FRB, FDIC release public sections of 2018 Resolution Plans of the four LISCC FBOs

July 17, 2018 | Financial services

The 2018 public sections are comparatively longer than those submitted in the firms’ last full submissions in 2015—a total of 214 pages in 2018 compared to 162 pages in 2015—and contain significant new details about the FBOs’ completed and forthcoming enhancements to resolution planning capabilities. This expansion was largely expected as this submission marked the FBOs’ first reaction to regulatory guidance published in April 2017² and FAQs in September 2017³ (collectively “2017 FBO Guidance”) that was specifically directed at these four banks.

Background

The 2017 FBO Guidance is generally consistent with the guidance previously issued to the eight US global systemically important banks (“US G-SIBS”) for 2017.⁴ Most notably in the 2017 FBO Guidance, the Agencies incorporated Supervision and Regulation (SR) Letter 14-1 (Principles and Practices for Recovery and Resolution Preparedness),⁵ which previously was technically applicable to US-GSIBs only. The guidance contained in SR 14-1 outlines specific and more substantive expectations for resolution capabilities.⁶ While overall the 2017 FBO guidance follows that for the US G-SIBs, it contains certain modifications and tailoring to address issues unique to FBOs such as the relationship and alignment between the US and group resolution plans, the role of branch entities, and guidance for permissible parent support.

Key takeaways from public sections

The public sections are varied in the level of detail and content that each firm provides, including the level of response to the 2017 FBO Guidance. One firm in particular offered a much higher level summary compared to the others, in terms of both length and detail provided. For the remaining three FBOs, the firms were consistent in including the following themes:

• Implementation of a global resolution strategy and US-specific resolution strategy and the capabilities that support each initiative
• Use of single point of entry (“SPOE”) resolution strategy in the US whereby in the event of resolution, the intermediate holding companies (“IHCs”), that were put in place due to FRB Regulation YY would enter bankruptcy and the underlying Material Entities (“MEs”) and US branches of the parent entity would continue operations or wind-down in an orderly manner. The intention of this SPOE strategy for the FBOs is to enhance the likelihood of US operations continuing in a minimally disruptive manner through the resolution period, as the IHC would be the only entity filing for bankruptcy at the outset, and the remaining MEs would be re-capitalized
• Strengthening capital and leverage for the firm’s global and US material entities (e.g., Tier 1 Capital, Leverage Ratios, etc.)
• Enhancements to resolution capabilities such as derivatives & trading (“DER”) and management information systems (“MIS”), similar to those implemented by the US G-SIBs, in particular those for qualified financial contracts (“QFCs”)
• Creation and usage of dedicated shared service entities to support operational continuity in the US

Themes by capability

Unless otherwise specified, themes were identified by capability for three of the four FBOs as one public section was unspecific in their documentation of resolution planning capabilities and drivers for such improvements.

Resolution strategy and potential obstacles

Below are some key takeaways across the firms’ resolution strategies and potential obstacles.

Group and US resolution strategies

• All firms provided thematic guidance on the interplay between their US-specific and group-level resolution plans/strategies
• One firm states that the group plan is the “most appropriate for a resolution of the group’s global operations, including the US Operations”
• Two firms’ group resolution plans would involve a bail-in of the parent to restore capital for the parent and any subsidiaries suffering losses while allowing for continuity of the US subsidiaries

Branches

• All firms stated that the US-branches of their parent would remain operational, at least in part, and in some cases, placed under heightened supervision by their state-level regulator
• Two firms stated that cessation of branch operations would not impede implementation of the resolution strategy as the respective branches did not hold direct financial market utility (“FMU”) access and shared services staff were transferred to service entities

Legal obstacles

• Three firms discussed conducting a legal obstacle analysis to identify potential hindrances to the execution of the resolution strategies and identified potential mitigating actions

Financial

Below are some key takeaways across the firms’ financial capabilities.

Capital

• Firms installed either loss-absorbing or pre-positioned capital in a manner whereby funds will be available to MEs in a resolution scenario to assist with continuity of US operations. In the case of loss-absorbing capital, it is held by the IHC but is down streamed upon the occurrence of certain triggers
• Firms identified capabilities and methodologies covering both resolution capital adequacy positioning (“RCAP”) and resolution capital execution need (“RCEN”) that are incorporated into their respective risk management frameworks as overseen by senior management

Liquidity

• In addition to identifying specific details regarding resolution liquidity adequacy and positioning (“RLAP”) and resolution liquidity execution need (“RLEN”), two firms went into significant detail regarding their methodologies and supporting technology
• Three firms identified that the liquidity methodologies are incorporated into the firm’s risk management frameworks, with oversight from senior management
• One firm discussed a liquidity dashboard provided to management on a weekly basis

DER

• Firms identified specific capabilities to identify and manage risks across legal entities
• Firms addressed both passive and active wind-down analysis for their derivatives portfolios. Two firms provided detail on the composition and maturity profiles of their portfolios
• Three firms addressed the scenario where derivatives portfolios do not survive post-US bankruptcy proceedings (i.e., entering Securities Investment Protection Act proceedings) and therefore remain with the respective broker-dealers
• One firm indicated that it did not provide intra-IHC guarantees, either “upward” or “downward”, between the IHC and lower entities and advised that it was progressing towards a single-entity booking strategy in which each business or product is booked in one entity. Such an approach to bring uniformity to booking is likely to also enhance the FBO’s preparation for QFC rules, as noted below

Operational—FRB/FDIC incorporated directly the operational capabilities that were originally issued to the US BHC LISCC firms in SR14-1 in the FBO guidance issued in March 2017; this guidance was very prescriptive in nature.

Below are some key takeaways across the firms’ operational capabilities.

Payment, clearing & settlement (“PCS”) activities

• All firms provided varying levels of detail but all addressed the development of detailed FMU playbooks, and in some cases agent banks, inclusive of contingency and communication plans for agent banks and clients
• In their PCS playbooks, two firms provided details on how their firm would handle potential adverse actions taken by FMUs (e.g., heightened requirements) in the event of financial distress prior to resolution

Collateral

• Three firms provided near point-by-point detail of how they are compliant with SR 14-1 requirements, which is perhaps expected given the prescriptive nature of the 2017 Guidance regarding this compliance requirement

MIS

• Two firms provided detailed information on MIS capabilities as identified in SR 14-1 including areas such as risk levels, internal and external agreements/contracts, real estate, personnel, and other legal data; one only provided thematic summary detail on its capabilities

Shared and outsourced services (“SOS”)

• Three firms developed service taxonomies and methodologies to assist with the identification of critical services supporting MEs and core business lines (“CBLs”) which are stored in service catalogs/matrices that support the management of services. Each firm also documented how the outputs from this capability are integrated to wider calculations regarding working capital and liquidity requirements during the resolution period, such as RLEN.
• Three firms documented how the SOS defined are documented into internal service agreements containing resolution resilient language
• One firm reduced the number of non-US material entities by establishing a US shared service entity which localized many of their shared services

QFCs

• Three firms are preparing for adherence to regulations in the US regarding the Universal International Swaps and Derivatives Association (“ISDA”) Stay Protocol
• Firms described maintaining capabilities to monitor and aggregate information on QFCs regarding cross-default, rating downgrade, and other collateral-related provisions

Structural

Below are some key takeaways across the firms’ structural capabilities.

Governance mechanisms

• All firms provided varying degrees of detail on how risk and financial triggers are linked to senior management, committees, and board oversight of operating conditions in the event of resolution scenarios
• One firm provided information on how its triggers were designed to also provide sufficient time for reaction and response to certain events
• Three of the firms described having a US specific committee involved in the review and approval of their US resolution plan

Legal entity rationalization (“LER”)

• Three firms established LER criteria covering areas as set by the 2017 FBO Guidance with two firms identifying the objectives of their criteria including reduction of operational and financial complexities, protection of insured depository institutions, and reduction of non-essential entities
• Two firms indicated quantitative reductions in the number of legal entities and each firm identified commitments to further reduce their total number of legal entities
• One firm identified the number of LER criteria and principles used “to identify opportunities for improvement and to use as a guide when considering future changes to our legal entity structure”

Separability

• Three firms advised on frameworks for identifying potential objects of sale (“OOS”) for divestiture including:
  • Two firms advised that they have identified potential OOS and have developed virtual data rooms containing relevant financial, business, and operational information to assist in a sale should the need arise
  • One firm specifically stated that its resolution strategy did not rely upon any divestitures, though no further detail was provided to indicate if this was the output of internal analysis that indicated sales were not required, or alternatively whether they believed that no particular business elements would be suitable OOS
• One firm discussed performing an analysis of potential buyers of its OOS

Next steps

Although the Agencies may not provide feedback on the 2018 plans for some time, firms should not wait for regulatory input before assessing their completed and planned actions to identify areas for improvement. Furthermore, the Agencies recently proposed guidance for the 2019 US G-SIB resolution plans, including the heightened focus on DER and PCS, which may give further perspective of regulatory guidance that may become applicable to FBOs.⁷

As part of this process, firms should consider benchmarking their respective strategy, approach, and capabilities against those presented in the public sections and guidance of other firms, and consider whether others have identified more efficient, simpler, or better approaches to various aspects of resolution planning. For the FBOs, reviewing capabilities and progress against the US G-SIBs may be particularly relevant given that SR 14-1 has been applicable to them for several years. A key fixture of resolution planning is not just the establishment and enhancement of capabilities, but also the embedding of resolution planning into business-as-usual processes. The next wave of FBO filers, due to submit in December 2018, should take note of the enhancements communicated in these public sections, and look to integrate where applicable to their own plans.

However, despite the need to follow and adopt any applicable guidance for the G-SIBs, the FBOs are unlikely to receive any of the expected relief regarding RRP filings that similar domestic financial institutions may receive due to modifications to certain regulatory attachment points based on asset holdings that would necessitate filing a resolution plan. Based on the bipartisan banking act, the “Economic Growth, Regulatory Relief, and Consumer Protection Act,⁸” which was signed into law on May 2018, some regulatory relief was provided for certain financial institutions, it does not, however, provide resolution planning relief for FBOs with more than $100 billion in global total consolidated assets.

Finally, institutions should continue to communicate with the FRB and FDIC to determine that the strategies implemented are in line with regulatory expectations as they prepare to submit their next resolution plans.

As further developments occur, Deloitte will issue additional updates as appropriate.

¹ Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Agencies post public sections of July 2018 plans” (July 9, 2018), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180709a.htm

² Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Guidance for 2018 §165(d) Annual Resolution Plan Submissions By Foreign-based Covered Companies that Submitted Resolution Plans in July 2015” (March 24, 2017), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170324a21.pdf

³ Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Resolution Plan FAQs: Foreign Bank Organizations” (September 21, 2017), available at https://www.federalreserve.gov/publications/files/resolution-plan-faqs-fbo.pdf

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 https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a1.pdf

⁵ Board of Governors for the Federal Reserve System, “SR 14-1: 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 https://www.federalreserve.gov/supervisionreg/srletters/SR1401.htm

⁶ Deloitte Center for Regulatory Strategy, “FRB, FDIC issue resolution planning guidance, one-year extension to four FBOs; Issue evaluation of 16 US BHC resolution plans” (March 31, 2017), available at https://regpulseblog.com/2017/03/31/frb-fdic-issue-resolution-planning-guidance-one-year-extension-to-four-fbos-issue-evaluation-of-16-us-bhc-resolution-plans/

⁷ Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Agencies seek comment on proposed 2019 resolution plan guidance” (June 29, 2018), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180629a.htm

⁸ S.2155—Economic Growth, Regulatory Relief, and Consumer Protection Act