New legislation approved in conformity with the EU Directive 2014/59

Following a previous approval of the Deposit Guarantee Schemes Law, the Cyprus Parliament enacted a new legislative package for purposes of harmonisation with the EU Directive 2014/59 (Bank Recovery and Resolution Directive – BBRD). The package comprises amendments to the Financial Collateral Arrangements Law, a new law on the Recovery of Cyprus Investment Firms, a new law on the Resolution of Credit Institutions and Investment Firms and an amendment of the Operations of Credit Institutions Law.

According to the approved amendment of the Financial Collateral Arrangements Law (43/2004, 100/2011), Sections 6-9 of the basic law on the security of the collateral taker shall not apply to any restriction on the enforcement of financial collateral arrangements or any restriction on the effect of a security financial collateral arrangement, any close out netting or set-off provision that is imposed by virtue of the BBRD Directive or to any such restriction that is imposed by virtue of similar powers in Cyprus law, to facilitate the orderly resolution of any entity which is subject to safeguards at least equivalent to those set out in the BBRD.

It is provided that the above provisions shall apply notwithstanding the provisions of the Credit Agreements for Consumers Law.

New legislation on the Recovery of Cyprus Investment Firms and Other Entities under the Supervision of the Cyprus Securities and Exchange Commission and Related Matters.

The above law aims to establish the legal framework to prevent the insolvency of Cyprus Investment Firms (CIFs) and other entities that belong to the same group of a CIF and which are under the supervision of the Cyprus Securities and Exchange Commission. In particular, the law provides for the drawing up of recovery plans which shall be assessed and updated by the Securities and Exchange Commission on a regular basis. The recovery plans shall include a range of capital and liquidity actions required to maintain or restore the viability and financial position of these entities. The law also provides for the implementation of early intervention measures including requesting that management is removed as well as special administration. In cases where either recovery or early intervention measures of a cross-border nature are implemented, the Cyprus Securities and Exchange Commission shall cooperate with the competent authorities of other EU member states.

The Resolution of Credit Institutions and Investment Firms Law of 2016 sets out the tools to intervene sufficiently, early and quickly in an unsound or failing institution so as to ensure the continuity of the institution’s critical financial and economic functions, while minimising the impact of an institution’s failure on the economy and financial system.

The new provisions aim to ensure that shareholders bear losses first and that creditors bear losses after shareholders, provided that no creditor incurs greater losses than it would have incurred if the institution had been wound up under normal insolvency proceedings.

Also, new powers enable authorities to maintain uninterrupted access to deposits and payment transactions, sell viable portions of the institution, where appropriate, and apportion losses in a manner that is fair and predictable.

The law also provides for the drawing up of recovery plans, as well as timely entry into resolution before a financial institution is balance- sheet insolvent, and before all equity has been fully wiped out. Resolution is initiated when the competent supervisory authority, namely the Central Bank of Cyprus (and the European Central Bank), after consulting the Resolution Authority, determines that an institution is failing or likely to fail.

The Operations of Credit Institutions (Amendment) Law of 2016 contains provisions on the drawing up of recovery plans by the authorised credit institutions. Recovery plans shall be assessed by the Central Bank of Cyprus. The Central Bank shall provide the Resolution Authority with the necessary information on the drawing up of the said plans and shall also have early intervention powers.