12 UK PN Banking Managingfinancialfailure

UK and European Regulatory Update:
Managing Financial Institution Failure

Tuesday 21 February 2012, 4.00 6.00 pm
In partnership with:
What we will cover

Legislative framework
overview of issues in the insolvency and financial
landscapes
the new legislative and regulatory framework
Banking Act and SAR in practice and experience to date
Claiming in the insolvency
Forewarned is forearmed lessons learned
Where to go from here? whats expected next?
2012 Baker & McKenzie 2
Forewarned is forearmed:
understanding the UK insolvency framework and financial
institution client and creditor landscape in the event of
further failure, locating the pressure points and the pros
and cons of early action
steps to consider now; what to expect on day 1; and what
to do on day 1
What provoked the current regulation & legislation?

- problems with the financial and insolvency
landscape
Company
Voluntary
Arrangement
Dissolution
Scheme of
Arrangement
UK Corporate
Insolvency
Processes
Liquidation
Administration
Receivership
Limitations of UK insolvency law

Financial institutions:
transact globally and across borders: die locally
Insolvency laws:
enacted locally for local use;

for entities not groups;
with potential long-arm, cross border reach;
No UK client asset recognition;
No UK historic provisions for financial institution insolvency;
No global provisions for consolidation of estates of affiliates;
No global co-ordination or co-operation of officeholders;
No UK debtor in possession control concept;
No UK formal insolvency funding process;
Moratorium on creditor action
Implications of potential fire sale of assets
Inability to deal quickly with depositors and clients
Mismatch between insolvency and financial set-off, netting concepts

Issues to address on financial institution failure

Who owes what to whom, why, and on what basis?
trust, secured or unsecured claims;
quantifying and reconciling claims - differing valuation
methodologies
external parties claims
How to deal with client positions?
What is house and what is client?
Determining and allocating shortfalls in client omnibus
accounts
Establishing extent of rights of use
Issues to address on financial institution failure

Third party risk of recovery
Identifying and collecting what is no longer in the possession of the
firm
Affiliate claims
Interaction of cross pledges and security granted by clients to firm and
affiliates
Different claims process, protocols, bar dates
Documentation inadequacies
Reconciliation of inadequate; incomplete; inconsistent; or unsigned
transaction documents;
Who understands the banks business and can help on insolvency?
Few employees aware of all transaction types and business risks
Employees not required to stick around
Limitations on managements knowledge?
What has been done to date?

- New legislative and regulatory framework
2008 onwards - Preparing for further UK failure

Recognition - different treatment needed
Intervention dilemma:
protect clients and depositors
over-regulated, de-risked, more costly financial services
reduce brokerage firms to quasi custodians?
in order to:
minimise risk of disruption to financial markets on
insolvency; speed up returns; and raise confidence in the
UK as an investment venue
The UK Legislative Response

The Banking Special Provisions Act 2008
The Banking Act 2009
Deposit taking institutions:
Incorporating pre insolvency special resolution regime and 2
insolvency processes
Ss233-234 enabling powers
Investment Banking Liaison Panel of industry experts
Investment Bank Special Administration Regulations 2011 (SAR)
Born out of Treasurys enabling powers under Banking Act 2009
New administration process tailored to investment banks
Subject to 2 year fit for purpose review (per s236 Banking Act 2009)
Banking Act 2009 - Overview

Aim
permanent statutory regime to improve resilience of UK markets.
customer and depositor protection.
Use
targets deposit taking institutions
where failure is imminent and other powers inadequate
Provides
3 pre-insolvency stabilisation options; and 2 insolvency options
transfer powers
Scope
deposit taking institutions
Building societies (with modifications)
Powers to apply SRR to credit unions
Power to disapply to any other institution type by order of HM Treasury
Banking Act 2009- Statutory Objectives

5 statutory special resolution objectives:
1 protect and enhance stability of UK financial systems
and continuity of banking systems;
2 protect and enhance public confidence;
3 protect depositors;
4 protect public funds;
5 ensure right to peaceful enjoyment of property
(ECHR);
Anticipated that objectives may change over time.
Banking Act 2009 When will SRR trigger?

Trigger of the SRR by the FSA. (S7)
Opaque FSA discretion
All or part of business has encountered or is likely to encounter
financial difficulties s1(1) nb not insolvency
When FSA considers bank is failing or likely to fail to meet its threshold
condition
Bank not reasonably likely to be able to cure this
Linkage to bank threshold conditions is key:
adequate resources;
includes internal and external factors
In Dunfermline, FSA tried first to work with Dunfermline to avoid SRR
Reflects ultimate obligation on FSA to reduce bank failures
FSA decision to intervene: the Dunfermline

experience, March 2009
Largest building society in Scotland: 12th in Britain
Dunfermline financially weak required to put in place strategy to avoid
use of SRR
FSA exposedrisked criticism post-determination
2008 stress tests on Dunfermline capital levels
60m new capital requirement
Board Dunfermline unable to continue as a going concern
FSA Dunfermline unable to meet threshold conditions
Criticism of expectation gap around communications with FSA.
Scottish Affairs Committee inadequate supervision by FSA in run
up to failure.
Unclear how FSA decision making process escalates in intensity
Banking Act 2009 Stabilisation Options

Following FSA determination, BofE and FSA together decide
if first 2 options viable:
Transfer by BofE of all or part to a private sector
purchaser;
Transfer by BofE of all or part to a publicly owned
/controlled bridge bank. (HM Treasury recommendation
needed?)
HM Treasury involved to transfer all or part of bank
temporarily to public ownership and safeguard public
funds.
Code of Practice issued by HM Treasury after consultation
with BofE and FSCS. The how and when of SRR
BofE required to make announcement of use of SRR tools
Banking Act 2009 Exercise of Stabilisation Powers

SRR tools:
designed to effect transfers of shares, securities, property, rights
and liabilities by law;
permit transfer of property located outside UK;
permit transfer of rights and liabilities governed by non UK law
permit transfers regardless of pre-existing contractual rights or
restrictions, free of trusts, liens or encumbrances and without
triggering default
Subject to safeguards and Banking Liaison Panel interaction
HM Treasury drives process where public funds involved
FSCS determines depositor payout arrangements and
compensation
Banking Act 2009 compensation (ss49-62)

Compensation following part transfer:
Strikes balance between public interest and personal
interests in property:
Transfer to private sector HM Treasury makes
compensation order
Transfer to bridge bank HM Treasury makes
resolution order
Transfer to temporary public ownership compensation
order or resolution order
Any third party compensation order
Banking Act 2009 compensation (ss49-62)

Compensation Scheme Order
if disposal process establishes business/share price, compensation
based on price paid
independent valuer to be appointed. Decision may be appealed
Resolution Fund Order
transferors obtain contingent economic interest in proceeds of
resolution
Proceeds of resolution deduct cost of public fund.
Third Party Order
HM Treasury discretion to pay to third party counterparts
No profit to be made by authorities from compensation
Banking Act 2009 Exercise of SRR tools by

Bank of England to date
How has BofE exercised SRR powers to date to determine
the fate of financial institutions?
Private takeover Lloyds TSB takeover of HBOS
Bridge Bank - Dunfermline
Temporary public ownership Northern Rock, Bradford
and Bingley (part only mortgages and laons)
Decisions driven by:
need for business continuity of critical functions
where HM Treasury funds extended, HM Treasury
decides on option in order to protect public funds
Banking Act 2009 insolvency options

A. Bank insolvency procedure:
default option unless in public interest to put in place an
SRR
FSA and BofA apply to court to facilitate FSCS payout
and transfer of accounts
B. Bank administration procedure:
BofE applies to court for administration
Administration facilitates transfer of part to private sector
bank or bridge bank
Administration of residual business
The Investment Bank Special Administration

Regulations 2011 (SAR)
Aim:
improve UKs ability to deal with investment bank failure:
clarify treatment and focus on faster return of client assets;
equip officeholder with powers that recognise idiosyncrasies
of investment firms; and
process for investment firms that are non deposit-taking.
Regulations and Investment Bank Special Administration
(England and Wales) Rules 2011
Use:
where unable or likely to become unable to pay debts; where
fair; or where in public interest to put into special administration
SAR - Scope
Who is within Scope?
Those with permission under Part 4 of FSMA 2000 to carry on at
least 1 of:
safeguarding and administering investments;
dealing in investments as principal;
dealing in investments as agent; and
Those who hold client assets (to include client money n.b. except
money held related to insurance mediation which is not part of
investment activities); and
Those incorporated in, or formed under the law of, the UK
(eg MF Global UK but not MF Global US; e.g not a branch of non-UK
firm carrying out business in UK)
SAR Statutory objectives

Statutory Administration Objectives:
1 - Ensure return of client assets (inc money) as soon
as reasonably practicable;
2 - Timely engagement with market infrastructure
bodies and authorities (Treasury, Bank of England and
FSA);
3 - Rescue investment bank as a going concern or wind
it up in the best interests of creditors
(FSA described MF Global SAOs as 1 and 2)
SAR FSA power to direct priority of objectives

FSAs power to direct administrator to prioritise any statutory
objective:
following consultation with Treasury and BofE
with a view to retaining public confidence in stability of
financial markets
direction intended to give administrators:
clarity to minimise requirement to seek court directions;
comfort and defence where otherwise might avoid
action due to personal liability concerns
Power not exercised to date in MF Global
Who plays what role going forwards?

The Court
makes interim order or order on terms it deems fit
gives directions on any matter
reviews administrators actions
The Administrator
agent, causing firm to act as it sees fit in furtherance of SAO
Duty to prepare statement of proposals
Duty to provide statement of affairs to include client asset particulars
May seek directions from court
Must consult with creditors committee, if formed
May impose bar date, may allocate shortfall, may distribute to clients and creditors
Must work with authorities
The Firm
Management loses powers unless administrator permits otherwise
The FSA
Consulted prior to order being made; ability to direct administrator to prioritise
Entitled to attend and be heard at court hearing and throughout
Committee
Client and creditor representation; attendance of FSA
SAR power to allocate shortfalls

Administrator has power to allocate shortfalls in client assets
(not money):
shortfalls in client securities in omnibus account may be
allocated pro rata
Security holders in respect of the client assets may participate
in the distributions and shall share in the shortfall
Where disputes exist regarding shares in a distribution,
administrator may discharge his duties by:
Lodging securities in court; or
Distributing in accordance with terms of settlement between
parties
Parties shortfall ranks as unsecured claim against bank
SAR bar date to expedite return of client assets

Bar Date for client claims:
administrator may set bar date to expedite return of client assets
bar date creates cut off date after which claims can be reconciled
By way of safeguard, bar date:
must allow time for fact of administration to be publicised;
must allow time for clients to establish, calculate and submit claims;
allows clients to appeal on grounds of inadequate time;
requires administrator to contact clients on firms books;
Once set, prevents distribution after bar date until creditor committee
approval of distribution plan and court approval received
No ability for late claimant to challenge bona fide distribution by
administrator
SAR in practice - MF Global UK Ltd

Commencement of SAR process in UK: 31 October 2011
Principle Operations: US, Australia, Singapore, India, Canada, Hong
Kong, Japan and the United Kingdom
(As at 3 February 2012 administrators report and subject to validation)
No./ Value of client money claims:
$2.1 billion
(2643 total)
Client money collected so far:
$912,674,147
No. / Value of client asset claims:
$1,036 million (547 total)
Client assets (not money) held:
$100 million
No / Value of non-client money claims:$5.4 billion
(757 total)
Affiliate claims made:
$400m
Affiliate claims received:
$1.5bn
Employees: Approx 300 of 727 staff initially retained to assist the
administrators.
SAR MF Global bar date update

Key Date 1 29 February 2012 Bar Date for
submission of client asset claims (other than client
money)
Key Date 2 30 April 2012 final date for submission of
claims from unsecured creditors wishing to participate
in interim dividend planned on or before 30 June 2012.
SAR in practice The MF Global experience

Delay to statement of affairs;
Claims submission and supporting evidence
Flexibility to prioritise objectives subject to FSA direction;
Distributions:
Interim for client money;
Interim for unsecureds;
Bar date for client assets;
Committee constitution;
Staff and services;
Conflicts of interest new administrator;
Affiliates claims, proofs and bar dates, protocols;
SAR anticipated benefits

All parties benefit from continuity of services :
I.T hardware/software; financial data; electronic communication
systems; data processing and secure networks; sponsoring
systems; employees; utilities
Clients benefit from:
Bar date and faster resolution of client pool;
Ability to share pro rata in shortfall;
Ability to be present at and vote (as client and creditor in some
cases) at meeting to approve SA proposals
Ability to participate in creditors committee
Creditors benefit from:
client cost sharing;
bar date produces certainty faster;
Potentially higher distribution rates;
SAR and Banking Act interaction

Where firm is deposit taking with no eligible depositors:
Use Special Administration (SAR) or Bank Administration
Procedure
Cannot enter Bank Insolvency Procedure
Where firm is deposit taking with eligible depositors:
Banking Act Insolvency or Administration procedure; or
BofE may apply to court for Bank Administration
Procedure or Bank Administration Procedure where
SRR transfer power has been exercised under Banking
Act Part 1;
FSA may apply for Bank Insolvency Procedure with
BofE consent
Financial Institution Insolvency


Creditors only have an unsecured claim
Clients have a claim against the Client Money Pool (CMP)
Generally speaking this determination will be based
largely on an analysis of the terms of business that
governed the relationship between [MF Global] and the
claimant at the date of [MF Globals] collapse [KPMG]
SAO creates potential conflict between clients/creditors
Precedence to the distribution of client assets
Delay in dealing with creditor claims

MF Global
Client money
880 customers asserting trust/CM claims amounting to
US$554m
Entitlement to CM protection does not accord with MF
Globals own systems and records
Client assets
547 claims to client assets 139 disputed claims
US$742 million MF Global Inc
US$114 million title considered to have passed to firm
Categories of client/creditor
Segregated clients (contributors to CMP)
Shortfall risks
Third party failure (e.g., affiliated bank)
Identifying client money
Alternative approach
Claims from non-contributors
Segregated clients (non-contributors)
Creditors with a claim to be clients
Segregated Clients (contributors)

Clients who have contractually agreed CM protections
Money has been paid to the firms CM accounts
Contrast with:
Clients to whom the firm has agreed to provide CM
protection but their money has not been segregated
Entitled to participate in distribution of CM from the CMP
In theory should receive a full return on CM
In practice likely to be a shortfall on insolvency
Shortfall risk third party failure

Lehman Brother International (Europe) held CM with Lehman Brothers
Bankhaus AG
Lehman Bankhaus also insolvent resulting in loss of CM of US$1bn
MF Global US$136 million held with affiliates in insolvency processes
Uncertain at present how much will be recovered and in what
timescale [KPMG]
CASS 7.4.7R
A firm must exercise all due skill, care and diligence in the selection,
appointment and periodic review of the credit institution or bank where
CM is deposited and the arrangements for the holding of the CM
CASS 7.4.9G need for diversification of risks
Shortfall risk third party failure

CASS 7.4.9A
A firm must limit the funds that it deposits or holds with a
relevant group entity or combination of such entities so
that those funds do not at any point in time exceed 20 per
cent of the balance on:
All of its general client bank accounts;
Each of its designated client bank accounts; and
Each of its designated client fund accounts.
Shortfall risk identifying client money

Insolvency constitutes a PPE
Pooling of monies held in client accounts
Status of client money held outside the firms client
accounts
Obligations on Administrators to identify CM held outside
the client accounts
Supreme Court considering this issue in the Lehmans
Administration
Tracing of money held outside client accounts
Shortfall risk alternative approach

Use of the alternative approach
CASS 7.4.19G
A firm that adopts the alternative approach may receive all
client money into its own bank account
Money is segregated into a client bank account on a daily
basis after performance of reconciliations
Risk of funds being swept out of house accounts leaving
shortfall in next days funding requirement
Need to maintain float
Potential breach of trust
Shortfall risk claims from non-contributors

Who can share in the Client Money Pool?
Claims or contribution basis?
Claims basis means parties who have not contributed to the CMP can
share in the funds contributed by other clients
This results in a shortfall and prejudice to those who have contributed
to the Client Money Pool
Lehmans position of affiliates
MFG SIPA Trustee claim for US$742 million (30.7 claim)
Intercompany wire transfer claim US$175 million
CASS 7.1.12G a firm that holds/receives money from an affiliated
company in respect of MiFID business must treat the affiliated
company as any other client
Shortfall risk claims from non-contributors

Claims or contribution basis subject to consideration by the
Supreme Court in the Lehmans Administration
Decision expected shortly
Segregated Clients (non-contributors)

Clients to whom the firm has agreed to provide CM
protection but whose money has not in fact been
segregated
Firm has breached FSA rules in failing to segregate
Potential statutory right of action s. 150 FSMA
Does not improve their position on insolvency
Ability to share in the client money pool depends on
outcome of the claims or contribution basis issue

Clients who dispute client categorisation
Clients who dispute opt out of CM protections
Use of Title Transfer Collateral Arrangements (TTCA)
Financial Collateral Directive
Transfer of full ownership of money to firm for purpose of
securing or otherwise covering present or future, actual or
contingent or prospective obligations, such money should
no longer be treated as client money
Exception for retail clients (CFDs/rolling spot forex)

Breach of rule or principle
Does not improve position on an insolvency
Unless it invalidates the action taken by the firm
Creditor will not have made contribution to the client
money pool
Ability to claim also depends on outcome of the
claims/contribution issue currently before the Supreme
Court in the Lehmans case
Client with open positions

Transfer of open positions
Some positions may not transfer
Firm transacts on back to back basis
Default rules
Status of proceeds
May depend on whether client receives CM protections
Proceeds of trust assets where client was opted out of
client money protections
Lomas & Ors v RAB Market Cycles (Master) Fund Ltd &
Ors [2009] EWHC 2545 (Ch)
Sums owed to clients

CM does not include sums due and payable by the firm to
its clients but not yet appropriated for that purpose
For example:
Where the firm is a counterparty to the client and the
client has a claim to sums due under the relevant
contract
Self generated indebtedness does not constitute client
money
Client assets
Investment Bank Special Administration Regulations 2011
Ability to set a bar date
Assets can be distributed free from risk of competing
claims
Regulation 12
Pro rata distribution of assets held in omnibus account,
where there is a shortfall
Contrast with Lehman
Scheme of arrangement
Conclusions
Client money
pressure to act and distribute promptly but
old problems resurface
Client assets
an improved framework
Forewarned is forearmed:
Lessons learned
Lessons Learned
Pre-Administration:
Understand your Agreements
Exposure to Third Parties
Exposure to Other Jurisdictions
Post-Administration:
The day after
Monitoring the Administration Process
Courses of Action
Understand Your Agreements (1)

Who is your Custodian/Banker?
Segregation of assets
Omnibus account
Designated account
Segregation of money
When does segregation occur?
Normal approach
Alternative approach
Does the agreement create a TTCA?
Do not agree to TTCA provisions if you do not want to take the risk
Do not agree to being opted up to a higher client status
Do not sign acknowledgments before reading them
Understand your Agreements (2)

What is the difference between a TTCA, a Right of Use
and a Security clause?
Can you limit TTCA/Right of use?
Cherry Pick assets
Included upper limit
Request to be notified when assets are being used
How is excess margin/proceeds of trades treated?
TTCA vs Client Money Protection

MF Global ToBs:
Clause 11:
All assets, whether cash or financial instruments, received by us either from
you or in respect of your accounts will be actually or potentially in respect of
margin or collateraland full ownership of such assets will be transferred to
us and all right, title and interest in and to such assets will pass to us outright
and absolutely
Clause 17(h):
Any surplus on a sale or closing out after exercising our rights under these
Terms belongs to you and we will treat it as client money. Accordingly if we
default while still holding it will be pooled with our other client money for the
benefit of all our customers and you will share rateably with them in the pool.
Exposure to Third Parties

Have you provided an omnibus lien extending to
affiliates?
Does your custodian use an affiliate bank (Lehmans
Bankhaus)?
20% FSA restriction on use of affiliates
Does your custodian operate an overnight sweep of
funds or other similar process?
What do you know about the use of Sub-custodians?
Exposure to Other Jurisdictions

Are you familiar with the Sub-custodian network
Has the Custodian exercised due skill care and diligence
in the selection?
Does the law of the sub-custodian recognise assets
segregation?
Has the sub-custodian confirmed assets/money
segregation?
Monitoring and periodic review?
Consider notification clause for change of sub-custodian
Summary
Custody
Prime Brokerage
Red Flags
No client money protections - No Trust

No segregation - No asset protection
Unidentified Custodian
No due diligence on third parties used
Exposure to countries with no/low regulatory
protection
Concentrated risk
Right of use without notification

TTCA Rehypothecation
Broad security interest
Broad security trigger - Event of Default
No client money protections
Protective Measures
Legal review of custody / client money

provisions
Use of designated accounts
Use of third party custodian
Awareness of cross-border regulations
Letters of Trust
Recovery of third party DD
Notification provision
Rehypothecation : risks
Assess excluded from rehypothecation
Client money prohibition
Use of third party custodian
Limitation of secrecy
Rumours of and/or entering into Insolvency

Identify latest statements and nature of exposure
Consider transferring any open positions (Alternative
Broker)
Monitor announcements of
Administrators/Exchange/Clearing House
What information has been provided to you in connection
with your client money and assets - are there time critical
issues (e.g., bonds maturing) so that you would require
information urgently?
Should you initiate bilateral communications with
Administrators/counsel?
Safeguarding your Interests

Are the Administrators dealing evenly between all of the interested
parties?
Clients vs Creditors
Conflicts of interest?
Fees and Expenses Where will they be paid from?
Are the Administrators taking appropriate steps to trace money and
retrieve this?
What steps are the Administrators taking in relation to assets or cash
held overseas - is this issue relevant to you?
What is being proposed in relation to the proceeds of any open
transactions- where will any income or proceeds of such transactions
be credited to and does this prejudice you in any way?
Interim Distribution
Courses of Action
Bilateral Communications
Submitting a claim How and What should you submit?
Can you make a claim in the client money pool if you are
not segregated?
Creditors committee
Should you attend court hearings?
Can you become a respondent?
Should you initiate a court application?
Can you have recourse against other parties (e.g.,
advisors, brokers etc)
Regulatory
Update
Recent Changes and Next Steps (1)

FSA Enhancing CASS:
CMAR
CF10a
TTCA for retail clients
Omnibus Liens
Prime Brokerage Reporting
FSA CP on Recovery and Resolution Plans

CP11/16 scope:
UK Banks and BIPRU730 firms with at least 15 billion
assets
Proposals:
Recovery Plan Proposals
Resolution Plan Proposals
CASS Resolution Packs (all firms CASS 6 and 7)
Implementation in early 2012 with transition period June
2012

FSB Key Attributes of Effective Resolution Regimes
EU Crisis Management Directive:
Resolution Authorities and EBA
Recovery Planning
Intra-Group Financial Support
Resolution Plans
Early intervention Appointment of manager?
Resolution Triggers
Resolution Tools
FSA/HMT/BOE Comments?
EU Insolvency Harmonisation by 2014
Appendix 1 - Banking Act 2009 additional

information
Banking Act 2009 Authorities Powers

HM Treasury given new powers in relation to FSCS:
To make regulations to facilitate establishment of FSCS contingency fund
through levies;
To require FSCS to contribute to costs of applying SRR;
to arrange loans from National Loans Funds to FSCS to allow FSCS to cover
expenses. FSCS able to invest its levies into National Loans Fund
to make recognition order in relation to IBS to give BofE formal oversight
FSA give new powers in relation to FSCS
To facilitate speedy repayment to depositors and faster account transfer
mechanisms
To obtain information from firms and people to transfer to FSCS to facilitate
FSCSs functioning
Bank of England given clarified role in relation to Inter Banking Systems
Oversight of various IBS to investigate, appoint inspectors, obtain information
and determine whether to require IBS to take action and impose sanctions
New Regulatory regime for oversight of inter banking systems
Banking Act 2009 Role of Authorities in SRR

Roles and parts played in SRR:
FSA triggers regime once satisfied that:
Bank is failing
Following consultation with HM Treasury and Bank of England, not
likely that bank will satisfy FSA thresholds (nb may have positive net
worth
Bank of England exercises powers to transfer to bridge bank or private
sector purchaser :
Following consultation with HM Treasury and FSA, and if at least one of
following public interest condition is satisfied:
once satisfied that stability of UK financial systems; maintenance of
public confidence; protection of depositors will be achieved
Where HM Treasury has provided financial assistance and
recommended use of SRR, power by BofE to protect public interest if:
Exercise of power will provide that protection
Banking Act 2009 Role of Authorities in SRR

Roles and parts played in SRR:
HM Treasury
Following consultation with FSA and BofE, solely able to
exercise power to transfer part or all to public ownership if
satisfied that:
to do so would reduce or avoid to UK financial systems
stability;
Protect public interest following HM Treasury financial
assistance provided;
Ability, following FSA and BofE consultation, to take bank
holding companies into temporary public ownership (subject to
similar conditions) and if holding company is UK
incorporated/formed
Banking Act 2009 Stabilisation Powers safeguards

Partial transfer safeguards;
Banking Act 2009 Restriction of Partial Property
Transfers Order 2009 (SI 2009/322);
Banking Act 2009 (Third Party Compensation
Arrangements for Partial Property Transfers)
Regulations 2009 (SI2009/319);
Banking Liaison Panel (s10)
Banking Act 2009 Insolvency Options

A) Bank Insolvency Procedure
Only where bank has depositors entitled under FSCS;
Based on UK liquidation under Insolvency Act 1986;
Designed to speed up payment to depositors by FSCS or transfer
of their accounts (bulk transfer facilitated);
Commenced by court order on application of BofE, FSA (with BofE
consent) or SoS;
Bank unable or likely to be unable to pay its debts or fair to wind up
(FSA/BofE); in public interest (SoS only)
FSCS right to be heard at any hearing
Liquidator to work with FSCS to compensate depositors or transfer
accounts and to wind up bank and can do anything necessary or
expedient to achieve this
Banking Act 2009 Insolvency Options

B) Bank Administration Procedure
where bank has depositors entitled to compensation under FSCS;
based on UK administration under Insolvency Act;
Where transfer of part to bridge bank or private purchaser under
SRR leaving residual insolvent rump;
Commenced by court order on application of BofE (or FSA on
notice to BofE) and BofE right to be heard at any hearing;
SRR transfer has occurred or will occur and residual bank unable
or likely to be unable to pay its debts
Administrator to support bridge bank/private purchaser with
ongoing service arrangements, rescue residual bank as going
concern or achieve better outcome than on insolvent winding up
BofE to agree administrators statement of proposals and to be
provided to FSA
Appendix 2 - The Investment Bank Special

Administration Regulations additional
information
SAR process - commencement

Against Whom?
Those in scope
Application made to court by whom?
The investment bank
The directors of the investment bank
One or more creditors (inc contingent/prospective)
Officer of a magistrates court for fines imposed on companies
A contributory of the investment bank (if 2 or fewer members or if
contributory has held shares- or some of them - for more than 6
months in past 18 months or have devolved on death)
Secretary of State
FSA

Application made on what grounds?
A - Is or is likely to become unable to pay its debts (including s123
and being in default of a payment obligation that is due and payable
under an agreement which constitutes or is part of regulated
activity);
B- It would be fair to do so; or
C- It is expedient in the public interest to do so
Secretary of State can only apply if Grounds B and C are met
FSA entitlement to be heard at hearing of application and all
subsequent hearings

Order may be made subject to what conditions?
FSA has been notified of preliminary steps and notice of
compliance to this effect has been filed at court
More than 2 weeks has passed since notification to FSA; or
FSA has consented to insolvency process;
No other application for SAR is pending;
FSA must notify applicant within 2 week of notice whether:
it consents; intends to apply for another process itself; it intends
to apply for a Special Administration Order
Court may make order on such terms as the court deems fit

12 UK PN Banking Managingfinancialfailure

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12 UK PN Banking Managingfinancialfailure

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UK and European Regulatory Update:

Managing Financial Institution Failure

What we will cover

2012 Baker & McKenzie 2

2012 Baker & McKenzie 3

What provoked the current regulation & legislation?

2012 Baker & McKenzie 5

Limitations of UK insolvency law

transact globally and across borders: die locally

enacted locally for local use;

Mismatch between insolvency and financial set-off, netting concepts

Issues to address on financial institution failure

Issues to address on financial institution failure

What has been done to date?

2008 onwards - Preparing for further UK failure

The UK Legislative Response

2012 Baker & McKenzie 11

Banking Act 2009 - Overview

Banking Act 2009- Statutory Objectives

Banking Act 2009 When will SRR trigger?

FSA decision to intervene: the Dunfermline

Banking Act 2009 Stabilisation Options

Banking Act 2009 Exercise of Stabilisation Powers

Banking Act 2009 compensation (ss49-62)

Banking Act 2009 compensation (ss49-62)

Banking Act 2009 Exercise of SRR tools by

Banking Act 2009 insolvency options

The Investment Bank Special Administration

SAR Statutory objectives

SAR FSA power to direct priority of objectives

Who plays what role going forwards?

SAR power to allocate shortfalls

SAR bar date to expedite return of client assets

SAR in practice - MF Global UK Ltd

SAR MF Global bar date update

2012 Baker & McKenzie 30

SAR in practice The MF Global experience

SAR anticipated benefits

2012 Baker & McKenzie 32

SAR and Banking Act interaction

Financial Institution Insolvency

Claiming in the insolvency

Claiming in the insolvency

2012 Baker & McKenzie 37

Segregated Clients (contributors)

2012 Baker & McKenzie 38

Shortfall risk third party failure

2012 Baker & McKenzie 39

Shortfall risk third party failure

2012 Baker & McKenzie 40

Shortfall risk identifying client money

Shortfall risk alternative approach

Shortfall risk claims from non-contributors

2012 Baker & McKenzie 43

Shortfall risk claims from non-contributors

2012 Baker & McKenzie 44

Segregated Clients (non-contributors)

2012 Baker & McKenzie 45

Creditors with a claim to be clients

Creditors with a claim to be clients

2012 Baker & McKenzie 47

Client with open positions

Sums owed to clients