The Guidance Notice External Bail-in Execution informs institutions and Financial Market Infrastructures (FMIs) about how and within what time frame they should act and exchange information and which communication channels they are expected to use in the event of a bail-in. This information is aimed at supporting the external bail-in execution as efficiently and effectively as possible. The objective is also to create transparency and security in the market through a timely technical implementation of the bail-in.

The draft of the new version includes international central securities depositories – Euroclear Bank and Clearstream Banking Luxembourg – in the process of the external bail-in execution. Other cross-border aspects are expected to follow.

But what is the specific objective of the Guidance Notice and how has it evolved over the years?

What is external bail-in execution?

External bail-in execution is the technical implementation of the bail-in by the affected institution and the Financial Market Infrastructures as soon as the resolution order is announced. It primarily involves the (international) central securities depositories, market information service providers and stock exchanges.

As part of the bail-in tool, in a first step the instruments of ownership of the institution under resolution are cancelled. This is followed by the write-down of liabilities until the asset side corresponds to the liability side in terms of value. The institution can then be recapitalised by converting the liabilities into new shares.

While during the internal bail-in execution the institution adjusts its own systems, the Financial Market Infrastructures provide support during the external bail-in execution. If necessary, stock exchanges can thus suspend trading of affected instruments and market information service providers, in Germany for example WM Datenservice, can adjust the information base and inform the market about the resolution measures. The central securities depository (CSD) reduces the affected instruments in its system, technically generates new shares and books the bail-in in the accounts of its participants – which include, among others, custodian banks, national and international CSDs and institutional investors.

What is the objective of the Guidance Notice?

The Guidance Notice aims to improve the resolvability of institutions and to ensure market transparency and security through timely technical implementation of the bail-in. It describes the overall process (see Figure 2) including the actors involved, their responsibilities, communication channels and interfaces, as well as the time frames involved. Furthermore, it specifies which information the affected institution must provide in order to support the external bail-in execution. Format templates for documents to be completed by the institution are also included.

First and second version of the Guidance Notice

The focus of the first version of the Guidance Notice dated 1 October 2019 was a baseline scenario (see expert article on the BaFin website dated 20 September 2019). It considered only German stock corporations with bearer shares (Inhaberaktien), it assumed that only non-structured bonds denominated in euros were issued, and was limited to the activities of the Financial Market Infrastructures that helped prepare the Guidance Notice: Clearstream Banking Frankfurt (CBF), WM Datenservice and Frankfurt Stock Exchange.

The second version of the Guidance Notice, published on 13 April 2021, extended the focus procedurally and technically to cover all legal forms and all classes of shares, and took foreign currency bonds into account. It also included the suspension of trading on regulated and non-regulated markets of the regional stock exchanges – such as the Stuttgart Stock Exchange. Furthermore, it offers the possibility to suspend payments during the technical implementation – i.e. for a limited period of time. In addition, the second version included the pool factor reduction.

Third version of the Guidance Notice

BaFin is currently consulting on the third version of the Guidance Notice – feedback is possible until 15 April 2022. The main addition is the inclusion of international central securities depositories in a so-called ICSD Add-On – a uniform approach that was developed in close consultation with the international central securities depositories (ICSDs), the Single Resolution Board (SRB) and other national resolution authorities (see also SRB document "Reflecting bail-in in the books of the International Central Securities Depositories (ICSDs)"). The Add-On focuses on cross-border aspects of the safekeeping and administration of international bearer bonds by the ICSDs – Euroclear Bank and Clearstream Banking Luxembourg.

The jointly developed process was integrated into the operational structure of the existing Guidance Notice in order to take account of the special features of the domestic bail-in execution (see Figure 2). In addition, the focus at the institution under resolution is broadened to include percentage-quoted structured debt instruments. With the inclusion of the exchanges Eurex Germany, Eurex Repo and Tradegate Exchange, the new version now covers the discontinuation or suspension of trading on all relevant exchanges in Germany.

Main addition: the ICSD Add-On

If the institution under resolution has issued international bearer bonds via the ICSDs, they are directly involved in the external bail-in execution. Their supervisory authorities and the common depository and service providers are also involved, so that the institution's activities relate to additional Financial Market Infrastructures.

The ICSDs must implement the bail-in in their systems in the same way as the German domestic central securities depository (i.e. CBF). In addition, the ICSDs’ supervisory authorities – Commission de Surveillance du Secteur Financier (CSSF) and Nationale Bank van België (NBB) – must be informed of the resolution measure. The ICSDs’ depository and service providers (Common Safekeepers, Common Depositories or Common Service Providers) adjust the global certificates/global notes of the international bearer bonds.

Why is the ICSDs’ involvement only an Add-on?

The ICSDs can participate in the external bail-in execution as “issuer CSDs” and as “investor CSDs”, i.e. as participants of the domestic central securities depository.

In the technical reduction of international bearer bonds – after write-down and conversion – the ICSDs are involved as “issuer CSDs”. This is done on the basis of information provided by domestic actors.

If there is a conversion of international bearer bonds into new shares, it is always CBF that generates the new shares and transmits them to the ICSDs, which in turn distribute them as “investor CSDs” or participants of CBF (see Figure 1) to their participants – including national CSDs and institutional investors.

Thus, the ICSD process always builds on the domestic process of bail-in execution, which is why it is always an addition, or add-on.

Figure 1: The role of the (I)CSDs in the process of external bail-in execution

© BaFin

Legend

© BaFin

Outlook

The consultation of the third version is only an intermediate step in reflecting all facets of the external bail-in execution. In future versions, BaFin plans to consider further cross-border aspects – for example, other CSDs in the European Union such as Monte Titoli, Iberclear, etc. In addition, in the future the Guidance Notice will provide information on the bail-in of liabilities issued in a third country (for example via DTC or SIX SIS). For these purposes, BaFin is closely coordinating with other European and national authorities to ensure a standardised approach in the European Union.

Figure 2: Overall process of the external bail-in execution

© BaFin

Legend

© BaFin