Provisional agreement between the EU Council and European Parliament on the ‘Daisy Chains’ proposal was announced yesterday (6 December 2023), following trilogue negotiations.

Introduced as a stand-alone limb of the European Commission’s CMDI (crisis management and deposit insurance) package on 18 April 2023, the Daisy Chains proposal was fast-tracked through the legislative process and addresses issues specific to the treatment of internal MREL (minimum requirement for own funds and eligible liabilities) in bank resolution groups.  It will amend the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation.

The proposal stemmed from the mandate given to the Commission in the original 2022 Daisy Chain Regulation (read our insights on that Regulation here) to:

• Look at the implementation of the deduction approach for indirect subscription of internal MREL eligible resources across different types of banking group structures.
• Consider potential unintended consequences of that deduction mechanism.
• Ensure proportionate treatment and a level playing field, with a particular focus on certain chains of ownership.

While the Commission found that the full holdings-based deduction approach in the 2022 Daisy Chain Regulation should be preserved, it felt that some tweaks were needed to ensure a more proportionate impact on certain holdco structures (operating company between a parent holding company and its subsidiaries) and opco structures (parent entity is not a holding company).

Under the agreed proposal, resolution authorities will have the power to set internal MREL on a consolidated basis (subject to certain conditions).  In those cases, intermediate subsidiaries will not be obliged to deduct their individual holdings of internal MREL, thereby addressing the proportionality issue which concerned the Commission.

The agreed proposal will also introduce specific MREL treatment for entities in a banking group that are to be wound-up in accordance with insolvency laws (and therefore will not be subject to resolution action such as a conversion or write-down of MREL instruments) (Liquidation Entities).  Liquidation Entities will not be required to comply with an MREL requirement unless the resolution authority decides otherwise.  The own funds of Liquidation Entities issued to intermediate entities will not need to be deducted except save where they represent a material share of the own funds and eligible liabilities of the intermediate entity.

Once the provisional political agreement is formally approved by the EU Council and the European Parliament, it will be published in the Official Journal and apply 6 months + 20 days later (most likely from Q3 2024).

For insights on the other three limbs of the Commission’s April 2023 CMDI package, read our earlier insights: Bank Resolution: Commission CMDI proposal published.