Recovery and Resolution
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Know the numbers? Now learn the why.Read the Recovery and Resolution study notes: short answers, key numbers and the law behind each rule.
- Which CIFs need a recovery plan, and what must it contain?
- When can group entities support each other financially, and when does CySEC approve it?
- When can CySEC step in early at a weakening CIF, and what can it require?
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Framework
- What is the scope of Law 20(I)/2016 on recovery and resolution?
- Exam material: CIFs of any size plus entities authorised outside the EU that carry on investment business in Cyprus, including financial and mixed financial holding companies and branches. Since 18 March 2016 (Law 20(I)/2016): only CIFs in the top initial capital class, €750,000 since 5 November 2021 (€730,000 before), so €75,000 and €150,000 firms are outside; also EU financial-institution subsidiaries under consolidated supervision, holding companies supervised by CySEC and Cyprus branches of third-country investment firms.
- Who is the resolution authority in Cyprus, and under which law?
- The Central Bank of Cyprus (CBC), under Law 22(I)/2016. CySEC is the supervisory authority; the CBC is the resolution authority — a frequently tested distinction.
- Which law governs the verification and classification of claims in a CIF's normal insolvency?
- Exam material: the Companies Law, section 300, for verifying and classifying claims, with special provisions for unsecured claims. Since 21 May 2019 (Law 73(I)/2019): section 300(1)–(2) supplies only the preferential debts, such as certain taxes and wages, paid first; Law 20(I)/2016 section 41A ranks the rest: ordinary unsecured claims, then non-preferred senior debt, then capital instruments and other subordinated debt, with own-funds claims last since 7 May 2021. Resolution is separate, under Law 22(I)/2016.
Recovery plans
- What type of arrangement is a recovery plan, and who must approve it before submission to CySEC?
- It is part of the CIF's governance arrangements and must be approved by the management body (board of directors) before it is filed with CySEC.
- What form of support must a recovery plan NOT assume access to?
- Extraordinary public financial support (a government bail-out). A credible recovery plan must rely only on the firm's own resources and private-market solutions.
- How often must a CIF review its recovery plan?
- Exam material: at least once a year and after any material change to its legal or organisational structure. Since 20 December 2019 (CySEC Directive DI20-01): the yearly cycle is the full-plan rule; a CIF that is not an O-SII and has assets or liabilities under €1 billion, or income under €100 million, may file a simplified plan on Form 20-01 every two years by 30 September, and other CIFs file a full plan every year by 30 June. Every plan must still be updated after a material change.
- Who prepares a group recovery plan and what must it cover?
- The union parent undertaking supervised on a consolidated basis. It must coordinate measures at the level of the parent and its subsidiaries and significant branches, and include intra-group financial support arrangements.
- When is a CIF's operation a 'significant share' of the financial system?
- When its total assets exceed €30 billion, OR its total assets exceed 20% of the Member State's GDP — but the GDP test applies only if assets also exceed €5 billion.
- Whom must CySEC notify before specifying simplified recovery-plan obligations?
- Exam material: the EBA, notified first, before CySEC sets the obligations. Since 18 March 2016 (Law 20(I)/2016): CySEC informs the EBA of the simplified obligations it applies, without a set order. CySEC sets them by directive (today Directive DI20-01) after assessing what the firm's failure could do to financial markets, other institutions, funding conditions or the wider economy; shareholders do not decide.
Intra-group support
- What are the conditions for an intra-group financial support agreement?
- Exam material: each party enters freely and acts in its own best interest; the provider gets full disclosure of relevant information from the recipient; the consideration may take account of inside information and ignores anticipated temporary market-price effects. Since 18 March 2016 (Law 20(I)/2016): the information is non-public information the provider holds as a group member, and the parties need not take account of temporary price effects of events outside the group, but may. The agreement sets the principles; the consideration is fixed when support is given.
- When may intra-group support be given without a formal agreement, and when will CySEC approve one?
- Support may be given ad-hoc, case by case, per group policies, provided it poses no risk to the whole group. CySEC approves an agreement only where none of the parties meets the conditions for early intervention.
Early intervention
- What own-funds trigger signals a likely infringement?
- Exam material: own funds +1.5%, given as an example from a set of triggers. Since 18 March 2016 (Law 20(I)/2016): own funds at 1.5 percentage points above the own funds requirement is one trigger a set may include, not a fixed threshold; warning signs such as worsening liquidity, rising leverage, non-performing loans or concentrated exposures also count, and likely breaches of conduct and market rules can lead to early intervention too. The 1.5-point wording is due to go from 12 May 2028 (Directive (EU) 2026/806, once transposed).
- What early-intervention measures may CySEC require when own funds are (likely) breached?
- Exam material: updating the recovery plan, an action plan with a timetable, a shareholders' meeting called with immediate effect, removing or replacing managers, a debt-restructuring plan, changes to business strategy or to legal or operational structure, and on-site inspections with information for the resolution authority. Since 18 March 2016 (Law 20(I)/2016): the same measures, with CySEC requiring the board to call the meeting, or calling it directly, and setting the agenda; on-site inspections come from the BRRD. Suspending or withdrawing authorisation is a separate licensing power under the Investment Services Law, not an early intervention or resolution measure.
Administrators
- Who appoints a temporary administrator, when, and for how long?
- Exam material: CySEC, when replacing the senior management is not enough, for up to one year; it may remove the administrator or vary the terms at any time. Since 18 March 2016 (Law 20(I)/2016): the same, and the appointment may also be extended exceptionally while the conditions persist, with CySEC justifying the decision to the shareholders.
- Who appoints a special administrator, and what are the key terms?
- Exam material: the resolution authority (the CBC), for up to one year; it may appoint one or more persons on professional and personal criteria, the institution pays them, and they take no other work without the resolution authority's approval. Since 18 March 2016 (Law 22(I)/2016): it takes over the management of an institution under resolution and uses all shareholder and board powers under the resolution authority's control; one year is the first term, renewable exceptionally, and since 8 July 2022 (Law 102(I)/2022) without the former six-month cap.
- What must a special administrator report, and within what period?
- Within 30 days of appointment: an updated balance sheet, an assessment of the effectiveness of the resolution measures, and a list of assets categorised by degree of risk.
- With what qualities must a special administrator exercise their duties?
- Diligence, professionalism, integrity, discretion and confidentiality. Their powers include increasing the institution's capital, restricting operations, and revising policies.
Resolution tools
- What are the four resolution tools available to the CBC, and what is excluded?
- Exam material: sale of business, transfer to a bridge institution (which it calls the asset separation tool), transfer to an asset management company and bail-in, with write-down or conversion as a fifth measure. Since 18 March 2016 (Law 22(I)/2016): the same four tools, the asset management company used only together with another tool; write-down or conversion is a separate power, and in the BRRD 'asset separation' names the asset management vehicle tool. A public bail-out is not a tool: protecting public funds is one of the objectives of resolution.
- What is the bail-in mechanism?
- The exercise by the resolution authority of write-down and conversion powers over the institution's liabilities — writing them down or converting debt into equity to recapitalise the firm without public money.
- How does the 'write down or conversion' mechanism treat the capital stack?
- Exam material: Common Equity Tier 1 is written down; Additional Tier 1 and then Tier 2 instruments are written down or converted into CET1, and the order stops there. Since 7 May 2021 (Law 96(I)/2021, transposing BRRD2): certain eligible liabilities come next, after Tier 2. CET1 goes first, in proportion to losses, and the mechanism is a power the resolution authority may use alone or with resolution action, not one of the four tools.
- How does the 'sale of business' tool differ from the bridge institution tool?
- Exam material: sale of business moves shares or other ownership instruments, or assets, rights or liabilities, to a purchaser that is not a bridge institution; the bridge institution tool, which it calls the asset separation tool, moves them to a bridge institution. Since 18 March 2016 (Law 22(I)/2016): the same split; the bridge is wholly or partly owned by public authorities, controlled by the resolution authority and keeps critical functions going until a sale, and in the BRRD 'asset separation' names the asset management vehicle tool.
- What is the asset management company tool?
- A mechanism for the resolution authority to transfer assets, rights or liabilities of an institution under resolution to a specialised asset management company that holds and manages them separately.
Sale & bail-in mechanics
- What is CySEC's role in the sale of business tool, and what if its assessment is not finalised at transfer?
- CySEC checks whether the acquirer has appropriate authorisation to undertake the business. If the assessment is not finalised by the transfer date, the transfer takes effect immediately but the acquirer's voting rights are suspended until completion.
- In the sale of business tool, whom must CySEC notify of its assessment?
- The resolution authority (CBC) and the acquirer — whether it approves or opposes the transfer.
- In the bail-in tool, what is suspended if CySEC has not completed its shareholder assessment at application?
- The legal transfer takes immediate effect, but only the voting rights are suspended until CySEC finishes its assessment — preserving the acquirer's economic interest while withholding governance control.
Notifications & cooperation
- When a CIF is failing or likely to fail, whom does CySEC notify first?
- The relevant resolution authorities, sharing details of any crisis-prevention measures already in place, so they can prepare for potential resolution.
- Once CySEC determines the conditions for resolution are met, whom must it inform?
- Exam material: the resolution and competent authorities of the entity and any branch, the CBC or relevant central bank, a deposit guarantee scheme, the resolution financing body, the group-level resolution authority, the ministry, the consolidating supervisor, and the ESRB with the macroprudential authority. Since 18 March 2016 (Law 20(I)/2016): the same bodies, told without delay where they are different, but the deposit guarantee scheme only for a credit institution and the financing body only where necessary; the macroprudential authority is the CBC. ESMA, the EBA and courts are not on the list.
- What are CySEC's tasks in a resolution college as consolidating supervisor?
- Exchanging information relevant to the development of group resolution plans (including preparatory and preventative powers), and coordinating the public communication of group resolution strategies.
- What conditions apply to sharing confidential resolution information with third-country authorities?
- The third country's professional-secrecy standards must be at least equivalent to EU standards, the exchange must be necessary for resolution functions, and appropriate data protection must apply. CySEC must notify the EBA of any cooperation arrangements.
Business continuity
- How does a disaster recovery plan relate to a business continuity plan, and where should the DR site be?
- The disaster recovery plan (DRP) is a component of the broader business continuity plan (BCP). The disaster recovery site should be geographically separated from the main office (so one event does not hit both) but within the same jurisdiction — e.g. Nicosia for a Limassol firm.