HM TREASURY News
Release (PN/18/09) issued by COI News Distribution Service. 26
February 2009
Introduction
On 19 January the Government set out a comprehensive plan to
remove the remaining obstacles to increased bank lending and
restore confidence to financial markets. The Government is today
announcing the implementation of its Asset Protection Scheme (the "Scheme").
This statement briefly summarises the Scheme, the terms of which
are attached to this statement.
Overview of the Scheme
Under the Scheme, in return for a fee, the Treasury will provide
to each participating institution protection against credit losses
incurred on one or more portfolios of defined assets to the extent
that credit losses exceed a "first loss" amount to be
borne by the institution. The Scheme aims to target those assets
where there is the greatest amount of uncertainty about their
future performance. The Treasury protection will cover 90 per
cent. of the credit losses which exceed this "first
loss" amount, with each participating institution retaining a
further residual exposure of 10 per cent. of any credit losses
exceeding this amount. Both the "first loss" amount and
the residual exposure provide an appropriate incentive for
participating institutions to endeavour to keep losses to a
minimum on those assets included in the Scheme.
Eligible Institutions
Protection under the Scheme is offered, in the first instance, to
those UK incorporated authorised deposit-takers (including UK
subsidiaries of foreign institutions) with more than £25 billion
of eligible assets. Affiliated entities of those deposit-takers
will also be considered by the Treasury for participation under
the Scheme.
The Treasury will consider extending the Scheme more widely to
other UK incorporated authorised deposit-takers (including UK
subsidiaries of foreign institutions). Eligible institutions are
entitled to request to participate in the Scheme until 31 March 2009.
Each applicant to the Scheme is required to satisfy the Treasury that:
* it is adequately capitalised and funded or has a realistic plan
for accessing adequate capital and funding;
* it has a sustainable business model and delivery plan;
* its funding profile, sources and mix are broad-based and
sustainable; and
* its senior management team is credible, with demonstrable
ability to deliver its business model and delivery plan.
Each applicant's participation in the Scheme will also be
conditional upon the applicant committing to agreements to
increase lending to credit-worthy borrowers in a commercial
manner. They will report to Government on a monthly basis on
delivering on the commitments. The Government will report annually
on their delivery. Participation in the Scheme will also be
conditional upon the applicant giving the Treasury and its
advisors access to information required to assess the risk in
relation to that applicant's assets, and its satisfaction of
the eligibility criteria for protection under the Scheme.
Applicants will be required to:
* comply with a remuneration policy consistent with the Financial
Services Authority's code of practice on remuneration
policies; and
* meet the highest international standards of public disclosure
in relation to the applicants assets.
Finalised Scheme Rules will be published by the Treasury in due
course. Each applicant wishing to participate in the Scheme is
required to accede to the Scheme pursuant to an accession
agreement to be entered into with the Treasury (in a form to be
agreed between that applicant and the Treasury).
Eligible Assets
* The following categories of assets are eligible for inclusion
in the Scheme:
* corporate and leveraged loans;
* commercial and residential property loans;
* structured credit assets, including residential mortgage-backed
securities (RMBS), commercial mortgage-backed securities (CMBS),
collateralised loan obligations (CLO) and collateralised debt
obligations (CDO); and
* participations in respect of the above,in each case, held by
the covered entities as at 31 December 2008 and thereafter.
Inclusion of additional classes of assets within the Scheme is
subject to determination by the Treasury and its advisers in
conjunction with the participating bank on a case-by-case basis.
Assets proposed for inclusion in the Scheme will be subject to
appropriate investigation by the Treasury and its advisers in
order to assess their satisfaction of the asset eligibility
criteria and the expected future performance of the asset.
Applicants are required to give the Treasury and its advisers open
access to all information required by them for this purpose.
Assessment of "First Loss" Amount and Fee
In setting the terms under which protection will be offered, the
Treasury and its advisers will take into account their estimation
of the performance of the assets of the institution to be included
in the Scheme.
Pricing of the Scheme will be structured having regard to
international practice so as to provide appropriate incentives to
participating institutions to meet their commitments agreed with
the Treasury to support lending to creditworthy borrowers and to
ensure appropriate protection for taxpayers. The pricing will also
ensure that the Treasury benefits from a share of any upside returns.
The fee may be satisfied by the issue of capital instruments by
the institution. These may include a range of alternative capital
instruments, but are not expected to include ordinary voting
shares at the outset. The Treasury is open to proposals for other
forms of fee, including cash.
Assessment of Loss under the Scheme
Once the first loss amount has been exceeded, the Treasury will
cover 90% of the loss based on the outstanding principal amount of
the asset at the date on which a credit event (failure to pay,
bankruptcy or other applicable event) occurs or, if lower, the
amount covered under the Scheme in respect of the asset. After
this first loss amount has been exceeded, participants will
receive interest on the amount due from Treasury at a rate equal
to the Treasury's cost of funding until that payment is
settled. The Scheme therefore protects the banks against
accounting impairments which would otherwise have accrued.
Recoveries will be offset against losses (other than the 10%
vertical slice of recoveries retained by the participent).
Duration of the Scheme
The duration of the coverage will be not less than five years and
will be consistent with the tenor of the assets. Participating
institutions may terminate their participation in the Scheme at
any time in whole or in part with the prior consent of the Treasury.
Asset Management Requirements for Scheme Participants
Assets included in the Scheme will continue to be managed by the
relevant participating institution in accordance with its ordinary
business practices and remain on their balance sheets. To protect
taxpayers' interests, participants will be subject to a
number of conditions and Treasury controls over the management of
protected assets. These requirements are expected to include:
* managing protected assets according to agreed principles and guidelines;
* requiring participating institutions to set up effective
operating structures to manage and report on protected assets in a
regular, transparent, and comprehensive fashion;
* implementation of monitoring and reporting systems which allow
verification of asset performance and facilitate determination of payouts;
* requiring participants to agree remuneration policies with the
Treasury that align the interests of employees involved in
managing assets backed by the Scheme with those of taxpayers;
* right for the Treasury to appoint an independent asset manager
in prescribed circumstances; and
* policies regarding the management of conflicts of interest.
Implementation and Regulatory approvals
Implementation of the Asset Protection Scheme will be subject to
further due diligence by the Treasury and its advisers,
documentation and satisfaction of applicable conditions (including
the application criteria and asset eligibility criteria of the
Scheme), conditions precedent to accession to the Scheme,
including applicable regulatory, state aid and shareholder approvals.
Appendix
Asset Protection Scheme Term Sheet
Part 1. Scheme Participation
1.
Scheme participants
(1) UK incorporated authorised deposit-taker (including UK
subsidiary of foreign institution) with more than £25 billion of
assets satisfying the Asset Eligibility Criteria (as defined in
paragraph 11) (the "Bank"); or
(2) an affiliate of the Bank (including a holding company
thereof) that has been approved by Her Majesty's Treasury
("HMT") as eligible for inclusion under the Scheme, (the
Bank or, as the case may be, such affiliate, the "Participant").
HMT may consider extending the Scheme to other UK incorporated
authorised deposit-takers (including UK subsidiaries of foreign
institutions not covered by (1) or (2) above) based on advice of
the Bank of England and the Financial Services Authority (the
"FSA") and based on HMT's best judgment of how
important the deposit-taker concerned is to financial market
stability and the overall economy and the most effective possible
use of public resources.
2.
Application period
A Participant shall be entitled, until (and including) 31 March
2009 (or such later date as may be determined by HMT in its sole
discretion), to request to participate in the Scheme.
3.
Application Criteria; Lending Condition
In order to participate in the Scheme each Participant must
satisfy HMT that it meets the criteria for eligibility for
protection under the Scheme (the "Application
Criteria"), namely that the Participant and its group:
* is adequately capitalised and funded or has a realistic plan
for accessing adequate capital and funding;
* has a sustainable business model and delivery plan;
* has a broad-based and sustainable funding profile, sources and
mix; and
* has a credible senior management team, with demonstrable
ability to deliver its business model and delivery plan.
Each Participant's participation in the Scheme is also
conditional upon:
(1) the relevant Participant making a verifiable commitment to
advance new credit to creditworthy borrowers in a commercial
manner (the "Lending Condition"); and
(2) the relevant Participant giving HMT and its advisers (or, as
applicable, procuring that HMT and advisers are given) open access
to all information (including full disclosure of the Balance Sheet
(as defined in paragraph 11)) as may be required by HMT and its
advisers to assess the probability and expected quantum of future
loss in relation to the relevant assets and the satisfaction of
the Application Criteria.
4.
Accession to the Scheme by the Participants
Each Participant wishing to participate in the Scheme is required
to accede to the Scheme Rules (as defined in paragraph 6) pursuant
to an accession agreement to be entered into with HMT (in a form
to be agreed between that Participant and HMT) (the
"Accession Agreement"). The Accession Agreement will
specify, inter alia, each of the details set out in the Schedule
to this term sheet in respect of that Participant. The relevant
accession date with respect to a Participant shall be the
"Participant Accession Date".
5.
Conditions precedent to the Participant's accession to the Scheme
To include the following in respect of each Participant:
* evidence satisfactory to HMT that the Participant and its group
(i) satisfy the Application Criteria (including the delivery of
its business model and delivery plan) and (ii) have committed to
the applicable Lending Condition;
* executed Scheme documents, including the relevant Accession
Agreement and documents relating to issue of capital instruments
pursuant to the fee arrangements referred to in paragraph 23, each
in a form satisfactory to HMT;
* European Commission state aid clearance in respect of the Scheme;
* other applicable regulatory approvals or waivers (including any
approvals required in connection with the issue of capital
instruments pursuant to the fee arrangements referred to in
paragraph 23);
* all relevant opinions (which may include legal, regulatory
capital, tax and accounting opinions) issued to the Participant
(and disclosed to HMT) by the Participant's relevant
professional advisers;
* board resolutions (including specified signatories acceptable
to HMT) and requisite shareholder resolutions approving the entry
into the Scheme and execution of associated documentation,
including the applicable Accession Agreement and any capital
instruments to be issued as part of the fee arrangements referred
to in paragraph 23 (in the case of shareholder resolutions, save
to the extent that a derogation from the applicable Listing Rule
has been obtained from the UKLA);
* documentation for implementation, administration and monitoring
compliance with the applicable Remuneration Policy (as defined in
paragraph 27), as specified in the applicable Accession Agreement;
* evidence that the asset management structure required by the
Asset Management Requirements (as defined in paragraph 26) has
been or will be implemented as specified in the applicable
Accession Agreement;
* completion of due diligence satisfactory to HMT in relation to
the relevant Covered Assets (as defined in paragraph 10) and in
relation to the Balance Sheet (as defined in paragraph 11); and
* such further conditions as may be specified in the relevant
Accession Agreement.
6.
Anticipated commencement date of Scheme
The date of publication of the finalised rules of the Scheme (the
"Scheme Rules") by HMT shall be the "Scheme
Commencement Date".
This term sheet is not legally binding and no obligation or
liability on HMT or any Participant arises except to the extent
that it is expressly undertaken by such party, whether in the
Scheme Rules, the relevant Accession Agreement or otherwise.
Part 2. Scheme structure and parameters
7.
Availability of Scheme within Participant's group; nature of
the Scheme Subject as provided below in this paragraph 7, it is
envisaged that the Scheme will comprise one protection scheme
(which will be structured as a financial guarantee as defined in
IAS 39 and recorded as such in the consolidated accounts of the
Participant's group).
The Scheme is intended to cover assets satisfying the Asset
Eligibility Criteria (as defined in paragraph 11) Owned (as
defined in paragraph 11) by the Participant and one or more of its
affiliates approved by HMT in light of HMT's assessment of
(i) the impact on financial market stability and the overall
economy and (ii) the most effective possible use of public
resources (such affiliates together with the relevant Participant
and any transferee of the Covered Assets referred to in paragraph
28, the "Covered Entities"). The Participant may enter
into appropriate risk transfer arrangements with the Covered Entities.
To the extent that the Covered Assets cannot be reclassified so
that they are no longer required to be fair valued, HMT may
consider a request by a Participant to split the Scheme into two
transactions for, respectively:
(1) Covered Assets not being fair valued through the consolidated
profit and loss account of that Participant's group (the
relevant protection being structured as a financial guarantee as
defined in IAS 39); and
(2) Covered Assets being fair valued through the consolidated
profit and loss account of that Participant's group (the
relevant protection being structured as a derivative as defined in
IAS 39).
HMT will seek to implement the Scheme in respect of each
Participant in a manner which is efficient and effective for
regulatory capital purposes and, in this regard, HMT intends to
work closely with the relevant Participant and the FSA.
8.
Term
The term of the protection under the Scheme will be consistent
with the tenor of the relevant Covered Assets. The Scheme will
terminate on the date specified in the applicable Accession
Agreement or, as the case may be, on the date of termination of
that Participant's participation in the Scheme in accordance
with paragraph 9 (the "Termination Date").
9.
Early termination
A Participant may terminate its participation in the Scheme at
any time in whole or in part with the prior consent of HMT. It is
envisaged that a termination amount will be payable in connection
with any early termination in accordance with paragraph 23.
10.
Covered Assets; Covered Assets Pool
The following assets may be included within the Scheme:
* corporate and leveraged loans;
* commercial and residential property loans;
* structured credit assets (including residential mortgage-backed
securities (RMBS), commercial mortgage-backed securities (CMBS),
collateralised loan obligations (CLO) and collateralised debt
obligations (CDO));
* participations in respect of the above; and
* such other assets or exposures as HMT may consent to being
included in the Scheme, in each case, provided each asset or
exposure satisfies the Asset Eligibility Criteria. Assets which
meet such Asset Eligibility Criteria and are included within the
Scheme constitute the "Covered Assets".
Each asset or exposure to be included in a pool of Covered Assets
(the "Covered Assets Pool") must be identified upon
entry into the Scheme in a schedule to the Accession Agreement
(the "Covered Assets Schedule"). The Covered Assets
Schedule may be amended as a result of the post-accession
confirmation process pursuant to paragraph 25.
The Covered Assets may include unfunded commitments and revolving
facilities that satisfy the Asset Eligibility Criteria provided
that the commitment to fund was in effect at all times from (and
including) 31 December 2008 to (and including) the date of
utilisation. Certain refinancings and roll overs of assets or
exposures will be eligible for inclusion on a basis to be agreed
with HMT.
The Covered Assets may not include synthetic positions or long
positions arising without Ownership (as defined in paragraph 11)
nor do they include short positions, hedges or other credit
mitigants, unless HMT specifically consents to the inclusion of
such assets.
When considering whether to consent to the inclusion within the
Scheme of assets or exposures which would otherwise be excluded,
HMT is likely to have regard, among other things, to whether the
inclusion of such assets or exposures is likely to be consistent
with the Scheme's objectives. The provisions of this term
sheet may have to be amended to accommodate any such assets or
exposures which are so included.
11.
Asset Eligibility Criteria
The "Asset Eligibility Criteria" are that the relevant
asset or exposure:
* must have been an asset or exposure:
(i) Owned (as defined in this paragraph 11) by the Participant,
an affiliate of the Participant or any Relevant Entity (as defined
in this paragraph 11) from (and including) 31 December 2008 to
(and including) the Scheme Commencement Date (subject to any
Permitted Arrangement, as defined in this paragraph 11),
(ii) Owned by a Covered Entity on the Scheme Commencement Date
(subject to any Permitted Arrangement), and
(iii) which was included in the audited consolidated balance
sheet of the Participant's group or the audited balance sheet
of a Relevant Entity (each, a "Balance Sheet") from (and
including) 31 December 2008 to (and including) the Scheme
Commencement Date;
* must not be an equity or equity-linked asset, save that
convertible and exchangeable instruments on standard terms may be
included with the consent of HMT;
* must have fixed or determinable payments and a defined final
maturity or an imputed maturity date;
* must not have as an obligor the Participant or a person that,
directly or indirectly, is in control of, is controlled by or is
under common control with the Participant (and, for this purpose,
SPV issuers of asset-backed securities will not be deemed to be so
affiliated solely as a result of any economic interest in such
issuer); and
* must be denominated in euro, US dollars or sterling or such
other currency as may be agreed by HMT, provided that HMT may at
any time waive one or more of such criteria on a case by case
basis. When considering whether to waive such criteria with
respect to a specific asset or exposure, HMT is likely to have
regard, among other things, to whether the inclusion of such asset
or exposure within the Scheme is likely to be consistent with the
Scheme's objectives. The provisions of this term sheet may
have to be amended to the extent such criteria are waived.
In this paragraph 11:
"Ownership" of an asset means (i) legal and beneficial
ownership of that asset or (ii) other significant economic
exposure to that asset acceptable to HMT and "Owned"
shall be construed accordingly.
"Permitted Arrangement" means a pledge or other
security interest or a repo, stock loan or other title transfer
arrangement in respect of an asset where:
(i) the relevant Covered Entity (or, as the case may be,
affiliate of the Participant) continues to retain sufficient
economic exposure to the relevant asset, and
(ii) such arrangement allows the relevant Covered Entity (or, as
the case may be, affiliate of the Participant) to obtain Ownership
of the asset (or an equivalent asset) at any time (including, for
example, by substituting other eligible collateral), provided that
HMT may agree to vary the conditions referred to in (i) and/or
(ii) above on a case by case basis.
"Relevant Entity" means an entity which became a member
of a Participant's group before the Scheme Commencement Date
but which was not part of that Participant's group as at 31
December 2008.
12.
Quantum of Covered Assets
The amount of each Participant's Covered Assets Pool (the
"Covered Assets Pool Amount") will be set out in the
relevant Accession Agreement, being an amount equal to the
aggregate of the outstanding principal balance (or, as the case
may be, the amount of the applicable commitment) (the
"Covered Amount") of each Covered Asset in the relevant
Covered Assets Pool as at 31 December 2008, as specified in the
Covered Assets Schedule.
13.
First loss retention by Participant
Payments will be made under the Scheme in respect of Losses (as
defined in paragraph 16) on Covered Assets only to the extent that
the aggregate amount of such Losses (as reduced by any Recoveries
received by the Participant in accordance with paragraph 17)
exceeds the sterling amount specified as the first loss amount in
the Accession Agreement for that Participant (the "First Loss Amount").
14.
Loss allocation
HMT will cover 90% of the Losses arising in respect of the
Covered Assets Pool which exceed the First Loss Amount applicable
to that Participant. The remaining 10% of those Losses will be
borne by the relevant Covered Entity (the "Residual Amount").
15.
Triggers
A Covered Asset will be treated as defaulted upon the occurrence
with respect to it of any of the following (each, a "Trigger"):
(1) failure to pay amounts due (whether principal, interest or
otherwise), subject to grace period and provision for cure;
(2) bankruptcy; or
(3) such other event or circumstance (including certain
restructurings) as HMT may agree shall be a Trigger in respect of
a specific Covered Asset or a Covered Assets Pool (as specified in
the relevant Accession Agreement).
A Trigger may have occurred in respect of a Covered Asset before
the Scheme Commencement Date.
Triggers do not include (i) unrealised mark-to-market losses,
(ii) accounting provisions or accounting write-downs, or (iii)
disposals of Covered Assets.
16.
Calculation of Losses on Covered Assets
Losses will be determined in respect of each Participant by
reference to the following principles:
* Following the occurrence of a Trigger in respect of a Covered
Asset, a loss (the "Loss") will arise equal to the
lesser of the outstanding principal balance of that Covered Asset
as at the date on which the Trigger occurred and the Covered
Amount (but excluding any interest capitalised after 31 December 2008).
* All Covered Assets in respect of which a Trigger has occurred
(regardless of whether the Trigger occurs before the First Loss
Amount is exceeded) will be triggered assets for the purposes of
the Scheme (the "Triggered Assets").
* Losses will be adjusted to exclude losses arising from a
failure by the Participant to manage (or procure the management
of) the Covered Assets in accordance with the Asset Management Requirements.
17.
Allocation of Recoveries
All amounts paid or other recoveries made with respect to the
Triggered Assets (whether in respect of principal or interest),
net of the direct costs and expenses of any such amounts and
recoveries (such net amount, the "Recoveries"), will be
applied in respect of each quarter (each, a "Calculation
Period") on the following basis:
(1) whenever the First Loss Amount is not exceeded, Recoveries
will be for the account of the relevant Participant and,
accordingly, will be deducted from the aggregate amount of Losses
for the purpose of determining whether the First Loss Amount has
been exceeded;
(2) whenever the First Loss Amount is exceeded, Recoveries will
be applied as follows:
(a) 90% of Recoveries will be applied in (i) firstly,
discharging amounts (whether or not then due) that would otherwise
have been payable by HMT under the Scheme in respect of then
Triggered Assets and (ii) secondly, reimbursing HMT for payments
made under the Scheme, including interest thereon (from the date
of the relevant payment by HMT to the date of reimbursement) at
the Reference Rate (as defined in paragraph 21); and
(b) 10% of Recoveries will be for the account of the relevant
Participant; and
(3) whenever Recoveries exceed the amount then required (on a
90/10 basis) to discharge the amounts referred to in paragraphs
17(2)(a)(i) and 17(2)(a)(ii) above, the whole of the excess will
be for the account of the relevant Participant and, accordingly,
will be deemed to reduce the aggregate amount of Losses (as
reduced by any Recoveries received by the Participant in
accordance with this paragraph 17) below the First Loss Amount by
an amount corresponding to the excess, with the effect that
subsequent Losses will be for the account of the Participant and
subsequent Recoveries will be applied in accordance with paragraph
17(1) above until the First Loss Amount is once again exceeded.
18.
Treatment of non-sterling denominated Covered Assets
HMT and the Participant will together develop a hedging strategy
in respect of the Covered Assets.
Losses will be converted into sterling at the spot rate on the
date of the relevant Trigger. Recoveries in respect of Triggered
Assets will be converted into sterling at the spot rate on the
date the relevant Recoveries are received.
19.
Quarterly Statement
Each Participant shall provide HMT with a quarterly statement
setting out the aggregate amount of all Losses and Recoveries in
respect of the Triggered Assets (within a period to be agreed)
after the end of each Calculation Period (a "Quarterly Statement").
The form of a Quarterly Statement will be set out in the Scheme Rules.
Part 3. Settlement of Losses
20.
Scheme Ledger
A separate ledger account (each, a "Scheme Ledger")
shall be maintained by or on behalf of each Participant of the
amounts payable by HMT to that Participant in respect of Losses
referable to Triggered Assets. Whenever the First Loss Amount is
exceeded, the balance of the relevant Scheme Ledger shall be:
* increased as of the date of the applicable Trigger by an amount
equal to 90% of each Loss;
* reduced by an amount equal to 90% of each Recovery as of the
date that Recovery is received in accordance with paragraph 17(2)(a)(i);
* reduced by the amount of each payment made by HMT pursuant to
paragraph 21;
* increased by the interest credited pursuant to paragraph 21; and
* adjusted as otherwise required to give effect to the Scheme documentation.
If the relevant Scheme Ledger reduces to zero, subsequent
Recoveries shall be applied in accordance with paragraph
17(2)(a)(ii) in reimbursing HMT for payments it has made under the
Scheme (including interest thereon) and, thereafter, pursuant to
paragraphs 17(3) and 17(1).
Each Scheme Ledger shall be maintained in sterling. The balance
of a Scheme Ledger shall not reduce below zero.
21.
Timing and frequency of payments in respect of Losses by HMT;
Reference Rate
HMT shall settle amounts due under the Scheme in respect of
Losses (as reduced by Recoveries) in accordance with timing to be
specified in or pursuant to the Scheme documentation until the
balance of the relevant Scheme Ledger is reduced to zero, provided
that HMT may (at its sole discretion) resolve to make such
payments on earlier dates. HMT shall make such payments only to
the extent the balance of the relevant Scheme Ledger is more than
zero. Each such payment shall reduce the balance of the relevant
Scheme Ledger. HMT's liability under the Scheme shall not
exceed the balance from time to time of the relevant Scheme Ledger.
Any positive balance on the relevant Scheme Ledger shall accrue
interest daily at a rate determined by HMT to correspond to
HMT's cost of funds (the "Reference Rate"). The
Reference Rate is expected to be reset by HMT, and accrued
interest is expected to be credited to the relevant Scheme Ledger,
on a quarterly basis.
Each payment by HMT shall be made in sterling.
22.
Conditions precedent to payment by HMT under the Scheme To
include the following:
* the balance of the relevant Participant's Scheme Ledger is
more than zero;
* each of the repeating representations and warranties are true,
accurate and not misleading on the date of the relevant payment;
* no Event of Default has occurred and is continuing on the date
of the relevant payment;
* HMT has received a duly delivered and completed Quarterly
Statement; and
* delivery of such other documents as may be specified in the
applicable Accession Agreement.
Part 4. Fees and costs
23.
Fees to be paid by each Participant
The relevant Accession Agreement will specify the fee (and the
form of such fee) payable by the relevant Participant to HMT (the
"Fee"). The Fee will include an amount calculated to be
the applicable Participant's pro rata share of the costs
incurred or to be incurred by HMT in establishing the Scheme.
Upon early termination by a Participant pursuant to paragraph 9,
a termination amount will be payable as agreed by HMT and the
relevant Participant at the relevant time, taking into account the
Fee paid (or payable) by the relevant Participant.
24.
Cost of the Scheme
Each Participant shall bear its own costs and expenses in
connection with its accession to, and participation in, the Scheme.
Each Participant shall bear an appropriate proportion of the
ongoing costs and expenses of administering the Scheme incurred by
or on behalf of HMT (including any costs and expenses of (i) the
assignment, transfer or delegation of its monitoring,
administration or enforcement rights pursuant to paragraph 31, or
(ii) the appointment of an independent manager by HMT pursuant to
paragraph 26). HMT will invoice the relevant Participant
quarterly in respect of these costs. If, following a period of
consultation, the parties are unable to resolve any disagreement
as to the amount of any such costs, HMT's position will prevail.
Part 5. Scheme operation
25.
Post-accession confirmation process; removal of assets from
Covered Assets Pool An updated Covered Assets Schedule must be
prepared by the Participant within a specified period following
the relevant Participant Accession Date reflecting any necessary
adjustments to the Covered Assets Pool Amount or to the
composition of the Covered Assets Pool (due to any asset not
meeting the Asset Eligibility Criteria or not being within an
eligible asset class (as described in paragraph 10) or any Covered
Amount or other material details of any asset having been
incorrectly stated).
The Scheme will not cover Losses in respect of any asset removed
from the initial Covered Assets Schedule pursuant to the
post-accession confirmation process. If assets are removed from
the initial Covered Assets Schedule as a result of the
post-accession confirmation process, the Participant may include
substitute assets in its updated Covered Assets Schedule, provided
that (i) each such substitute asset satisfies the Asset
Eligibility Criteria and (ii) the aggregate of the Covered Amount
of each of the substitute assets as at 31 December 2008 does not
exceed the aggregate of the Covered Amount of each of the removed
assets as at 31 December 2008. HMT may object to the updated
Covered Assets Schedule within a specified period following the
receipt thereof. In the case of any disagreement as to the final
composition of the updated Covered Assets Schedule, if there is no
resolution within a specified period following the relevant
Participant Accession Date, the relevant Covered Assets Schedule
shall be amended consistent with HMT's position.
Following the completion of the post-accession confirmation
process, substitutions of Covered Assets or additions of assets to
the Covered Asset Pool are not permitted.
26.
Management of assets
Each Participant will continue to manage, or procure that the
relevant Covered Entities manage, the Covered Assets (including
any Triggered Assets) in accordance with its ordinary business
practices, and will in addition be required to comply with the
general and asset pool specific asset management requirements
prescribed by HMT and specified in the applicable Accession
Agreement (the "Asset Management Requirements"). The
Asset Management Requirements will include:
* reporting requirements, including for purposes of facilitating
Loss quantification, to provide financial, risk and performance
data in respect of the Covered Asset Pool and to monitor
compliance with the Scheme (including the applicable Remuneration
Policy and the applicable Asset Management Requirements), such
reporting to be undertaken in a format and manner prescribed by,
or agreed with, HMT;
* a requirement to adopt oversight and control procedures with
respect to the management of the Covered Assets Pool, including
notice and/or approval requirements for (i) transactions with
related parties (or otherwise on terms that are not arm's
length), (ii) transactions (including disposals) affecting or
involving the Covered Assets with a value in excess of, or
resulting in aggregate Losses in excess of, thresholds specified
in the relevant Accession Agreement or (iii) transactions which
adversely affect the credit quality of a Covered Asset (the
"Restricted Transactions").
* increased reporting requirements, and oversight and control
procedures for Restricted Transactions;
* requirements in relation to organisational structure,
staffing, resourcing, systems and controls required for
implementation, administration and monitoring compliance with the
Scheme, the applicable Remuneration Policy and the other Asset
Management Requirements, in each case, on terms no less favourable
than those accorded to the group's assets which are outside
the Scheme, and including audit/verification requirements
prescribed by HMT;
* a requirement to provide HMT and its agents access to all
books, records and other relevant information within that
Participant's control and relating to that Participant's
group's Covered Assets and its participation in the Scheme;
* a requirement to mitigate its Loss, including in respect of the
implementation of any restructuring, compromise or other dealing
in respect of a Covered Asset, realisation of security/collateral,
the application of netting and set-off rights, and claiming on
hedges, guarantees and/or indemnities and any other risk mitigants;
* negative pledge in respect of assets contained in the Covered
Assets Pool (subject to any Permitted Arrangements up to the date
of delivery of a Quarterly Statement in respect of the relevant asset);
* right for HMT to appoint an independent manager to manage or
supervise the management of some or all of the Covered Assets in
prescribed circumstances, including if aggregate Losses exceed the
applicable threshold specified in the relevant Accession
Agreement; and
* requirements relating to the monitoring and management of
conflicts of interest and potential conflicts of interest.
27.
Remuneration
Each Participant will be required to adopt a remuneration policy
within the parameters, or which otherwise meets the requirements,
specified in the relevant Accession Agreement (the
"Remuneration Policy"). It is envisaged that the
Remuneration Policy will include a performance based remuneration
policy applicable to those involved in implementing, administering
and monitoring compliance with the terms of the Scheme and the
applicable Asset Management Requirements.
28.
Covenants of each Participant in respect of its Covered Assets
To include the following (subject to any applicable materiality
and/or other thresholds or remedy periods specified in the Scheme
Rules or, as the case may be, the applicable Accession Agreement):
* by the first anniversary of the relevant Accession Agreement,
transfer of Ownership of certain of the Covered Assets to a group
company or companies agreed with HMT (or, where such transfer is
not feasible or where the relevant Participant demonstrates to the
satisfaction of HMT that the burden of such transfer would
outweigh the benefits of such transfer, such other arrangement
with respect to the relevant Covered Assets as may be agreed with HMT);
* each Covered Asset is Owned by a Covered Entity (subject to any
Permitted Arrangement) and the Covered Assets are included in the
Balance Sheet;
* provision of such financial and other information within the
control or possession of a Covered Entity as HMT may from time to
time reasonably request;
* compliance with applicable laws and compliance with and
performance of its obligations under the Scheme, the relevant
Accession Agreement and any other document relating to its
participation in the Scheme (including compliance by each
Participant and the relevant Covered Entities with the applicable
Remuneration Policy, the applicable Asset Management Requirements
and the best practice disclosure requirements referred to in
paragraph 34);
* keep separate and appropriate books and records in relation to
the Covered Assets and permit representatives of HMT access to its
books and records relating to the Covered Assets;
* no credit hedging in respect of the Residual Amount without
HMT's prior consent;
* give notice to HMT of (i) any Event of Default (as defined in
paragraph 30) or potential Event of Default, (ii) any material
litigation, investigation or proceeding affecting any Covered
Entity, (iii) any other development or event that has or could
reasonably be expected to have a material adverse effect on the
Covered Entities or rights and remedies of HMT under the Scheme; and
* such other covenants as may be specified with respect to a
Participant in the relevant Accession Agreement.
29.
Representations and warranties of each Participant
To include the following (those marked with asterisk to be given
by the Participant in respect of itself and each other relevant
Covered Entity), subject to any applicable materiality and/or
other thresholds or remedy periods specified in the Scheme Rules
or, as the case may be, the applicable Accession Agreement:
* customary corporate representations (*);
* ownership of all Covered Entities;
* power and authority to enter into the Scheme as a Participant
or a Covered Entity (*);
* no conflict (*);
* accuracy of information provided (*);
* financial statements, including no material change (*);
* no guarantees, indemnities, borrowings or defaults which would
be material in the context of the Scheme (*);
* intellectual property, information technology (*);
* insurance (*);
* insolvency (*);
* regulatory, competition (*);
* litigation (*);
* pensions (*); and
* such other representations and warranties as may be specified
with respect to a Participant in the relevant Accession Agreement.
30.
Events of Default
* The following events will constitute an event of default (each,
an "Event of Default") with respect to a Participant
(subject to any applicable materiality and/or other thresholds or
remedy periods specified in the Scheme Rules or, as the case may
be, the applicable Accession Agreement):
* failure to apply Recoveries in accordance with the requirements
specified in paragraph 17;
* any repeating representation or warranty is untrue, inaccurate
or misleading in any respect;
* failure by the relevant member(s) of the Participant's
group to observe or perform any covenant, agreement or undertaking
in relation to the Scheme (including in respect of the applicable
Asset Management Requirements and the applicable Remuneration Policy);
* repudiation and rescission;
* unlawfulness or invalidity of a Participant's obligations
under Scheme; and
* such other events or circumstances as may be specified with
respect to a Participant in the relevant Accession Agreement.
Part 6. Other matters
31.
Assignment; Transfer
HMT will be entitled to assign, transfer or otherwise delegate at
any time during the term of the Scheme and on such terms as it
considers appropriate:
(1) some or all of its monitoring, administration and
enforcement rights under the Scheme to a regulatory authority,
government department, non-departmental government body, a body
exercising functions on behalf of the Crown, a body corporate
established by HMT or any third party provider; and/or
(2) some or all of the risk associated with the protection under
the Scheme, subject to parameters to be agreed at the relevant
time between HMT and the Participant, and having regard to the
effect of any such transfer on the regulatory capital position of
the Covered Entities.
No Participant is entitled to assign, transfer or otherwise
delegate any of its rights or obligations under or in connection
with the Scheme without the prior written consent of HMT, except
(i) as provided for in paragraph 7, and (ii) (in the case of any
delegation of its obligations under or in connection with the
Scheme) in respect of ordinary course of business arrangements for
the relevant class of asset or intra-group arrangements.
32.
Confidentiality
Scheme documentation will provide for suitable confidentiality
provisions in relation to the disclosure of information by the
Covered Entities, taking into account the applicable legal,
regulatory and contractual restrictions.
HMT will enter into suitable confidentiality undertakings with
each Participant with regard to confidential information provided
to HMT in order to monitor, administer and enforce the terms of
the Scheme. Such undertakings will provide appropriate disclosure
carve-outs to enable HMT to:
* fulfil its reporting obligations, including to Parliament,
Parliamentary committees and the European Commission;
* comply with legal obligations to which it is subject; and
* liaise with the other Tripartite Authorities on the
implementation, administration and monitoring of the Scheme.
33.
Announcements; publicity
Save as required by applicable law or regulations (including in
connection with listing securities), no announcements will be made
by any Participant, its agents or advisers in relation to the
Scheme or a Participant's participation in the Scheme without
the prior written consent of HMT.
HMT will publish and lay before Parliament the material
documentation in relation to the Scheme (including the Scheme
Rules and the Accession Agreements).
34.
Best practice disclosure in relation to Participant's assets
(1) Requirement to comply with the highest international
standards of public disclosure in relation to the
Participant's Covered Assets Pool as well as the
Participant's assets which are outside the Scheme, as set out
in the final form of the public disclosure requirements
established by the FSA and HMT in relation to the Scheme following
the end of the consultation period referred to in the FSA's
consultation paper dated on or around 26 February 2009.
(2) Requirement to provide sufficient and appropriate
information on a regular basis to enable HMT and its advisers to monitor:
* compliance with the terms of the Scheme;
* the performance of the Covered Assets; and
* any transaction or event that has or might have a material
impact on the Scheme or the rights and remedies of HMT under the Scheme.
(3) HMT verification requirements in relation to the public
disclosure referred to in paragraph 34(1):
* full audit/verification for annual results of the Covered
Assets Pool;
* review opinion to be provided for half-yearly results of the
Covered Assets Pool; and
* no opinion to be provided for interim management statements, in
line with current practice.
35.
Dispute resolution
Any disputes in relation to the Scheme will be determined in
accordance with an agreed, expedited process and any
determinations in relation to the Scheme (including in relation to
Losses and/or Recoveries) will be conclusively determined by an
independent third party.
36.
Governing law
English law.
SCHEDULE
Details to be specified in respect of a Participant in the
relevant Accession Agreement
The Accession Agreement to be entered into between each
Participant and HMT will include the following details in respect
of that Participant:
* Covered Entities;
* Covered Assets Schedule;
* term of the protection provided to the Participant under the Scheme;
* First Loss Amount;
* Covered Assets Pool Amount (calculated in accordance with
paragraph 12), denominated in sterling;
* any additional Triggers applicable to that Participant;
* the quarterly payment dates applicable to that Participant;
* details of the Fee payable by the Participant to HMT;
* the Asset Management Requirements;
* details of the Remuneration Policy to be adopted;
* any representations, warranties, covenants, events of default
and/or conditions precedent specific to that Participant and any
applicable materiality and/or threshold qualifications or remedy
periods for specific representations, warranties and/or covenants; and
* any necessary variation to the Scheme Rules in respect of that Participant.
Notes for Editors
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