[Federal Register Volume 84, Number 23 (Monday, February 4, 2019)]
[Notices]
[Pages 1438-1464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-00800]
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FEDERAL RESERVE SYSTEM
FEDERAL DEPOSIT INSURANCE CORPORATION
[FRB Docket No. OP-1644]
Final Guidance for the 2019
AGENCY: Board of Governors of the Federal Reserve System (Board) and
Federal Deposit Insurance Corporation (FDIC).
ACTION: Final guidance.
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SUMMARY: The Board and the FDIC (together, the ``Agencies'') are
adopting this final guidance for the 2019 and subsequent resolution
plan submissions by the eight largest, complex U.S. banking
organizations (``Covered Companies'' or ``firms''). The final guidance
is meant to assist these firms in developing their resolution plans,
which are required to be submitted pursuant to the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act''). The
final guidance, which is largely based on prior guidance issued to
these Covered Companies, describes the Agencies' expectations regarding
a number of key vulnerabilities in plans for an orderly resolution
under the U.S. Bankruptcy Code (i.e., capital; liquidity; governance
mechanisms; operational; legal entity rationalization and separability;
and derivatives and trading activities). The final guidance also
updates certain aspects of prior guidance based on the Agencies' review
of these firms' most recent resolution plan submissions.
FOR FURTHER INFORMATION CONTACT:
Board: Michael Hsu, Associate Director, (202) 452-4330, Division of
Supervision and Regulation, Jay Schwarz, Special Counsel, (202) 452-
2970, or Steve Bowne, Counsel, (202) 452-3900, Legal Division. Users of
Telecommunications Device for the Deaf (TDD) may call (202) 263-4869.
[[Page 1439]]
FDIC: Mike J. Morgan, Corporate Expert, [email protected], CFI
Oversight Branch, Division of Risk Management Supervision; Alexandra
Steinberg Barrage, Associate Director, Resolution Strategy and Policy,
Office of Complex Financial Institutions, [email protected]; David N.
Wall, Assistant General Counsel, [email protected]; Pauline E. Calande,
Senior Counsel, [email protected]; or Celia Van Gorder, Supervisory
Counsel, [email protected], Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
a. Background
b. Proposed Guidance
II. Overview of Comments
III. Final Guidance
a. Consolidation of Prior Guidance
b. Single Point of Entry Resolution Strategy
c. Engagement With Non-U.S. Regulators
d. Capital and Liquidity
e. Operational: Payment, Clearing, and Settlement Activities
f. Legal Entity Rationalalization and Separability
g. Derivatives and Trading Activities
h. Cross References to Supervisory Letters
i. Additional Comments
IV. Paperwork Reduction Act
I. Introduction
a. Background
Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5365(d)) and the jointly issued implementing
regulation, 12 CFR part 243 and 12 CFR part 381 (``the Rule''),
requires certain financial companies to report periodically to the
Board and the FDIC their plans for rapid and orderly resolution under
the U.S. Bankruptcy Code \1\ in the event of material financial
distress or failure.
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\1\ 11 U.S.C. 101 et seq.
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Among other requirements, the Rule requires each financial
company's resolution plan to include a strategic analysis of the plan's
components, a description of the range of specific actions the company
proposes to take in resolution, and a description of the company's
organizational structure, material entities, and interconnections and
interdependencies. The Rule also requires that resolution plans include
a confidential section that contains confidential supervisory and
proprietary information submitted to the Agencies, and a section that
the Agencies make available to the public. Public sections of
resolution plans can be found on the Agencies' websites.\2\
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\2\ See the public sections of resolution plans submitted to the
Agencies at www.federalreserve.gov/bankinforeg/resolutionplans.htm
and www.fdic.gov/regulations/reform/resplans/.
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Objectives of the Resolution Planning Process
The goal of the Dodd-Frank Act resolution planning process is to
help ensure that a firm's failure would not have serious adverse
effects on financial stability in the United States. Specifically, the
resolution planning process requires firms to demonstrate that they
have adequately assessed the challenges that their structure and
business activities pose to resolution and that they have taken action
to address those issues. Management should also consider resolvability
as part of day-to-day decision making, particularly in connection with
decisions related to structure, business activities, capital and
liquidity allocation, and governance. In addition, firms are expected
to maintain a meaningful set of options for selling operations and
business lines to generate resources and to allow for restructuring
under stress, including through the sale or wind down of discrete
businesses that could further minimize the direct impact of distress or
failure on the broader financial system. While these measures cannot
guarantee that a firm's resolution would be simple or smoothly
executed, these preparations can help ensure that the firm could be
resolved under bankruptcy without government support or imperiling the
broader financial system.
The guidance describes an iterative process aimed at strengthening
the resolution planning capabilities of each financial institution.
With respect to the eight largest, complex U.S. banking organizations
(``Covered Companies'' or ``firms''),\3\ the Agencies have previously
provided guidance and other feedback.\4\ In general, the feedback was
intended to assist firms in their development of future resolution plan
submissions and to provide additional clarity with respect to the
expectations against which the Agencies will evaluate the resolution
plan submissions. The Agencies reviewed the firms' 2017 resolution
plans and issued a letter to each firm indicating that it had taken
important steps to enhance its resolvability and facilitate its orderly
resolution in bankruptcy.\5\ As a result of those reviews and following
the Agencies' joint decisions in December 2017, the Agencies identified
four areas where more work may need to be done to improve the
resolvability of the firms.\6\ As described below, the Agencies have
updated aspects of the prior guidance based on their review of the
firms' 2017 resolution plans,\7\ including two areas of the guidance
regarding payment, clearing, and settlement services, and derivatives
and trading activities.
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\3\ Bank of America Corporation, The Bank of New York Mellon
Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan
Chase & Co., Morgan Stanley, State Street Corporation, and Wells
Fargo & Company.
\4\ This includes Guidance for 2013 Sec. 165(d) Annual
Resolution Plan Submissions by Domestic Covered Companies that
Submitted Initial Resolution Plans in 2012; firm-specific feedback
letters issued in August 2014 and April 2016; the February 2015
staff communication; and Guidance for 2017 Sec. 165(d) Annual
Resolution Plan Submissions by Domestic Covered Companies that
Submitted Resolution Plans in July 2015, including the frequently
asked questions that were published in response to the Guidance for
the 2017 resolution plan submissions (taken together, ``prior
guidance'').
\5\ See Letters dated December 19, 2017, from the Board and FDIC
to Bank of America Corporation, The Bank of New York Mellon
Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan
Chase & Co., Morgan Stanley, State Street Corporation, and Wells
Fargo & Company, available at https://www.federalreserve.gov/supervisionreg/resolution-plans.htm.
\6\ Id.
\7\ Currently, each firm's resolution strategy is designed to
have the parent company recapitalize and provide liquidity resources
to its material entity subsidiaries prior to entering bankruptcy
proceedings. This single point of entry (``SPOE'') strategy calls
for material entities to be provided with sufficient capital and
liquidity resources to allow them to avoid multiple competing
insolvencies and maintain continuity of operations throughout
resolution.
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While the capital and liquidity sections of the final guidance
remain largely unchanged from the proposed guidance and the 2016
Guidance, the Agencies intend to provide additional information on
resolution liquidity and internal loss absorbing capacity in the
future. Accordingly, while certain concerns raised by commenters in
connection with the proposed guidance have not resulted in changes to
the capital and liquidity sections of the final guidance, the Agencies
will consider these comments as they determine what future actions
should be taken in these areas. The Agencies expect that any future
actions in these areas, whether guidance or rules, would be adopted
through notice and comment procedures, which would provide an
additional opportunity for public input. The Agencies further expect to
collaborate in taking such actions in a manner consistent with the
Board's TLAC rule.\8\ Until any such future actions are taken, the
final guidance sets
[[Page 1440]]
forth the Agencies' supervisory expectations regarding development of
the firms' resolution strategies. As noted below and in the final
guidance, the final guidance is not a regulation but represents the
Agencies' supervisory expectations for how the firms' resolution plans
should address key vulnerabilities in resolution.
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\8\ See 82 FR 8266.
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b. Proposed Guidance
In July 2018, the Agencies invited public comment on proposed
resolution plan guidance for the eight largest, most complex U.S.
banking organizations, to apply beginning with the firms' July 1, 2019
resolution plan submissions.\9\ The proposed guidance described the
Agencies' expectations in six substantive areas: Capital, liquidity,
governance mechanisms, operational, legal entity rationalization and
separability, and derivatives and trading activities. The proposed
guidance was largely consistent with the guidance provided by the
Agencies in April 2016 to assist in the development of their 2017
resolution plans, Guidance for 2017 Sec. 165(d) Annual Resolution Plan
Submissions by Domestic Covered Companies that Submitted Resolution
Plans in July 2015 (``2016 Guidance'').\10\ Accordingly, the firms have
already incorporated significant aspects of the proposed guidance into
their resolution planning. The proposal updated the derivatives and
trading activities, and payment, clearing, and settlement (``PCS'')
activities areas of the 2016 Guidance based on the Agencies' review of
the Covered Companies' 2017 resolution plans. It also made minor
clarifications to certain areas of the 2016 Guidance. In general, the
proposed revisions to the guidance were intended to streamline the
firms' submissions and to provide additional clarity. The proposed
guidance was not meant to limit a firm's consideration of additional
vulnerabilities or obstacles that might arise based on the firm's
particular structure, operations, or resolution strategy and that
should be factored into the firm's submission.
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\9\ 83 FR 32856.
\10\ Available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a1.pdf and at https://www.fdic.gov/news/news/press/2016/pr16031b.pdf.
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The Agencies invited comments on all aspects of the proposed
guidance. The Agencies also specifically requested comments on a number
of issues, including whether the topics in the proposed guidance
represent the key vulnerabilities of the Covered Companies in
resolution, whether the proposed guidance was sufficiently clear, and
whether the Agencies should consolidate all applicable guidance that
covers expectations for resolution planning.
II. Overview of Comments
The Agencies received and reviewed six \11\ comments on the
proposed guidance. Commenters included various financial services trade
associations, a financial market utility (``FMU''), a foreign banking
organization (``FBO''), and several individuals. A number of commenters
strongly supported efforts by the Agencies to consolidate existing
resolution plan guidance. One commenter stated that consolidating prior
guidance in one document would help streamline the resolution planning
process while increasing clarity and transparency.
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\11\ The Board received two additional comments that were not
directed to the FDIC.
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Various commenters urged the Agencies to acknowledge that an
effective SPOE resolution strategy is a credible means of resolving a
global systemically important bank (``GSIB'') in an orderly manner.
These commenters also requested that elements of the guidance unrelated
to an SPOE strategy be eliminated so firms can focus on issues tailored
to address an SPOE resolution. Further, these commenters stated that
acknowledging SPOE as a credible resolution strategy should lead to a
reconsideration of the FDIC's resolution plan requirements for certain
insured depository institutions (``IDIs'').\12\ These commenters
recommended that IDI plans be eliminated for firms adopting SPOE as a
resolution strategy since SPOE focuses on the resolution of the parent
holding company and not material subsidiaries. Commenters also
suggested that the resolution planning process be further streamlined
by adopting a two-year cycle for submission of resolution plans under
Section 165(d) of the Dodd-Frank Act and for submission of IDI plans if
IDI plan requirements were not eliminated for SPOE filers. Commenters
also suggested that the Agencies engage more proactively with non-U.S.
regulators to improve efficiency of resolution planning and enhance
information sharing, including with respect to reducing ex ante ring-
fencing.
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\12\ See FDIC, Resolution Plans Required for Insured Depository
Institutions with $50 Billion or More in Total Assets, 77 FR 3075
(Jan. 23, 2012), codified at 12 CFR 360.10.
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The Agencies received specific responses to questions raised in the
proposed guidance related to key vulnerabilities, PCS services, and
derivatives and trading activities. Two commenters agreed that the
proposed guidance generally addresses the vulnerabilities of Covered
Companies in resolution (although one of the commenters suggested that
the guidance should be refined to more explicitly encourage an analysis
of certain concentration risks).
PCS. One commenter recommended that the PCS analysis should be
limited to matters relevant to the successful execution of a filer's
particular resolution strategy and offered general topical themes and
specific recommendations for clarifying the PCS guidance and
streamlining the resolution planning process. Another commenter
suggested that the final guidance should highlight more clearly the
importance of firms' continued engagement with key external
stakeholders, including FMUs and agent banks. Two commenters provided
specific recommendations with respect to: The scope of PCS services
that would be analyzed in resolution plans; the extent to which the PCS
guidance should be consistent with the Financial Stability Board's
(``FSB's'') Guidance on Continuity of Access to Financial Market
Infrastructures (FMIs) for a Firm in Resolution, published in July
2017; distinctions between different types of providers of PCS
services; the content that would be presented in FMU, agent bank, and
PCS service provider playbooks; the extent to which contingency
analysis would be discussed in resolution plans; and expectations
concerning communication of potential impacts of contingency or
alternative arrangements on key clients.
Derivatives. One commenter supported the elimination in the
proposed guidance of the expectation for a dealer firm to provide
separate active and passive wind-down analyses. However, the commenter
requested that the Agencies further eliminate other aspects of the
guidance that may retain elements of a passive wind-down analysis. The
commenter also recommended that the Agencies should allow firms to
tailor capabilities and analysis to those supporting a firm's SPOE
resolution strategy and incorporate reasonable alternative assumptions
consistent with a firm's resolution strategy. In addition, this
commenter stated that the Agencies should limit the development of
derivatives capabilities and related analyses to material entities,
eliminate modeling of operational costs at the level of specific
derivatives activities, and clarify that ``linked'' non-derivatives
trading positions should be defined by dealer firms in light of their
overall business model and resolution strategies.
[[Page 1441]]
Capital and Liquidity. Commenters offered recommendations on
resolution capital and liquidity that primarily covered four areas: (i)
Secured support agreements; (ii) tailoring liquidity flow assumptions;
(iii) avoiding false positive resolution triggers; and (iv) other
requests.
Qualified Financial Contract (``QFC'') Stay Rules. One commenter
criticized the proposed guidance requesting that additional resolution
plan information be provided for firms who do not adhere to the
International Swaps and Derivatives Association 2015 Universal
Resolution Stay Protocol (or similar provisions of the U.S.
protocol),\13\ including explaining the firm's alternative method of
complying with the QFC stay rules. The same commenter also recommended
that the Agencies clarify the final guidance regarding the impact of
bankruptcy claims status of guarantees of QFCs if a firm were to pursue
the elevation alternative described in the guidance.
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\13\ U.S. protocol has the same meaning as it does at 12 CFR
252.85(a). See also 12 CFR 382.5(a) (including a substantively
identical definition).
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Foreign Banking Organizations. Two commenters provided
recommendations with respect to enhancing the resolution planning
process applicable to FBOs under Section 165(d) of the Dodd-Frank Act.
The final guidance does not apply to FBOs, and the appropriate
expectations for resolution plans of FBOs would be better considered in
the context of guidance applicable to those firms. Accordingly, these
comments are not addressed in this Supplementary Information section.
The comments received on the proposed guidance are further
discussed below.
III. Final Guidance
After carefully considering the comments and conducting further
analysis, the Agencies are issuing final guidance that includes certain
modifications and clarifications to the proposed guidance. In
particular, the PCS and the derivatives and trading activities sections
of the final guidance contain several changes based on commenters'
suggestions, while retaining the same key principles embodied in the
proposed guidance. These principles include: (i) Streamlining the
firms' submissions; (ii) facilitating continuity of PCS services in
resolution; and (iii) helping ensure that a firm's derivatives and
trading activities can be stabilized and de-risked during resolution
without causing significant market disruption that could cause risks to
the financial stability of the United States. In addition, the final
guidance consolidates all prior resolution planning guidance for the
firms in one document and clarifies that any prior guidance not
included in the final guidance has been superseded. These changes are
discussed in more detail below.
The final guidance is intended to assist firms in mitigating risks
to the financial stability of the United States that could arise from
their material financial distress or failure, consistent with Section
165 of the Dodd-Frank Act.
a. Consolidation of Prior Guidance
Commenters favored consolidating and making public the relevant
aspects of all existing guidance into a single document. One commenter
provided a list of examples of how prior guidance could be consolidated
and recommended principles for the Agencies to follow. Accordingly, the
final guidance includes a new section regarding the format,
assumptions, and structure of resolution plans, which includes the
aspects of previous guidance that remain applicable to resolution
planning. In addition, because commenters found the Agencies'
previously issued Frequently Asked Questions (``FAQs'') to the guidance
to be helpful, those FAQs that remain relevant have been appended to
the final guidance. To the extent not incorporated in or appended to
the final guidance, prior guidance \14\ is superseded.
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\14\ See footnote 5.
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Consistent with recommendations made by the commenters, the
Agencies have updated the final guidance to maintain certain key
concepts contained in prior firm-specific feedback letters. For
example, the final guidance deletes the cross-reference to SR 14-1 \15\
as the Agencies believe the relevant elements and associated
capabilities contained in SR 14-1 have been consolidated into the final
guidance. In addition, the final guidance clarifies the content of a
firm's external communications strategy contained in the firm's
governance playbooks and the scope of actionable implementation plans
to ensure continuity of shared services. The final guidance also
provides that firms discuss compliance with the QFC stay rules (as
defined below) and the potential impact of such compliance on a firm's
resolution strategy. Additionally, as recommended by a commenter,
certain FAQs that are no longer meaningful or relevant have not been
consolidated and are excluded, such as FAQ LIQ 7.
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\15\ SR Letter 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'' (Jan. 24, 2014).
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A number of comments were directed at streamlining the resolution
plan submission process. These comments included suggestions to
formalize a two-year submission cycle and to allow firms to provide
updates to quantitative analyses, while relying on references to
previously submitted material where capabilities remain unchanged.
Implementation of the changes proposed by these comments would require
changes to the Rule. Accordingly, these comments would be better
considered in connection with a future rulemaking proposal. The
Agencies note, however, that the Rule provides that firms may
incorporate by reference certain informational elements from previously
submitted resolution plans to the extent such information remains
accurate.
One commenter noted that, to the extent filers have adequately
addressed deficiencies and shortcomings identified in prior firm-
specific feedback, the Agencies should explicitly provide in the final
guidance that the expectations set forth in that feedback do not
continue to alter the expectations in the final guidance. This
commenter noted that the final guidance should govern where it contains
expectations similar to, or that directly supersede, expectations in
prior feedback letters or similar communications. As stated above,
prior guidance not incorporated in or appended to the final guidance is
superseded. The Agencies note that in the future, firm-specific
weaknesses and applicable remediation will continue to be addressed in
firm-specific feedback communications in a manner that is consistent
with applicable guidance.
The Agencies note that commenters described certain expectations
that are set forth in the guidance as ``requirements.'' The Agencies
are clarifying that the final guidance does not have the force and
effect of law. Rather, the final guidance outlines the Agencies'
supervisory expectations and priorities for the firms' resolution plans
and articulates the Agencies' general views regarding appropriate
practices for each subject area covered by the final guidance.\16\
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\16\ See generally, Interagency Statement Clarifying the Role of
Supervisory Guidance (Sept. 11, 2018) at https://www.federalreserve.gov/supervisionreg/srletters/sr1805a1.pdf.
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b. Single Point of Entry (SPOE) Resolution Strategy
Some commenters suggested that the Agencies acknowledge the SPOE
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strategy as a credible means of resolving a GSIB in an orderly manner.
Commenters cited SPOE as a basis for eliminating various aspects of the
Guidance they contend are relevant to non-SPOE resolution strategies.
The Agencies do not prescribe specific resolution strategies for
any firm, nor do the Agencies identify a preferred strategy. Firms may
submit resolution plans using the resolution strategies they believe
would be most effective in achieving an orderly resolution of their
firms, but must address the key vulnerabilities and support the
underlying assumptions required to successfully execute their chosen
resolution strategy. The final guidance is not intended to favor one
strategy or another. It is flexible enough to allow firms to address
the resolution obstacles that are relevant to their chosen strategy.
The Agencies have acknowledged the significant progress U.S. GSIBs
have made in addressing key vulnerabilities and mitigants associated
with SPOE. While significant progress has been made, like any
resolution strategy for large bank holding companies, SPOE is untested
and there remain inherent challenges and uncertainties associated with
the resolution of a systemically important financial institution under
any specific resolution strategy. In light of this uncertainty, the
final guidance provides that the firms should develop and maintain
capabilities to address situations where their selected strategy
presents vulnerabilities.
Some commenters offered recommendations about IDI Plan requirements
for filers that have adopted SPOE in their 165(d) Plans.\17\ IDI Plans
are outside of the scope of the guidance and have a unique objective
from Title I ensuring least-cost resolution to the Deposit Insurance
Fund in an IDI receivership. The FDIC plans to address proposed IDI
Plan requirements through an advanced notice of public rulemaking in
2019.
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\17\ One commenter stated that the FDIC should finalize its
public notice using SPOE as the strategy for resolution of GSIBs
under Title II of the Dodd-Frank Act. Because Title II of the Dodd-
Frank Act is outside the scope of this guidance, the FDIC does not
address such comment at this time.
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c. Engagement With Non-U.S. Regulators
Certain commenters recommended the Agencies engage more proactively
with non-U.S. regulators to improve the efficiency of resolution
planning requirements. Additionally, certain commenters recommended the
Agencies enhance information-sharing across jurisdictions in a manner
that would expand and clarify the type of information that firms may
share with cooperating regulatory authorities.
The Agencies acknowledge that engagement with non-U.S. regulators
is critical. The Agencies already engage proactively with non-U.S.
regulators related to resolution planning, and have established
frameworks and information-sharing arrangements for effective cross-
border resolution cooperation with counterparts in key foreign
jurisdictions. This includes leading, as home authority Co-Chairs, the
work of firm-specific cross-border Crisis Management Groups (``CMGs'')
for U.S. GSIBs as well as entering into firm-specific cooperation
agreements with CMG members. In furtherance of its resolution authority
responsibilities, the FDIC also has concluded bilateral Resolution
Memoranda of Understanding with foreign authorities that address
cooperation and information sharing for cross-border resolution
planning and crisis management preparedness.
In addition, the Agencies work on a bilateral and multilateral
basis on cross-border resolution planning matters with authorities from
other jurisdictions that regulate GSIBs, including by participating in
joint working groups and interagency financial regulatory dialogues
(such as the Joint U.S.-European Union Financial Regulatory Forum and
the U.S.-UK Financial Regulatory Working Group) and by contributing to
the development and ongoing implementation of standards for cross-
border resolution by the FSB's Resolution Steering Group and its
committees, including implementing the Key Attributes of Effective
Resolution Regimes for Financial Institutions.\18\ The Agencies will
continue to coordinate with non-U.S. regulators regarding resolution
matters.
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\18\ ``Key Attributes of Effective Resolution Regimes for
Financial Institutions'' (October 15, 2014), http://www.fsb.org/wp-content/uploads/r_141015.pdf.
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d. Capital and Liquidity
Like the proposed guidance, the capital and liquidity sections
(Sections II and Section III) of the final guidance remain materially
unchanged from the 2016 Guidance, including the expectations to model
resolution capital and liquidity needs for each material entity and to
hold and pre-position sufficient resources to meet those needs. The
only change to the capital section is to eliminate a superfluous
reference to creditor challenge mitigation. The proposed guidance
carried forward an unintentional reference to creditor challenge in the
Resolution Capital Adequacy and Positioning (``RCAP'') discussion,
which if left unedited suggests that pre-positioning of intercompany
debt that is indirectly issued to a parent through one or more
intermediate entities needs to be structured in a manner that
``mitigates uncertainty related to potential creditor challenge.'' The
need to address creditor challenges is addressed in the Pre-Bankruptcy
Parent Support section of the guidance. The relevant point regarding
the firm's structuring of the internal debt is that it should ``ensure
that the entity can be recapitalized.''
Although the Agencies received a number of written comments on
resolution capital and liquidity, the commenters noted that the
Agencies intend to issue information addressing issues relating to
intra-group liquidity and internal loss absorbing capacity in
resolution. These commenters therefore did not presume that the intra-
group liquidity and internal loss-absorbing capacity recommendations
would be addressed in this guidance. The Agencies have reviewed and
considered the commenters' recommendations, and have responded to
specific recommendations below, but have not adopted any modifications
in the final guidance in response to those recommendations. The
Agencies will continue to consider these comments as they assess the
additional information they intend to provide in these areas.
Commenters offered recommendations on resolution capital and
liquidity that primarily covered four areas: (i) Secured support
agreements; (ii) tailoring liquidity flow assumptions; (iii) avoiding
false positive resolution triggers; and (iv) other requests.
Ultimately, the result of these recommendations would be to allow firms
to, among other things, reduce the amount of resolution liquidity and
capital resources (e.g., Resolution Liquidity Adequacy and Positioning
(``RLAP'') and RCAP) that would otherwise be positioned at a material
entity.
Secured Support Agreements. Commenters recommended that as a result
of the development (and adoption) of support agreements by filers, the
Agencies should reconsider the pre-positioning expectations and legal
entity friction assumptions (e.g., ring fencing of surplus liquidity)
articulated in the Agencies' prior guidance. Commenters noted the
design objectives and intended benefits of secured support agreements
for addressing the Agencies' expectation that firms balance the
flexibility provided by holding contributable
[[Page 1443]]
resources at support providers with the certainty provided by pre-
positioning resources at material subsidiaries. The legally binding
features and enforceability of the secured support agreements,
commenters asserted, maximize the firm's ability to direct capital and
liquidity where and when it is needed, while maintaining a degree of
certainty that contributable resources will be available to the
material entities when needed. Similarly, commenters suggested that the
Agencies should engage with non-U.S. regulators to establish support
agreements as a key tool for meeting the capital and liquidity needs of
material subsidiaries of a U.S. GSIB in a resolution scenario.
Commenters believe that secured support agreements are complementary to
the objectives of internal total loss-absorbing capacity (``TLAC'') and
other gone-concern standards designed to provide host authorities
comfort that non-locally positioned resources--or surplus resources
moved out of a local material entity--will be available to the local
material entity if and when needed in resolution.
The Agencies continue to consider the merits and limitations of
secured support agreements. A successful SPOE resolution requires a
balancing of the tradeoffs between the certainty provided by locally
pre-positioned resources and the flexibility provided by a pool of
globally available resources. A key objective of pre-positioning of
resolution resources (e.g., pre-positioned internal TLAC) is to delay
the need for host authorities to take self-protective actions that
disrupt the group SPOE resolution. However, over-calibration of pre-
positioned internal TLAC can prove self-defeating, if excess resources
are trapped in local jurisdictions when they are needed elsewhere
within the group. The Agencies acknowledge that balancing these trade-
offs successfully will require shared understandings between home and
host authorities, and firms, about the expected allocation during a
group resolution of resources held at the parent or other support
entity.
However, secured support agreements remain an imperfect substitute
for the certainty (and transparency) provided by pre-prepositioned
resources. First, the Agencies note that secured support agreements are
untested. While secured support agreements may offer a measure of
assurance that available contributable resources within the firm will
be allocated in a pre-determined manner, on their own, the agreements
do not provide the same certainty as pre-positioned resources. More
pre-positioned resources increase host comfort and cross-border
cooperation during a group resolution because the host is in control of
a known and quantifiable amount of emergency capital and liquidity, and
not dependent on the potential delivery of contributable resources.
Second, the availability and sufficiency of contributable resources for
group resolution purposes may be unclear.
The Agencies' resolution resource estimation and positioning
expectations, including many of the assumptions that restrict the flow
of liquidity among affiliates for resolution planning purposes, support
the broader goal of increasing host authority confidence through
straightforward assumptions about the movement of liquidity within
groups and transparency of resolution resource needs and resource
locations. For example, enhancing clarity with respect to the size,
location, and composition of pre-positioned resources, can provide
authorities with the necessary comfort that resources are not being
double-counted, and that they can be reasonably relied on to be
available locally, when needed. The Agencies acknowledge that
engagement with non-U.S. regulators is critical because the
effectiveness of secured support agreements could be reduced if they do
not provide key host regulators a sufficient level of comfort during
stress. To that end, the Agencies will continue to coordinate with the
non-U.S. regulators regarding resolution matters, including
developments in the resolution capabilities of U.S. GSIBs and in
existing secured support agreements.
Tailoring Liquidity Flow Assumptions. Commenters recommended that
firms be permitted to make more idiosyncratic assumptions about flows
of liquidity in their resolution planning liquidity estimates and
methodologies for RLAP.\19\ More specifically, commenters argued for
the relaxation of various enumerated assumptions, which they assert
reflect unrealistic assumptions about the generation of liquidity and
the flows of liquidity between affiliates. Commenters further asserted
that these restrictive assumptions are rendered less realistic and less
necessary in light of the secured support agreements' framework for
ensuring the timely allocation of resolution resources. The Agencies
continue to evaluate the liquidity guidance for opportunities to
enhance the efficiency of the resolution planning process.
---------------------------------------------------------------------------
\19\ For Resolution Liquidity Execution Need (``RLEN''), the
Agencies' guidance does not prescribe specific modeling assumptions
for intra-affiliate flows.
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Avoiding False Positive Resolution Triggers. One commenter
requested that the Agencies clarify whether firms are permitted to
tailor their resolution planning capital and liquidity estimates and
methodologies based on specific factual circumstances concerning their
material entities, as well as modify these assumptions during an actual
stress scenario. According to the commenter, expressly providing firms
with the ability to tailor and modify these estimates and methodologies
would serve as a safeguard against premature bankruptcy filings.
The guidance provides firms with the flexibility to tailor their
RLEN and Resolution Capital Execution Need (``RCEN'') methodologies.
For the purposes of the resolution plan submissions, firms should
assume conditions consistent with the DFAST Severely Adverse
scenario.\20\ In an actual stress environment, however, methodologies
for estimating RLEN and RCEN should have the flexibility to incorporate
actual stress conditions that may deviate from the DFAST Severely
Adverse scenario. Firms' capabilities to calibrate and alter
assumptions in their RLEN and RCEN methodologies to reflect actual
stress conditions is a meaningful safeguard against false positive
resolution triggers.
---------------------------------------------------------------------------
\20\ See final guidance, Section VIII, Guidance Assumption 4.
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Other Requests. Commenters also sought modification of certain
definitional issues. More specifically, commenters suggested that
forthcoming guidance reconsider two additional aspects of the
resolution planning capital and liquidity standards: (i) Whether firms
can turn off restrictive market access assumptions post-
recapitalization and (ii) whether investment grade status can
substitute for the level of recapitalization necessary to achieve
market confidence in stabilization for material entities not subject to
``well-capitalized'' standards or bank regulatory capital regimes. The
two requests relate to definitional issues addressed in existing FAQs
and would primarily impact a firm's assumptions regarding resolution
capital and liquidity resource need estimates. Therefore, the Agencies
will continue to consider these recommendations when they provide
additional information in these areas in the future.
e. Operational: Payment, Clearing, and Settlement Activities
The Agencies received a number of comment letters regarding the
proposed
[[Page 1444]]
PCS guidance. Commenters generally recommended certain modifications
and clarifications to the proposed guidance in order to streamline the
resolution plan submissions and to provide further clarity. The
Agencies have modified the final guidance to address certain matters
raised by the commenters consistent with the Agencies' overall
objective of facilitating continuity of PCS services in resolution.
i. PCS Terminology
The Agencies received several comments regarding the scope of the
proposed guidance and requesting clarity and/or modification of certain
terms and PCS-related concepts, such as ``PCS services providers,''
``key clients,'' ``critical PCS services,'' and the scope of direct and
indirect PCS activities. These clarifications in the final guidance
also address several related comments, which are discussed in further
detail below.
Providers of PCS Services: Under the final guidance, a firm is a
provider of PCS services if it provides PCS services to clients as an
agent bank or it provides clients with access to an FMU or agent bank
through the firm's membership in or relationship with that service
provider. A firm also is a provider if it provides clients with PCS
services through the firm's own operations (e.g., payment services or
custody services). One commenter recommended that a firm's contingency
plans should cover its relationships with the Society for Worldwide
Interbank Financial Telecommunication (``SWIFT''), real-time gross
settlement (``RTGS'') systems, and nostro-agents in the identification
of key PCS providers. The Agencies note that the guidance is not
prescriptive regarding the inclusion of specific providers and that a
firm retains the discretion to identify SWIFT, RTGS, and/or certain
nostro-agents as key PCS providers.
The Agencies note that, to the extent a firm addresses all items
noted in the final PCS guidance section on Content Related to Users
and/or Providers of PCS Services in other areas of the firm's
submission (e.g., the discussion of material entities and/or critical
operations in its resolution plan), the firm may include a specific
cross-reference to that PCS content accordingly, and a separate
playbook need not be provided.
Key Client Identification: Some commenters requested that the
guidance either adopt a more limited scope for the concept of key
clients or clarify that a provider of PCS services may identify and
describe its key clients by category or in a manner consistent with the
services it provides. Commenters argued that consideration of a wider
scope of key clients could be burdensome to administer and result in a
list of key clients that may fluctuate over time. In response to these
comments, the final guidance clarifies that firms should identify
clients as key from the firm's perspective, rather than from the
client's perspective. The final guidance further clarifies that a firm
is expected to use both quantitative and qualitative criteria to
identify key clients. Qualitative criteria may include categories of
clients associated with PCS activities and business lines,\21\ while
quantitative criteria may include transaction volume/value, market
value of exposures, market value of assets under custody, usage of PCS
services, and availability/usage of intraday credit or liquidity.
Commenters were also concerned that the list of key clients could
fluctuate over time. The Agencies recognize that information provided
in a firm's resolution plan, including a list of key clients, may
change with each submission. Some commenters requested that the scope
of key clients should be limited to GSIBs, arguing that such limitation
would be more consistent with the limited scope of the FSB's July 2017
Guidance on Continuity of Access To Financial Market Infrastructures
(FMI) for a Firm in Resolution, including the corresponding Annex,
which provides a list of information requirements relevant to
facilitating continuity of access (together, the ``FSB FMI Guidance'').
The Agencies have not limited the scope of key clients to GSIBs, since
key clients may include entities other than GSIBs, and continuity of
access to services provided to all key clients supports a key objective
of the guidance.
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\21\ Commenters also suggested that a firm should consider the
degree of interconnectedness among its clients and evaluate
concentration risk from its perspective as a provider of PCS
services (including where a firm is the sole provider or one of only
a few providers for a particular service). The Agencies note that a
firm may consider interconnectedness or concentration risk presented
by a particular client as qualitative criteria when identifying key
clients.
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PCS Services: Commenters argued that a concept of critical PCS
services that depended on the criticality of PCS services to a
particular client would be impractical and difficult to administer.
Commenters also argued that a concept of critical PCS services that
hinged on the criticality of such services to a particular client would
be an overly-broad standard. The final guidance replaces references to
``critical PCS services'' with ``PCS services,'' focuses on key
clients, and clarifies that a firm should identify clients, FMUs, and
agent banks as key from its perspective rather than its clients'
perspective. Further, the final guidance modifies the definition of
client by deleting the reference to ``reliance upon continued access''
such that a client is defined as ``an individual or entity, including
affiliates of the firm, to whom the firm provides PCS services.'' As
noted above, firms are expected to identify clients as key from the
firm's perspective using both quantitative and qualitative criteria and
have flexibility to tailor their identification methodologies and
criteria. These clarifications are not expected to result in
consideration of any additional PCS services provided by the firm.
Direct and Indirect Relationships: With respect to the scope of PCS
providers, certain commenters sought to narrow the concept to those
instances in which a firm that has a direct relationship with an FMU or
agent bank provides indirect access to an FMU or agent bank through its
membership or contractual relationship. The Agencies have not limited
this concept, as continuity of PCS activities in resolution remains
essential both with respect to the provision of PCS services to a
firm's affiliates and where the firm is a provider of PCS services
through its own operations.
In addition, one commenter stated that firms should be expected to
understand which of an FMU's tools are most likely to be utilized in
resolution, and to differentiate mitigating actions from adverse
actions. The Agencies note that the guidance provides firms with
discretion to identify such tools and contingency arrangements in their
resolution plan submissions, including whether the arrangements are
likely to be used by a PCS provider in resolution.
One commenter also focused on the need, to the extent possible, for
firms to update contracts with agent banks to incorporate appropriate
terms and conditions to prevent automatic termination and facilitate
continued provision of critical outsourced services during resolution.
The Agencies note that this comment is addressed under the Shared and
Outsourced Services section of the final guidance. Notwithstanding the
foregoing, the Agencies understand that in certain cases, PCS providers
may not be permitted to provide continued access by an entity that has
not met either its financial or contractual obligations. In addition,
one commenter noted that firms should consider including continuity of
access to key FMUs and key agent banks in their legal entity
rationalization (``LER'') criteria. In order
[[Page 1445]]
to enhance resolvability, firms have included continuity of critical
operations in their LER criteria and certain firms also considered
mitigation of continuity risk regarding FMU access in applying their
LER criteria. The final guidance provides all firms with the
flexibility, as appropriate, to consider continuity of access to key
FMUs and key agent banks.
ii. Playbooks for Continued Access to PCS Services
The provision of PCS services by firms, FMUs, and agent banks is an
essential component of the U.S. financial system, and maintaining the
continuity of PCS services is important for the orderly resolution of
firms. Prior guidance from the Agencies indicated that a firm's
resolution plan submission should describe arrangements to facilitate
continued access to PCS services through the firm's resolution. Firms
have developed capabilities to identify and consider the risks
associated with continuity of access to PCS services in resolution,
including playbooks for key FMUs and key agent banks that describe
potential adverse actions and possible contingency arrangements.
Some commenters suggested that filers could update certain
discussions in the PCS playbooks for material changes only and not
resubmit the complete discussion as part of the resolution plan
submission. The Agencies acknowledge that the Rule generally allows for
incorporation by reference of previously submitted information that
remains accurate. However, certain PCS-related content may be more
likely to change between submissions (such as provider rulebooks, key
clients, volume and value of activity, exposure quantifications, and
key PCS providers) and therefore would be expected to be provided in
each submission. To the extent that certain updated information may be
addressed in other sections of the firm's submission, the firm may
include a specific cross-reference to that content in the appropriate
playbook.
In addition, the Agencies have clarified the expectations for
playbook content for both users and providers of PCS services. Firms
are expected to provide a playbook for each key FMU and key agent bank
that addresses financial and operational considerations that would
assist the firm in maintaining continued access to PCS services for
itself and its clients during stress and in resolution.
Form and Content: Some commenters suggested that playbooks for
agent bank relationships might be different than those produced for
FMUs, and as a result, analysis in playbooks for agent banks generally
would be different from the analysis for FMUs in terms of content,
organization, and level of detail. Another commenter suggested that
firms should consider discussing whether contingency arrangements and/
or analyses in playbooks would change depending on which entity enters
into resolution. The final guidance sets out the expectations for PCS
playbooks for FMUs and agent banks, and allows flexibility for a firm
to tailor the contents of its PCS playbooks to the specific
relationships of the firms with its key FMUs and key agent banks.
Together with financial resources, a firm should consider operational
resources (including critical services, MIS reporting, communications,
and internal and external contacts) that would be needed to respond to
adverse actions and execute any contingency arrangements.
Some commenters suggested that separate playbooks should not be
expected for a firm's role as provider of PCS services. If the firm is
both a user and provider of PCS services, content related to user and
provider of PCS services may be provided in the same playbook, with
appropriate and specific cross-references to other sections. Where a
firm is a provider of PCS services through the firm's own operations,
the firm is expected to produce a playbook for the material entities
that provide those services, addressing each of the items described in
the section on Content related to Provider of PCS Services.
Mapping: The final guidance specifies that each playbook should
identify and map the PCS services provided by each material entity and
critical operation to its key clients, and describe the scale and
manner in which each provides PCS services and any related credit or
liquidity offered in connection with such services.
Commenters focused on the issue of identification and mapping key
clients to the firm's PCS activities. Comments concerning
identification of key clients were discussed in connection with the
definition of ``key client.'' The Agencies expect a firm to map each of
its key clients to the firm's key FMUs and key agent banks. The
Agencies note that a firm is expected to track PCS activities, map them
to the relevant material entities and core business lines, and track
customers and counterparties for PCS activities, including values and
volumes of various transaction types, and used and unused capacity for
all lines of credit. Firms are expected to report on the individual key
clients to whom the firm provides PCS services. Some commenters argued
that this mapping of key clients would require the development of new
information and monitoring systems. However, based on the Agencies'
engagement with firms, the Agencies have observed that firms already
have the capability to identify and report these relationships on an
individual basis.
Funding and Liquidity Analysis: Commenters recommended that PCS
playbooks be consistent with the expectations in other parts of the
final guidance, and that any PCS-related liquidity expectations should
be factors incorporated into a filer's overall resolution liquidity
models. Another commenter noted that firms should clarify further the
extent to which they would rely on committed credit lines as liquidity
resources in resolution. The final guidance clarifies that firms are
expected to include a discussion of liquidity sources and uses of funds
in business as usual (``BAU''), in stress, and in the resolution
period. The final guidance is not prescriptive, and each firm is
expected to determine the relevant PCS-related liquidity analysis that
is specific to its PCS activities. There is no expectation for such
liquidity analysis to include stress-testing or multiple scenario
analysis. To the extent that specific FMU and agent bank information is
provided, firms may include the information in the relevant FMU and
agent bank playbooks or provide appropriate, specific cross-references
to other sections of the resolution plan in the playbook.
Key Client Contingency Arrangements: Some commenters argued that if
a filer's resolution strategy is designed to maintain client access to
key FMUs and key agent banks, then contingency analysis regarding
client loss of access to PCS services is not relevant to the successful
execution of a firm's particular resolution strategy and should not be
expected to be included in a firm's resolution plan submission. The
Agencies consider the need to address contingencies (e.g., the
potential for loss of access to PCS services, FMUs, or agent banks) as
supplemental to those in the firm's preferred resolution strategy, and
maintain that the preparation of a loss of access contingency analysis
is appropriate as the successful execution of a firm's preferred
resolution strategy is not guaranteed. To minimize disruption to the
provision of PCS services to clients, a filer should describe the
potential range of contingency arrangements that the firm may take,
including the viability of transferring client activity and related
assets, as well as any
[[Page 1446]]
alternative arrangements that would allow the firm's key clients
continued access to critical PCS services, in the event the firm could
no longer provide such access.
Commenters also noted that filers should have flexibility to
provide analysis that recognizes the different types and scope of PCS
services offered by each PCS provider. The Agencies note that the
guidance distinguishes between FMUs and agent banks and is not
prescriptive, providing firms with discretion under the existing
guidance to tailor analysis consistent with varied types of PCS
services and PCS providers.
Commenters also indicated that a filer is not in the best position
to understand the financial and operational impacts to its key clients,
and suggested that any contingency arrangements for clients should be
at a higher level and not be provided on a per-client basis. The
Agencies are clarifying that the discussion of potential financial and
operational impacts to key clients is from the perspective of the
filer, and not from the clients' perspectives. The Agencies note that
the final guidance is not prescriptive and that firms have the
discretion to tailor the discussion to client impacts specific to the
PCS services provided.\22\
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\22\ Examples of financial and operational impacts to key
clients may include considerations such as intraday or uncommitted
credit lines that a firm provides to key clients, settlement
volumes/value, or market value of the activity that is processed for
its key clients. To the extent certain key client relationships or
PCS services to key clients are unique, firms are expected to
address potential contingency arrangements for those instances on an
individual client basis.
---------------------------------------------------------------------------
Loss of Access: Several commenters requested additional clarity
around loss of access to an FMU or agent bank, and the potential
financial and operational impacts to a filer's material entities and
key clients. The final guidance maintains that a firm is not expected
to incorporate a scenario in which it loses FMU or agent bank access
into its preferred resolution strategy or into its RLEN/RCEN analysis.
In support of maintaining the continuity of PCS services, each playbook
should provide analysis of the financial and operational impacts to the
filer's material entities and key clients due to adverse actions that
may be taken by an FMU or agent bank, and contingency actions that may
be taken by the filer. Each playbook also should include considerations
of any substitutes and/or any possible alternative arrangements, if
available, that would allow the firm and its key clients to maintain
continued access to PCS services in resolution.\23\
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\23\ Impact analysis in the final guidance is consistent with
the FSB FMI Guidance regarding impact analysis of discontinuity of
access that complements mitigation measures for dealing with a
termination or suspension of access to FMI services. See FSB FMI
Guidance, Section 2.5 (p. 17), and Annex, Items #17 and 18 (p. 27).
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Client Communication: One commenter suggested that firms engage
with users and clients and communicate the range of risk management
actions and requirements that may be imposed on a user when a firm is
in resolution, setting out a common set of expectations and processes
across users to the extent possible. The Agencies recognize the
importance of firms' engagement and communication with clients and the
final guidance allows firms to determine the method, form, and timing
of such engagement and communication with clients. Firms are best
positioned to make decisions regarding common expectations and
processes across users because the facts and circumstances of client
relationships vary, which in turn informs the specific content in the
playbooks.
The final guidance specifies that a firm should communicate to its
key clients the potential impacts of implementation of any identified
contingency arrangements or alternatives, and that playbooks should
describe the firm's methodology for determining whether additional
communication should be provided to some or all key clients (e.g., due
to the client's BAU usage of that access and/or related intraday credit
or liquidity), and the expected timing and form of such communication.
A firm is expected to consider the benefits of client communications in
multiple forms (e.g., verbal, written, and electronic), and at multiple
times (e.g., in BAU, stress events, and some point in advance of taking
contingency actions) in order to provide adequate notice to key clients
of the action and the potential impact on the client of that action.
Firms should consider the benefits of tailoring client communications
to different segments of clients in form, timing, or both, and
providing sample client contracts or agreements containing provisions
related to the firm's provision of intraday credit or liquidity in its
resolution plan submission.\24\
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\24\ In their most recent resolution plan submissions, all of
the firms addressed the issue of client communications and provided
descriptions of planned or existing client communications, with some
firms submitting specific samples of such communication.
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iii. Other PCS Comments (FSB FMI Guidance, International Coordination,
and Agency Communication)
Consistency with FSB FMI Guidance: Commenters recommended greater
consistency with the FSB FMI Guidance. The final guidance remains
consistent with the FSB FMI Guidance, focusing on the identification of
providers, mapping of contractual relationships, continuity analysis
(e.g., adverse actions and contingency arrangements), communications,
and discontinuity of access. Another commenter suggested that the
Agencies should consider coordinating with firms' foreign resolution
authorities with respect to content and the submission process for
resolution-related reporting templates. The Agencies recognize that
international coordination in resolution-related matters is important,
and will continue to work with domestic and international counterparts
through various forums, including CMGs. The final guidance is also
consistent with FSB FMI Guidance in this respect, as it broadly
addresses all information aspects contained in the FSB FMI Guidance,
including those informational requirements specified in the FSB Annex.
In addition, the final guidance provides a firm with the flexibility to
provide playbooks that are tailored to the circumstances relevant to
that firm and therefore does not adopt standardized resolution-related
reporting templates.
Agency Communication: One commenter suggested that the Agencies
engage ex ante with key market stakeholders, including PCS providers
both in BAU and leading up to and during a firm's resolution. The
Agencies proactively engage with firms and PCS providers through
various forums including CMGs. As this comment is not applicable to the
content contained in a firm's plan submissions, the Agencies did not
make any modification to final guidance in response to this comment.
f. Legal Entity Rationalization and Separability
One commenter argued that the cost-benefit analysis does not
justify requiring filers to maintain active virtual data rooms for each
object of sale identified in their separability analysis. In order to
reduce the burden on the firms, the Agencies have modified the Guidance
to provide that firms should have the capability to populate a data
room with information pertinent to a potential divestiture in a timely
manner, rather than maintain an active data room. The Agencies expect
to test this capability by asking firms to produce
[[Page 1447]]
selected sale-related materials within a certain timeframe as part of
future resolution plan reviews.
g. Derivatives and Trading Activities
The Agencies received a number of comments on Section VII
(Derivatives and Trading Activities) of the proposed guidance.
Commenters supported the proposed elimination of the active and passive
wind-down scenario analyses and rating agency playbooks, but
recommended certain modifications and clarifications to the proposed
guidance in order to streamline the resolution plan submissions and
provide further clarity.
After reviewing the comments on the proposed guidance, the Agencies
have adopted final guidance that includes several adjustments and
clarifications to address matters raised by the commenters. For
example, commenters argued that having a dealer firm provide
information on compression strategies that it would not expect to use
in resolution would have limited regulatory purpose and distract
resources away from developing other capabilities and analyses. The
final guidance clarifies that this expectation only applies when a
dealer firm expects to rely upon compression strategies for executing
its preferred strategy. Commenters suggested a dealer firm should not
have to model the operational costs necessary to execute its
derivatives strategy by separating out and specifying costs at the
level of specific derivatives activities, as a firm would have included
those costs in the material entity cost analyses provided as part of
its resolution plan. The final guidance clarifies that a dealer firm
may choose not to model its operational costs for executing its
derivatives strategy at the level of specific derivatives activities;
however, a firm's cost analyses should provide operational cost
estimates at a more granular level than the material entity level
(e.g., business line level within a material entity, subject to wind-
down).
The Agencies also have made a number of changes to clarify the
scope, intent, and terminology of the final guidance. For example,
commenters recommended the Agencies confirm that the term ``material
derivatives entities'' means a dealer firm's material entities that
engage in derivatives activities. The final guidance confirms the
definition of the term. Commenters suggested that a dealer firm should
be expected only to incorporate capital and liquidity needs associated
with derivatives activities into its RCEN and RLEN estimates with
respect to its material entities. The final guidance includes this
clarification. Commenters urged the Agencies to clarify that dealer
firms may define linked non-derivatives trading positions based on
their overall business and resolution strategy. The final guidance
includes this clarification.
Some commenters recommended the Agencies adjust certain
expectations that are not specified in the proposed guidance. The
Agencies have determined not to modify the guidance in these instances.
For example, commenters suggested the Agencies eliminate certain
remnants of the passive wind-down analysis (e.g., potential residual
portfolio analysis under a scenario involving the sale of a line of
business). The Agencies do not expect a dealer firm to include a
separate wind-down or run-off analysis in its plan. Instead, a dealer
firm is expected to assess the risk profile of any derivatives
portfolios that would be included in the sale of a line of business and
analyze the potential counterparty and market impacts of non-
performance on these contracts upon the stability of U.S. financial
markets. Commenters advocated for allowing a dealer firm to assume that
inter-affiliate transactions may be unwound at lower costs than
transactions with external counterparties. The Agencies confirm that
the guidance would permit a dealer firm to make such an assumption as
long as the firm provides adequate support for that assumption.
Commenters recommended dealer firms should not be expected to replicate
detailed information in their resolution plans to the extent that a
firm is required to make the information available to regulators
pursuant to other regulatory requirements or that information is
provided elsewhere in the firm's resolution plan. The Agencies clarify
that, consistent with the Rule, a dealer firm may cross-reference or
incorporate by reference information that the firm has provided in its
current plan submission in another section or has previously provided
in a specific section of a past resolution plan submission. However,
consistent with the Rule, the Agencies expect a dealer firm to submit
all relevant information as part of a formal plan submission.
Commenters suggested tailoring certain capability expectations and
resolution-specific assumptions in the guidance. The Agencies developed
those expectations and resolution-specific assumptions in order to
facilitate a dealer firm's planning and preparedness for an orderly
resolution. A dealer firm's capabilities should demonstrate flexibility
to account for alternative outcomes and permit sensitivity analysis, as
it is difficult to predict precisely how a firm's untested resolution
strategy may operate in an actual resolution scenario. As a result, the
Agencies have not revised the guidance to include certain modifications
recommended by commenters. For instance, commenters suggested the
Agencies eliminate the expectation to provide timely transparency into
management of risk transfers between material entities and non-material
entities. The Agencies maintain expectations related to risk transfers
between affiliates, as material exposures could exist outside material
entities. In addition, commenters argued that a dealer firm that adopts
an SPOE strategy should not be expected to demonstrate its capabilities
with respect to the management of risk transfers between material
entities that survive under its preferred resolution strategy. The
Agencies maintain the expectations related to risk transfers between
material entities, including surviving entities, because those
capabilities would help facilitate a dealer firm's planning and
preparedness for alternative outcomes that may arise in the context of
an actual resolution.
Commenters advocated for allowing a dealer firm to present
reasonable alternative assumptions on counterparty behavior in relation
to early exits and break clauses if the assumed actions would benefit
both parties. To establish a baseline, 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. A dealer firm may perform additional sensitivity
analysis around the baseline assumption by assessing the impact from
alternative assumptions regarding counterparty actions that could
deviate from the baseline assumption. Commenters argued that a dealer
firm should be permitted to assume it could enter into or unwind
bilateral inter-affiliate transactions in resolution, even if they are
not strictly ``risk-reducing'' to both parties, as long as the firm
provides a reasonable justification. The final guidance maintains this
constraint related to market risk exposure, but clarifies that a firm
may assume it could enter into or unwind inter-affiliate trades in
resolution as long as those trades do not materially increase credit
exposure to any participating entity. The Agencies believe that this
provides firms with sufficient flexibility with respect to inter-
affiliate trades in resolution. Commenters suggested a dealer firm
should not be constrained to a 12-24 month timeline for its
stabilization and resolution periods. The
[[Page 1448]]
Agencies continue to believe that the timeline to be reasonable for
unwinding a dealer firm's derivatives portfolios, based on the firms'
preferred wind-down strategy in their past submissions; therefore, that
expectation remains unchanged.
The Agencies received comments related to the scope of derivatives
portfolios defined in the guidance. After considering multiple relevant
factors, the Agencies have not modified the guidance in these
instances. For example, commenters recommended that the final guidance
apply the capabilities specified in the Portfolio Segmentation and
Forecasting section only to material entities of a dealer firm. While a
dealer firm's capabilities may be commensurate with the size, scope,
and complexity of its derivatives portfolio, the Agencies maintain that
a dealer firm should have the capability to identify and report basic
metrics on all of its derivatives positions, if only to confirm the
portion of the firm's exposures exist outside its material entities.
The final guidance further clarifies that a dealer firm's firm-wide
derivatives portfolio should represent the vast majority (for example,
95 percent) of a dealer firm's derivatives transactions measured by the
notional and gross market value of the firm's total derivatives
transactions. Commenters also suggested that the potential residual
portfolio analysis should consider only the derivatives transactions of
a dealer firm's material entities. The Agencies expect a dealer firm to
include the derivatives portfolios of both material and non-material
entities in its potential residual portfolio analysis, as the
composition of the firm's potential residual portfolio may be impacted
by exposures in non-material entities.
h. Cross References to Supervisory Letters
Some commenters advocated eliminating the cross-references
contained in the Board's SR letter 14-1 (which covers both recovery and
resolution preparedness) and SR letter 14-8 (which is limited to
recovery),\25\ directly incorporating the relevant expectations in the
guidance, and rescinding the SR letters. Commenters maintained that
recovery planning guidance should remain separate from resolution
planning guidance.
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\25\ SR Letter 14-8, ``Consolidated Recovery Planning for
Certain Large Domestic Bank Holding Companies'' (Sept. 25, 2014).
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The Agencies have omitted the cross-references, which is consistent
with the aim of consolidating expectations for resolution plan
submissions. In the case of SR 14-8, the relevant resolution plan
expectations have been incorporated into the Separability section of
the guidance. In the case of SR 14-1, the resolution-related
expectations and associated capabilities contained in SR 14-1 are also
addressed by the final guidance. The Board will continue to rely on SR
letters 14-1 and 14-8 for assessing firms' recovery planning.
i. Additional Comments
i. QFC Stay Rules
One commenter expressed that by requiring the production of
additional plan content related to a firm's method of complying with
the QFC stay rules only from those firms that do not adhere to the
International Swaps and Derivatives Association 2015 Universal
Resolution Stay Protocol (``ISDA Protocol''), the guidance may have the
effect of discouraging such firms from complying with the QFC stay
rules through any means other than ISDA Protocol adherence.
The QFC stay rules seek to improve the resolvability of U.S. GSIBs
by mitigating the risk of potentially destabilizing closeouts of QFCs
that could occur upon the entry of a GSIB or one or more of its
affiliates into resolution. In connection with promulgating the QFC
stay rules, the Agencies have recognized that the ability to comply
with the QFC stay rules by adhering to the ISDA Protocol may be a
desirable alternative to implementing the rules' restrictions on a
counterparty-by-counterparty basis. Through their consideration of the
ISDA Protocol in connection with promulgating the QFC stay rules, the
Agencies have already assessed whether adherence to the ISDA Protocol
addresses the risks that can arise from QFC closeouts. For firms that
choose to adhere to the ISDA Protocol through other means, any
additional plan content they provide can assist the Agencies in
understanding how a firm's chosen alternative compliance method
addresses these risks.
Notably, prior to the effective date of the QFC stay rules, all
eight U.S. GSIBs elected to adhere to the ISDA Protocol and incur any
fees associated with adhering to the ISDA Protocol. Therefore, as long
as the U.S. GSIBs continue to adhere, the Agencies will not expect
these firms to submit additional plan content related to compliance
with the QFC stay rules through a method other than adherence to the
ISDA Protocol.
ii. Bankruptcy Claims
The Agencies recognize that a firm's compliance with the ISDA
Protocol may have an effect on various creditor constituencies, and
that actions taken by these constituencies may have an effect on the
prospect of the firm conducting an orderly resolution under the U.S.
Bankruptcy Code. One commenter suggested that the Agencies provide
additional guidance on the material impact on their resolution plans
and communications plans with respect to all unsecured claimants, as
well as depositors of an insured depository institution, that could
arise from a firm choosing to satisfy the ISDA Protocol's stay
conditions for credit enhancements (i.e., a parent company acting as a
guarantor of its subsidiary's QFCs) by pursuing the elevation
alternative wherein the firm files a motion with the bankruptcy court
asking that QFC counterparties' claims receive administrative priority
status. The guidance expressly recommends that firms both address legal
issues associated with the implementation of the ISDA Protocol,\26\ and
also develop external communications strategies.\27\
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\26\ 83 F.R. 32867 (July 16, 2018).
\27\ 83 F.R. 32864 (July 16, 2018).
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This commenter also stated that, specifically in relation to the
elevation alternative and QFC counterparties' claims in bankruptcy, the
proposed guidance failed to address two vulnerabilities associated with
those claims receiving administrative priority under Section 507 of
Bankruptcy Code. First, the commenter asserted that a firm that elects
in its resolution plan to pursue the elevation alternative may be
exposed to civil liability to bondholders both immediately as a
consequence of incorporating such a strategy into its plan, and in the
future if the strategy is actually implemented through a bankruptcy
court granting the firm's motion. The commenter asserted that a firm
pursuing the elevation alternative may be required to make disclosures
under Section 10(b) if the Securities Act of 1933 \28\ prior to
resolution to indicate to bondholders that its resolution strategy
contemplates a bankruptcy court providing QFC counterparties' claims
higher payment priority than the unsecured claims of bondholders. A
firm's disclosure obligations, if any, under the Securities Act or
other regulations during BAU that relate to adherence to the ISDA
Protocol are beyond the scope of the guidance.
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\28\ 15 U.S.C. 77a et seq.
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Second, with regard to liability to bondholders, the commenter also
asserted that implementation of the
[[Page 1449]]
elevation alternative may result in a creditor of the firm violating
its indenture obligations regarding fiduciary duties and conflicts of
interest where the creditor is a GSIB that is both a QFC counterparty
of the firm, and an indenture trustee for bonds issued by the firm. For
a GSIB that is a creditor of a firm in bankruptcy, its obligations to
uphold its fiduciary duties or avoid conflicts of interest may affect
the actions it takes during the course of the bankruptcy of a firm. The
guidance focuses on firms addressing potential risks to their
resolvability, which does not include discrete legal liabilities of the
type discussed by the commenter that a third party may encounter upon a
firm's entry into resolution. The Agencies expect firms to consider and
address the dynamics of relationships with creditors to the extent any
creditor's potential course of action could present legal obstacles in
the bankruptcy court's consideration of a motion to seeking to
implement the elevation alternative.
The commenter also suggested that further clarification is needed
in the final guidance with respect to the impact of the elevation
alternative on firms' relationships with secured borrowers.
Specifically, the commenter contended that a firm's proposal in its
resolution plan to comply with the ISDA Protocol by adopting the
elevation alternative may compel any firms that provide secured loans
or residential mortgages to direct borrowers during business as usual
to seek administrative priority for such prepetition obligations in the
event the borrowers file for bankruptcy. Similarly, the commenter noted
that the possibility of a firm implementing the elevation alternative
could motivate secured creditors in the ordinary course of business
with GSIBs to seek contractual provisions that would designate their
claims as administrative expenses in any future bankruptcy case.
However, the extent to which a firm's adherence to the ISDA Protocol
might impact its relationships with external stakeholders during BAU,
including its adoption of the elevation alternative for emergency
motions, is beyond the scope of the guidance.
The commenter also asked that the Agencies clarify whether there is
legal support for a creditor obtaining priority status for its claim.
The guidance provides that firms' resolution plans should address legal
issues associated with the implementation of the stay pursuant to the
ISDA Protocol, including if a firm pursues the elevation strategy.
The commenter also asked the Agencies to address whether the
recovery in bankruptcy for depositors holding funds in accounts that
exceed the amount of deposit insurance provided by the FDIC would be
negatively impacted by a firm pursuing the elevation alternative. The
extent of depositors' recoveries is an issue that may arise in the
resolution of an insured depository institution under the Federal
Deposit Insurance Act and, therefore, is beyond the scope of the
guidance.
IV. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (``PRA'') (44 U.S.C. 3501 through 3521), the Agencies may not
conduct or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget control number. The proposed guidance stated that
the Agencies believed that the proposed changes to the 2016 Guidance
would not result in an increase in information collection burden to the
Covered Companies, and the Agencies invited public comment on this
assessment. The Agencies received no comments regarding this assessment
or the PRA more generally.
GUIDANCE FOR Sec. 165(D) RESOLUTION PLAN SUBMISSIONS BY DOMESTIC
COVERED COMPANIES.
I. Introduction
II. Capital
a. Resolution Capital Adequacy and Positioning (RCAP)
b. Resolution Capital Execution Need (RCEN)
III. Liquidity
a. Resolution Liquidity Adequacy and Positioning (RLAP)
b. Resolution Liquidity Execution Need (RLEN)
IV. Governance Mechanisms
a. Playbooks and Triggers
b. Pre-Bankruptcy Parent Support
V. Operational
a. Payment, Clearing, and Settlement Activities
b. Managing, Identifying, and Valuing Collateral
c. Management Information Systems
d. Shared and Outsourced Services
e. Legal Obstacles Associated with Emergency Motions
VI. Legal Entity Rationalization and Separability
a. Legal Entity Rationalization Criteria (LER Criteria)
b. Separability
VII. Derivatives and Trading Activities
a. Booking Practices
b. Inter-Affiliate Risk Monitoring and Controls
c. Portfolio Segmentation and Forecasting
d. Prime Brokerage Customer Account Transfers
e. Derivatives Stabilization and De-risking Strategy
VIII. Format and Structure of Plans
IX. Public Section
I. INTRODUCTION
Resolution Plan Requirement: Section 165(d) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (12 U.S.C. 5365(d)) requires
certain financial companies (Covered Companies) to report periodically
to the Board of Governors of the Federal Reserve System (the Federal
Reserve or Board) and the Federal Deposit Insurance Corporation (the
FDIC) (together the Agencies) the Companies' \1\ Plans for Rapid and
Orderly Resolution in the event of Material Financial Distress or
failure. On November 1, 2011, the Agencies promulgated a joint rule
(the Rule) implementing the provisions of Section 165(d), 12 CFR parts
243 and 381.\2\ Certain Covered Companies meeting criteria set out in
the Rule must file a resolution plan (Plan) annually or at a different
time period specified by the Agencies.
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\1\ Capitalized terms not defined herein have the meaning set
forth in the Rule.
\2\ 76 Fed. Reg. 67323 (November 1, 2011).
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Overview of Guidance Document: This document is intended to assist
the eight current U.S. Global Systemically Important Banks (GSIBs or
firms) \3\ in further developing their preferred resolution strategies.
The document does not have the force and effect of law. Rather, it
describes the Agencies' supervisory expectations regarding these firms'
resolution plans and the Agencies' general views regarding specific
areas where additional detail should be provided and where certain
capabilities or optionality should be developed and maintained to
demonstrate that each firm has considered fully, and is able to
mitigate, obstacles to the successful implementation of the preferred
strategy.\4\
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\3\ Bank of America Corporation, The Bank of New York Mellon
Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan
Chase & Co., Morgan Stanley, State Street Corporation, and Wells
Fargo & Company.
\4\ This guidance consolidates the Guidance for 2013 Sec.
165(d) Annual Resolution Plan Submissions by Domestic Covered
Companies that Submitted Initial Resolution Plans in 2012; firm-
specific feedback letters issued in August 2014 and April 2016; the
February 2015 staff communication; and Guidance for 2017 Sec.
165(d) Annual Resolution Plan Submissions by Domestic Covered
Companies that Submitted Resolution Plans in July 2015, including
the frequently asked questions that were published in response to
the Guidance for the 2017 Plan Submissions (taken together, prior
guidance). To the extent not incorporated in or appended to this
guidance, prior guidance is superseded.
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This document is organized around a number of key vulnerabilities
in resolution (i.e., capital; liquidity; governance mechanisms;
operational;
[[Page 1450]]
legal entity rationalization and separability; and derivatives and
trading activities) that apply across resolution plans. Additional
vulnerabilities or obstacles may arise based on a firm's particular
structure, operations, or resolution strategy. Each firm is expected to
satisfactorily address these vulnerabilities in its Plan--e.g., by
developing sensitivity analysis for certain underlying assumptions,
enhancing capabilities, providing detailed analysis, or increasing
optionality development, as indicated below.
The Agencies will review the Plan to determine if it satisfactorily
addresses key potential vulnerabilities, including those detailed
below. If the Agencies jointly decide that these matters are not
satisfactorily addressed in the Plan, the Agencies may determine
jointly that the Plan is not credible or would not facilitate an
orderly resolution under the U.S. Bankruptcy Code.
II. CAPITAL
Resolution Capital Adequacy and Positioning (RCAP): To help ensure
that a firm's material entities \5\ could operate while the parent
company is in bankruptcy, the firm should have an adequate amount of
loss-absorbing capacity to recapitalize those material entities. Thus,
a firm should have outstanding a minimum amount of total loss-absorbing
capital, as well as a minimum amount of long-term debt, to help ensure
that the firm has adequate capacity to meet that need at a consolidated
level (external TLAC).\6\
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\5\ The terms ``material entities,'' ``critical operations,''
and ``core business lines'' have the same meaning as in the
Agencies' Rule.
\6\ 82 Fed. Reg. 8266 (January 24, 2017).
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A firm's external TLAC should be complemented by appropriate
positioning of additional loss-absorbing capacity within the firm
(internal TLAC). The positioning of a firm's internal TLAC should
balance the certainty associated with pre-positioning internal TLAC
directly at material entities with the flexibility provided by holding
recapitalization resources at the parent (contributable resources) to
meet unanticipated losses at material entities. That balance should
take account of both pre-positioning at material entities and holding
resources at the parent, and the obstacles associated with each.
Accordingly, the firm should not rely exclusively on either full pre-
positioning or parent contributable resources to recapitalize any
material entity. The plan should describe the positioning of internal
TLAC within the firm, along with analysis supporting such positioning.
Finally, to the extent that pre-positioned internal TLAC at a
material entity is in the form of intercompany debt and there are one
or more entities between that material entity and the parent, the firm
should structure the instruments so as to ensure that the material
entity can be recapitalized.
Resolution Capital Execution Need (RCEN): To support the execution
of the firm's resolution strategy, material entities need to be
recapitalized to a level that allows them to operate or be wound down
in an orderly manner following the parent company's bankruptcy filing.
The firm should have a methodology for periodically estimating the
amount of capital that may be needed to support each material entity
after the bankruptcy filing (RCEN). The firm's positioning of internal
TLAC should be able to support the RCEN estimates. In addition, the
RCEN estimates should be incorporated into the firm's governance
framework to ensure that the parent company files for bankruptcy at a
time that enables execution of the preferred strategy.
The firm's RCEN methodology should use conservative forecasts for
losses and risk-weighted assets and incorporate estimates of potential
additional capital needs through the resolution period,\7\ consistent
with the firm's resolution strategy. However, the methodology is not
required to produce aggregate losses that are greater than the amount
of external TLAC that would be required for the firm under the Board's
rule.\8\ The RCEN methodology should be calibrated such that
recapitalized material entities have sufficient capital to maintain
market confidence as required under the preferred resolution strategy.
Capital levels should meet or exceed all applicable regulatory capital
requirements for ``well-capitalized'' status and meet estimated
additional capital needs throughout resolution. Material entities that
are not subject to capital requirements may be considered sufficiently
recapitalized when they have achieved capital levels typically required
to obtain an investment-grade credit rating or, if the entity is not
rated, an equivalent level of financial soundness. Finally, the
methodology should be independently reviewed, consistent with the
firm's corporate governance processes and controls for the use of
models and methodologies.
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\7\ The resolution period begins immediately after the parent
company bankruptcy filing and extends through the completion of the
preferred resolution strategy.
\8\ See 12 CFR 252.60-.65; 82 Fed. Reg. 8266 (January 24, 2017).
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III. LIQUIDITY
The firm should have the liquidity capabilities necessary to
execute its preferred resolution strategy. For resolution purposes,
these capabilities should include having an appropriate model and
process for estimating and maintaining sufficient liquidity at or
readily available to material entities and a methodology for estimating
the liquidity needed to successfully execute the resolution strategy,
as described below.
Resolution Liquidity Adequacy and Positioning (RLAP): With respect
to RLAP, the firm should be able to measure the stand-alone liquidity
position of each material entity (including material entities that are
non-U.S. branches)--i.e., the high-quality liquid assets (HQLA) at the
material entity less net outflows to third parties and affiliates--and
ensure that liquidity is readily available to meet any deficits. The
RLAP model should cover a period of at least 30 days and reflect the
idiosyncratic liquidity profile and risk of the firm. The model should
balance the reduction in frictions associated with holding liquidity
directly at material entities with the flexibility provided by holding
HQLA at the parent available to meet unanticipated outflows at material
entities. Thus, the firm should not rely exclusively on either full
pre-positioning or the parent. The model \9\ should ensure that the
parent holding company holds sufficient HQLA (inclusive of its deposits
at the U.S. branch of the lead bank subsidiary) to cover the sum of all
stand-alone material entity net liquidity deficits. The stand-alone net
liquidity position of each material entity (HQLA less net outflows)
should be measured using the firm's internal liquidity stress test
assumptions and should treat inter-affiliate exposures in the same
manner as third-party exposures. For example, an overnight unsecured
exposure to an affiliate should be assumed to mature. Finally, the firm
should not assume that a net liquidity surplus at one material entity
could be moved to meet net liquidity deficits at other material
entities or to augment parent resources.
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\9\ ``Model'' refers to the set of calculations estimating the
net liquidity surplus/deficit at each legal entity and for the firm
in aggregate based on assumptions regarding available liquidity,
e.g., HQLA, and third-party and interaffiliate net outflows.
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Additionally, the RLAP methodology should take into account (A) the
daily contractual mismatches between inflows and outflows; (B) the
daily
[[Page 1451]]
flows from movement of cash and collateral for all inter-affiliate
transactions; and (C) the daily stressed liquidity flows and trapped
liquidity as a result of actions taken by clients, counterparties, key
FMUs, and foreign supervisors, among others.
Resolution Liquidity Execution Need (RLEN): The firm should have a
methodology for estimating the liquidity needed after the parent's
bankruptcy filing to stabilize the surviving material entities and to
allow those entities to operate post-filing. The RLEN estimate should
be incorporated into the firm's governance framework to ensure that the
firm files for bankruptcy in a timely way, i.e., prior to the firm's
HQLA falling below the RLEN estimate.
The firm's RLEN methodology should:
(A) Estimate the minimum operating liquidity (MOL) needed at each
material entity to ensure those entities could continue to operate
post-parent's bankruptcy filing and/or to support a wind-down strategy;
(B) Provide daily cash flow forecasts by material entity to support
estimation of peak funding needs to stabilize each entity under
resolution;
(C) Provide a comprehensive breakout of all inter-affiliate
transactions and arrangements that could impact the MOL or peak funding
needs estimates; and
(D) Estimate the minimum amount of liquidity required at each
material entity to meet the MOL and peak needs noted above, which would
inform the firm's board(s) of directors of when they need to take
resolution-related actions.
The MOL estimates should capture material entities' intraday
liquidity requirements, operating expenses, working capital needs, and
inter-affiliate funding frictions to ensure that material entities
could operate without disruption during the resolution.
The peak funding needs estimates should be projected for each
material entity and cover the length of time the firm expects it would
take to stabilize that material entity. Inter-affiliate funding
frictions should be taken into account in the estimation process.
The firm's forecasts of MOL and peak funding needs should ensure
that material entities could operate post-filing consistent with
regulatory requirements, market expectations, and the firm's post-
failure strategy. These forecasts should inform the RLEN estimate,
i.e., the minimum amount of HQLA required to facilitate the execution
of the firm's strategy. The RLEN estimate should be tied to the firm's
governance mechanisms and be incorporated into the playbooks as
discussed below to assist the board of directors in taking timely
resolution-related actions.
IV. GOVERNANCE MECHANISMS
Playbooks and Triggers: A firm should identify the governance
mechanisms that would ensure execution of required board actions at the
appropriate time (as anticipated under the firm's preferred strategy)
and include pre-action triggers and existing agreements for such
actions. Governance playbooks should detail the board and senior
management actions necessary to facilitate the firm's preferred
strategy and to mitigate vulnerabilities, and should incorporate the
triggers identified below. The governance playbooks should also include
a discussion of (A) the firm's proposed communications strategy, both
internal and external; \10\ (B) the boards of directors' fiduciary
responsibilities and how planned actions would be consistent with such
responsibilities applicable at the time actions are expected to be
taken; (C) potential conflicts of interest, including interlocking
boards of directors; and (D) any employee retention policy. All
responsible parties and timeframes for action should be identified.
Governance playbooks should be updated periodically for all entities
whose boards of directors would need to act in advance of the
commencement of resolution proceedings under the firm's preferred
strategy.
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\10\ External communications include those with U.S. and foreign
authorities and other external stakeholders.
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The firm should demonstrate that key actions will be taken at the
appropriate time in order to mitigate financial, operational, legal,
and regulatory vulnerabilities. To ensure that these actions will
occur, the firm should establish clearly identified triggers linked to
specific actions for:
(A) The escalation of information to senior management and the
board(s) to potentially take the corresponding actions at each stage of
distress post-recovery leading eventually to the decision to file for
bankruptcy;
(B) Successful recapitalization of subsidiaries prior to the
parent's filing for bankruptcy and funding of such entities during the
parent company's bankruptcy to the extent the preferred strategy relies
on such actions or support; and
(C) The timely execution of a bankruptcy filing and related pre-
filing actions.\11\
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\11\ Key pre-filing actions include the preparation of any
emergency motion required to be decided on the first day of the
firm's bankruptcy. See ``OPERATIONAL--Legal Obstacles Associated
with Emergency Motions,'' below.
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These triggers should be based, at a minimum, on capital,
liquidity, and market metrics, and should incorporate the firm's
methodologies for forecasting the liquidity and capital needed to
operate as required by the preferred strategy following a parent
company's bankruptcy filing. Additionally, the triggers and related
actions should be specific.
Triggers linked to firm actions as contemplated by the firm's
preferred strategy should identify when and under what conditions the
firm, including the parent company and its material entities, would
transition from business-as-usual conditions to a stress period and
from a stress period to the runway and recapitalization/resolution
periods. Corresponding escalation procedures, actions, and timeframes
should be constructed so that breach of the triggers will allow
prerequisite actions to be completed. For example, breach of the
triggers needs to occur early enough to ensure that resources are
available and can be downstreamed, if anticipated by the firm's
strategy, and with adequate time for the preparation of the bankruptcy
petition and first-day motions, necessary stakeholder communications,
and requisite board actions. Triggers identifying the onset of the
runway and recapitalization/resolution periods, and the associated
escalation procedures and actions, should be discussed directly in the
governance playbooks.
Pre-Bankruptcy Parent Support: The resolution plan should include a
detailed legal analysis of the potential state law and bankruptcy law
challenges and mitigants to planned provision of capital and liquidity
to the subsidiaries prior to the parent's bankruptcy filing (Support).
Specifically, the analysis should identify potential legal obstacles
and explain how the firm would seek to ensure that Support would be
provided as planned. Legal obstacles include claims of fraudulent
transfer, preference, breach of fiduciary duty, and any other
applicable legal theory identified by the firm. The analysis also
should include related claims that may prevent or delay an effective
recapitalization, such as equitable claims to enjoin the transfer
(e.g., imposition of a constructive trust by the court). The analysis
should apply the actions contemplated in the plan regarding each
element of the claim, the anticipated timing for commencement and
resolution of the claims, and the extent to which adjudication of such
[[Page 1452]]
claim could affect execution of the firm's preferred resolution
strategy.
As noted, the analysis should include mitigants to the potential
challenges to the planned Support. The plan should include the
mitigant(s) to such challenges that the firm considers most effective.
In identifying appropriate mitigants, the firm should consider the
effectiveness of a contractually binding mechanism (CBM), pre-
positioning of financial resources in material entities, and the
creation of an intermediate holding company. Moreover, if the plan
includes a CBM, the firm should consider whether it is appropriate that
the CBM should have the following: (A) clearly defined triggers; (B)
triggers that are synchronized to the firm's liquidity and capital
methodologies; (C) perfected security interests in specified collateral
sufficient to fully secure all Support obligations on a continuous
basis (including mechanisms for adjusting the amount of collateral as
the value of obligations under the agreement or collateral assets
fluctuates); and (D) liquidated damages provisions or other features
designed to make the CBM more enforceable. The firm also should
consider related actions or agreements that may enhance the
effectiveness of a CBM. A copy of any agreement and documents
referenced therein (e.g., evidence of security interest perfection)
should be included in the resolution plan.
The governance playbooks included in the resolution plan should
incorporate any developments from the firm's analysis of potential
legal challenges regarding the Support, including any Support
approach(es) the firm has implemented. If the firm analyzed and
addressed an issue noted in this section in a prior plan submission,
the plan may reproduce that analysis and arguments and should build
upon it to at least the extent described above. In preparing the
analysis of these issues, firms may consult with law firms and other
experts on these matters. The Agencies do not object to appropriate
collaboration between firms, including through trade organizations and
with the academic community, to develop analysis of common legal
challenges and available mitigants.
V. OPERATIONAL
Payment, Clearing, and Settlement Activities
Framework. Maintaining continuity of payment, clearing, and
settlement (PCS) services is critical for the orderly resolution of
firms that are either users or providers,\12\ or both, of PCS services.
A firm should demonstrate capabilities for continued access to PCS
services essential to an orderly resolution through a framework to
support such access by:
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\12\ A firm is a user of PCS services if it accesses PCS
services through an agent bank or it uses the services of a
financial market utility (FMU) through its membership in that FMU or
through an agent bank. A firm is a provider of PCS services if it
provides PCS services to clients as an agent bank or it provides
clients with access to an FMU or agent bank through the firm's
membership in or relationship with that service provider. A firm is
also a provider if it provides clients with PCS services through the
firm's own operations (e.g., payment services or custody services).
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Identifying clients,\13\ FMUs, and agent banks as key from
the firm's perspective, using both quantitative (volume and value) \14\
and qualitative criteria;
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\13\ For purposes of this section V, a client is an individual
or entity, including affiliates of the firm, to whom the firm
provides PCS services and any related credit or liquidity offered in
connection with those services.
\14\ In identifying entities as key, examples of quantitative
criteria may include: for a client, transaction volume/value, market
value of exposures, assets under custody, usage of PCS services, and
any extension of related intraday credit or liquidity; for an FMU,
the aggregate volumes and values of all transactions processed
through such FMU; and for an agent bank, assets under custody, the
value of cash and securities settled, and extensions of intraday
credit.
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Mapping material entities, critical operations, core
business lines, and key clients to both key FMUs and key agent banks;
and
Developing a playbook for each key FMU and key agent bank
reflecting the firm's role(s) as a user and/or provider of PCS
services.
The framework should address both direct relationships (e.g., a
firm's direct membership in an FMU, a firm's provision of clients with
PCS services through its own operations, or a firm's contractual
relationship with an agent bank) and indirect relationships (e.g., a
firm's provision of clients with access to the relevant FMU or agent
bank through the firm's membership in or relationship with that FMU or
agent bank).
Playbooks for Continued Access to PCS Services. The firm is
expected to provide a playbook for each key FMU and key agent bank that
addresses considerations that would assist the firm and its key clients
in maintaining continued access to PCS services in the period leading
up to and including the firm's resolution. Each playbook should provide
analysis of the financial and operational impact to the firm's material
entities and key clients due to adverse actions that may be taken by a
key FMU or a key agent bank and contingency actions that may be taken
by the firm. Each playbook also should discuss any possible alternative
arrangements that would allow the firm and its key clients continued
access to PCS services in resolution. The firm is not expected to
incorporate a scenario in which it loses key FMU or key agent bank
access into its preferred resolution strategy or its RLEN/RCEN
estimates. The firm should continue to engage with key FMUs, key agent
banks, and key clients, and playbooks should reflect any feedback
received during such ongoing outreach.
Content Related to Users of PCS Services. Individual key FMU and
key agent bank playbooks should include:
Description of the firm's relationship as a user with the
key FMU or key agent bank and the identification and mapping of PCS
services to material entities, critical operations, and core business
lines that use those PCS services;
Discussion of the potential range of adverse actions that
may be taken by that key FMU or key agent bank when the firm is in
resolution,\15\ the operational and financial impact of such actions on
each material entity, and contingency arrangements that may be
initiated by the firm in response to potential adverse actions by the
key FMU or key agent bank; and
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\15\ Examples of potential adverse actions may include increased
collateral and margin requirements and enhanced reporting and
monitoring.
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Discussion of PCS-related liquidity sources and uses in
business-as-usual (BAU), in stress, and in the resolution period,
presented by currency type (with U.S. dollar equivalent) and by
material entity.
[cir] PCS Liquidity Sources: These may include the amounts of
intraday extensions of credit, liquidity buffer, inflows from FMU
participants, and key client prefunded amounts in BAU, in stress, and
in the resolution period. The playbook also should describe intraday
credit arrangements (e.g., facilities of the key FMU, key agent bank,
or a central bank) and any similar custodial arrangements that allow
ready access to a firm's funds for PCS-related key FMU and key agent
bank obligations (including margin requirements) in various currencies,
including placements of firm liquidity at central banks, key FMUs, and
key agent banks.
[cir] PCS Liquidity Uses: These may include firm and key client
margin and prefunding and intraday extensions of credit, including
incremental amounts required during resolution.
[cir] Intraday Liquidity Inflows and Outflows: The playbook should
describe the firm's ability to control intraday liquidity inflows and
outflows and to
[[Page 1453]]
identify and prioritize time-specific payments. The playbook also
should describe any account features that might restrict the firm's
ready access to its liquidity sources.
Content Related to Providers of PCS Services.\16\ Individual key
FMU and key agent bank playbooks should include:
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\16\ Where a firm is a provider of PCS services through the
firm's own operations, the firm is expected to produce a playbook
for the material entities that provide those services, addressing
each of the items described under ``Content Related to Providers of
PCS Services,'' which include contingency arrangements to permit the
firm's key clients to maintain continued access to PCS services.
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Identification and mapping of PCS services to the material
entities, critical operations, and core business lines that provide
those PCS services, and a description of the scale and the way in which
each provides PCS services;
Identification and mapping of PCS services to key clients
to whom the firm provides such PCS services and any related credit or
liquidity offered in connection with such services;
Discussion of the potential range of firm contingency
arrangements available to minimize disruption to the provision of PCS
services to its key clients, including the viability of transferring
key client activity and any related assets, as well as any alternative
arrangements that would allow the firm's key clients continued access
to PCS services if the firm could no longer provide such access (e.g.,
due to the firm's loss of key FMU or key agent bank access), and the
financial and operational impacts of such arrangements from the firm's
perspective;
Description of the range of contingency actions that the
firm may take concerning its provision of intraday credit to key
clients, including analysis quantifying the potential liquidity the
firm could generate by taking such actions in stress and in the
resolution period, such as (i) requiring key clients to designate or
appropriately pre-position liquidity, including through prefunding of
settlement activity, for PCS-related key FMU and key agent bank
obligations at specific material entities of the firm (e.g., direct
members of key FMUs) or any similar custodial arrangements that allow
ready access to key clients' funds for such obligations in various
currencies; (ii) delaying or restricting key client PCS activity; and
(iii) restricting, imposing conditions upon (e.g., requiring
collateral), or eliminating the provision of intraday credit or
liquidity to key clients; and
Description of how the firm will communicate to its key
clients the potential impacts of implementation of any identified
contingency arrangements or alternatives, including a description of
the firm's methodology for determining whether any additional
communication should be provided to some or all key clients (e.g., due
to the key client's BAU usage of that access and/or related intraday
credit or liquidity), and the expected timing and form of such
communication.
Managing, Identifying, and Valuing Collateral: The firm should have
capabilities related to managing, identifying, and valuing the
collateral that it receives from and posts to external parties and its
affiliates. Specifically, the firm should:
Be able to query and provide aggregate statistics for all
qualified financial contracts concerning cross-default clauses,
downgrade triggers, and other key collateral-related contract terms--
not just those terms that may be impacted in an adverse economic
environment--across contract types, business lines, legal entities, and
jurisdictions;
Be able to track both firm collateral sources (i.e.,
counterparties that have pledged collateral) and uses (i.e.,
counterparties to whom collateral has been pledged) at the CUSIP level
on at least a t+1 basis;
Have robust risk measurements for cross-entity and cross-
contract netting, including consideration of where collateral is held
and pledged;
Be able to identify CUSIP and asset class level
information on collateral pledged to specific central counterparties by
legal entity on at least a t+1 basis;
Be able to track and report on inter-branch collateral
pledged and received on at least a t+1 basis and have clear policies
explaining the rationale for such inter-branch pledges, including any
regulatory considerations; and
Have a comprehensive collateral management policy that
outlines how the firm as a whole approaches collateral and serves as a
single source for governance.\17\
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\17\ The policy may reference subsidiary or related policies
already in place, as implementation may differ based on business
line or other factors.
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Management Information Systems: The firm should have the management
information systems (MIS) capabilities to readily produce data on a
legal entity basis and have controls to ensure data integrity and
reliability. The firm also should perform a detailed analysis of the
specific types of financial and risk data that would be required to
execute the preferred resolution strategy and how frequently the firm
would need to produce the information, with the appropriate level of
granularity.
Shared and Outsourced Services: The firm should maintain a fully
actionable implementation plan to ensure the continuity of shared
services that support critical operations and robust arrangements to
support the continuity of shared and outsourced services, including
without limitation appropriate plans to retain key personnel relevant
to the execution of the firm's strategy. The firm should (A) maintain
an identification of all shared services that support critical
operations (critical services); \18\ (B) maintain a mapping of how/
where these services support its core business lines and critical
operations; (C) incorporate such mapping into legal entity
rationalization criteria and implementation efforts; and (D) mitigate
identified continuity risks through establishment of service-level
agreements (SLAs) for all critical shared services. These SLAs should
fully describe the services provided, reflect pricing considerations on
an arm's-length basis where appropriate, and incorporate appropriate
terms and conditions to (A) prevent automatic termination upon certain
resolution-related events and (B) achieve continued provision of such
services during resolution. The firm should also store SLAs in a
central repository or repositories in a searchable format, develop and
document contingency strategies and arrangements for replacement of
critical shared services, and complete re-alignment or restructuring of
activities within its corporate structure. In addition, the firm should
ensure the financial resilience of internal shared service providers by
maintaining working capital for six months (or through the period of
stabilization as required in the firm's preferred strategy) in such
entities sufficient to cover contract costs, consistent with the
preferred resolution strategy.
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\18\ This should be interpreted to include data access and
intellectual property rights.
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The firm should identify all critical outsourced services that
support critical operations and could not be promptly substituted. The
firm should (A) evaluate the agreements governing these services to
determine whether there are any that could be terminated despite
continued performance upon the parent's bankruptcy filing, and (B)
update contracts to incorporate appropriate terms and conditions to
prevent automatic termination and facilitate continued provision of
such services during resolution. Relying on entities projected to
survive during
[[Page 1454]]
resolution to avoid contract termination is insufficient to ensure
continuity. In the plan, the firm should document the amendment of any
such agreements governing these services.
Legal Obstacles Associated with Emergency Motions: The Plan should
address legal issues associated with the implementation of the stay on
cross-default rights described in Section 2 of the International Swaps
and Derivatives Association 2015 Universal Resolution Stay Protocol
(Protocol), similar provisions of any U.S. protocol,\19\ or other
contractual provisions that comply with the Agencies' rules regarding
stays from the exercise of cross-default rights in qualified financial
contracts, to the extent relevant.\20\ Generally, the Protocol provides
two primary methods of satisfying the stay conditions for covered
agreements for which the affiliate in Chapter 11 proceedings has
provided a credit enhancement (A) transferring all such credit
enhancements to a Bankruptcy Bridge Company (as defined in the
Protocol) (bridge transfer); or (B) having such affiliate remain
obligated with respect to such credit enhancements in the Chapter 11
proceeding (elevation).\21\ A firm must file a motion for emergency
relief (emergency motion) seeking approval of an order to effect either
of these alternatives on the first day of its bankruptcy case.
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\19\ U.S. protocol has the same meaning as it does at 12 CFR
252.85(a). See also 12 CFR 382.5(a) (including a substantively
identical definition).
\20\ See 12 CFR part 47, 252.81-.88, and part 382 (together, the
QFC stay rules). Plans submitted prior to the final initial
applicability date of the QFC stay rules should reflect how the
early termination of qualified financial contracts could impact the
firm's resolution in light of the current state of its qualified
financial contracts' compliance with the requirements of the QFC
stay rules. The firm may also separately discuss the firm's
resolution assuming that the final initial applicability date has
been reached and all covered qualified financial contracts have been
conformed to comply with the QFC stay rules. If the firm complies
with the QFC stay rules other than through adherence to the
Protocol, the plan also should explain how the alternative
compliance method differs from Protocol, how those differences
affect the analysis and other expectations of this ``Legal Obstacles
Associated with Emergency Motions'' section, and how the firm plans
to satisfy any different conditions or requirements of the
alternative compliance method.
\21\ Under its terms, the Protocol also provides for the
transfer of credit enhancements to transferees other than a
Bankruptcy Bridge Company.
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First-day Issues--For each alternative the firm selects, the
resolution plan should present the firm's analysis of issues that are
likely to be raised at the hearing on the emergency motion and its best
arguments in support of the emergency motion. A firm should include
supporting legal precedent and describe the evidentiary support that
the firm would anticipate presenting to the bankruptcy court--e.g.,
declarations or other expert testimony evidencing the solvency of
transferred subsidiaries and that recapitalized entities have
sufficient liquidity to perform their ongoing obligations.
For either alternative, the firm should address all potential
significant legal obstacles identified by the firm. For example, the
firm should address due process arguments likely to be made by
creditors asserting that they have not had sufficient opportunity to
respond to the emergency motion given the likelihood that a creditors'
committee will not yet have been appointed. The firm also should
consider, and discuss in its plan, whether it would enhance the
successful implementation of its preferred strategy to conduct outreach
to interested parties, such as potential creditors of the holding
company and the bankruptcy bar, regarding the strategy.
If the firm chooses the bridge transfer alternative, its analysis
and arguments should address at a minimum the following potential
issues: (A) the legal basis for transferring the parent holding
company's equity interests in certain subsidiaries (transferred
subsidiaries) to a Bankruptcy Bridge Company, including the basis upon
which the Bankruptcy Bridge Company would remain obligated for credit
enhancements; (B) the ability of the bankruptcy court to retain
jurisdiction, issue injunctions, or take other actions to prevent third
parties from interfering with, or making collateral attacks on (i) a
Bankruptcy Bridge Company, (ii) its transferred subsidiaries, or (iii)
a trust or other legal entity designed to hold all ownership interests
in a Bankruptcy Bridge Company (new ownership entity); and (C) the role
of the bankruptcy court in granting the emergency motion due to public
policy concerns--e.g., to preserve financial stability. The firm should
also provide a draft agreement (e.g., trust agreement) detailing the
preferred post-transfer governance relationships between the bankruptcy
estate, the new ownership entity, and the Bankruptcy Bridge Company,
including the proposed role and powers of the bankruptcy court and
creditors' committee. Alternative approaches to these proposed post-
transfer governance relationships should also be described,
particularly given the strong interest that parties will have in the
ongoing operations of the Bankruptcy Bridge Company and the likely
absence of an appointed creditors' committee at the time of the
hearing.
If the firm chooses the elevation alternative, the analysis and
arguments should address at a minimum the following potential issues:
(A) the legal basis upon which the parent company would seek to remain
obligated for credit enhancements; (B) the ability of the bankruptcy
court to retain jurisdiction, issue injunctions, or take other actions
to prevent third parties from interfering with, or making collateral
attacks on, the parent in bankruptcy or its subsidiaries; and (C) the
role of the bankruptcy court in granting the emergency motion due to
public policy concerns--e.g., to preserve financial stability.
Regulatory Implications--The plan should include a detailed
explanation of the steps the firm would take to ensure that key
domestic and foreign authorities would support, or not object to, the
emergency motion (including specifying the expected approvals or
forbearances and the requisite format--i.e., formal, affirmative
statements of support or, alternatively, ``non-objections''). The
potential impact on the firm's preferred resolution strategy if a
specific approval or forbearance cannot be timely obtained should also
be detailed.
Contingencies if Preferred Structure Fails--The plan should
consider contingency arrangements in the event the bankruptcy court
does not grant the emergency motion--e.g., whether alternative relief
could satisfy the Transfer Conditions and/or U.S. Parent debtor-in-
possession (DIP) Conditions of the Protocol; \22\ the extent to which
action upon certain aspects of the emergency motion may be deferred by
the bankruptcy court without interfering with the resolution; and
whether, if the credit-enhancement-related protections are not
satisfied, there are alternative strategies to prevent the closeout of
qualified financial contracts with credit enhancements (or reduce such
counterparties' incentives to closeout) and the feasibility of the
alternative(s).
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\22\ See Protocol sections 2(b)(ii) and (iii) and related
definitions.
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Format--If the firm analyzed and addressed an issue noted in this
section in a prior plan submission, the plan may incorporate this
analysis and arguments and should build upon it to at least the extent
required above. A bankruptcy playbook, which includes a sample
emergency motion and draft documents setting forth the post-transfer
governance terms substantially in the form they would be presented to
the bankruptcy court, is an appropriate vehicle for detailing the
issues outlined in this section. In preparing analysis of
[[Page 1455]]
these issues, the firm may consult with law firms and other experts on
these matters. The Agencies do not object to appropriate collaboration
among firms, including through trade organizations and with the
academic community and bankruptcy bar, to develop analysis of common
legal challenges and available mitigants.
VI. LEGAL ENTITY RATIONALIZATION AND SEPARABILITY
Legal Entity Rationalization Criteria (LER Criteria): A firm should
develop and implement legal entity rationalization criteria that
support the firm's preferred resolution strategy and minimize risk to
U.S. financial stability in the event of the firm's failure. LER
Criteria should consider the best alignment of legal entities and
business lines to improve the firm's resolvability under different
market conditions. LER Criteria should govern the firm's corporate
structure and arrangements between legal entities in a way that
facilitates the firm's resolvability as its activities, technology,
business models, or geographic footprint change over time.
Specifically, application of the criteria should:
(A) Facilitate the recapitalization and liquidity support of
material entities, as required by the firm's resolution strategy. Such
criteria should include clean lines of ownership, minimal use of
multiple intermediate holding companies, and clean funding pathways
between the parent and material operating entities;
(B) Facilitate the sale, transfer, or wind-down of certain discrete
operations within a timeframe that would meaningfully increase the
likelihood of an orderly resolution of the firm, including provisions
for the continuity of associated services and mitigation of financial,
operational, and legal challenges to separation and disposition;
(C) Adequately protect the subsidiary insured depository
institutions from risks arising from the activities of any nonbank
subsidiaries of the firm (other than those that are subsidiaries of an
insured depository institution); and
(D) Minimize complexity that could impede an orderly resolution and
minimize redundant and dormant entities.
These criteria should be built into the firm's ongoing process for
creating, maintaining, and optimizing its structure and operations on a
continuous basis.
Separability: The firm should identify discrete operations that
could be sold or transferred in resolution, which individually or in
the aggregate would provide meaningful optionality in resolution under
different market conditions.
A firm's separability options should be actionable, and impediments
to their execution and projected mitigation strategies should be
identified in advance. Relevant impediments could include, for example,
legal and regulatory preconditions, interconnectivity among the firm's
operations, tax consequences, market conditions, and other
considerations. To be actionable, divestiture options should be
executable within a reasonable period of time.
In developing their options, firms should also consider potential
consequences for U.S. financial stability of executing each option,
taking into consideration impacts on counterparties, creditors,
clients, depositors, and markets for specific assets.
Firms should have a comprehensive understanding of the entire
organization and certain baseline capabilities. That understanding
should include the operational and financial linkages among a firm's
business lines, material entities, and critical operations.
Additionally, information systems should be robust enough to produce
the required data and information needed to execute separability
options.
The level of detail and analysis should vary based on the firm's
risk profile and scope of operations. A separability analysis should
address the following elements:
Divestiture Options: the options in the plan should be
actionable and comprehensive, and should include:
[cir] Options contemplating the sale, transfer, or disposal of
significant assets, portfolios, legal entities or business lines.
[cir] Options that may permanently change the firm's structure or
business strategy.
Execution Plan: for each divestiture option listed, the
separability analysis should describe the steps necessary to execute
the option. Among other considerations, the description should include:
[cir] The identity and position of the senior management officials
of the company who are primarily responsible for overseeing execution
of the separability option.
[cir] An estimated time frame for implementation.
[cir] A description of any impediments to execution of the option
and mitigation strategies to address those impediments.
[cir] A description of the assumptions underpinning the option.
[cir] A plan describing the methods and forms of communication with
internal, external, and regulatory stakeholders.
Impact Assessment: the separability analysis should
holistically consider and describe the expected impact of individual
divestiture options. This should include the following for each
divestiture option:
[cir] A financial impact assessment that describes the impact of
executing the option on the firm's capital, liquidity, and balance
sheet.
[cir] A business impact assessment that describes the effect of
executing the option on business lines and material entities, including
reputational impact.
[cir] A critical operation impact assessment that describes how
execution of the option may affect the provision of any critical
operation.
[cir] An operational impact assessment and contingency plan that
explains how operations can be maintained if the option is implemented;
such an analysis should address internal operations (for example,
shared services, IT requirements, and human resources) and access to
market infrastructure (for example, clearing and settlement facilities
and payment systems).
Further, the firm should have, and be able to demonstrate, the
capability to populate in a timely manner a data room with information
pertinent to a potential divestiture of the business (including, but
not limited to, carve-out financial statements, valuation analysis, and
a legal risk assessment).
Within the plan, the firm should demonstrate how the firm's LER
Criteria and implementation efforts meet the guidance above. The plan
should also provide the separability analysis noted above. Finally, the
plan should include a description of the firm's legal entity
rationalization governance process.
VII. DERIVATIVES AND TRADING ACTIVITIES
Applicability.
This section of the proposed guidance applies to Bank of America
Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase
& Co., Morgan Stanley, and Wells Fargo & Company (each, a dealer firm).
Booking Practices.
A dealer firm should have booking practices commensurate with the
size, scope, and complexity of a firm's derivatives portfolios,\23\
including
[[Page 1456]]
systems capabilities to track and monitor market, credit, and liquidity
risk transfers between entities. The following booking practices-
related capabilities should be addressed in a dealer firm's resolution
plan:
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\23\ A firm's derivatives portfolios include its derivatives
positions and linked non-derivatives trading positions. The firm may
define linked non-derivatives trading positions based on its overall
business and resolution strategy.
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Derivatives booking framework. A dealer firm should have a
comprehensive booking model framework that articulates the principles,
rationales, and approach to implementing its booking practices. The
framework and its underlying components should be documented and
adequately supported by internal controls (e.g., procedures, systems,
and processes). Taken together, the derivatives booking framework and
its components should provide transparency with respect to (i) what is
being booked (e.g., product/counterparty), (ii) where it is being
booked (e.g., legal entity/geography), (iii) by whom it is booked
(e.g., business/trading desk); (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).\24\ The
dealer firm's resolution plan should include detailed descriptions of
the framework and each of its material components. In particular, a
dealer firm's resolution plan should include descriptions of the
documented booking models covering its firm-wide derivatives
portfolio.\25\ The descriptions should provide clarity with respect to
the underlying trade flows (e.g., the mapping of trade flows based on
multiple trade characteristics as decision points that determine on
which entity a trade is booked, if risk is transferred, and at which
entity that risk is subsequently managed). For example, a firm may
choose to incorporate decision trees that depict the multiple trade
flows within each documented booking model.\26\ Furthermore, a dealer
firm's resolution plan should describe its 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 plan
should also discuss why the firm believes its current (or planned)
scope of automation is sufficient for managing its derivatives
activities and executing its preferred resolution strategy.\27\
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\24\ The description of controls should include any components
of the firm-wide market, credit, and liquidity risk management
framework that are material to the management of its derivatives
practices.
\25\ ``Firm-wide derivatives portfolio'' should represent the
vast majority (for example, 95%) of a dealer firm's derivatives
transactions measured by firm-wide derivatives notional and by firm-
wide gross market value of derivatives. Presumably, each asset
class/product would have a booking model that is a function of the
firm's regulatory and risk management requirements, client's
preference, and regulatory requirements specifically for the
underlying asset class, and other transaction related
considerations.
\26\ Some firms use trader mandates or similar controls to
constrain the potential trading strategies that can be pursued by a
business and to monitor the permissibility of booking activity.
However, the mapping of trader mandates alone, especially those
mandates that grant broad permissibility, may not provide sufficient
distinction between booking model trade flows.
\27\ Effective preventative (up-front) and detective (post-
booking) controls embedded in a dealer firm's derivatives booking
processes can help avoid and/or timely remediate trades that do not
align with a documented booking model or related risk limits. Firms
typically use a combination of manual and automated control
functions. Although automation may not be best suited for all
control functions, as compared to manual methods it can improve
consistency and traceability with respect to derivatives booking
practices. Nonetheless, non-automated methods can also be effective
when supported by other internal controls (e.g., robust detective
monitoring and escalation protocols).
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Derivatives entity analysis and reporting. A dealer firm should
have the ability to identify, assess, and report on each of its
entities (material and non-material) with derivatives portfolios (a
derivatives entity). First, the firm's resolution plan should describe
its method (that may include both qualitative and quantitative
criteria) for evaluating the significance of each derivatives entity
both with respect to the firm's current activities and to its preferred
resolution strategy.\28\ Second, a dealer firm's resolution plan should
demonstrate (including through illustrative samples) its ability to
readily generate 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).
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\28\ The firm should leverage any existing methods and criteria
it uses for other entity assessments (e.g., legal entity
rationalization and/or the pre-positioning of internal loss-
absorbing resources). The firm's method for determining the
significance of derivatives entities is allowed to diverge from the
parameters for material entity designation under the Resolution Plan
Rule (i.e., entities significant to the activities of a critical
operation or core business line) but should be adequately supported
and any differences should be explained.
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Inter-Affiliate Risk Monitoring and Controls.
A dealer firm should be able to assess how the management of inter-
affiliate risks can be affected in resolution, including the potential
disruption in the risk transfers of trades between affiliate entities.
Therefore, a dealer firm should have capabilities to provide timely
transparency into the management of risk transfers between affiliates
by maintaining an inter-affiliate market risk framework, consisting of
at least the following two components \29\:
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\29\ The inter-affiliate market risk framework is a supplement
to the firm's systems capabilities to track and monitor market,
credit, and liquidity risk transfers between entities.
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1. A method for measuring, monitoring, and reporting the market
risk exposures for a given material derivatives entity \30\ resulting
from the termination of a specific counterparty or a set of
counterparties (e.g., all trades with a specific affiliate or with all
affiliates in a specific jurisdiction) \31\ and
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\30\ A ``material derivatives entity'' is a material entity with
a derivatives portfolio.
\31\ Firms may use industry market risk measures such as
statistical risk measures (e.g., VaR or SVaR) or other risk measures
(e.g., worst case scenario or stress test).
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2. A method for identifying, estimating associated costs of, and
evaluating the effectiveness of, a re-hedge strategy in resolution put
on by the same material derivatives entity.\32\
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\32\ A dealer firm's method may include an approach to
identifying the risk factors and risk sensitivities, hedging
instruments, and risk limits a derivatives entity would employ in
its re-hedge strategy, and the quantification of any estimated basis
risk that would result from hedging with only exchange-traded and
centrally-cleared instruments in a severely adverse stress
environment.
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In determining the re-hedge strategy, the firm should consider
whether the instruments used (and the risk factors and risk sensitives
controlled for) are sufficiently tied to the material derivatives
entity's trading and risk-management practices to demonstrate its
ability to execute the strategy in resolution using existing resources
(e.g., existing traders and systems).
A dealer firm's resolution plan should describe and demonstrate its
inter-affiliate market risk framework (discussed above). In addition,
the firm's plan should provide detailed descriptions of its compression
strategies used for executing its preferred strategy and how those
strategies would differ from those used currently to manage its inter-
affiliate derivatives activities. To the extent a dealer firm relies on
compression strategies for executing its preferred strategy, the plan
should include detailed descriptions of its compression capabilities,
the associated risks, and obstacles in resolution.
Portfolio Segmentation and Forecasting.
A dealer firm should have the capabilities to produce analysis that
[[Page 1457]]
reflects derivatives portfolio segmentation and differentiation of
assumptions taking into account trade-level characteristics. More
specifically, a dealer firm should have the systems capabilities that
would allow it to produce a spectrum of derivatives portfolio
segmentation analysis using multiple segmentation dimensions, including
(1) legal entity (and material entities that are branches), (2) trading
desk and/or product, (3) cleared vs. clearable vs. non-clearable
trades, (4) counterparty type, (5) currency, (6) maturity, (7) level of
collateralization, and (8) netting set.\33\ A dealer firm should also
have the capabilities to segment and analyze the full contractual
maturity (run-off) profile of its external and inter-affiliate
derivatives portfolios. The dealer firm's resolution plan should
describe and demonstrate the firm's ability to segment and analyze its
firm-wide derivatives portfolio using the relevant segmentation
dimensions and to report the results of such segmentation and analysis.
In addition, the dealer firm's resolution plan should address the
following segmentation and forecasting related capabilities:
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\33\ The enumerated segmentation dimensions are not intended as
an exhaustive list of relevant dimensions. With respect to any
product/asset class, a firm may have reasons for not capturing data
on (or not using) one or more of the enumerated segmentation
dimensions, but those reasons should be explained.
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``Ease of exit'' position analysis. A dealer firm should have, and
its resolution plan should describe and demonstrate, a method and
supporting systems capabilities for categorizing and ranking the ease
of exit for its derivatives positions based on a set of well-defined
and consistently applied segmentation criteria. These capabilities
should cover the firm-wide derivatives portfolio and the resulting
categories should represent a range in degree of difficulty (e.g., from
easiest to most difficult to exit). The segmentation criteria should,
at a minimum, reflect characteristics \34\ that the firm believes could
affect the level of financial incentive and operational effort required
to facilitate the exit of derivatives portfolios (e.g., to motivate a
potential step-in party to agree to the novation or an existing
counterparty to bilaterally agree to a termination). Dealer firms
should consider this methodology when separately identifying and
analyzing the population of derivatives positions that it will include
in the potential residual portfolio under the firm's preferred
resolution strategy (discussed below).
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\34\ Examples of characteristics that may affect the level of
financial incentive and operational effort could include: product,
size, clearability, currency, maturity, level of collateralization,
and other risk characteristics.
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Application of exit cost methodology. Each dealer firm should have
a methodology for forecasting the cost and liquidity needed to exit
positions (e.g., terminate/tear-up, sell, novate, and compress), and
the operational resources related to those exits, under the specific
scenario adopted in the firm's preferred resolution strategy. To help
preserve sufficient optionality with respect to managing and de-risking
its derivatives portfolios in a resolution, a dealer firm should have
the systems capabilities to apply its exit cost methodology to its
firm-wide derivatives portfolio, at the segmentation levels the firm
would likely apply to exit the particular positions (e.g., valuation
segment level). The dealer firm's plan should provide detailed
descriptions of the forecasting methodology (inclusive of any challenge
and validation processes) and data systems and reporting capabilities.
The firm should also describe and demonstrate the application of the
exit cost method and systems capabilities to the firm-wide derivatives
portfolio.
Analysis of operational capacity. In resolution, a dealer firm
should have the capabilities to forecast the incremental operational
needs and expenses related to executing specific aspects of its
preferred resolution strategy (e.g., executing timely derivatives
portfolio novations). Therefore, a dealer firm should have, and its
resolution plan should describe and demonstrate, the capabilities to
assess the operational resources and forecast the costs (e.g., monthly
expense rate) related to its current derivatives activities at an
appropriately granular level and the incremental impact from executing
its preferred resolution strategy.\35\ In addition, a dealer firm
should have the ability to manage the logistical and operational
challenges related to novating (selling) derivatives portfolios during
a resolution, including the design and adjustment of novation packages.
A dealer firm's resolution plan should describe its methodology and
demonstrate its supporting systems capabilities for timely segmenting,
packaging, and novating derivatives positions. In developing its
methodology, a dealer firm should consider the systems capabilities
that may be needed to reliably generate preliminary novation packages
tailored to the risk appetites of potential step-in counterparties
(buyers), as well as the novation portfolio profile information that
may be most relevant to such counterparties.
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\35\ A dealer firm should have separate categories for fixed and
variable expenses. For example, more granular operational expenses
could roll-up into categories for (i) fixed-compensation, (ii) fixed
non-compensation, and (iii) variable cost.
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Sensitivity analysis. A dealer firm should have a method to apply
sensitivity analyses to the key drivers of the derivatives-related
costs and liquidity flows under its preferred resolution strategy. A
dealer firm's resolution plan should describe its method for (i)
evaluating the materiality of assumptions and (ii) identifying those
assumptions (or combinations of assumptions) that constitute the key
drivers for its forecasts of operational and financial resource needs
under the preferred resolution strategy. In addition, using its
preferred resolution strategy as a baseline, the dealer firm's
resolution plan should describe and demonstrate its approach to testing
the sensitivities of the identified key drivers and the potential
impact on its forecasts of resource needs.\36\
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\36\ For example, key drivers of derivatives-related costs and
liquidity flows might include the timing of derivatives unwind, cost
of capital-related assumptions (target ROE, discount rate, WAL,
capital constraints, tax rate), operational cost reduction rate, and
operational capacity for novations. Other examples of key drivers
likely also include CCP margin flow assumptions and risk-weighted
assets forecast assumptions.
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Prime Brokerage Customer Account Transfers.
A dealer firm should have the operational capacity to facilitate
the orderly transfer of prime brokerage accounts to peer prime brokers
in periods of material financial distress and in resolution. The firm's
plan should include an assessment of how it would transfer such
accounts. This assessment should be informed by clients' relationships
with other prime brokers, the use of automated and manual transaction
processes, clients' overall long and short positions facilitated by the
firm, and the liquidity of clients' portfolios. The assessment should
also analyze the risks of and mitigants to the loss of customer-to-
customer internalization (e.g., the inability to fund customer longs
with customer shorts), operational challenges, and insufficient
staffing to effectuate the scale and speed of prime brokerage account
transfers envisioned under the firm's preferred resolution strategy.
In addition, a dealer firm should describe and demonstrate its
ability 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 (e.g., size,
[[Page 1458]]
single-prime, platform, use of leverage, non-rehypothecatable
securities, and liquidity of underlying assets). The capabilities
should cover the firm's prime brokerage customer account balances, and
the resulting segments should represent a range in potential transfer
speed (e.g., from fastest to longest to transfer, from most liquid to
least liquid). The selected segmentation criteria should reflect
characteristics \37\ that the firm believes could affect the speed at
which the client account balance would be transferred to an alternate
prime broker.
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\37\ For example, relevant characteristics might include:
product, size, clearability, currency, maturity, level of
collateralization, and other risk characteristics.
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Derivatives Stabilization and De-risking Strategy.
A dealer firm's plan should provide a detailed analysis of the
strategy to stabilize and de-risk its derivatives portfolios
(derivatives strategy) that has been incorporated into its preferred
resolution strategy.\38\ In developing its derivatives strategy, a
dealer firm should apply the following assumption constraints:
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\38\ Subject to the relevant constraints, a firm's derivatives
strategy may take the form of a going-concern strategy, an
accelerated de-risking strategy (e.g., active wind-down) or an
alternative, third strategy so long as the firm's resolution plan
adequately supports the execution of the chosen strategy. For
example, a firm may choose a going-concern scenario (e.g.,
derivatives entities reestablish investment grade status and do not
enter a wind-down) as its derivatives strategy. Likewise, a firm may
choose to adopt a combination of going-concern and accelerated de-
risking scenarios as its derivatives strategy. For example, the
derivatives strategy could be a stabilization scenario for the lead
bank entity and an accelerated de-risking scenario for the broker-
dealer entities.
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OTC derivatives market access: At or before the start of
the resolution period, each derivatives entity should be assumed to
lack an investment-grade credit rating (e.g., unrated or downgraded
below investment grade). The derivatives entity should also be assumed
to have failed to establish or reestablish investment-grade status for
the duration of the resolution period, unless the plan provides well-
supported analysis to the contrary. As a result of the lack of
investment grade status, it should be further assumed that the
derivatives entity has no access to the bilateral OTC derivatives
markets and must use exchange-traded and/or centrally-cleared
instruments where any new hedging needs arise during the resolution
period. Nevertheless, a dealer firm may assume the ability to engage in
certain risk-reducing derivatives trades with bilateral OTC derivatives
counterparties during the resolution period to facilitate novations
with third parties and to close out inter-affiliate trades.\39\
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\39\ A firm may engage in bilateral OTC derivatives trades with,
for example, (i) external counterparties, to effect the novation of
the firm's side of a derivatives contract to a new counterparty,
bilateral OTC trades with the acquiring counterparty; and, (ii)
inter-affiliate counterparties, where the trades with inter-
affiliate counterparties do not materially increase (a) the credit
exposure of any participating counterparty and (b) the market risk
of any such counterparty on a standalone basis, after taking into
account hedging with exchange-traded and centrally-cleared
instruments. The firm should provide analysis to support the risk
nature of the trade on the basis of information that would be known
to the firm at the time of the transaction.
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Early exits (break clauses). A dealer firm should assume
that counterparties (external or affiliates) will exercise any
contractual termination right, consistent with any rights stayed by the
ISDA 2015 Universal Resolution Stay protocol or other applicable
protocols or amendments,\40\ (i) that is available to the counterparty
at or following the start of the resolution period; and (ii) if
exercising such right would economically benefit the counterparty
(counterparty-initiated termination).
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\40\ For each of the derivatives entities that have adhered to
the Protocol, the dealer firm may assume that the protocol is in
effect for all counterparties of that derivatives entity (except for
any affiliated counterparty of the derivatives entity that has not
yet adhered to the Protocol).
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Time horizon: The duration of the resolution period should
be between 12 and 24 months. The resolution period begins immediately
after the parent company bankruptcy filing and extends through the
completion of the preferred resolution strategy.
A dealer firm's analysis of its derivatives strategy should take
into account (i) the starting profile of its derivatives portfolios
(e.g., nature, concentration, maturity, clearability, and liquidity of
positions); (ii) the profile and function of the derivatives entities
during the resolution period; (iii) the means, challenges, and capacity
for managing and de-risking its derivatives portfolios (e.g., method
for timely segmenting, packaging, and selling the derivatives
positions; challenges with novating less liquid positions; re-hedging
strategy); (iv) the financial and operational resources required to
effect the derivatives strategy; and (v) any potential residual
portfolio (further discussed below). In addition, the firm's resolution
plan should address the following areas in the analysis of its
derivatives strategy:
Forecasts of resource needs. The forecasts of capital and liquidity
resource needs of material entities required to adequately support the
firm's derivatives strategy should be incorporated into the firm's RCEN
and RLEN estimates for its overall preferred resolution strategy. These
include, for example, the costs and/or liquidity flows resulting from
(i) the close-out of OTC derivatives, (ii) the hedging of derivatives
portfolios, (iii) the quantified losses that could be incurred due to
basis and other risks that would result from hedging with only
exchange-traded and centrally cleared instruments in a severely adverse
stress environment, and (iv) the operational costs.\41\
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\41\ A dealer firm may choose not to isolate and separately
model the operational costs solely related to executing its
derivatives strategy. However, the firm should provide transparency
around operational cost estimation at a more granular level than
material entity (e.g., business line level within a material entity,
subject to wind-down).
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Potential residual derivatives portfolio. A dealer firm's
resolution plan should include a method for estimating the composition
of any potential residual derivatives portfolio transactions remaining
at the end of the resolution period under its preferred resolution
strategy. The method may be a combination of approaches (e.g.,
probabilistic and deterministic) but should demonstrate the dealer
firm's capabilities related to portfolio segmentation (discussed
above). The dealer firm's plan should also provide detailed
descriptions of the trade characteristics used to identify the
potential residual portfolio and of the resulting trades (or categories
of trades).\42\ A dealer firm should assess the risk profile of the
potential residual portfolio (including its anticipated size,
composition, complexity, counterparties) and the potential counterparty
and market impacts of non-performance on the stability of U.S.
financial markets (e.g., on funding markets and the underlying asset
markets and on clients and counterparties).
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\42\ If under the firm's preferred resolution strategy, any
derivatives portfolios are transferred during the resolution period
by way of a line of business sale (or similar transaction), then
those portfolios should nonetheless be included within the firm's
potential residual portfolio analysis.
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Non-surviving entity analysis. To the extent the preferred
resolution strategy assumes a material derivatives entity enters its
own resolution proceeding after the entry of the parent company into a
bankruptcy proceeding (a non-surviving material derivatives entity),
the dealer firm should provide a 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 U.S. financial
stability and to the orderly
[[Page 1459]]
execution of the firm's preferred resolution strategy. In particular,
the firm should provide an analysis of the potential impacts on funding
markets and the underlying asset markets, on clients and counterparties
(including affiliates), and on the preferred resolution strategy. If
the non-surviving material derivatives entity is located in, or
provides more than de minimis services to clients or counterparties
located in, a non-U.S. jurisdiction, then the analysis should also
specifically consider potential local market impacts.
VIII. FORMAT AND STRUCTURE OF PLANS
Format of Plan
Executive Summary. The Plan should contain an executive summary
consistent with the Rule, which must include, among other things, a
concise description of the key elements of the firm's strategy for an
orderly resolution. In addition, the executive summary should include a
discussion of the firm's assessment of any impediments to the firm's
resolution strategy and its execution, as well as the steps it has
taken to address any identified impediments.
Narrative. The Plan should include a strategic analysis consistent
with the Rule. This analysis should take the form of a concise
narrative that enhances the readability and understanding of the firm's
discussion of its strategy for rapid and orderly resolution in
bankruptcy or other applicable insolvency regimes (Narrative). The
Narrative also should include a high level discussion of how the firm
is addressing key vulnerabilities jointly identified by the Agencies.
This is not an exhaustive list and does not preclude identification of
further vulnerabilities or impediments.
Appendices. The Plan should contain a sufficient level of detail
and analysis to substantiate and support the strategy described in the
Narrative. Such detail and analysis should be included in appendices
that are distinct from and clearly referenced in the related parts of
the Narrative (Appendices).
Public Section. The Plan must be divided into a public section and
a confidential section consistent with the requirements of the Rule.
Other Informational Requirements. The Plan must comply with all
other informational requirements of the Rule. The firm may incorporate
by reference previously submitted information as provided in the Rule.
Guidance Regarding Assumptions
1. The Plan should be based on the current state of the applicable
legal and policy frameworks. Pending legislation or regulatory actions
may be discussed as additional considerations.
2. The firm must submit a plan that does not rely on the provision
of extraordinary support by the United States or any other government
to the firm or its subsidiaries to prevent the failure of the firm.\43\
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\43\ 12 CFR 243.4(a)(4)(ii) and 381.4(a)(4)(ii)
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3. The firm should not assume that it will be able to sell critical
operations or core business lines, or that unsecured funding will be
available immediately prior to filing for bankruptcy.
4. The Plan should assume the Dodd-Frank Act Stress Test (DFAST)
severely adverse scenario for the first quarter of the calendar year in
which the Plan is submitted is the domestic and international economic
environment at the time of the firm's failure and throughout the
resolution process. The Plan should also discuss any changes to the
resolution strategy under the adverse and baseline scenarios to the
extent that these scenarios reflect obstacles to a rapid and orderly
resolution that are not captured under the severely adverse scenario.
5. The resolution strategy may be based on an idiosyncratic event
or action. The firm should justify use of that assumption, consistent
with the conditions of the economic scenario.
6. Within the context of the applicable idiosyncratic scenario,
markets are functioning and competitors are in a position to take on
business. If a firm's Plan assumes the sale of assets, the firm should
take into account all issues surrounding its ability to sell in market
conditions present in the applicable economic condition at the time of
sale (i.e., the Firm should take into consideration the size and scale
of its operations as well as issues of separation and transfer.)
7. The firm should not assume any waivers of section 23A or 23B of
the Federal Reserve Act in connection with the actions proposed to be
taken prior to or in resolution.
8. The firm may assume that its depository institutions will have
access to the Discount Window only for a few days after the point of
failure to facilitate orderly resolution. However, the firm should not
assume its subsidiary depository institutions will have access to the
Discount Window while critically undercapitalized, in FDIC
receivership, or operating as a bridge bank, nor should it assume any
lending from a Federal Reserve credit facility to a non-bank affiliate.
Financial Statements and Projections
The Plan should include the actual balance sheet for each material
entity and the consolidating balance sheet adjustments between material
entities as well as pro forma balance sheets for each material entity
at the point of failure and at key junctures in the execution of the
resolution strategy. It should also include projected statements of
sources and uses of funds for the interim periods. The pro forma
financial statements and accompanying notes in the Plan must clearly
evidence the failure trigger event; the Plan's assumptions; and any
transactions that are critical to the execution of the Plan's preferred
strategy, such as recapitalizations, the creation of new legal
entities, transfers of assets, and asset sales and unwinds.
Material Entities
Material entities should encompass those entities, including
foreign offices and branches, which are significant to the maintenance
of a critical operation or core business line. If the abrupt disruption
or cessation of a core business line might have systemic consequences
to U.S. financial stability, the entities essential to the continuation
of such core business line should be considered for material entity
designation. Material entities should include the following types of
entities:
a. Any U.S.-based or non U.S. affiliates, including any branches,
that are significant to the activities of a critical operation
conducted in whole or material part in the United States.
b. Subsidiaries or foreign offices whose provision or support of
global treasury operations, funding, or liquidity activities (inclusive
of intercompany transactions) is significant to the activities of a
critical operation.
c. Subsidiaries or foreign offices that provide material
operational support in resolution (key personnel, information
technology, data centers, real estate or other shared services) to the
activities of a critical operation.
d. Subsidiaries or foreign offices that are engaged in derivatives
booking activity that is significant to the activities of a critical
operation, including those that conduct either the internal hedge side
or the client-facing side of a transaction.
e. Subsidiaries or foreign offices engaged in asset custody or
asset management that are significant to the activities of a critical
operation.
f. Subsidiaries or foreign offices holding licenses or memberships
in clearinghouses, exchanges, or other
[[Page 1460]]
FMUs that are significant to the activities of a critical operation.
For each material entity (including a branch), the Plan should
enumerate, 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 the actions
and forbearances. Describe the consequences for the covered company's
resolution strategy if specific actions in a non-U.S. jurisdiction were
not taken, delayed, or forgone, as relevant.
IX. PUBLIC SECTION
The purpose of the public section is to inform the public's
understanding of the firm's resolution strategy and how it works.
The public section should discuss the steps that the firm is taking
to improve resolvability under the U.S. Bankruptcy Code. The public
section should provide background information on each material entity
and should be enhanced by including the firm's rationale for
designating material entities. The public section should also discuss,
at a high level, the firm's intra-group financial and operational
interconnectedness (including the types of guarantees or support
obligations in place that could impact the execution of the firm's
strategy). There should also be a high-level discussion of the
liquidity resources and loss-absorbing capacity of the firm.
The discussion of strategy in the public section should broadly
explain how the firm has addressed any deficiencies, shortcomings, and
other key vulnerabilities that the Agencies have identified in prior
Plan submissions. For each material entity, it should be clear how the
strategy provides for continuity, transfer, or orderly wind-down of the
entity and its operations. There should also be a description of the
resulting organization upon completion of the resolution process.
The public section may note that the resolution plan is not binding
on a bankruptcy court or other resolution authority and that the
proposed failure scenario and associated assumptions are hypothetical
and do not necessarily reflect an event or events to which the firm is
or may become subject.
APPENDIX: Frequently Asked Questions
In April 2016, the Federal Reserve Board and the Federal Deposit
Insurance Corporation issued guidance for use in developing the 2017
resolution plan submissions by eight large domestic bank holding
companies (BHCs).\44\
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\44\ Bank of America Corporation, Bank of New York Mellon,
Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State
Street Corporation, and Wells Fargo & Company.
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In response to frequently asked questions regarding the guidance
from the BHCs, Board and FDIC staff jointly developed answers and
provided those answers to the firms in 2016 so that firms could take
them into account in developing their next resolution plan
submissions.\45\
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\45\ The FAQs represent the views of staff of the Board of
Governors of the Federal Reserve System and the Federal Deposit
Insurance Corporation and do not bind the Board or the FDIC.
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The questions in this Appendix:
Comprise common questions asked by different BHCs. Not
every question is applicable to every BHC; not every aspect of the
guidance applies to each BHC's preferred strategy/structure; and
Reflect updated references to correspond to the Agencies'
final resolution planning guidance for the BHCs (the Final Guidance).
As indicated below, those questions and answers that are deemed to
be no longer meaningful or relevant have not been consolidated in this
Appendix to the Final Guidance and are superseded.
Capital
CAP 1. Capital Pre-Positioning and Balance
Q. How should a firm determine the appropriate balance between
resources pre-positioned at the material entities and held at the
parent?
A. The Final Guidance addresses this issue in the Capital section.
The Agencies are not prescribing a specific percentage allocation of
resources pre-positioned at the material entities versus resources held
at the parent. In considering the balance between certainty and
flexibility, the Agencies note that the risk profile of each material
entity should inform the ``unanticipated losses'' at the entity, which
should be taken into account in determining the appropriate balance.
For instance, the balance would likely be different for a large,
complex, foreign trading subsidiary versus a small, domestic bank
subsidiary.
CAP 2. Not consolidated.
CAP 3. Definition of ``Well-Capitalized'' Status
Q. How should firms apply the term ``well-capitalized'' to material
entities outside the U.S. or to material entities not subject to Basel
III requirements?
A. Material entities must comply with the local capital
requirements and expectations of their primary regulator. Material
entities should be recapitalized to meet jurisdictional requirements
and to maintain market confidence as required under the preferred
resolution strategy.
CAP 4. RCEN Relationship to DFAST Severely Adverse Scenario
Q. How should the firm's RCEN and RLEN estimates relate to the
DFAST Severely Adverse scenario (as per the 2014 feedback letters)? Can
those estimates be recalibrated in actual stress conditions?
A. For resolution plan submission purposes, the estimation of RLEN
and RCEN should assume macroeconomic conditions consistent with the
DFAST Severely Adverse scenario.
However, the RLEN and RCEN methodologies should have the
flexibility to incorporate macroeconomic conditions that may deviate
from the DFAST Severely Adverse scenario in order to facilitate
execution of the preferred resolution strategy.
CAP 5. Not consolidated.
Liquidity
LIQ 1. Inter-Company ``Frictions'' and Inter-Affiliate Deposits
Q. Can the Agencies clarify what kinds of frictions might occur
between affiliates beyond regulatory ring-fencing?
A. Frictions are any impediments to the free flow of funds,
collateral and other transactions between material entities. Examples
include regulatory, legal, financial (i.e., tax consequences), market,
or operational constraints or requirements. Explicit frictions are
described in the Final Guidance and include the requirement that firms
should not assume that a net liquidity sur- plus at one material entity
subsidiary (including material entities that are non-U.S. branches) can
be moved to meet net liquidity deficits at other material entities or
to augment parent resources.
Q2. How should firms treat deposits at affiliate banks, including
parent deposits? Should firms assume they are, or are not, fungible in
resolution?
A. As stated in the Final Guidance, the model estimating the net
liquidity surplus/deficit for the firm may assume the parent holding
company's deposits at the U.S. branch of the lead bank subsidiary are
available as HQLA. Further, the stand-alone net liquidity position of
each material entity (HQLA less net outflows) should treat inter-
affiliate exposures in the same manner as third-party exposures. For
example, an overnight unsecured exposure, including deposits, made with
an
[[Page 1461]]
affiliate should be assumed to mature. As noted in the Liquidity
section of the Final Guidance, firms should not assume that a net
liquidity surplus at one material entity could be moved to meet net
liquidity deficits at other material entities or to augment parent
resources.
LIQ 2. Distinction between Liquidity Forecasting Periods
Q. How long is the stabilization period?
A. The stabilization period begins immediately after the parent
company bankruptcy filing and extends until each material entity
reestablishes market confidence. The stabilization period may not be
less than 30 days. The reestablishment of market confidence may be
reflected by the maintaining, reestablishing, or establishing of
investment grade ratings or the equivalent financial condition for each
entity. The stabilization period may vary by material entity, given
differences in regulatory, counterparty, and other stakeholder
interests in each entity.
Q2. How should we distinguish between the runway, resolution, and
stabilization periods on the one hand, and RLAP and RLEN on the other,
in terms of their length, sequencing, and liquidity thresholds?
A. In the Final Guidance, the Agencies did not specify a direct
mathematical relationship between the runway period, the RLAP model,
and RLEN model. As noted in prior guidance, firms may assume a runway
period of up to 30 days prior to entering bankruptcy provided the
period is sufficient for management to contemplate the necessary
actions preceding the filing of bankruptcy. The RLAP model should
provide for the adequate sizing and positioning of HQLA at material
entities for anticipated net liquidity outflows for a period of at
least
30 days. The RLEN model estimates the liquidity needed after the
parent's bankruptcy filing to stabilize the surviving material entities
and to allow those entities to operate post-filing. As noted in the
Final Guidance, the RLEN model should be integrated into the firm's
governance framework to ensure that the firm files for bankruptcy prior
to HQLA falling below the RLEN estimate. See ``LIQ 4. RLEN and Minimum
Operating Liquidity (MOL),'' Question 1, for further detail on the
required components of the RLEN model.
Q3. What is the resolution period?
A. The resolution period begins immediately after the parent
company bankruptcy filing and extends through the completion of the
preferred strategy. After the stabilization period (see ``LIQ 2.
Distinction between Liquidity Forecasting Periods,'' Question 1,
regarding ``stabilization period''), financial statements and
projections may be provided at quarterly intervals through the
remainder of the resolution period.
LIQ 3. Inter-Affiliate Transaction Assumptions
Q. Does inter-affiliate funding refer to all kinds of intercompany
transactions, including both unsecured and secured?
A. Yes.
LIQ 4. RLEN and Minimum Operating Liquidity (MOL)
Q. How should firms distinguish between the minimum operating
liquidity (MOL) and peak funding needs during the RLEN period?
A. The RLEN should ensure that the firm has sufficient liquidity in
the form of HQLA to facilitate the execution of the firm's resolution
strategy; therefore, RLEN should include both MOL and peak funding
needs. The peak funding needs represent the peak cumulative net out-
flows during the stabilization period. The components of peak funding
needs, including the monetization of assets and other management
actions, should be transparent in the RLEN projections. The peak
funding needs should be supported by projections of daily sources and
uses of cash for each material entity, incorporating inter-affiliate
and third-party exposures. In mathematical terms, RLEN = MOL + peak
funding needs during the stabilization period. For the firms subject to
the Derivatives and Trading Activities section of the Final Guidance
(dealer firms), RLEN should also incorporate liquidity execution needs
of the preferred derivatives strategy (see ``DER 1. Preferred
Resolution Strategy and Wind-Down Scenarios'' in the Derivatives and
Trading Activities section).
Q2. Should the MOL per entity make explicit the allocation for
intraday liquidity requirements, inter-affiliate and other funding
frictions, operating expenses, and working capital needs?
A. Yes, the components of the MOL estimates for each material
entity should be transparent and supported.
Q3. Can MOLs decrease as MLEs wind down?
A. MOL estimates can decline as long as they are sufficiently
supported by the firm's method- ology and assumptions.
LIQ 5. Liquidity Pre-Positioning and Balance
Q. How should a firm determine the appropriate balance between
liquidity resources pre-positioned at the material entities and held at
the parent? Do the Agencies have a specific ratio allocation in mind?
A. The Final Guidance addresses this issue in the Liquidity
section. The Agencies are not prescribing a specific percentage
allocation of resources pre-positioned at the material entities versus
resources held at the parent. In considering the balance between
certainty and flexibility, the risk profile of each material entity
should inform the ``unanticipated outflows'' at the entity, which
should be taken into account in determining the appropriate balance.
For instance, the balance would likely be different for a large,
complex, foreign trading subsidiary versus a small, domestic bank
subsidiary.
LIQ 6. RLAP Guidance Application
Q. The RLAP guidance elements can be applied in different ways that
yield disparate outcomes for the same situation. For instance, a parent
overnight loan to a material entity could be assumed to unwind (treated
as a third-party exposure), or it could be assumed to be trapped (to
not augment parent resources). In such situations, what should a firm
do to ensure it is applying the guidance appropriately?
A. Firms should interpret and apply the Final Guidance in the
context of the Resolution Plan Assessment Framework and Determinations
paper (April 2016), which states on page 10: ``[Firms] must be able to
track and measure their liquidity sources and uses at all material
entities under normal and stressed conditions. They must also conduct
liquidity stress tests that appropriately capture the effect of
stresses and impediments to the movement of funds'' (emphasis added).
For instance, the Final Guidance states:
``The [RLAP] model should ensure that the parent holding
company holds sufficient HQLA (inclusive of its deposits at the U.S.
branch of the lead bank subsidiary) to cover the sum of all stand-alone
material entity net liquidity deficits.''
An RLAP model that utilizes the U.S. LCR definition of
HQLA for each material entity and expands that for the parent to
include parent deposits at the U.S. branch of the lead bank subsidiary
would be consistent with the Final Guidance. For an RLAP model that
utilizes an internal stress testing definition of HQLA that is more
expansive than the U.S. LCR definition, the Agencies expect the firm to
support whether that assumption is consistent with a liquidity stress
test that appropriately captures the effect of
[[Page 1462]]
stresses and impediments to the movement of funds.
The Final Guidance also states:
``[T]he firm should not assume that a net liquidity
surplus at one material entity could be moved to meet net liquidity
deficits at other material entities or to augment parent resources''
(emphasis added).
An RLAP model that assumes zero liquidity flows from
material entities back to the parent would be consistent with this
statement. Note, parent HQLA (including overnight secured lending
collateralized by Treasury securities), as well as deposits at the U.S.
branch of the lead bank subsidiary, would also be consistent with this
statement.
In addition, the Final Guidance states:
``The stand-alone net liquidity position of each material
entity (HQLA less net outflows) should be measured using the firm's
internal liquidity stress test assumptions and should treat inter-
affiliate exposures in the same manner as third-party exposures.''
A firm's RLAP model should ``treat inter-affiliate exposures in the
same manner as third-party exposures'' only where the results would
appropriately capture impediments to the movement of funds. For
instance, application of third-party assumptions to inter-affiliate
deposits that would result in treatment of inter-affiliate deposits as
HQLA, and thus not subject to any impediments to the movement of funds,
even though such impediments could exist, would not be consistent with
the Final Guidance.
More generally, for material entities where the net liquidity
position is comprised of a significant third party net outflow offset
by an inter-affiliate net inflow, the Agencies note the heightened
importance of taking into account ``trapped liquidity as a result of
actions taken by clients, counterparties, financial market utilities
(FMUs), and foreign supervisors, among others,'' as described in the
Liquidity section of the Final Guidance.
LIQ 7. Not consolidated.
LIQ 8. Inter-Affiliate Transactions with Optionality
Q. How should firms treat an inter-affiliate transaction with an
embedded option that may affect the contractual maturity date?
A. For the purpose of calculating a firm's net liquidity position
at a material entity, RLAP and RLEN models should assume that these
transactions mature at the earliest possible exercise date; this
adjusted maturity should be applied symmetrically to both material
entities involved in the transaction. See also ``LIQ 6. RLAP Guidance
Application.''
LIQ 9. Stabilization and Regulatory Liquidity Requirements
Q. As it relates to the RLEN model and actions necessary to re-
establish market confidence, what assumptions should firms make
regarding compliance with regulatory liquidity requirements?
A. Firms should consider the applicable regulatory expectations for
each material entity to achieve the stabilization needed to execute the
preferred strategy. Firms' assumptions in the RLEN model regarding the
actions necessary to reestablish market confidence during the
stabilization period may vary by material entity, for example, based on
differences in regulatory, counterparty, other stakeholder interests,
and based on the preferred strategy for each material entity. See also
``LIQ 2. Distinction between Liquidity Forecasting Periods.''
LIQ 10. HQLA and Assets Not Eligible as HQLA in RLAP and RLEN
Models
Q. The Final Guidance states that HQLA should be used to meet
estimated net liquidity deficits in the RLAP model and that the RLEN
estimate should be based on the minimum amount of HQLA required to
facilitate the execution of the firm's preferred resolution strategy.
How should firms incorporate any expected liquidity value of assets
that are not eligible as HQLA (non-HQLA) into RLAP and RLEN models?
A. A firm's RLAP model should assume that only HQLA are available
to meet net liquidity deficits at material entities. For a firm's RLEN
model, firms may incorporate conservative esti- mates of potential
liquidity that may be generated through the monetization of non-HQLA.
The estimated liquidity value of non-HQLA should be supported by
thorough analysis of the potential market constraints and asset value
haircuts that may be required. Assumptions for the monetization of non-
HQLA should be consistent with the preferred resolution strategy for
each material entity. See ``LIQ 6. RLAP Guidance Application'' for
detail on assets eligible as HQLA.
LIQ 11. Components of Minimum Operating Liquidity
Q. Do the agencies have particular definitions of the ``intraday
liquidity requirements,'' ``operating expenses,'' and ``working capital
needs'' components of minimum operating liquidity (MOL) estimates?
A. No. A firm may use its internal definitions of the components of
MOL estimates. The components of MOL estimates should be well-supported
by a firm's internal methodologies and calibrated to the specifics of
each material entity.
LIQ 12. RLEN Model and Net Revenue Recognition
Q. Can firms assume in the RLEN model that cash-based net revenue
generated by material entities after the parent holding company's
bankruptcy filing is available to offset estimated liquidity needs?
A. Yes. Firms may incorporate cash revenue generated by material
entities in the RLEN model. Cash revenue projections should be
conservatively estimated and consistent with the operating environment
and the preferred strategy for each material entity.
LIQ 13. RLEN Model and Inter-Affiliate Frictions
Q. Can a firm modify its assumptions regarding one or more inter-
affiliate frictions during the stabilization or post-stabilization
period in the RLEN model?
A. Once a material entity has achieved market confidence necessary
for stabilization consistent with the preferred strategy, a firm may
modify one or more inter-affiliate frictions, provided the firm
provides sufficient analysis to support this assumption.
LIQ 14. RLEN Relationship to DFAST Severely Adverse scenario
(See ``CAP 4. RCEN Relationship to DFAST Severely Adverse
Scenario'' in the Capital section.)
LIQ 15. Application of Inter-Affiliate Frictions Guidance to
Intermediate Holding Companies (IHC)
Q. With respect to an IHC that has been established to facilitate
recapitalization or liquidity support to material entities, how should
firms apply the RLAP and RLEN guidance for inter-affiliate frictions?
A. For IHCs that provide funds for recapitalization or liquidity
support to material entities and do not have any operations or
outstanding third-party exposures of their own, the Agencies recognize
that fewer potential impediments to the movement of the funds may exist
when compared to movements of funds between operating material
entities. Still, for both the RLAP and RLEN model, firms are expected
to provide an analysis of, and take into account, potential inter-
affiliate frictions that may exist between an IHC and material
entities.
Specific to the Final Guidance for the RLAP model and the Q&A in
``LIQ 6. RLAP Guidance Application,'' it would be inconsistent with the
guidance for firms to assume that an IHC could be used as an
intermediary to facilitate transfers of net liquidity surpluses at one
material entity to another material entity. Instead, firms may only
assume
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a one-way flow of funds from the IHC to the material entity. For the
RLEN model, firms should assess the potential for inter-affiliate
frictions in transactions from the IHC to material entities as well as
from material entities to the IHC. The prohibition on assuming that net
liquidity surplus at one material entity could be moved to meet net
liquidity deficits at other material entities under the Final Guidance
does not prohibit the firm from assuming that an IHC may provide
liquidity to material entities.
LIQ 16. Access to Reserve Bank Daylight Credit
Q. What assumptions can firms make regarding access to Federal
Reserve daylight credit?
A. Access to daylight credit is governed by the Federal Reserve
Board's Policy on Payment System Risk (PSR Policy) and generally is
provided only to institutions that are in sound financial condition
based on their capital ratios and supervisory ratings and subject to
the discretion of the Reserve Bank. For the purpose of Section 165(d)
resolution plans only, firms may assume that subsidiary depository
institutions that are at least adequately capitalized will have access
to fully collateralized daylight credit even in cases where the
supervisory ratings of the parent assumed in the exercise fall below
fair as a result of the condition of the parent firm or an affiliate.
However, the plan should not assume depository institutions will have
access to intraday credit while undercapitalized, in FDIC receivership,
or operating as a bridge bank. This guidance applies only to the
Section 165(d) resolution plans and does not modify the PSR Policy.
Governance Mechanisms
GOV 1. Triggers
Q. Do firms need to have all three types of triggers (i.e.,
capital, liquidity, and market) for each phase (i.e., BAU to stress,
stress to runway, runway to recapitalization; and recapitalization to
bankruptcy filing/PNV)?
A. No, a firm does not need all three types of triggers for each
phase.
Q2. Are firms required to have triggers for each material entity or
are firm-wide triggers sufficient?
A. Triggers at the level of the consolidated company may not be
sufficient without additional triggers at the material entity level
depending upon the firm structure and/or preferred strategy. All
triggers may not be applicable to all material entities. For example,
pre-funded service entities or foreign branches may not require
particular capital or liquidity triggers if they will not need these
resources prior to the parent company entering bankruptcy.
Q3. Should firms include a formal regulatory trigger by which the
Agencies can directly trigger a contractually binding mechanism?
A. No.
Q4. Could the Agencies clarify what is meant by ``synchronized''
triggers within the Final Guidance?
A. ``Synchronized to the firm's liquidity and capital
methodologies'' in this context means informed by the firm's RCEN and
RLEN estimates.
Q5. What are examples of market metrics and market metric triggers?
A. The Agencies are not prescribing specific market metrics or
triggers.
Operational: Shared Services
OPS SS 1. Not consolidated.
OPS SS 2. Working Capital
Q. Must working capital be maintained for third party and internal
shared service costs?
A. Where a firm maintains shared service companies to provide
services to affiliates, working capital should be maintained in those
entities sufficient to permit those entities to continue to provide
services for six months or through the period of stabilization as
required in the firm's preferred strategy. Costs related to third-party
vendors and inter-affiliate services should be captured through the
working capital element of the MOL estimate (RLEN).
Q2. When does the six month working capital requirement period
begin?
A. The measurement of the six month working capital expectation
begins upon the bankruptcy filing of the parent company. The
expectation for maintaining the working capital is effective upon the
July 2017 submission.
OPS SS 3. Not consolidated.
OPS SS 4. Not consolidated.
Operational: Payments, Clearing, and Settlement
OPS PCS 1. Not consolidated.
OPS PCS 2. Access to Reserve Bank Daylight Credit
(See ``LIQ 16. Access to Reserve Bank Daylight Credit'' in the
Liquidity section)
Legal Entity Rationalization and Separability
LER 1. Data Room
Q. What information should be in the data room?
A. The Final Guidance addresses the data room on page in the
section regarding Legal Entity Rationalization and Separability. The
data room should contain the necessary information on discrete sales
options to facilitate buyer due diligence. Including only a table of
contents of information that could be provided when needed would not be
sufficient.
Q2. Are firms expected to include in a data room described in the
Final Guidance lists of individual employee names and compensation
levels?
A. The firm should include the necessary information to facilitate
buyer due diligence. In the circumstance where employee information
would be important to buyer due diligence the firm should demonstrate
the capability to provide such information in a timely manner. For
individual employee names and compensation, the data room may include a
representative sample and may have personally identifiable information
redacted.
LER 2. Not consolidated.
LER 3. Legal Entity Rationalization Criteria
Q. Is it acceptable to take into account business-related criteria,
in addition to the resolution requirements, so that the LER Criteria
can be used for both resolution planning and business operations
purposes?
A. Yes, LER criteria may incorporate both business and resolution
considerations. In determining the best alignment of legal entities and
business lines to improve the firm's resolvability under different
market conditions, business considerations should not be prioritized
over resolution needs.
LER 4. Creation of Additional Legal Entities
Q. Is the addition of legal entities acceptable, so long as it is
consistent with the LER criteria?
A. Yes.
LER 5. Clean Funding Pathway
Q. Can you provide additional context around what is meant by clean
lines of ownership and clean funding pathways in the legal entity
rationalization criteria? Additionally, what types of funding are
covered by the requirements?
A. The funding pathways between the parent and material entities
and the ownership chain should minimize uncertainty in the provision of
funds and facilitate recapitalization. Also, the complexity of
ownership should not impede the flow of funding to a material entity
under the firm's preferred resolution strategy. Potential sources of
additional complexity could include, for example, multiple intermediate
holding companies, tenor mismatches, or complicated ownership
structures (including those involving multiple jurisdictions or
fractional ownerships). Ownership should be as clean and simple as
practicable, supporting the preferred strategy and actionable sales,
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transfers, or wind-downs under varying market conditions. The clean
funding pathways expectation applies to all funding provided to a
subsidiary material entity regardless of type and should not be viewed
solely to apply to internal TLAC.
Q2. The Final Guidance regarding legal entity rationalization
criteria discusses ``clean lines of ownership'' and ``clean funding
pathways.'' Does this statement mean that firms' legal entity
rationalization criteria should require funding pathways and
recapitalization to always follow lines of ownership?
A. No. However, the firm should identify and address or mitigate
any legal, regulatory, financial, operational, and other factors that
could complicate the recapitalization and/or liquidity support of
material entities.
LER 6. Separability Options Information
Q. How should a firm approach inclusion of legal risk assessments
and other buyer due diligence information into separability options?
A. The legal assessment should consider both buyer and seller legal
aspects that could impede the timely or successful execution of the
divestiture option. Where impediments are identified, mitigation
strategies should be developed.
LER 7. Market Conditions
Q. What is meant by the phrase ``under different market
conditions'' in the Legal Entity Rationalization and Separability
section of the Final Guidance?
A. The phrase ``under different market conditions'' is meant to
ensure that a firm has a menu of divestiture options from which at
least some could be executed under different market stresses.
LER 8. Not consolidated.
LER 9. Application of Legal Entity Rationalization Criteria
Q. Which legal entities should be covered under the LER framework?
A. All legal entities. The scope of a firm's LER criteria should
apply to the entire enterprise.
Q2. To the extent a firm has a large number of similar non-material
entities (such as single-purpose entities formed for Community
Reinvestment Act purposes), may a firm apply its legal entity
rationalization criteria to these entities as a group, rather than at
the individual entity level?
A. Yes.
Derivatives and Trading Activities
To the extent relevant, the derivatives and trading FAQs have been
consolidated into the updated section of the Final Guidance.
Legal
LEG 1. Emergency Motion
Q. The Final Guidance states that ``the plan should consider
contingency arrangements in the event the bankruptcy court does not
grant the emergency motion.'' What are the Agencies' expectations given
the industry's focus on complying with the ISDA Resolution Stay
Protocol?
A. Firms may present a preferred strategy that makes use of the
Protocol. Nonetheless, the Agencies expect firms also to consider the
possibility that a bankruptcy court may not timely enter an order that
satisfies the Transfer Conditions and/or the U.S. Parent debtor-in-
possession Conditions of the Protocol as contemplated in the firm's
preferred strategy. See the Legal Obstacles Associated with Emergency
Motions section of the Final Guidance.
Q2. Could the Agencies clarify what further legal analysis would be
expected regarding the impact of potential state law and bankruptcy law
challenges and mitigants to the planned provision of Support?
A. The firms should address developments from the firm's own
analysis of potential legal challenges regarding the Support and should
also address any additional potential legal challenges identified by
the Agencies in the Pre-Bankruptcy Parent Support section of the Final
Guidance. A legal analysis should include a detailed discussion of the
relevant facts, legal challenges, and Federal or State law and
precedent. The analysis also should evaluate in detail the legal
challenges identified in the Final Guidance under the heading ``Pre-
Bankruptcy Parent Support,'' any other legal challenges identified by
the firm, and the efficacy of potential mitigants to those challenges.
Firms should identify each factual assumption underlying their legal
analyses and discuss how the analyses and mitigants would change if the
assumption were not to hold. Moreover, the analysis is not required to
take the form of a legal opinion.
Q3. Not consolidated.
LEG 2. Contractually Binding Mechanisms
Q. Do the Agencies have any preference as to whether capital is
down-streamed to key subsidiaries (including an IDI subsidiary) in the
form of capital contributions vs. forgiveness of debt?
A. No. The Agencies do not have a preference as to the form of
capital contribution or liquidity support.
Q2. The letter makes reference to a contractually binding
mechanism. Does such an agreement relate to the provision of capital or
liquidity? What classes of assets would be deemed to provide capital
vs. liquidity?
A. Contractually binding mechanism is a generic term and includes
the down-streaming of capital and/or liquidity as contemplated by the
preferred strategy. Furthermore, it is up to the firm, as informed by
any relevant guidance of the Agencies, to identify what assets would
satisfy a subsidiary's need for capital and/or liquidity.
Q3. Is there a minimum acceptable duration for a contractually
binding mechanism? Would an ``evergreen'' arrangement, renewable on a
periodic basis (and with notice to the Agencies), be acceptable?
A. To the extent a firm utilizes a contractually binding mechanism,
such mechanism, including its duration, should be appropriate for the
firm's preferred strategy, including adequately addressing relevant
financial, operational, and legal requirements and challenges.
Q4. Not consolidated.
Q5. Not consolidated.
Q6. The firm may need to amend its contractually binding mechanism
from time to time resulting potentially from changes in relevant law,
new or different regulatory expectations, etc. Is a firm able to do
this as long as there is no undue risk to the enforceability (e.g., no
signs of financial stress sufficient to unduly threaten the agreement's
enforceability as a result of fraudulent transfer)?
A. Yes, however the Agencies should be informed of the proposed
duration of the agreement, as well as any terms and conditions on
renewal and/or amendment. Any amendments should be identified and
discussed as part of the firm's next plan submission.
General
None of the general FAQs were consolidated.
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC, on December 18, 2018.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2019-00800 Filed 2-1-19; 8:45 am]
BILLING CODE P