the FSB, the opening of restructuring proceedings by FINMA with respect to the Swiss
resolution entity would need to trigger an immediate
event of default under the terms of the debt instrument
resulting in automatic acceleration, so that the entire aggregate principal amount of, plus any accrued unpaid interest on, the debt instrument would be immediately due
and payable. In that scenario, working on the assumption that the SPV would not have the funds to make such
payment when due and that no step other than non-payment by the issuer is required under the terms of the
guarantee, the obligations of the Swiss resolution entity
under the guarantee would be activated in full and, during the course of the restructuring proceedings, FINMA
would be in a position to bail-in the guarantor’s liabilities under the guarantee up to the entire aggregate prin-
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cipal amount of the debt instrument (as well as any other
amounts due thereunder). It is also worth considering
whether it would be desirable to avoid the situation in
which the entire aggregate principal amount of the debt
instrument has been accelerated and become due and
payable, the guarantee has been activated and the entire
amount due thereunder has been bailed-in by FINMA,
but the investors in the debt instrument continue to have
a claim against the SPV for the entire amount so bailedin. Not only would the claims of the external creditors
against the SPV still show up in the consolidated balance
sheet of the financial group to which the G-SIB belongs,
but, in the case of a bankruptcy of the SPV, the applicable bankruptcy court might find that the Swiss G-SIB or
the Swiss resolution entity still owes some kind of obligation to the SPV and, notwithstanding FINMA’s SPoE
strategy, FINMA might be forced to open restructuring
proceedings with respect to the Swiss G-SIB itself after
it closed the restructuring proceedings with respect to its
top-tier holding company. This potential scenario should
be excluded and the terms of the debt instrument would
have to include a limited recourse provision with respect
to claims against the SPV that would become applicable
once the guarantor is subject to restructuring or liquidation proceedings. Such a provision would limit the
amount payable by the SPV under the debt instrument
in such a case to the amount that would be paid out of
the assets of the guarantor had the debt instruments and
any other obligations ranking pari passu with the debt
instruments been obligations of the guarantor ranking
pari passu with direct, unsecured and senior obligations
of the guarantor. This feature, which relies on hypothetical liquidation proceedings of the Swiss guarantor,
was commonly seen in the terms of regulatory capital
instruments of Swiss banking groups before the current
exemption for certain regulatory capital instruments
from Swiss withholding tax came into effect and eliminated the need to use this «indirect» issuance structure
for these instruments.
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Second Option: Automatic Issuer Substitution Feature
A second option would be to include an automatic issuer
substitution feature in the terms of the debt instrument
pursuant to which the Swiss resolution entity would
be automatically substituted for the non-Swiss issuer
as principal debtor under the debt instrument upon the
opening of restructuring proceedings with respect to the
Swiss resolution entity. As with the first option described
above, this structure ensures that the relevant liabilities
(in this case, the debt instruments themselves, rather than
the claims under the guarantee) may be bailed-in during restructuring proceedings with respect to the Swiss
resolution entity. However, this structure has a further
advantageous effect when compared to the first option
in that it avoids the situation in which claims under the
instrument would remain outstanding against the non-
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234
Swiss issuer during (and even after) the restructuring
proceedings (see also the discussion regarding limiting
holder recourse above). Any such claims could lead to
the bankruptcy of the non-Swiss issuer and, consequently, the involvement of yet another (foreign) authority
that could potentially interfere with or file any claims
against the Swiss G-SIB or the Swiss resolution entity.
This structure would be novel for Swiss companies and,
consequently, we briefly address the Swiss legal foundation and elements of the structure that would be needed
to comply with Swiss law below.
Whether inclusion of an issuer substitution feature in the
terms of a particular debt instrument is legally permissible (particularly in the case of an automatic issuer substitution) is primarily a question of the law governing the
terms of the instrument. However, in the case of a Swiss
entity being substituted for a non-Swiss issuer, certain
elements of Swiss law are still implicated irrespective of
whether the instrument is governed by Swiss law or not.
Below we address what would apply if the debt instruments in question were to be governed by Swiss substantial law.
Under Swiss law, as a general rule, a party to a contract
may transfer the entirety of its rights and obligations
under such contract (Parteistellung) to a third person
or other legal entity by means of contractual arrangements among the transferor, the transferee and all counterparties to the contract.89 This is even permissible for
contracts that require the performance of a continuing
obligation (Dauerschuldverhältnis) by the transferring
party.90 Notwithstanding the foregoing, any transfer of
a Swiss law-governed contract would be subject to any
limitations on transfer set forth in Swiss law that would
apply to the relevant contract, as well as any limitations
set forth in the contract itself.91 The nature of the obligation of the transferring party under the contract may
also limit its transferability: Some legal scholars believe
that the transfer of a contract is not permissible if the
transfer in and of itself results not only in a mere change
in the identity of the person or other legal entity that is
the relevant party to the contract (e.g., a change in the
identity of the debtor), but also results in a change in the
substance of the contract92. For example, this would be
the case if the borrower under a loan agreement were to
transfer its rights and obligations under the loan agreement to another party and that other party were to have
89
Christoph Bauer, Parteiwechsel im Vertrag: Vertragsübertragung
und Vertragsübergang – unter besonderer Berücksichtigung des
allgemeinen Vertragsrechts und des Fusionsgesetzes, Diss., Zurich
2010, 75, with further references; BSK OR I-Tschäni, Art. 175 N 2.
90 Olivier Favre, Le transfert conventionnel de contract, Zurich
2005, N 1240.
91 Bauer (FN 89), 87 ff.
92E.g Erica Mergner-Dal Vesco, Die Übertragung des Vertrages
unter besonderer Berücksichtigung des Sozialschutzes im Arbeitsund Mietvertragsrecht, 73 ff.
2015
a much lower credit rating than that of the transferring borrower. However, the legal community’s view is
that this prohibition on transfer would not apply (if it
even applies at all in the first instance) if the parties to
the contract (as well as the transferor) were to agree to
change the identity of the relevant party under the contract from the transferring party to the transferor in advance93. In other words, as applied to our structure, if
the issuer substitution were to be «prepackaged» in the
terms of the relevant external TLAC debt instrument
(together with the consent of the Swiss resolution entity
to the substitution) so that it would automatically occur
under the terms of the debt instrument upon the opening
of restructuring proceedings with respect to the Swiss
resolution entity, this prohibition on transfer should not
apply. However, this issue in general could be avoided by
initially starting with a version of the SPV issuance structure described under the first issuance structure option:
If the external TLAC debt instrument were to be issued
by a (non-Swiss) SPV with a guarantee of the SPV’s obligations thereunder issued by the Swiss resolution entity for the benefit of investors, although an automatic
substitution of the Swiss resolution entity for the SPV
as principal debtor under the debt instrument would
change the identity of the debtor, it would not change the
substance of the contract. To the contrary, as the rating
of the relevant guaranteed instruments (and presumably
the investors’ investment decision) would on the issue
date be based on the creditworthiness of the guarantor,
the economic reality and the legal reality would become
aligned as the result of such an issuer substitution. In addition, in this case, the guarantee would simultaneously
fall away from a Swiss law perspective, since a Swiss entity cannot guarantee its own obligations. Despite avoiding the need to «prepackage» the transfer in the terms of
the debt instrument to address the Swiss law issues raised
above, the mechanic of the issuer substitution would
nevertheless need to be prepackaged in the sense that
it should be set forth in the terms of the instrument so
that it occurs automatically upon the opening of restructuring proceedings with respect to the Swiss resolution
entity without further action. Doing so ensures that the
instrument will work properly as external TLAC at the
appropriate time (and might assist in the analysis that the
automatic issuer substitution did not constitute a fraudulent transfer). In addition, the Swiss resolution entity
should agree to the substitution in the terms of its guarantee (or other relevant transaction document executed
by the guarantor for the benefit of the investors) as it is
not bound by the terms of the debt instrument.
In any structure in which the Swiss resolution entity is
substituted for the non-Swiss issuer of debt instruments
that qualify as «bonds» under Swiss law under the terms
93
Favre (FN 90), N 926; Bauer (FN 89), 91.
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of the instruments, a specific question may arise as to
whether the rules of articles 1157 et seq. of the Swiss
Code of Obligations (the «CO») would then apply. Were
this to be the case, certain issuances (e.g., issuances involving an offering in the United States that would require the terms of the instruments to comply with the
Trust Indenture Act throughout the life of the bonds)
would not be possible due to conflicts between mandatory regulations in one jurisdiction and those required
by articles 1157 et seq. CO. Additionally, to the extent
that the terms of the bond already contained provisions
governing bondholder meetings, such provisions would
be supplemented and, in the case of conflict, overridden
by the mandatory provisions of articles 1157 et seq.
More specifically, article 1157 para. 1 CO provides that if
bonds are issued directly or indirectly by an issuer domiciled or having a business establishment in Switzerland
via a public subscription, the bondholders form a community of creditors by operation of law. The provisions
of articles 1157 et seq. on the community of creditors in
the terms of the bonds, notably on the powers and organisation of bondholder meetings, are then subject to,
and must comply with, the provisions of the CO. Putting aside the issue of the issuer substitution, it is well
established that these provisions would not apply in the
first instance to either structure described above since a
Swiss-domiciled entity’s guarantee of a non-Swiss issuer’s obligations is not sufficient to trigger their applicability.94 As to whether the provisions would later apply
due to the substitution of the Swiss resolution entity as
principal debtor under the bonds, based on our reading
of these provisions (in particular, applying the wording
and principles underlying article 1165 CO by analogy to
an initial issuance by a non-Swiss issuer), we believe that
the regime for the community of creditors and voting
process is fixed at the time of issuance.
Article 1165 para 3 CO states that «the court at the current or last seat of the debtor in Switzerland has mandatory jurisdiction» (emphasis added) to authorize the
applicant (i.e., the person(s) who requested the issuer to
convene a meeting)95 to convene a creditors’ meeting of
his or her own accord in the event that the debtor fails
to comply with such request. Article 1165 para. 4 CO
states that the court at the location of the branch office
has mandatory jurisdiction «if the debtor has or had
only a branch office in Switzerland» (emphasis added).
We believe that the legislator intended to maintain the
applicability of these provisions in the CO on the community of creditors even if the Swiss debtor relocated to
a jurisdiction outside of Switzerland post-issuance. This
BSK Wertpapierrecht-Reutter/Steinmann, vor Art. 1157–1186
N 33. The issuer’s domicile is relevant. Cf. DFC 129 III 71, E. 3.3.;
KuKo OR-Bösch/Leisinger, Art. 1157 N 1.
95 BSK Wertpapierrecht-Reutter/Steinmann, vor Art. 1165 N 7.
2015
makes good sense in our view since the applicable provisions are known and fixed at the time the initial investors
make their investment decision. If the substance of these
provisions were to change any time the debtor were to
change its domicile or, to the extent permitted under the
terms, were to be substituted by another issuer organized under the laws of another jurisdiction, investors
would be subjected to additional (legal) risk. Applying
these provisions and the legislative intent by analogy to
bonds issued by a non-Swiss issuer, we do not believe
that the effect of these provisions should be to require
their applicability in cases in which the non-Swiss issuer
changes its domicile to Switzerland or is substituted by a
Swiss-domiciled issuer, at least if there still is some international aspect (e.g., due to the investors’ domicile) and
the terms of the bonds provide for some type of rules on
the meeting of creditors.96
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Additional Considerations
Notwithstanding the fact that the two potential structures should in principle avoid the Swiss withholding
tax issues discussed above, to the extent the relevant
debt instruments are bailed-in during the course of restructuring proceedings with respect to the Swiss entity
(whether directly because of the automatic issuer substitution feature or indirectly via a bail-in of the guarantee), this bail-in might be considered to be a use of
proceeds within Switzerland. In this case, if any of the
debt instruments remain outstanding after completion of
the restructuring proceedings (i.e., in the case of a partial
bail-in of the instruments), all future (interest) payments
on the debt instruments would, under the current Swiss
tax regime, be subject to Swiss withholding tax. Furthermore, irrespective of whether there is any bail-in, in the
case of an automatic issuer substitution upon the opening of restructuring proceedings, any (interest) payments
on the debt instruments from that time forward might
be subject (under the current Swiss tax regime) to Swiss
withholding tax since the principal debtor under the debt
instruments would then be a Swiss entity. As a practical matter, this issue would only become relevant to the
extent that the debt instruments are not fully converted
into equity or written down during the course of the restructuring proceedings (see the discussion of the mandatory exchange feature in the Credit Suisse notes at IV.
below for one potential solution to the Swiss withholding tax that would apply to any instruments that remain
outstanding after a bail-in). These risks would need to
be disclosed properly to potential investors (and, consequently, may affect the instruments’ marketability) or
otherwise addressed.
94
96
Also see KuKo OR-Bösch/Leisinger, Art. 1157 N 1.
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3.Unsecured
Aufsätze
The FSB Proposal requires all external TLAC to be unsecured.97
Even without this FSB Proposal requirement, secured
debt of Swiss resolution entities would not be able to
meet the FSB’s stated objective of the Minimum TLAC
Requirement (i.e., to be available to absorb losses in a
restructuring of the Swiss resolution entity). More specifically, because any bail-in of a Swiss resolution entity’s liabilities by FINMA in restructuring proceedings
would have to follow the NCWO principle (i.e., that
no creditor should be worse off in restructuring proceedings than in liquidation proceedings), a bail-in of
secured obligations would be prohibited to the extent
of the value of the collateral securing the relevant claim.
The reason for this is that, assuming there are sufficient
proceeds from the realization of the collateral, the claims
of secured creditors would be fully satisfied in Swiss liquidation proceedings.98
In addition, based on article 49 para. 1 lit. b BIO-
FINMA, FINMA would not be permitted to bail-in any
secured obligations of a Swiss resolution entity in restructuring proceedings to the extent of the value of the
collateral securing the obligation.99
It is worth noting that, in this context, «secured» means
only such security rights that would actually lead to a
seniority of, or full satisfaction of, the claim in the resolution entity’s bankruptcy proceedings (in other words,
the traditional concept of «collateralized»). It does not
mean personal security rights (Personalsicherheiten)
granted by the Swiss resolution entity itself, such as its
guarantee in the SPV issuance structures we described
above (see at III. 2.2). Moreover, in the case of the SPV
issuance structure that provides for an automatic issuer
substitution feature (see above at III. 2.3), the guarantee
would simultaneously fall away from a Swiss law perspective, since a Swiss entity cannot guarantee its own
obligations.100
4.
Minimum Maturity
The FSB Proposal requires external TLAC to have a
minimum remaining maturity of at least one year.101 This
condition of eligibility would not pose any issue from a
Swiss law perspective. Under Swiss law, the debtor and
creditor can freely stipulate when loans or bonds become
97
FSB (FN 1), Section 10, 16.
See article 219 para. 1 DEBA.
99 Kuhn (FN 25), 451.
100 Cf. article 111 CO, which states: «A person who gives an undertaking to ensure that a third party performs an obligation is liable in
damages for non-performance by said third party» (emphasis added).
101 FSB (FN 1), Section 11, 16.
98
2015
repayable – even perpetual instruments (i.e., instruments
with no fixed maturity date) are permissible, so long as
the instrument can be transferred (i.e., sold) by the holders during the life of the instrument.102 However, it is
worth noting that, as the authors’ understand this element of the FSB Proposal, any instrument with a fixed
maturity date that qualified as external TLAC at the time
of issuance would no longer qualify as such during the
365-period ending on its maturity date.
5.
Excluded Liabilities
The FSB Proposal includes a list of liabilities that would
be specifically excluded from being eligible as external
TLAC.103 Specifically, this list excludes: (a.) insured deposits, (b.) any liability that is callable on demand without supervisory approval, (c.) liabilities that are funded
directly by the issuer or a related party of the issuer,
except where the relevant home and host authorities in
the CMG agree that it is consistent with the resolution
strategy to count eligible liabilities issued to a parent of
a resolution entity towards external TLAC, (d.) liabilities arising from derivatives or debt instruments with
derivative-linked features, such as structured notes, (e.)
liabilities arising other than through a contract, such as
tax liabilities, (f.) liabilities that are preferred to normal
senior unsecured creditors under the relevant insolvency law, and (g.) any other liabilities that, under the laws
governing the issuing entity, cannot be effectively converted into equity or written down by the relevant resolution authority.
For external TLAC issued in the form of bonds that do
not qualify as regulatory capital, the terms of the bonds
must avoid features that would characterize them as an
excluded liability. While some listed excluded liabilities are not relevant in the context of a bond issuance
(e.g., insured deposits104 and liabilities arising other than
through contract), certain common (or, if not common,
then sometimes seen) characteristics of bonds may result
in ineligibility if included in the terms. These characteristics would include an issuer call or investor put right that
is not conditioned on supervisory approval (a familiar
limitation placed on regulatory capital instruments, but
otherwise atypical in the context of a bond issuance), as
well as derivative-linked features.
With respect to the requirement that external TLAC
not be funded by the issuer or a related party, a question
might arise regarding the common practice of a resolu-
102
Cf. BSK OR I-Schärer/Maurenbrecher, Art. 318 N 10; René
Bösch, Hybride Finanzinstrumente, in: Thomas Reutter/Thomas Werlen (eds.), Kapitalmarkttransaktionen III, Zürich 2008,
39–68, 48 ff.
103 FSB (FN 1), Section 12, 16.
104 In Swiss law, article 5 para. 3 lit. b of the Banking Ordinance explicitly states that bonds do not qualify as deposits.
26.06.15 08:36
tion entity’s debt instruments being underwritten in part
by a member of its group. As we understand this eligibility requirement, «funded» by the issuer or a related party
must mean funded in an investor capacity (i.e., the persons from whom the proceeds from the sale of the TLAC
are really received) and not in an underwriter capacity,
and that such common practice would not be prohibited.
6.Ranking
The FSB Proposal states that external TLAC must absorb losses prior to «excluded liabilities» in insolvency
or in resolution (see above at III. 5. for information on
what constitutes an excluded liability for purposes of the
FSB Proposal).105
More specifically, in order to ensure that external TLAC
absorbs losses in this manner, it must be (a.) contractually subordinated to all excluded liabilities appearing on
the balance sheet of the resolution entity, but may still
rank senior to regulatory capital instruments (including
tier 2 subordinated debt) of the resolution entity for purposes of insolvency only, or (b.) junior to all excluded
liabilities appearing on the balance sheet of the resolution entity by operation of law, or (c.) issued by a resolution entity that does not have any excluded liabilities
on its balance sheet (for example, a holding company),
since there is no possibility of it ranking pari passu with
or senior to any excluded liabilities of the G-SIB itself.
While a Swiss resolution entity would be able to rely
in part on statute as described in option (b.) above, not
all excluded liabilities would automatically be senior to
external TLAC by operation of law. That being said,
excluded liabilities consisting of insured deposits (Section 12 a.), liabilities that are preferred to normal senior
unsecured creditors in liquidation proceedings under
Swiss law and liabilities that cannot be effectively converted into equity or written down by FINMA in restructuring proceedings under Swiss law (Section 12 g.),
would either automatically be senior to external TLAC
if F
INMA were to bail-in any liabilities of a Swiss resolution entity in restructuring proceedings (as required by
the hierarchy enshrined in article 48 BIO-FINMA)105a or
105
FSB (FN 1), Section 13, 16 f.
the authors’ view, by means of a revision of article 48 lit. d of the
BIO-FINMA, FINMA could also provide for a statutory subordination of certain financial instruments in restructuring proceedings
and, thereby, make any other (contractual, structural) subordination of external TLAC unnecessary. Because of the specific purpose
of the external TLAC instruments, which is known by the investors
at the time of their investment, a bail-in of these instruments before other senior unsecured debt of the relevant Resolution entity
would be justified on reasonable grounds and in the authors’ view
legally permissible (Art. 8 of the Swiss Constitution), as long as the
NCWO principle enshrined by the Banking Act is respected. While
the Banking Act specifically requires that the hierarchy of claims be
respected (article 31para 1 lit. c), it does not specifically address the
treatment of different types of creditors within one and the same
105aIn
2015
in any event not be eligible for bail-in pursuant to article 49 BIO-FINMA (and so de facto senior to external
TLAC in a bail-in). Consequently, with respect to these
types of excluded liabilities, external TLAC of a Swiss
resolution entity would not need to be contractually
subordinated thereto.
In the case of other liabilities of a Swiss resolution entity that are categorized as excluded liabilities by the
FSB Proposal, external TLAC must be either structurally subordinated106 or contractually subordinated in the
terms of the external TLAC in accordance with the principles of Swiss law in order to ensure that a bail-in of the
external TLAC would occur before any bail-in of such
excluded liabilities.
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• The FSB Proposal doesn’t specifically mention
structural subordination, but does state that external TLAC may be issued out of «a resolution entity
which does not have excluded liabilities on its balance
sheet (for example, a holding company)» to ensure
that external TLAC absorbs losses prior to excluded liabilities. As has been pointed out in many of the
commentaries to the FSB Proposal that were submitted as part of the consultation process, a typical holding company will incur certain liabilities that qualify
as excluded liabilities (e.g., tax liabilities). In view of
this, a literal reading of this option would make reliance on it (and, consequently, on structural subordination) impossible since it is unlikely that the balance
sheet of any entity (even a holding company) would
be devoid at all times of all types of excluded liabilities. That this would be the case even though, by issuing out of a holding company with some excluded
liabilities on its balance sheet, all creditors of operating liabilities of the G-SIB would be protected via
this structural subordination appears to be a strange
result when viewed against the backdrop of the FSB’s
stated objective of the Minimum TLAC Requirement. In the authors’ view, this cannot have been
the intention of the FSB (not least because of their
specific use of a holding company as an example) and
certainly should not be what is ultimately required.
Taking the FSB’s stated objective of the Minimum
TLAC Requirement into consideration (i.e., ensur-
class but does contain a relatively broad delegation of power to
FINMA to draft the appropriate rules and take the necessary decisions for restructuring of Banks (article 28 para. 2 Banking Act).
Dissenting: Kuhn (FN 25), 453.
106 For an explanation of structural subordination, see Patrick
Hünerwadel/Marcel Tranchet, Akquisitionsfinanzierungen,
Finanzierung als Erfolgsfaktor bei Akquisitionen, in: Oertle et
al. (eds.), M&A, Recht und Wirtschaft in der Praxis, Liber Amicorum für Rudolf Tschäni, Zurich/St. Gallen 2010, 361–379, 372;
Rudolf Tschäni/Hans-Jakob Diem, Going Private durch LBO,
in: Tschäni (ed.), Mergers & Acquisitions XVI, Zurich/Basel/Genf
2014, 55–114, 92, fn. 110; Lukas Glanzmann, Konzern-Kreditfinanzierungen aus Sicht der kreditgebenden Bank, SZW 2011, 229–
248, 235.
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238
2015
ing that, in and immediately following a resolution,
critical functions can be continued without taxpayer’s
funds or financial stability being put at risk (see above
at III. 1.)), we believe that structural subordination of
external TLAC to the creditors of the relevant G-SIB
should be sufficient to satisfy the FSB Proposal’s subordination requirements irrespective of whether the
issuing holding company itself has excluded liabilities on its balance sheet that rank pari passu with the
external TLAC.107 The FSB Proposal itself puts the
focus on operating liabilities when mentioning subordination in connection with the determination of
which type of instruments should be eligible as external TLAC.108 Additionally, it is the liabilities susceptible to «runs» at the bank level and liabilities directly
linked to a firm’s critical functions that could compromise the restructuring objectives.109
In Swiss law, structural subordination through an
issuance of external TLAC by a (non-bank) Swiss
holding company would provide a good means of
protecting creditors of operating liabilities of its
Swiss bank subsidiary (i.e., the Swiss G-SIB),110 including all of the creditors of the bank’s excluded liabilities (see above at II. 4.2). The reason for this is
because Swiss law would not except under very limited circumstances disregard corporate separateness
in either restructuring or liquidation proceedings,111
which would mean that the structural subordination
of the external TLAC would be respected in all but
the most extreme cases in the Swiss resolution entity’s restructuring proceedings and, assuming the bailin of the resolution entity’s liabilities are sufficient to
recapitalize it and its financial group, the operating
liabilities of the G-SIB would remain protected. Furthermore, the Swiss bail-in hierarchy that would be
observed by FINMA in the Swiss resolution entity’s
restructuring proceedings would require FINMA to
look only to the resolution entity’s liabilities.
• Contractual subordination (i.e., where the debtor and
creditor contractually agree to subordinate the claims
of the creditor to certain other third party claims
against the debtor or to certain classes of creditors)
Also see the IIF-GFMS Joints Comments (FN 57), 4, at 9.b.
«Similarly, authorities must be confident that the holders of these
instruments are able to absorb losses in a time of stress in the financial markets without spreading contagion and without necessitating the allocation of loss to liabilities where that would cause
disruption to critical functions or significant financial instability.
TLAC should not therefore include operational liabilities on which
the performance of critical functions depends, and TLAC should be
subordinated in some way to those operational liabilities.» (emphasis added). See FSB (FN 1), 11.
109See Hüpkes (FN 13), 492.
110Cf. Olivier Wünsch, Die Quadratur des Kreises: Rechtliche und
ökonomische Aspekte der Abwicklung von Banken, SZW 2012,
523–534, 530 f.
111See Daniel Hunkeler, Bankensanierung – insbesondere unter internationalen Aspekten, SZW 2010, 480–492, 486.
is also possible under Swiss law. The majority of legal scholars qualify this means of subordination as a
contract for the benefit of third parties.112 Because it
is considered to be a contractual arrangement and, as
such, subject to freedom of contract as long as it is
not detrimental to a third party that is not involved
in the arrangement, illegal, or against good faith, any
such subordination could be tailored as required.113
In particular, under Swiss law, a creditor is permitted
to stipulate by contract (i) which of the debtor’s other creditors rank ahead of such creditor (to the extent
they do not already by operation of law) and (ii) in
which circumstances this subordination applies.114
Since TLAC is intended to be a «debt shield» in the
case of restructuring proceedings that helps to return the bank to viability and protect creditors of
the bank’s operating liabilities, any subordination of
claims thereunder must at the very minimum (1) apply in restructuring proceedings (but not necessarily
in liquidation proceedings) and (2) protect the creditors of the bank’s operating liabilities that are relevant for the ongoing operations of the bank, including its branches. Any subordination that would lead
to claims under an external TLAC eligible instrument
being junior in the case of the liquidation of the resolution entity (i.e., in bank bankruptcy) is, in the
authors’ view, not an essential feature when taking
into consideration to the FSB’s stated objective of the
Minimum TLAC Requirement (see at III. 1. above).
On the other hand, not requiring subordination in
liquidation has commercial benefits, the most important of which is that an external TLAC eligible instrument that ranks senior in liquidation would likely have lower spreads than an external TLAC eligible
instrument that ranks junior and such lower spread
would be less of a continuous strain on the liquidity of the bank (including in times where the bank is
fully viable). Additionally, instruments that rank senior in liquidation generally have better marketability
than those that rank junior since the investor base is
broader.
107
108
112Cf.
Peter Böckli, Rangrücktritt, in: Innominatverträge: Festgabe
zum 60. Geburtstag von Walter R. Schluep, Forstmoser/Tercier/
Zäch (eds.), Zurich 1988, 354 f.; Lukas Glanzmann, Rangrücktritt
oder Nachrangvereinbarung? Anwendungsbereiche, Ausgestaltung
und Grenzen zweier ungleicher Instrumente der Mezzanine-Finanzierung, GesKR 2007, 6–23, 11; BSK SchKG II-Lorandi, Art. 219
N 333; Bösch (FN 102), 57.
113Cf. Hunkeler (FN 111), 483.
114Cf. Markus Duss, Rangrücktritt des Gesellschaftsgläubigers bei
Aktiengesellschaften, Diss., Zurich 1971, 37; Böckli (FN 112), 342;
Glanzmann (FN 112), 16. Generally, see BSK OR I-Schärer/
Maurenbrecher, Art. 312 N 17 f. for subordination arrangements.
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7.
Waiver of Set off
The FSB Proposal prohibits subjecting external TLAC
to set-off or netting rights that would undermine their
loss absorbing capacity in resolution. Swiss law permits
parties to contractually exclude rights of set-off with respect to the obligations of any or all parties thereunder
(so-called pactum de non compensando).115 Furthermore,
although Swiss law generally doesn’t permit a transferee to be bound by a waiver of set-off agreed to by the
transferor without the transferee’s consent, this limitation does not apply to capital markets debt instruments
(i.e., all bondholders, irrespective of whether they were
initial investors in the bonds are bound by any provision
waiving holders’ rights of set-off). Consequently, this
condition of eligibility would not pose any issue from a
Swiss law perspective.
8.
Redemption Restrictions
The FSB prohibits the redemption of external TLAC
without supervisory approval, unless it is replaced with
liabilities «of the same or better quality» and such replacement is done at conditions that are sustainable for
the income capacity of the G-SIB. This prohibition is
similar to the category of excluded liabilities, which captures any liability that is callable on demand without
supervisory approval. Reading this eligibility condition
together with the condition that external TLAC have
a minimum remaining maturity of one year, we believe
that this condition does not apply to ordinary redemption at maturity. As we understand that the relevant liability will no longer qualify as external TLAC once there
is less than one year until maturity, any redemption (including early redemption) should not be subject to the
supervisory approval condition during such period in
the author’s view.
Accordingly, the terms of any external TLAC issued by a
Swiss resolution entity should include FINMA approval
as one of the conditions to redemption at the option of
the issuer, if early redemption is in fact permitted thereunder. Under Swiss law, such a restriction is permitted
and, in the case of regulatory capital instruments, required.116
9.
Governing law
The FSB Proposal provides resolution entities with two
options regarding the governing law of external TLAC:
either it must be governed by the law of the jurisdiction
115
Article 126 CO: «The debtor may waive his right of set-off in advance». Cf. Peter Gauch/Walter Schluep, Schweizerisches Obligationenrecht Allgemeiner Teil – Band I und Band II, 10th ed.,
Zurich 2014, 226; BSK OR I-Peter, Art. 126 N 1 ff.
116Cf. Bösch (FN 102), p. 53. See article 20 para. 2 lit. b CAO.
2015
in which the resolution entity is incorporated, or it may
be governed by the law of another jurisdiction, provided it includes legally enforceable contractual provisions
recognizing the application of resolution tools by the
relevant resolution authority if the resolution entity enters resolution, or there is equivalent binding statutory
provision for cross-border recognition of resolution actions.117
Under Swiss law, FINMA is permitted to recognize the
bankruptcy decrees and resolution measures of other
countries with respect to a Swiss bank or assets in Switzerland, irrespective of whether such other countries
afford reciprocation, if it is in the interest of such troubled bank’s creditors.118 However, it is unlikely that this
would be sufficient to satisfy the FSB Proposal’s condition regarding an equivalent binding statutory provision
for cross-border recognition of resolution actions. In
its report of September 2013, the FSB noted that an important area in which jurisdictions still need to act is the
adoption of powers for cross-border cooperation and
the recognition of foreign resolution actions.119 Accordingly, until there are further satisfactory developments in
other jurisdictions and international or bilateral treaties,
external TLAC for Swiss G-SIBs will likely need to either be governed by Swiss law or, if governed by the law
of another jurisdiction, include contractual provisions
pursuant to which investors recognize FINMA’s bail-in
and other resolution powers.120
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10.Triggers
The FSB Proposal requires external TLAC either to contain a contractual trigger, the breach of which results in
the exposure of the external TLAC to loss or its conversion into equity, or to be subject to a statutory mechanism that permits the relevant resolution authority to expose the external TLAC to loss or convert it into equity
in resolution.
117
For a discussion on the general problem of cross-border recognition in bank resolution proceedings, see Hunkeler (FN 111),
485 ff. Also see Wünsch (FN 110), 531.
118 Article 37g Banking Act and article 10 BIO-FINMA.
119 Cf. FSB, Progress and Next Steps Towards Ending «Too-Big-ToFail» (TBTF) – Report of the Financial Stability Board to the G-20,
2 September 2013, online at http://www.financialstabilityboard.
org/wp-content/uploads/r_130902.pdf?page_moved=1 (12 April
2015), 3. Also see Hüpkes (FN 13).
120 In the understanding of the authors, in the case of important places of jurisdiction and applicable law (i.e., the places of jurisdiction
and governing laws that are most commonly seen in international
capital market transactions involving a Swiss issuer (or guarantor),
such as New York courts/New York law and English courts/English law), a contractual agreement or acknowledgement by investors should be sufficient to safeguard the recognition of a bail-in
by FINMA by those courts and under those laws, subject to the
usual public policy limitations. It is not clear whether the mere applicability of Swiss law as the law governing the TLAC instruments
would have the same effect.
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As was discussed at length above (see above at II. 4.),
Swiss law provides FINMA with the statutory power to
write-down and/or convert into equity all liabilities of
a Swiss G-SIB or other bank or, in the near future, of a
Swiss top holding company of a financial group, so long
as they are not explicitly excluded from such power in
article 49 BIO-FINMA. Assuming the indirect issuance
structure described above, which would entail an issuance by a non-Swiss SPV and a guarantee by the Swiss
resolution entity, the only contractual trigger that would
be required in external TLAC of Swiss resolution entities in order to permit FINMA to expose them to loss
or convert them into equity in resolution is that they become liabilities of the Swiss resolution entity in Swiss restructuring proceedings with respect to such Swiss resolution entity. Ways for Swiss G-SIBs to achieve this have
been outlined in section III. 2.3 above.
IV. The Credit Suisse Notes
For its USD 4 billion inaugural issuance on 26 March
2015 of senior notes designed to satisfy the requirements
of external TLAC set forth in the FSB Proposal,121 Credit Suisse chose an issuance structure pursuant to which
Credit Suisse Group AG (a Swiss corporation that is the
top holding company of the G-SIB Credit Suisse AG)
guarantees notes issued by a non-Swiss SPV subsidiary, but is automatically substituted for the SPV issuer
as principal debtor under the notes upon the opening of
restructuring proceedings of Credit Suisse Group AG in
order to facilitate FINMA’s ability to bail-in the notes
themselves rather than the guarantee (see the second option explained above at III. 2.3).
Credit Suisse developed the structure of these notes insofar as it related to their potential bail-in in close coordination with FINMA to ensure that it is aligned with
FINMA’s SPoE resolution strategy and the recommendations of foreign regulators (in particular the U.S. Federal Reserve System and the Bank of England) in respect
of a SPoE bail-in. In developing that element of the
structure, Credit Suisse took the particularities of Swiss
law into account that we have discussed above, i.e., that
first, due to current Swiss tax laws, the direct issuance of
non-regulatory capital debt instruments by a Swiss holding company would attract withholding taxes on interest
payments (see above at III. 2.2) and, second, the top-level holding company of the group (Credit Suisse Group
AG) is currently not subject to the resolution powers of
FINMA, but is expected to be later this year or in early 2016 (see above at II. 1.). In line with FINMA’s SPoE
resolution strategy and for purposes of external TLAC
requirements, Credit Suisse Group AG, the top holding
company of the G-SIB Credit Suisse AG, is the «resolution entity».
The key characteristics and features of the senior notes
are as follows:
• A non-Swiss SPV wholly-owned subsidiary of Credit Suisse Group AG, with the benefit of a guarantee
from Credit Suisse Group AG, issued New York
law-governed notes in the market and on-lent the
issuance proceeds to a non-Swiss branch of Credit
Suisse AG (i.e., the G-SIB). This set-up means that
the claims of the holders of the notes are structurally
subordinated to claims of the creditors of the G-SIB’s
operating liabilities. This flow of funds is disclosed in
the offering documents relating to the notes.
• Pursuant to the terms of the notes, if restructuring
proceedings are opened by FINMA with respect to
Credit Suisse Group AG, the above-described issuer/guarantor structure collapses and Credit Suisse
Group AG is automatically substituted for the SPV
as issuer of the notes (and, as a result, Credit Suisse
Group AG’s guarantee of the notes falls away). Although the terms of the notes include the standard
event of default provisions for insolvency events with
respect to the guarantor, they explicitly exclude the
opening of restructuring proceedings by FINMA
with respect to the guarantor (i.e., the resolution entity) from the events that would trigger an event of
default. Although this carve-out from the events of
default is not required in order to comply with the
external TLAC eligibility standards set forth in the
FSB Proposal, if it were not included, and the result
were to be acceleration of the entire aggregate principal amount of the notes upon the opening of such
proceedings, FINMA would be faced with the option of either bailing in the notes in their entirety or
bailing in the notes in part, with the remainder being
redeemed by the resolution entity in accordance with
the terms of the notes – with the resulting immediate loss of liquidity resulting therefrom. Since a partial bail-in would necessarily involve an outflow of
funds, we believe that FINMA would likely use its
discretion122 to choose the full bail-in option in order
to prevent non-viability due to liquidity problems.123
It is worth noting in this context that a bail-in has no
122See
121
USD 1,500,000,000 2.750 % Senior Notes due 2020 and USD
2,500,000,000 3.750 % Senior Notes due 2025 issued by Credit
Suisse Group Funding (Guernsey) Limited and guaranteed by

Credit Suisse Group AG. Also see René Bösch/Benjamin Leisinger,
Inaugural Issuance of TLAC-Eligible Senior Unsecured Notes by
Swiss Bank, CapLaw-2015-15.
123
Schiltknecht (FN 49), 83.
Such an «over-bail-in» is possible to ensure a successful restructuring, with even more «tolerance» in the case of SIFIs. See
Grünewald/Weber (FN 50), 556 f.; Schiltknecht (FN 49), 80 f.
FINMA may also draw up a new restructuring plan instead of closing the restructuring proceedings and bail-in the accelerated notes,
if necessary. See Zulauf (FN 22), 355. For the liquidity problem in
times of distress generally, see Wünsch (FN 110), 531.
26.06.15 08:36
direct effect on the liquidity of the relevant entity but
merely reduces its liabilities.124 In the authors’ view,
allowing for the possibility that a portion of the notes
could continue to be outstanding after any restructuring has been completed, provides FINMA with more
flexibility and is potentially more investor-friendly.
For the same reasons, it’s the authors’ view that any
relevant «protective measures»125 ordered or confirmed by FINMA upon the opening of or during
restructuring proceedings based on article 25 para. 2
and article 26 of the Banking Act should also never
constitute an event of default. For example, non-payment of obligations due and payable under the notes
(typically subject, in the case of interest payments, to
a grace period) is a standard event of default in senior
notes. Consequently, if FINMA were to order protective measures during restructuring proceedings126
that would require the resolution entity not to make
any or certain payments on the notes, this would normally constitute an event of default under the terms
of the notes (if applicable, after giving effect to the
relevant grace period). The occurrence of an event
of default pursuant to the terms of the relevant bond
would again lead to the same problem outlined above
regarding the liquidity outflow and, in the authors’
view, make a full (rather than a partial) bail-in of the
notes more likely.
• Once Credit Suisse Group AG is subject to the
Banking Act’s resolution regime and assuming that
FINMA follows its publicly acknowledged SPoE

resolution strategy, if the Credit Suisse group were no
longer viable, FINMA would start the bail-in process
by opening restructuring proceedings with respect to
Credit Suisse Group AG and allow Credit Suisse AG
to continue its operations. FINMA (following the hierarchy of creditors mandated by Swiss law) would
bail-in the equity securities and liabilities of Credit Suisse Group AG, with the effect that its owners
and then the holders of its liabilities (and not those
of Credit Suisse AG and its operating liabilities) will
bear the losses resulting from the bail-in. Depending on the needs of the Credit Suisse group, FINMA
could exercise its powers to partially or fully convert
into equity and/or write-down the notes. For reasons
noted above, a portion of the notes could potentially
remain outstanding after the restructuring has been
completed and would not accelerate as a result of the
opening of restructuring proceedings or the bail-in.
Creditors of operating liabilities of Credit Suisse AG
124
Grünewald/Weber (FN 50), 560; Andreotti (FN 21), 460.
Protective measures within the meaning of article 26 of the Banking
Act, e.g., forbidding the relevant entity to make payments, ordering
deferment of payments or payment extensions.
126 FINMA might do so in order to freeze the status quo and to have
more time to assess the need of bail-in. See Zulauf (FN 22), 352.
2015
(including its branches), in particular depositors and
trade creditors, would be spared.
• As the notes are governed by New York law, the
terms of the notes contain a contractual acknowledgement of FINMA’s bail-in powers by the noteholders as required by the FSB Proposal, and the acknowledgement is supported by disclosure in the risk
factors.
• If necessary, the internal down-streaming instrument
issued by a non-Swiss branch of Credit Suisse AG to
the SPV in return for the proceeds of the notes previously referred to above has features that provide
a basis for FINMA (relying on its powers under the
Banking Act) to recapitalize the G-SIB Credit Suisse
AG during restructuring proceedings with respect
to Credit Suisse Group AG without the need for
FINMA open restructuring proceedings with respect
to Credit Suisse AG itself (which would be in line
with FINMA’s SPoE resolution strategy), as well as
for the instrument to so absorb losses prior to any
operating liabilities of Credit Suisse AG.
• In the case in which the notes are not fully converted
into equity and/or written down by FINMA during
the course of restructuring proceedings with respect
to Credit Suisse Group AG, the terms of the notes
require Credit Suisse Group AG (as substitute issuer) to exchange the notes for newly issued notes by
the original SPV issuer if, after the completion of the
restructuring proceedings, Credit Suisse Group AG
as (substitute issuer) is or would be required to deduct Swiss withholding tax from interest payments
on the notes under Swiss laws in effect at such time.
If there are no Swiss withholding tax issues once
the restructuring proceedings have been completed,
Credit Suisse Group AG may carry out such an exchange, but is not required to do so. The newly issued
notes would, with the exception of any reduction in
denomination resulting from any partial conversion
into equity or write-down, have the same terms as the
notes originally issued by the SPV (including having
the benefit of a guarantee from Credit Suisse Group
AG).
241
Aufsätze
GesKR 2
V. Concluding Remarks
In a January 2010 guest article in The Economist, Paul
Calello, the former head of Credit Suisse AG’s investment bank division, and Wilson Ervin, Credit Suisse
AG’s former chief risk officer, proposed a new process
for resolving failing banks.127 In the authors’ understanding,128 their article entitled «From bail-out to bail-
125
127
128
Cf. http://www.economist.com/node/15392186 (12 April 2015).
Also see Andreotti (FN 21), 449; Bösch (FN 15), 278.
26.06.15 08:36
GesKR 2
Aufsätze
242
2015
in» was the first to present the idea of giving authorities
the power to order a reduction in creditors’ claims (haircut) or a conversion of such claims into equity of the insolvent debtor (debt/equity-swap) – in other words, to
order a «bail-in» – before public money (taxpayers) must
be used to protect the systemically relevant functions,
or operating liabilities generally, of a bank. A long time
has passed since the publication of that article in terms
of regulatory developments on both the international
and local Swiss level, and important progress – at least in
Switzerland – has been made (and is still under way) to
address the too-big-to-fail conundrum.
However, as mentioned by the FSB in its status report of
September 2013,129 a very important underdeveloped130
element of addressing the too-big-to-fail conundrum
is the development of an international framework for
cross-border cooperation and recognition of resolution
measures.131 Without this, many of the measures already
provided for in national laws might not be as effective
as intended.132 Unfortunately for the individual banking groups and their home regulators, unlike developing structures for bonds that ensure they are eligible for
bail-in and safeguard the recognition of bail-in in foreign
courts, this is something they cannot do on their own.
Rather, they depend on the international community of
states to act133 and international actors such as the FSB to
continue urging the community to act.
129
See FSB (FN 96), 3.
Hüpkes (FN 13), 493; Grünewald/Weber (FN 50), 561; Peter
V. Kunz, Kreuzfahrt durch’s schweizerische Finanzmarktrecht, in:
Müller/Tschannen (eds.), KSR – Kleine Schriften zum Recht, Bern
2014, 73 f.
131 Also see Hunkeler (FN 111), 489; Wünsch (FN 110), 533 ff.
132See Bösch (FN 15), 289 f.; Kuhn (FN 25), 460 ff.
133See Hüpkes (FN 13), 494.
130See
26.06.15 08:36

TLAC and Bail-in

Transcription

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