US G-SIBs resolution plan guidance finalized by FRB and FDIC Bookmark has been added
US G-SIBs resolution plan guidance finalized by FRB and FDIC
Modifications released for PCS and Derivatives and trading
The agencies released finalized resolution plan guidance applying to the eight US global systemically important banks for the 165 (d) Resolution plans.
January 25, 2019 | Financial services
FRB and FDIC finalize resolution plan guidance for US G-SIBs
On December 20, 2018, the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) (collectively, "the agencies") released the finalized resolution plan guidance1 (final guidance) applying to the eight US global systemically important banks (G-SIBs) in relation to how G-SIBs should develop their next iterations of the 165 (d) Resolution plans2 due July 1, 2019. The agencies have previously issued a proposed 2019 G-SIB resolution plan on June 29, 2018 (proposed guidance). The final guidance, which remains mostly unchanged from the proposed guidance, provides additional information for the firms regarding their resolution planning capabilities in six areas: capital, liquidity, governance mechanisms, operational, legal entity rationalization and separability, and derivatives and trading activities.
Key updates to the final guidance
The final guidance is largely consistent with the proposed guidance, except for certain modifications and clarifications in the following sections:
- Payment, clearing, and settlement (PCS); and
- Derivatives and trading activities
Despite the modifications, the two sections retain the same key principles embodies in the proposed guidance. Also, the agencies did not make notable modifications to the capital and liquidity sections of the proposed guidance. Moreover, the agencies have not stated that the single point of entry (SPOE) strategy is a viable resolution strategy, and instead, the final guidance states that the agencies do not “prescribe specific resolution strategies for any firm.” Below are the specific changes in the final guidance:
In response to comments on the difficulty of a G-SIB PCS provider assessing the extent of each client’s reliance on its PCS services, the final guidance clarifies that the G-SIB should identify clients as a key from the US G-SIB’s perspective rather than from the client’s perspective, using quantitative and qualitative criteria. Under the final guidance, the US G-SIBs are expected to identify financial market utilities (FMUs) and agent banks that are key from G-SIBs’ perspective. The final guidance states that “each US G-SIB is expected to provide a playbook for each key FMU and key agent bank that addresses considerations that would assist the US G-SIBs and its key clients in maintaining continued access to PCS services in the period leading up to and including the US G-SIBs resolution."
Derivatives and trading activities
The final guidance clarifies that there is no modification in defining dealer firm’s derivatives portfolio, but emphasizes that it should represent the vast majority (for example, 95 percent) of a dealer firm’s derivatives transactions rather than highlighting that it should represent no less than 95 percent of a dealer firm’s derivatives transactions.
Below are key changes and clarification of scope/expectations related to derivatives and trading activities:
- The expectation that a dealer firm provides information on inter-affiliate trade compression strategies applies only when a dealer firm expects to rely upon such compression strategies to execute its preferred strategy.
- The final guidance allows a dealer firm to assume that inter-affiliate transactions may be unwound at lower costs than transactions with external counterparties as long as the firm provides adequate support.
- The final guidance confirms the definition of the term “material derivatives entities” and expected to incorporate capital and liquidity neds associated with derivatives activities into its Resolution Capital Execution Need (RCEN) and Resolution Liquidity Execution Need (RLEN) estimates with respect to its material entities.
- In forecasting capital and liquidity resource needs, a dealer firm may choose not to model operational costs associated with executing its derivatives at the level of each specific derivatives activity, though it must develop those cost estimates at a granular level than simply the activity taking place at the material entity as a whole.
- In connection with the requirement that a dealer firm maintains booking practices commensurate with the size, scope, and complexity of its derivatives portfolios, firms may identify “linked” non-derivatives trading positions in a manner that appropriately reflects their overall business and resolution strategy.
- There were no changes to language around preventative controls despite industry feedback.
- The agencies expect a dealer firm to assume that counterparties will exercise any contractual termination rights if exercising that right would economically benefit the counterparty and need to conduct such additional sensitivity analysis around the baseline assumption.
- The final guidance expects a dealer firm to include the derivatives portfolios of both material and non-material entities in its potential residual portfolio analysis.
QFC stay rule implementation
The final guidance sets a new expectation that plans submitted prior to the final initial applicability date of the qualified financial contracts (QFC) stay rules (prior to January 1, 2020, which will include the next round of G-SIBs plans required to be submitted on July 1, 2019) should reflect how the early termination of QFCs could impact the firm’s resolution in light of the current state of its QFC compliance with the requirements of the QFC stay rules.
US G-SIBs will be expected to maintain and demonstrate the capability to populate a data room with information that would facilitate buyer due diligence with respect to a potential divestiture in a timely manner. This replaces the prior requirement that G-SIBs annually update and maintain active data from for each of the G-SIB’s respective divestiture options.
Structure of 2019 resolution plan
Each resolution plan should include:
- An executive summary;
- Strategic analysis in the form of a concise narrative that also includes a high-level discussion of how the US G-SIBs are addressing key vulnerabilities jointly identified by the FRB and FDIC;
- Appendices containing a sufficient level of detail and analysis to substantiate and support the strategy described in the narrative;
- A public section; and
- All other informational items required by the resolution plan rule
The final guidance incorporates prior guidance on the identification of material entities and adds a new express expectation that US G-SIBs should describe “for each material entity, on a jurisdiction-by-jurisdiction basis, the specific mandatory and discretionary actions or forbearances that regulatory and resolution authorities would take during resolution, including any regulatory filings and notifications that would be required as part of the preferred strategy, and explain how the plan addresses such actions and forbearances.”
Avoiding false positive resolution triggers
The adopting release focuses on the importance of avoiding false positive resolution triggers governed by pre-set RLEN and RCEN thresholds, assumptions, and methodologies. In addition, it states that the risks can be mitigated by allowing US G-SIBs to tailor their resolution planning capital and liquidity estimates based on specific factual circumstances concerning their material entities as well as modify these assumptions during an actual stress scenario.
Back in October 2018, the FRB released a proposed framework tailoring the Enhanced Prudential Standards (EPS) applicability to reflect the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The proposed framework made a reference to several upcoming regulatory actions, including the indication that the agencies are expected to jointly release a proposal to make adjustments to the resolution planning requirements for domestic bank holding companies (BHCs) with total consolidated assets between $100–250 billion. Expectations surrounding this proposal include formalizing submissions every two years, primarily focusing on material changes and new areas of interest. Covered institutions will need to continue to monitor regulatory developments, study proposals, and anticipate changes.
It will be important for the G-SIBs to note that the final guidance supersedes all previously issued resolution planning guidance. Although many aspects of the final guidance have not been materially changed from the proposed guidance, the agencies have noted that they intend to propose for public comment additional guidance regarding resolution liquidity and internal loss-absorbing capacity. With plans due in July 2019, US G-SIBs will be expected to address their shortcomings from their 2017 resolution plans and understand the specific changes between the proposed and final guidance.
As further developments occur, Deloitte will issue additional updates as appropriate.
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David M. Wright