15.1 Rule 41 provides as follows:
(1) The resolution authority, by written notice served on a resolution entity, may require the resolution entity to provide to the resolution authority, within the time specified in the notice, evidence of a kind specified by the resolution authority that the resolution entity’s external loss-absorbing capacity, or items claimed by the resolution entity to form part of its external loss-absorbing capacity, meet the requirements of these Rules.
(2) The resolution authority, by written notice served on a material subsidiary, may require the material subsidiary to provide to the resolution authority, within the time specified in the notice, evidence of a kind specified by the resolution authority that the material subsidiary’s internal loss-absorbing capacity, or items claimed by the material subsidiary to form part of its internal loss-absorbing capacity, meet the requirements of these Rules.
(3) Without limiting the kinds of evidence the resolution authority may specify, the resolution authority may require a resolution entity or material subsidiary to obtain, and provide to the resolution authority, independent legal advice acceptable to the resolution authority.
15.2 The inclusion of an item in a resolution entity’s external loss-absorbing capacity or in a material subsidiary’s internal loss-absorbing capacity is subject to the provisions of rule 37 or rule 39 (as applicable) of the LAC Rules. In order to ensure that a proposed item can be included within external loss-absorbing capacity or internal loss-absorbing capacity, the resolution entity or material subsidiary will have to undertake a detailed self-assessment and will be expected to review and document the item’s compliance with those provisions (including, for an external LAC debt instrument, that it meets all of the criteria set out in Schedule 1 to the LAC Rules, and for an internal LAC debt instrument, that it meets all of the criteria set out in Schedule 2 to the LAC Rules).
15.3 As part of the self-assessment, the resolution entity or material subsidiary should obtain a sufficiently independent legal opinion (preferably from an external legal firm) to ensure compliance of the proposed instrument from a legal perspective. However, where a resolution entity or material subsidiary proposes to issue a new instrument with identical features (save only for price,
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maturity, amount and dates) to instruments previously issued that meet all the criteria set out in Schedule 1 (for external LAC debt instruments) or Schedule 2 (for internal LAC debt instruments) of the LAC Rules, and for which an independent legal opinion was obtained, the resolution entity or material subsidiary may, instead of obtaining a fresh legal opinion, obtain a confirmation issued by its in-house legal counsel that there are no other terms or any intervening changes that will render the previous legal opinion “out-of-date”.
15.4 After completing the self-assessment, the resolution entity or material subsidiary should submit a letter to the resolution authority confirming (in the case of an instrument with identical features to a previous instrument, with explicit reference to the instrument previously issued and meeting the criteria set out in Schedule 1 or Schedule 2 of the LAC Rules, including the issue date, name of instrument, any acknowledgement issued by the resolution authority etc.) that based on its assessment, the proposed instrument meets all the criteria set out in Schedule 1 (for external LAC debt instruments) or Schedule 2 (for internal LAC debt instruments) of the LAC Rules.
15.5 As a standing practice, a resolution entity or material subsidiary proposing to issue an instrument for inclusion in its loss-absorbing capacity is expected, when in doubt, to discuss with the resolution authority beforehand whether the instrument complies with the necessary criteria. For this purpose, the resolution entity or material subsidiary is expected to submit to the resolution authority the relevant supporting documents (including a summary of the main features of, and a draft term sheet for, the instrument, together with the resolution entity’s or material subsidiary’s self-assessment and confirmation (by its Chief Financial Officer or another person with an equivalent role and seniority within the institution) of the instrument’s compliance with all of the criteria in Schedule 1 or Schedule 2 of the LAC Rules, as the case may be) for the resolution authority’s review.
15.6 The resolution authority will, once no further follow-up issues need to be raised with a resolution entity or material subsidiary in respect of its proposed instrument, communicate its acknowledgement to the resolution entity or material subsidiary based on the confirmation by the resolution entity or material subsidiary of the instrument’s compliance with all of the criteria set out in Schedule 1 or Schedule 2 of the LAC Rules. Such an acknowledgement should not be taken as confirmation by the resolution authority that the
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relevant instrument complies with the criteria set out in Schedule 1 or Schedule 2 of the LAC Rules. Such compliance remains at all times the responsibility of the resolution entity or material subsidiary.
15.7 Generally speaking, it is to be expected that the process described in paragraphs 15.2-15.6 above would provide sufficient evidence on the eligibility of an item to be included within a resolution entity’s external loss-absorbing capacity or material subsidiary’s internal loss-absorbing capacity. Where the resolution authority requires additional evidence, it would be open to the resolution authority to use the powers under rule 41(1) or rule 41(2) to require that such additional evidence be provided.
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