Regulation (EU) 2022/2036 came into force on 14 November 2022 and makes targeted amendments to the Capital Requirements Regulation (575/2013/EU) (CRR) and consequential amendments to the Banking Recovery and Resolution Directive (2014/59/EU) (BRRD) to improve the resolvability of EU banking Institutions. It is commonly referred to as the ‘daisy chain’ regulation (the Daisy Chain Regulation).

One aspect of the amendments is to align the resolution treatment of global systemically important institutions (G-SII) that have multiple-point-of-entry (MPE) resolution strategies and ‘daisy chain’ structures (namely, where MREL elements are issued indirectly through multiple legal entities to the resolution entity, which creates a chain of issuances —and purchases— at each level of the subsidiaries) with the Financial Stability Board’s Total Loss-absorbing Capacity (TLAC) term sheet and guidance ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (the Standards) (the Amendment).

The detail of the Amendment

G-SIIs with MPE strategies and daisy chain structures are now allowed to deduct a lower amount for the holdings of the own funds and eligible liabilities of their subsidiaries, including those in third countries, when they do not belong to the same resolution group (the Holdings) provided they consider the opinion of the relevant national resolution authorities before doing so. When the G-SII deducts the lower amount, the difference between the full, and this reduced, amount of the Holdings (the Surplus) will be deducted by the relevant subsidiary. This Amendment will be subject to a new transition period until the end of 2024.

Requirements and conditions to benefit from the Amendment

The Regulation amends CRR and introduces a new Article 477a to set out when such deductions are permitted. This is: (i) where the relevant subsidiary is located in a third country with a resolution framework that is deemed by the EU resolution authorities to meet the Financial Stability Board’s Standards and, therefore, to be equivalent; or (ii) where, during the transition period, the relevant third country does not have an equivalent resolution framework but complies with one of the two conditions set out in Article 477a(2) of the CRR.

These conditions are:

• a legal opinion provided to the Single Resolution Board (SRB) from each applicable jurisdiction confirming that: (i) there are no generally applicable, current or foreseen, material, practical or legal impediments to the prompt transfer of assets from the resolution group of the third country subsidiary to the resolution group of the EU parent entity; and (ii) that the way the funds are able to flow through the layers of relevant subsidiaries ensures that they are available and freely transferrable. Consequently, a legal opinion for each jurisdiction - until the EU parent entity - will be required; or
• a legal opinion of the third country subsidiary’s relevant resolution authority confirming that the Surplus could be transferred to the EU parent entity. 

As stated above, one, not both, of these conditions must be complied with in order to take advantage of the Amendment.

Our analysis

In relation to the first condition, in our view “prompt transfer” should exclusively apply to situations where the entities operate under a “business as usual” situation - i.e. when the subsidiaries are not in a “failing or likely to fail” (FOLTF) scenario. There are two main reasons for this:

• first, the Amendment is intended to allow the deduction of part of the exposures when the subsidiary is over-capitalised; thus, those Surpluses will not exist in a FOLTF scenario because either the Surplus no longer exists or there would be no liquid assets to transfer; and
• secondly, the same wording is used in the solvency requirement waivers provided under Articles 7, 9 and 113.6 of CRR and the guidance provided by national prudential supervisors as to whether the entity is operating in a “business as usual” situation does not require the assessment to be carried out when the transferring entity is in a FOLFT scenario. Moreover, Spanish supervisors have so far expressly indicated that this concept must be applied under the business as usual principle, not considering the impediments arising from a FOLFT scenario of the subsidiary or the EU parent entity.

Finally, there are also interpretative doubts on the scope of the assets to be transferred. In our view, prompt transferability of cash is the only in-scope asset as this is the natural way of mobilising funds and resources within banking groups. Certain types of assets, by definition, cannot be transferred (i.e. deferred tax or intangible assets) which strongly suggests these cannot be considered ‘in-scope’ for the purposes of providing the opinion.