Entire Section

  • RAR 3.4 The Bail-In Tool

    • Application of Bail-in Tool

      • RAR 3.4.1 RAR 3.4.1

        (1) The DFSA may exercise one or more Resolution Powers, in particular the Write Down or Conversion Power as set out in RAR rule 3.2.5 in order to apply the Bail-in Tool to an Authorised Firm.
        (2) The Bail-in Tool may be applied in respect of any capital instrument and liability of an Authorised Firm (Eligible Liability), provided that the liability is not excluded from the scope of the Bail-in Tool under (3) or (4).
        (3) The DFSA may not exercise the Write Down or Conversion Power in relation to the following liabilities (whether they are governed by DIFC law or by the law of another jurisdiction):
        (a) secured liabilities, but this exclusion does not prevent the write down of any liability in respect of net sum following close out of a Derivative in accordance with RAR Rule 3.4.5;
        (b) a Deposit of an Eligible Depositor;
        (c) any liability that arises by virtue of the holding of Client Assets, to the extent such Client Assets are protected under DIFC Law;
        (d) any liability that arises by virtue of a fiduciary relationship between the Authorised Firm (as fiduciary) and another person (as beneficiary) provided that such beneficiary's interests are protected under DIFC law;
        (e) unsecured liabilities to other financial institutions excluding entities that are part of the same Group, with an original maturity of less than seven days;
        (f) liabilities owed to payment systems, Central Counterparties, Securities Settlement Systems, Central Securities Depositories, or their operators or their participants and arising from the participation in any such system; or
        (g) a liability to any one of the following:
        (i) an employee, in relation to accrued salary, pension benefits or other fixed remuneration, except for the variable component of remuneration;
        (ii) a commercial or trade creditor arising from the provision to the Authorised Firm in Resolution of goods and services that are critical to the daily functioning of its operations, including information technology services, utilities and rental, servicing and upkeep of premises; or
        (iii) any tax and social security authority or scheme in the UAE.
        (4) In exceptional circumstances, where the Bail-in Tool is applied, the DFSA may exclude or partially exclude certain liabilities from the application of the Write Down or Conversion Power where:
        (a) it is not possible to bail-in that liability within a reasonable time despite the reasonable efforts of the DFSA;
        (b) the exclusion is strictly necessary and is proportionate to meet the Resolution Objectives;
        (c) the exclusion is strictly necessary and proportionate to avoid giving rise to widespread contagion, which will severely disrupt the functioning of financial markets, including financial market infrastructures, in a manner that could cause broader financial instability; or
        (d) the application of the Bail-in Tool to those liabilities will cause a destruction of value such that the losses borne by other creditors will be higher than if those liabilities were excluded from bail-in.
        (5) Where the DFSA decides to exclude or partially exclude an Eligible Liability or class of Eligible Liabilities under (4), the level of write down or conversion applied to other Eligible Liabilities may be increased to take account of such exclusions, provided that the level of write down or conversion applied to other Eligible Liabilities is consistent with the Resolution Objectives.
        (6) Where the DFSA decides to apply the Bail-In Tool, the DFSA shall in the written notice given under Article 84N of the Law set out the type and amount of liabilities owed by the Authorized Firm in Resolution that will be subject to the Bail-In Tool and whether they are:
        (a) cancelled (i.e. written down to zero);
        (b) modified (as far as their terms or the effects of the terms therein are concerned); or
        (c) caused to change their form by converting from a form or a class to a different one, replacing the existing instrument with one of another form or class or creating a new security.
        (7) A written notice under Article 84N of the Law relating to the application of the Bail-in Tool shall have effect according to its terms.

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

        • RAR 3.4.1 Guidance

          1. The DFSA may apply the Bail-in Tool if there is a reasonable prospect that applying the tool together with other relevant measures can, in addition to achieving the relevant Resolution Objectives, restore the Authorised Firm to financial soundness and long-term viability. The Bail-In Tool may also be applied in connection with the Sale of Business Tool.
          2. In exercising its discretion under RAR Rule 3.4.1(4), the DFSA will consider:
          a. the need not to apply any bail-in to a netting set before such netting is completed;
          b. the need to avoid disruption to AMIs, Regulated Exchanges, payment systems, Central Counterparties, Securities Settlement Systems and Central Securities Depositories;
          c. the principle that losses shall be borne first by shareholders and subsequently by creditors of the Authorised Firm in Resolution in order of preference in light of the Resolution Objectives;
          d. the level of LAC that will remain in the Authorised Firm in Resolution if the liability or class of liabilities were excluded; and
          e. the need to maintain adequate resources for Resolution financing.

           

          Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Assessment of Amount of Bail-in

      • RAR 3.4.2

        (1) In applying the Bail-in Tool under RAR Rule 3.4.1, the DFSA shall assess for the purposes of (2), on the basis of the Pre-Resolution Valuation or Provisional Valuation, the aggregate of:
        (a) where applicable, the amount by which capital instruments and Eligible Liabilities are to be written down in order to ensure that the net asset value of the Authorised Firm in Resolution is equal to zero; and
        (b) where applicable, the amount by which capital instruments and Eligible Liabilities are to be converted into Shares or other types of capital instruments in order to restore the CET1 Capital ratio of the Authorised Firm in Resolution.
        (2) The purpose of the assessment under (1) is to establish the amount by which Eligible Liabilities need to be written down or converted in order:
        (a) to restore the CET1 Capital ratio of the Authorised Firm in Resolution;
        (b) to sustain sufficient market confidence in the Authorised Firm in Resolution; and
        (c) to enable the Authorised Firm to continue, for at least twelve months, to satisfy the requirements for authorisation and to carry on the activities or services for which it is authorised.
        (3) Where capital instruments have been written down in accordance with the Write Down or Conversion Power under RAR Rule 3.2.5, the Bail-in Tool has been applied, and the level of write down based on the Pre-Resolution Valuation is found to exceed requirements when assessed against the Definitive Valuation, a write up mechanism may be applied to reimburse creditors and then shareholders to the extent necessary.

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Treatment of Shareholders in Bail-in

      • RAR 3.4.3

        (1) When applying the Bail-in Tool, the DFSA shall take, in respect of shareholders of the Authorised Firm in Resolution, one or both of the following actions:
        (a) cancel existing Shares or transfer them to bailed-in creditors; or
        (b) where, in accordance with the Pre-Resolution Valuation (or Provisional Valuation, if applicable), the Authorised Firm in Resolution has a positive net value, dilute existing shareholders as a result of the conversion into Shares of:
        (i) relevant capital instruments; or
        (ii) Eligible Liabilities,
        issued by the Authorised Firm in Resolution.
        (2) The DFSA shall take the action referred to in (1) in respect of shareholders where the Shares were issued or conferred in the following circumstances:
        (a) pursuant to the conversion of Debt Instruments to Shares in accordance with the contractual terms of the original Debt Instruments, on the occurrence of an event that preceded or occurred at the same time as the assessment by the DFSA that the Authorised Firm met the Resolution Conditions; or
        (b) pursuant to the conversion of relevant capital instruments to CET1 Capital instruments, under the Write Down or Conversion Power.
        (3) In considering which action to take in accordance with (1), the DFSA will have regard to:
        (a) the Pre-Resolution Valuation (or Provisional Valuation, if applicable);
        (b) the amount by which the DFSA has assessed that CET1 Capital items are to be reduced and relevant capital instruments are to be written down or converted pursuant to the Write Down or Conversion Power; and
        (c) the aggregate amount assessed by the DFSA under RAR Rule 3.4.2(1).

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Sequence of Bail-in

      • RAR 3.4.4

        (1) Subject to any exclusions set out in RAR Rule 3.4.1(3) and (4), in exercising the Write Down or Conversion Power when applying the Bail-in Tool, the DFSA shall apply the following sequence to write down or conversion:
        (a) the DFSA shall reduce the CET1 items in accordance with RAR Rule 3.4.3;
        (b) if the total reduction under (a) is less than the sum of the amounts referred to in RAR Rule 3.4.3(3)(b) and (c), the DFSA shall reduce the principal amount of AT1 Capital instruments to the extent required and to the extent of their capacity;
        (c) if the total reduction pursuant to (a) and (b) is less than the sum of the amounts referred to in RAR Rule 3.4.3(3)(b) and (c), the DFSA shall reduce the principal amount of T2 Capital instruments to the extent required and to the extent of their capacity;
        (d) if the total reduction of AT1 and T2 Capital instruments pursuant to (a), (b) and (c) is less than the sum of the amounts referred to in RAR Rule 3.4.3(3)(b) and (c), the DFSA shall reduce to the extent required the principal amount of Eligible Liabilities in accordance with the hierarchy of claims that will apply to the Authorised Firm under the DIFC Insolvency Law, in conjunction with the write down pursuant to (a), (b) and (c) to produce the sum of the amounts referred to in RAR Rule 3.4.3(3)(b) and (c); and
        (e) if the total reduction of AT1 and T2 Capital instruments and Eligible Liabilities pursuant to (a) to (d) is less than the sum of the amounts referred in RAR Rule 3.4.3(3)(b) and (c), the DFSA shall reduce to the extent required the principal amount of, or outstanding amount payable in respect of, the rest of Eligible Liabilities in accordance with the hierarchy of claims that will apply to the Authorised Firm under the DIFC Insolvency Law, in conjunction with the write down pursuant to (a) to (d) to produce the sum of the amounts referred to in RAR Rule 3.4.3(3)(b) and (c).
        (2) When applying the Write Down or Conversion Power, the DFSA shall allocate the losses represented by the sum of the amounts referred to in RAR Rule 3.4.3(3)(b) and (c) equally between Shares and Eligible Liabilities of the same rank by reducing the principal amount of, or outstanding amount payable in respect of, those Shares and Eligible Liabilities to the same extent pro rata to their value, except where a different allocation of losses amongst liabilities of the same rank is allowed in the circumstances specified in RAR Rule 3.4.1(4).
        (3) Before applying the Write Down or Conversion Power, the DFSA shall convert or reduce the principal amount of instruments referred to in (1)(b), (c) (d) and (e) when those instruments contain the following terms and have not been fully converted:
        (a) terms that provide for the principal amount of the instrument to be reduced on the occurrence of any event that refers to the financial situation, viability, solvency or levels of Capital Resources of the Authorised Firm; or
        (b) terms that provide for the conversion of the instrument to Shares on the occurrence of any such event.
        (4) Where the principal amount of an instrument has been reduced, but not reduced to zero, in accordance with terms referred to in (3)(a) before the application of the bail-in pursuant to (1), the DFSA shall apply the Write Down or Conversion Power to the residual amount.
        (5) In deciding on whether liabilities are to be written down or converted into Shares, the DFSA shall not convert one class of liabilities while a class of liabilities that is subordinated to that class remains substantially unconverted into Shares or not written down, unless otherwise permitted under RAR Rule 3.4.1(4) and (5).

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Derivatives

      • RAR 3.4.5

        (1) The DFSA may exercise the Bail-In Tool in relation to a liability arising from a Derivative only to the extent it is an unsecured liability and when, upon or after closing-out that Derivative, there is a net liability which is an Eligible Liability.
        (2) The DFSA may terminate and close out any Derivative upon an Authorised Firm’s entry into Resolution for the purpose of realising an Eligible Liability that is to be subject to the Bail-In Tool under (1).
        (3) The DFSA may, where an Eligible Liability under a Derivative has been excluded from the application of the Bail-in Tool pursuant to RAR Rule 3.4.1(5), terminate and close out the Derivative.
        (4) Where a Derivative is subject to a netting agreement, the value of the Eligible Liability for the purposes of the Pre-Resolution Valuation (or Provisional Valuation, if applicable) is to be determined on a net basis in accordance with the terms of the agreement.
        (5) The DFSA shall determine the value of Eligible Liabilities arising from a Derivative on the basis of appropriate methodologies.

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Conversion Rate

      • RAR 3.4.6

        When the Write Down or Conversion Power is exercised, the DFSA may apply a different Conversion Rate to different classes of capital instruments and Eligible Liabilities provided that when different Conversion Rates are applied, the Conversion Rate applicable to liabilities that are considered to be senior under DIFC insolvency law shall be higher than the Conversion Rate applicable to subordinated liabilities.

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Business Reorganisation Plan

      • RAR 3.4.7 RAR 3.4.7

        (1) A Business Reorganisation Plan shall, where the Bail-in Tool has been used to recapitalise an Authorised Firm, be drawn up and implemented for that Authorised Firm in accordance with this Rule.
        (2) The DFSA may require persons to be appointed (under its powers over an Authorised Firm in Resolution under Article 84N of the Law) for the purpose of drawing up and implementing the Business Reorganisation Plan.
        (3) The management of the Authorised Firm shall, within one month after the application of the Bail-in Tool to that Authorised Firm, draw up and submit to the DFSA a Business Reorganisation Plan that satisfies the requirements in (6).
        (4) Where the Bail-in Tool is applied to two or more Group entities, including where a Recognition Order has been made, a Group level Business Reorganisation Plan may be accepted by the DFSA for the purpose of this Rule.
        (5) The DFSA may, in exceptional circumstances, and if it is necessary for achieving the Resolution Objectives, extend the period in (3) up to a maximum of two months from the date of the application of the Bail-in Tool.
        (6) A Business Reorganisation Plan shall contain at least the following:
        (a) a detailed diagnosis of the factors and problems that caused the Authorised Firm to fail or to be likely to fail and the circumstances that led to its difficulties;
        (b) a description of the measures aiming to restore the long-term viability of the Authorised Firm or parts of its business that are to be adopted, on the basis of realistic assumptions as to the economic and financial market conditions under which the Authorised Firm will operate; and
        (c) a timescale for the implementation of those measures.
        (7) The DFSA shall, within one month of the submission of the Business Reorganisation Plan by the Authorised Firm, assess the likelihood that the Business Reorganisation Plan, if implemented, is likely to restore the long-term viability of the Authorised Firm.
        (8) If following its assessment under (7), the DFSA is satisfied that the Business Reorganisation Plan is likely to restore the long-term viability of the Authorised Firm, the DFSA may approve the plan.
        (9) If following its assessment under (7), if the DFSA is not satisfied that the Business Reorganisation Plan is likely to restore the long term viability of the Authorised Firm, the DFSA shall notify the management of the Authorised Firm or persons appointed under (2) of its concerns and require the Business Reorganisation Plan to be amended in a way that will address those concerns.
        (10) The management of the Authorised Firm or persons appointed under (2) shall, within two weeks of receiving a notification by the DFSA under (9), submit an amended Business Reorganisation Plan to the DFSA for approval.
        (11) The DFSA shall, within one week of receipt of the amended Business Reorganisation Plan submitted under (10), assess the amended Business Reorganisation Plan and notify the management of the Authorised Firm or persons appointed under (2) as to whether the DFSA is satisfied that the amended Business Reorganisation Plan addresses the concerns notified or whether further amendment is required.
        (12) The management of the Authorised Firm or persons appointed under (2) shall implement the Business Reorganisation Plan as approved by the DFSA.
        (13) The management of the Authorised Firm or persons appointed under (2) shall submit a report to the DFSA on the progress of the implementation of the Business Reorganisation Plan at least every six months or until the DFSA, in writing, specifies otherwise.
        (14) A Business Reorganisation Plan may be further amended following its initial implementation if the DFSA is of the view that changes to the plan are required to achieve the long-term viability of the Authorised Firm.

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

        • RAR 3.4.7 Guidance

          1. Measures aiming to restore the long-term viability of the Authorised Firm under RAR Rule 3.4.7(6) may include:
          a. the reorganisation of the activities of the Authorised Firm;
          b. changes to the operational systems and infrastructure within the Authorised Firm;
          c. the withdrawal from loss-making activities;
          d. the restructuring of existing activities that can be made competitive; and
          e. the sale of assets or business lines.
          2. The Business Reorganisation Plan must take account of, amongst other things, the current state and future prospects of the financial markets, reflecting best-case and worst-case assumptions, including a combination of events allowing the identification of the Authorised Firm’s main vulnerabilities. Assumptions must be compared with appropriate sector-wide benchmarks.

           

          Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Ancillary Provisions Relating to Bail-in

      • RAR 3.4.8

        (1) Where the DFSA exercises the Write Down or Conversion Power in the context of the application of the Bail-In Tool, the write down or conversion will take effect and be immediately binding on the Authorised Firm in Resolution and the creditors and shareholders of the Authorised Firm in Resolution.
        (2) The DFSA may complete, or cause the completion, of all administrative and procedural tasks necessary to give effect to the Write Down or Conversion Power including, but not limited to, effecting amendments to all relevant registers and listing rules applicable.
        (3) Where the DFSA reduces to zero the principal amount of, or outstanding amount payable in respect of, a liability by means of the Write Down or Conversion Power, that liability and any obligations, rights or claims arising in relation to it that are not accrued at the time when the power is exercised are fully discharged for all purposes in relation to the Authorised Firm in Resolution or any successor entity in any subsequent winding up.
        (4) Where the DFSA reduces in part, but not in full, the principal amount of, or outstanding amount payable in respect of, a liability by means of the Write Down or Conversion Power:
        (a) the liability, and the counterparty's corresponding claim, is discharged to the extent of the amount reduced; and
        (b) the relevant instrument or agreement that created the original liability continues to apply in relation to the residual principal amount of, or outstanding amount payable in respect of the liability, subject to any modification of the amount of interest payable to reflect the reduction of the principal amount, and any further modification of the terms that the DFSA might make by means of the Write Down or Conversion Power or other powers under Article 84N of the Law.
        (5) The DFSA is not prevented from exercising a Resolution Power or applying a Resolution Tool because of any procedural impediments to the conversion of Eligible Liabilities to Shares by virtue of the instrument of incorporation or of any other DIFC law, including pre-emption rights for shareholders or requirements for the consent of shareholders to an increase in capital.

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]

    • Contractual Recognition of Bail-in

      • RAR 3.4.9

        (1) The DFSA may, subject to (2), require an Authorised Firm to include in its contractual documents a contractual term by which the creditor or party to an agreement creating an Eligible Liability recognises that that liability may be subject to the Write Down or Conversion Power and agrees to be bound by any reduction of the principal or outstanding amount due, conversion or cancellation that is effected by the exercise of that power by the DFSA, provided that such liability is:
        (a) not excluded under RAR Rule 3.4.1(4);
        (b) governed by the law of another jurisdiction; and
        (c) issued or entered into after the date on which these Rules come into force.
        (2) Where the DFSA determines that the liability referred to in (1) can be subject to Write Down or Conversion Powers by the Resolution Authority of another jurisdiction or pursuant to a binding agreement concluded with that other jurisdiction, (1)(a) will not apply.
        (3) A failure to include the terms referred to in (1) does not prevent the DFSA from exercising the Write Down or Conversion Power in relation to that liability.
        (4) The DFSA may require the Authorised Firm to provide independent legal opinions on the enforceability and effectiveness of the contractual bail-in recognition provisions.

         

        Derived from DFSA RMI283/2020 (Made 16th December 2020). [VER1/04-21]