Provisions on the Temporary Suspension by the Resolution Authority of Termination Mechanisms in Financial Contracts Governed by the Law of a Third State

The present document is consistent with the original contained in the archives of the Bank of Italy Digitally signed by Legal Address Via Nazionale, 91 - P.O. Box 2484 - 00100 Rome - Share capital Euro 156,000.00 Tel. 06/47921 - telex 630045 BANKIT - VAT No. 00950501007 - www.bancaditalia.it

Page 1 of 8 PROVISIONS ON THE TEMPORARY SUSPENSION BY THE RESOLUTION AUTHORITY OF TERMINATION MECHANISMS IN FINANCIAL CONTRACTS GOVERNED BY THE LAW OF A THIRD STATE

1. In listing the powers that resolution authorities must possess, Chapter VI of the BRRD (Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014) provides in Article 71 for the power to temporarily suspend termination mechanisms recognized to any contractual counterparty of an entity subject to resolution and, under certain conditions, to its subsidiaries. This power covers all contracts governed by the law of a Member State. This provision has been implemented in our legal system through Article 68 of Legislative Decree No. 180 of 16 November 2015 (d.lgs. 180/2015), which assigns to the Bank of Italy, in its capacity as Resolution Authority, the power to suspend – from the publication of the resolution plan until midnight of the next working day – the activation of termination mechanisms recognized to any contractual counterparty of an entity subject to resolution (paragraph 1) and, provided certain conditions are met, to the counterparties of a company controlled by the entity subject to resolution (paragraph 2). To make the exercise of this power effective also with regard to contracts governed by the law of a third state, paragraph 8 of Article 68 of d.lgs. 180/2015 provides that the Bank of Italy may order, in cases identified by it, that these contracts contain a clause whereby the parties agree to be subject to the effects of the suspension provided for in the same article. Particular relevance in this context assumes financial contracts (derivative instruments and securities financing transactions). The existence of a power vested in the resolution authority to temporarily suspend the activation of termination mechanisms of such contracts is indeed one of the elements that the standards developed by the Financial Stability Board (FSB) ask to be considered to assess the resolvability of a bank or other financial institution1. At the urging of the FSB itself, globally systemically important banks (Global Systemically Important Banks - G-SIBs), by adhering to the Universal Resolution Stay Protocol of 2015 published by ISDA, have voluntarily committed to recognizing the power of the resolution authorities of their foreign G-SIB counterparties to temporarily suspend the activation of termination mechanisms inserted in financial contracts concluded between them.

1 Cf. Key Attributes of Effective Resolution Regimes for Financial Institutions.

Page 2 of 8 Financial contracts governed by the law of a third state are also present in banking groups with sizes smaller than G-SIBs. Some jurisdictions, including some States of the European Union, have already adopted regulatory measures requiring all intermediaries, or anyway a wider range of intermediaries than that of G-SIBs, to mandatorily include in financial contracts clauses whereby the counterparty recognizes the power of the resolution authority to temporarily suspend the activation of termination mechanisms in financial contracts, governed by the law of a foreign state, concluded by the entity subject to resolution.

2. With this Order, the Bank of Italy – in its capacity as Resolution Authority – sets out implementing provisions of Art. 68, paragraph 8 of d.lgs. 180/2015, identifying the type of contracts, intermediaries, and counterparties to which the power of suspension for two working days may apply. The provisions apply to financial contracts, as defined in Article 1, paragraph 1, letter (o), of d.lgs. 180/2015 (with the exception of interbank loan agreements with a maturity equal to or less than three months), governed by the law of a third state, concluded with any counterparty, by banks and financial companies (including SIMs) falling within the competence of the Single Resolution Board, excluding contracts concluded within the framework of payment systems or securities settlement systems or with their operators, central counterparties, or central banks. The application solely to intermediaries falling within the competence of the Single Resolution Board is attributable to the need to prioritize improving the resolvability of subjects of greater size and complexity, due to the higher degree of systemic risk they entail and the fact that almost exclusively relevant financial contracts for the purposes of these provisions are concentrated at such intermediaries. The Order is not subject to the consultation and impact analysis obligations provided for by the Order of 24 March 2010 for the issuance of acts of a normative nature by the Bank of Italy, given its urgent character, without prejudice to the need to guarantee, in some cases, a transitional period for application (see infra). Indeed, the lack of power vested in the competent resolution authority to suspend the activation of termination mechanisms of financial contracts governed by the law of a third state constitutes an element potentially capable of compromising the full and effective resolvability of intermediaries and the implementation of planned strategies to overcome the crisis. The rapid issuance of the Order is also consistent with the objective of harmonizing the Italian legal system, in the perspective of the European integration of the banking and financial system and the rules on the crisis of credit intermediaries, with the legislative solutions already adopted by other Member States. However, an impact analysis and an informal consultation involving ABI and intermediaries holding contracts of this kind have been conducted. They confirmed that the Order entails very limited costs for the addressees, considering that financial contracts governed by the law of third states are concentrated, as stated, at intermediaries of high size and that their notional value is negligible compared to the total value of financial contracts.

Page 3 of 8 The comments collected during the consultation have been taken into consideration in the drafting of the regulatory text. 3. The Order enters into force from the date of publication in the Official Gazette of the Italian Republic and will be published on the Bank of Italy website: www.bancaditalia.it. The provisions contained therein apply with the following timelines: a) for financial contracts concluded between G-SIBs, they apply from the date of publication in the Official Gazette, to ensure continuity with the obligations that G-SIBs have already voluntarily assumed by adhering to the ISDA Universal Resolution Stay Protocol of 2015; b) in all other cases, they apply one year after their entry into force. This solution allows taking into account possible initiatives by ISDA aimed at facilitating the acceptance of the new clauses provided for by the Order through the preparation of a specific Jurisdictional Modular Protocol or, in their absence, the time needed to adapt contractual documentation to the new regulation. In accordance with Art. 68, paragraph 8, of d.lgs. 180/2015, the Order applies to contracts concluded or renewed after the dates indicated in points a) and b); since it further strengthens the resolvability of intermediaries, it is up to the addressees to voluntarily insert suspension clauses in contracts concluded previously, also within the framework of ISDA initiatives. Rome, 16 January 2018 THE GOVERNOR Ignazio Visco

Page 4 of 8 PROVISIONS ON THE TEMPORARY SUSPENSION BY THE RESOLUTION AUTHORITY OF TERMINATION MECHANISMS IN FINANCIAL CONTRACTS GOVERNED BY THE LAW OF A THIRD STATE

The Bank of Italy HAVING REGARD to Legislative Decree 16 November 2015, No. 180 (d.lgs. 180/2015) which sets out rules for the implementation of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014, establishing a framework for the recovery and resolution of credit institutions and investment firms; HAVING REGARD in particular to Article 68 of d.lgs. 180/2015 which regulates the exercise, by the Bank of Italy, of the power to temporarily suspend termination mechanisms recognized to the counterparty of a contract concluded by an entity subject to resolution or by a company controlled by it; HAVING REGARD in particular to paragraph 8 of Article 68 of d.lgs. 180/2015 which confers upon the Bank of Italy the power to order, in cases identified by it, that contracts governed by the law of a third state and concluded after the entry into force of the aforementioned legislative decree contain a clause whereby the parties agree to be subject to the effects of the suspension provided for in the same article; HAVING REGARD to Articles 32 and 33 of d.lgs. 180/2015 which regulate the resolution of banks and financial companies belonging to a banking group; HAVING REGARD to paragraph 4 of Article 61 of the Banking Consolidated Law which, in regulating the direction and coordination activities of the parent company, provides that it issues provisions to the components of the banking group for the execution of instructions given by the Bank of Italy in the interest of the stability of the group itself; CONSIDERING that the Financial Stability Board (FSB), in consultation with the Basel Committee on Banking Supervision (BCBS) and with competent national authorities, identifies and publishes annually the list of Global Systemically Important Banks (G-SIBs);

Page 5 of 8 CONSIDERING that the standards developed by the FSB evaluate the existence of the power vested in the resolution authority to temporarily suspend the termination mechanisms of financial contracts concluded by the entity subject to resolution among the elements to be considered for the judgment on the resolvability of the entity itself; CONSIDERING that the existence of financial contracts governed by the law of third states could render ineffective the exercise, by the competent resolution authority, of its own powers to temporarily suspend the aforementioned termination mechanisms; DEEMING it necessary to introduce regulation that makes mandatory the commitments that G-SIBs have voluntarily assumed by adhering to the ISDA Universal Resolution Stay Protocol of 2015, according to which, in the event of resolution of a G-SIB own contractual counterparty, G-SIBs are subject to the effects of the temporary suspension, ordered by the competent resolution authority, of their rights to activate the termination mechanisms of financial contracts governed by the law of a third state; DEEMING it necessary to improve, more generally, the resolvability of all banking groups and banks not part of groups falling within the competence of the Single Resolution Board pursuant to Article 7, paragraphs 2, 4 letter b) and 5 of Regulation (EU) No. 806/2014 of the European Parliament and of the Council of 15 July 2014, by introducing regulation that obliges such subjects not to bind themselves to financial contracts governed by the law of a third state lacking a clause whereby, in the event of their resolution, the counterparty agrees to be subject to the effects of the temporary suspension of the activation of termination mechanisms ordered by the competent resolution authority; ORDERS

Page 6 of 8 Article 1 (Scope of Application)

1. These provisions apply to the following companies, having legal seat in Italy and falling within the competence of the Single Resolution Board, pursuant to Article 7, paragraphs 2, 4 letter b) and 5 of Regulation (EU) No. 806/2014 of the European Parliament and of the Council of 15 July 2014: a) banks not belonging to banking groups; b) banks, financial companies, and mixed financial holding companies that are parent companies of a banking group pursuant to Article 61 of the Banking Consolidated Law; c) other banks and financial companies belonging to a banking group pursuant to Article 60 of the Banking Consolidated Law.

Article 2 (Definitions)

1. For the purposes of this Order, the following terms are intended: a) "control": the power exercised over a company pursuant to Article 23 of the Banking Consolidated Law; b) "financial contracts": the contracts and agreements referred to in Art. 1, paragraph 1, letter (o), numbers 1), 2), 3), 4) and 6) of d.lgs. 180/2015 concluded by the subjects referred to in Article 1 with any type of counterparty, with the exception of those concluded within the framework of payment systems or securities settlement systems or with their operators, central counterparties, or central banks; c) "guaranteed financial contracts": the financial contracts referred to in point b) that jointly meet the following conditions: c1) the obligations arising from such contracts are guaranteed by a holding company referred to in Art. 1, letters b) and c), or otherwise fall upon such company; c2) the prerequisite for the activation of termination mechanisms is the insolvency of the aforementioned holding company or is otherwise determined with regard to the financial situation of the latter; d) "termination mechanisms": the clauses referred to in Article 1, paragraph 1, letter (ii) of d.lgs. 180/2015;

Page 7 of 8 e) "G-SIBs": the banks present in the list of Global Systemically Important Banks identified annually by the Financial Stability Board (FSB), in consultation with the Basel Committee on Banking Supervision (BCBS) and with competent national authorities; f) "financial companies": the companies referred to in Article 59, paragraph 1, letter b), of the Banking Consolidated Law. 2. For definitions not expressly indicated in this Article, the definitions provided for in Article 1 of d.lgs. 180/2015 apply.

Article 3 (Contractual Recognition of the Power to Suspend Termination Mechanisms)

1. The subjects referred to in Art. 1 do not bind themselves to financial contracts governed by the law of a third state lacking a clause whereby, in the event of resolution of the same subjects, the counterparty agrees to be subject to the effects of the temporary suspension of the activation of termination mechanisms ordered by the competent resolution authority, pursuant to Article 68, paragraph 1, of d.lgs. 180/2015.
2. Banks and financial companies having legal seat in Italy and controlled by one of the subjects referred to in Article 1, letters b) and c), do not bind themselves to guaranteed financial contracts governed by the law of a third state lacking a clause whereby, in the event of resolution of the holding company, the counterparty agrees to be subject to the effects of the temporary suspension of the activation of termination mechanisms ordered by the competent resolution authority, pursuant to Article 68, paragraph 2, of d.lgs. 180/2015.
3. The parent companies of a banking group referred to in Article 1, letter b), ensure that banks and financial companies having legal seat abroad, controlled by one of the subjects referred to in Article 1, letters b) and c), do not bind themselves to guaranteed financial contracts, governed by the law of a third state, lacking a clause whereby, in the event of resolution of the holding company, the counterparty agrees to be subject to the effects of the temporary suspension of the activation

Page 8 of 8 of termination mechanisms ordered by the competent resolution authority, pursuant to Article 68, paragraph 2, of d.lgs. 180/2015.

Article 4 (Commencement)

1. The provisions of Article 3 apply, one year after the entry into force of this Order, to the contracts referred to in Article 2, paragraph 1, letters b) and c), concluded or renewed, even tacitly, from that date, also based on framework agreements concluded previously.
2. With reference to financial contracts referred to in Article 2, paragraph 1, letter b), concluded between G-SIBs and counterparties having the same nature as G-SIBs, the provisions of paragraph 1 apply from the entry into force of this Order.
3. Companies that become part of the list of subjects referred to in Article 1 after the entry into force of this Order apply the relevant provisions one year after the date on which they are subject to the competence of the Single Resolution Board.

Article 5 (Entry into Force)

1. This Order enters into force from the date of publication in the Official Gazette of the Italian Republic.