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FRB, FDIC issue proposed additional and consolidated guidance for 2019 GSIB resolution plans

On Friday, June 29, the Board of Governors of the Federal Reserve System and Federal Deposit Insurance Corporation (collectively, “the Agencies”) issued proposed updated resolution planning guidance to the eight largest and complex US Banking Institutions (“GSIBs” or “firms”) in relation to how the GSIBs should develop their next iteration of the 165 (d) Resolution Plans¹ which are due July 1, 2019.² The GSIBs last submitted their 165(d) Resolution Plans in July 2017.

July 3, 2018 | Financial services

This proposed guidance is intended to be supplementary to the specific feedback guidance issued in December 2017,3 where the Agencies noted that firms have made progress on enhancing resolvability, including eight areas of common progress, but emphasized further action is needed to address certain shortcomings for four firms, and identified improvement areas for all GSIBs. From the proposed guidance issuance date in the Federal Register, the interested parties and the public have 60 days to provide feedback to the Agencies on the proposed guidance.

Key takeaways:

  • Progress was noted overall, but the Agencies are looking to increase requirements on derivatives and trading (DER) booking practices, monitoring and reporting; and payment, clearing, and settlement (PCS) capabilities
  • There is potentially less whitespace between UK and US regulatory views on booking model and agencies are sharing perspectives and will continue to increase focus on booking practices across regulatory bodies
  • Continues to focus on operational capabilities, which is is consistent to the guidance issued in 20164 inferring that continued development and enhancement is needed for continued build-out and sustainability
  • Incorporation of resolution planning into business-as-usual activities (BAU) is ongoing and needs to continue

Moving from development to maintenance and integration

Though the proposed guidance increases the level of detail expected in DER and PCS, it also acknowledges how firms have progressed from the development of resolution planning capabilities to that of maintenance as part of BAU processes. This point was noted by the change in terminology from the need of the firms to “maintain” rather than “develop” capabilities, clearly echoing the December 2017 feedback that the firms have collectively made progress, yet there is a clear pivot toward integration and sustainability.

Interestingly, of the four areas identified in December 2017 where the Agencies highlighted that the firms need to take greater measures to improve resolvability, the proposed guidance only addresses two of these four areas, DER and PCS—with an emphasis on booking model governances and introduction of expectations for an integrated control framework—including preventative controls. The two remaining areas, intra-group liquidity and internal loss-absorbing capacity, are to be addressed through additional guidance at a later date.

Increasing focus on derivatives booking practices and ability to unwind activities

The greatest level of updates in the proposed guidance is in the DER capability that will be applicable to six of the GSIBs (excludes GSIBs whose primary activities are custodial in nature), which the Agencies identified as “dealer firms.” The Agencies again recognize the progress made in development and integration of capabilities, but have separately added new requirements for firms in the following areas, highlights include:

Booking practices
  • GSIBs will be expected to document booking practices “commensurate with the size, scope, and complexity of a firm’s derivatives portfolios, including systems capabilities to track and monitor market, credit, and liquidity risk transfers between entities
  • There has been a strong emphasis on a firm’s ability to describe booking practices and sustain a broad booking model framework. The Agencies were more prescriptive in their expectations of documentation and content requirements: (i) what is being booked (e.g., product); (ii) where it is being booked (e.g., legal entity/geography); (iii) by whom it is booked (e.g. counterparty); (iv) why it is booked that way (e.g., drivers/rationales); and (v) what controls are in place to monitor and manage those practices (e.g. governance/information systems)
  • The proposed guidance affirms the importance of “completeness” while documenting booking model, and implies that the firms should have a capability to document booking practices outside of derivatives. The Agencies expect firms to explain the rationale behind their booking model as a function of the firm’s risk management requirements, client’s preference, and regulatory requirements
  • The Agencies also proposed that the firms may choose to incorporate decision trees to depict the multiple trade flows within each documented booking model
  • The proposed guidance provides the agencies perspective on preventative and detective controls and how 165(d) Resolution Plans should describe end-to-end trade booking and reporting processes, including a description of the current scope of automation (e.g., automated trade flows and detective monitoring) for the systems controls applied to its documented booking models
  • The guidance further explores expectations of a strong control framework and provides its view points on insufficiencies of broad permissibility controls like Trader Mandate
Derivatives entity analysis and reporting
  • The proposed guidance details how firms should have the ability to identify, assess, and report on each of its entities (material and nonmaterial) with derivatives portfolios (a “derivatives entity”)
  • There is a strong focus on the capability demonstrated by a firm to readily generate reporting related to current derivatives entity profiles that (i) cover all derivatives entities, (ii) are reportable in a consistent manner, and (iii) include information regarding current legal ownership structure, business activities/volume, and risk profile (including applicable risk limits
Inter-affiliate risk and monitoring controls
  • Firms need to provide timely transparency into risk transfers for trades between affiliates and the ability to monitor and limit material derivatives entity exposures in an extreme resolution scenario by maintaining an inter-affiliate market risk framework
  • The Agencies advised that in the case of re-hedging strategy, firms consider instruments sufficiently tied to the material derivatives entity’s trading and risk-management practices
  • The firm’s should provide detailed descriptions of its compression strategies and how those strategies may differ from those used currently to manage its inter-affiliate derivatives activities
  • There is recognized connectivity to SR14-15 requirements related to BHC’s capabilities for managing, identifying, and valuing the collateral that it receives from and posts to external parties and its affiliates and producing information related to credit exposures both on- and off-balance sheet
Portfolio segmentation and forecasting
  • Whilst each dealer firm has developed various modeling approaches that are used to evidence capability levels, and resources needed to execute its preferred resolution strategy using available data, enhanced capabilities will now be required in relation to: producing analysis on granular portfolio segmentation, differentiation of assumptions taking into account trade-level characteristics, and segmentation and forecasting capabilities
  • The proposed guidance provides additional detail relating to (i) a method and supporting systems capabilities for categorizing and ranking the ease of exit for its derivatives positions (“ease of exit” position analysis), (ii) the systems capabilities to apply the firm’s exit cost methodology to its firm-wide derivatives portfolio (application of exit cost methodology), (iii) capabilities to assess the operational resources and forecast the costs related to its current derivatives activities (analysis of operational capacity), and (iv) a method to apply sensitivity analyses to the key drivers of the derivatives-related costs and liquidity flows under its preferred resolution strategy (sensitivity analysis)
Prime brokerage account transfer
  • In addition to the earlier scope of having operational capacity to facilitate orderly transfer of prime brokerage accounts to peer prime brokers, firms are also expected to segment and analyze the quality and composition of prime brokerage customer account balances based on a set of well-defined and consistently applied segmentation criteria
Derivatives stabilization and de-risking strategy
  • Dealer firms are expected to perform detailed analysis of the strategy to stabilize and de-risk its derivatives portfolios
  • Firms will need to perform detailed analysis of how the non-surviving material derivatives entity’s resolution can be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk of serious adverse effects on US financial stability and to the orderly execution of the firm’s preferred resolution strategy

This additional scope for dealer firms may not be considered entirely unexpected, with the firms already facing increased scrutiny in trading activity through other new rules coming into effect in 2019. These include the Mandatory Contractual Stay Requirements for Qualified Financial Contracts from the OCC,6 which comes into effect for impacted GSIBs in January 2019, and SEC Rule 613 (Consolidated Audit Trail),7 currently scheduled for November 2019.

Additional detail required for PCS

For the other capabilities, the next largest revision has been made within operational expectations, with new requirements being focused on PCS. The Agencies again gave credit for the firms progress in this capability for their July 2017 165(d) Resolution Plan submissions, particularly giving specific acknowledgment for the establishment of methodologies in identifying key financial market utilities (FMUs) and agent banks based on quantitative and qualitative criteria, and for the documentation of playbooks for key FMUs and agent banks. The Agencies seek to extend this progress for PCS to “key clients,” and to integrate this into current methodologies for FMU identification and playbook requirements. The definition of “key client” in the guidance is fairly wide reaching and can include any individual, entity, or affiliate who relies on the GSIB for access to the FMU.

Additional detail is also being sought for each key FMU and agency bank playbook regarding the contingency arrangement and impacts on resolution planning capabilities and activities such as governance mechanisms or resource allocations (human resources), communications, and financial impacts such as liquidity or additional costs as a result of adverse actions or contingency arrangements. Particularly for financial impacts, playbooks will need to detail potential restrictions to intraday liquidity and payment prioritization.

Limited updates on other capabilities

There were no other significant changes for the other operational capability sub-sections, (shared and outsourced services, management information systems, etc.) or the four other capabilities: capital, liquidity, governance mechanisms, legal entity rationalization, and separability. Similarly, no changes were proposed for the content of the public section of the resolution plan.

Proposed consolidation and industry perspective

In a potential drive for efficiency and enhanced clarity on expectations, the Agencies are also seeking public feedback and interested parties’ comments for proposals to consolidate previously issued guidance, staff communications, and firm-specific letters into a single set of resolution planning guidance. Moreover, the Agencies are requesting comments on whether the current six sections (1) capital, (2) liquidity, (3) governance mechanisms, (4) operational, (5) legal entity rationalization and separability, and (6) derivatives and trading activities, comprehensively cover resolution-related vulnerabilities.

The GSIBs and others may submit comments during the 60-day comment period. Further proposed guidance is also expected later in the year for the remaining two focus areas of the December 2017 improvement areas in relation to intra-group liquidity and internal loss-absorbing capacity.

As further developments occur, Deloitte will issue additional updates.

Organizations may contact Deloitte with questions about the changes and activities to support planning, preparation, and compliance.

1 Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Proposed guidance; request for comments” (July 29, 2018).

2 Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Agencies announce joint determinations for living wills” (December 19, 2017) available at

3 Deloitte Center for Regulatory Strategy, “FRB, FDIC issue feedback on 2017 US G-SIB resolution plans, find no deficiencies” (December 21, 2017) available at

4 Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Guidance for 2017 §165(d) Annual Resolution Plan Submissions By Domestic Covered Companies that Submitted Resolution Plans in July 2015” (April 13, 2016), available at

5 Board of Governors of the Federal Reserve System, Heightened Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies—Supplemental Guidance on Consolidated Supervision Framework for Large Financial Institutions (SR letter 12-17/CA letter 12-14) (January 24, 2014), available at

6 Office of the Comptroller of Currency, “Mandatory Contractual Stay Requirements for Qualified Financial Contracts—Final Rule” (November 19, 2017), available at

7 Securities & Exchange Commission, Rule 613 “Consolidated Audit Trail”, 12 CFR 242 (2012), available at

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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