Recovery and resolution planning
Financial market utilities playbook
As financial institutions continue to evolve their recovery and resolution planning, there is increased focus on addressing the risk of exposures to financial market utilities.
Financial market utilities (FMUs) provide crucial financial market infrastructure for transferring, clearing, and settling payments and securities among or between financial institutions (FIs). Many FIs also have relationships with custodians and data repositories that may be part of other FIs but also provide critical market infrastructure.
While FMUs are critical to the operation of financial markets and help to reduce risks for FIs, they can also help concentrate the remaining risk. FIs should continue to strengthen their understanding of the potential operational, reputational, business, and financial risks of exposures to FMUs and consider alternatives to promote continuity of these operations in the event of service disruption or termination.
As FIs continue to evolve their recovery and resolution planning, there is increased focus on addressing the risk of exposures to FMUs. Financial market utilities play a critical role in the operations of most financial services firms, especially in the areas of trade execution, clearing, payments, and settlement:
- Many FIs that participate directly in the market, including banks and broker-dealers, may have significant exposure and obligations to these FMUs.
- FIs should understand their risks related to FMUs in order to meet regulatory requirements for recovery and resolution planning, as well as internal risk assessments.
- Once the FMU landscape is defined, FIs can examine trigger events that could produce operational degradation or failure to deliver required services to customers or internal entities.
- Proactive monitoring of the FMU landscape enables FIs to mitigate their operational, reputational, business, and financial risk and respond to stress or resolution scenarios in a timely manner.
- Events at the FMU, other member institutions, or internally, such as legal entity downgrades or default, could lead to disruption of critical services, such as execution, payment, clearing, or settlement.
- Deloitte has created an FMU Risk Assessment Framework to help accelerate the analysis of exposure to FMUs and identify strategies to address potential risks that affect the availability of FMUs.
- Key to the framework is the creation of a custom FMU playbook that documents key people, processes, and technology systems as well as detailed contingency planning within the FI.
The bottom line
Thirty-one of the more complex firms are required to file a full resolution plan. These plans must take into account potential obstacles to resolution. The obstacles include global issues, FMU interconnections, and funding and liquidity.2