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

On July 9, 2018, the Board of Governors of the Federal Reserve System (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Agencies”) released the public sections of the resolution plans for the four foreign banking organizations’ (“FBOs”) overseen by the Large Institution Supervision Coordinating Committee (“LISCC”).1 The four FBOs were required to submit their plans by July 1, 2018, which included both private and public sections.

The 2018 public sections are comparatively longer than those submitted in the firms’ last full submissions in 2015—a total of 214 pages in 2018 compared to 162 pages in 2015—and contain significant new details about the FBOs’ completed and forthcoming enhancements to resolution planning capabilities. This expansion was largely expected as this submission marked the FBOs’ first reaction to regulatory guidance published in April 2017 2 and FAQs in September 2017 3 (collectively “2017 FBO Guidance”) that was specifically directed at these four banks.

Background

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

Related links

Center for Regulatory Strategy

Key takeaways from public sections

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

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

Themes by Capability

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

Resolution Strategy and Potential Obstacles

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

Group and US Resolution Strategies

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

Branches

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

Legal Obstacles

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

Financial

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

Capital:

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

Liquidity:

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

DER:

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

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

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

Payment, clearing & settlement (“PCS”) activities

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

Collateral

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

MIS

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

Shared and outsourced services (“SOS”)

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

QFCs

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

Structural

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

Governance mechanisms

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

Legal entity rationalization (“LER”)

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

Separability

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

Next steps

Although the Agencies may not provide feedback on the 2018 plans for some time, firms should not wait for regulatory input before assessing their completed and planned actions to identify areas for improvement. Furthermore, the Agencies recently proposed guidance for the 2019 US G-SIB resolution plans, including the heightened focus on DER and PCS, which may give further perspective of regulatory guidance that may become applicable to FBOs. 7
As part of this process, firms should consider benchmarking their respective strategy, approach, and capabilities against those presented in the public sections and guidance of other firms, and consider whether others have identified more efficient, simpler, or better approaches to various aspects of resolution planning. For the FBOs, reviewing capabilities and progress against the US G-SIBs may be particularly relevant given that SR 14-1 has been applicable to them for several years. A key fixture of resolution planning is not just the establishment and enhancement of capabilities, but also the embedding of resolution planning into business-as-usual processes. The next wave of FBO filers, due to submit in December 2018, should take note of the enhancements communicated in these public sections, and look to integrate where applicable to their own plans.

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

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

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

Note after post

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

Contacts

Marlo Karp
Partner | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Irena Gecas-McCarthy
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Chris Spoth
Managing Director | Deloitte Risk and Financial Advisory Executive Director, Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

David Wright
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Stuart Shroff
Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Sean Hodgkinson
Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Eric Monzon
Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Marco Kim
Senior Consultant | Deloitte Risk and Financial Advisory
Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

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

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

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

4 Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Guidance for 2017 §165(d) Annual Resolution Plan Submissions By Domestic Covered Companies that Submitted Resolution Plans in July 2015” (April 13, 2016), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a1.pdf

5 Board of Governors for the Federal Reserve System, “SR 14-1: Heightened Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies – Supplemental Guidance on Consolidated Supervision Framework for Large Financial Institutions (SR letter 12-17/CA letter 12-14)” (January 24, 2014), available at https://www.federalreserve.gov/supervisionreg/srletters/SR1401.htm

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

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

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

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

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

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see http://www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2018 Deloitte Development LLC. All rights reserved.

MEDICAID NEWS: CMS Approves First State Medicaid Plan Aimed at Value-based Purchasing of Prescription Drugs, Rejects Application for Formulary Restrictions; Court Blocks Approval of Kentucky Medicaid Waiver for Work Requirements

On June 27, 2018, the Centers for Medicare and Medicaid Services (CMS) approved a Medicaid State Plan Amendment (SPA) allowing Oklahoma to negotiate with drug manufacturers for supplemental rebates under value-based purchasing agreements. Other states have won approval for Supplemental Rebate Agreements (SRAs), but Oklahoma’s SPA is the first specifically to provide for additional rebates to be made to the state if a prescription drug falls short of negotiated clinical benchmarks.

Products covered under an SRA with Oklahoma will have preferred status on the state’s Medicaid formulary and may be placed on lower tiers of the state’s drug listings, granting exemptions to utilization management policies such as prior authorization. The updated agreement applies to drugs dispensed effective January 1, 2019.

Drugs developed and marketed by manufacturers who do not participate in the supplemental rebate program will still be available to Medicaid recipients.

Related links

Center for Regulatory Strategy

Massachusetts waiver rejected

CMS rejected a part of a Massachusetts Medicaid program demonstration waiver to its Medicaid program that sought flexibilities in its Medicaid formulary to exclude certain covered outpatient drugs altogether, while retaining the state’s access to rebates under the federal Medicaid Drug Rebate Program (MDRP).

In its response, CMS explained that in order to receive federal approval, “the state would have to negotiate directly with manufacturers and forego all rebates available under the [MDRP]” in order to exclude drugs based on “cost-effectiveness or other approved criteria, or to employ a closed formulary structure similar to Medicare Part D or commercial plan formularies.”

Kentucky Medicaid Waiver for Work Requirements Hit Obstacles in Court

In other Medicaid news, the U.S. District Court for the District of Columbia on June 29, 2018, blocked the approval by the Department of Health and Human Services (HHS) of a Section 1115 Medicaid waiver that would establish work or community engagement requirements as a condition of Medicaid eligibility for able-bodied adults in Kentucky. The waiver for the Kentucky HEALTH initiative was the first for work requirements in Medicaid to win approval from HHS.

The ruling in the case focuses on whether HHS appropriately considered “whether Kentucky HEALTH would, in fact help the state furnish medical assistance to its citizens, a central objective of Medicaid.” Importantly, the decision does not automatically prevent Indiana or Arkansas from moving forward with implementation of their Medicaid work requirements, which already have won federal approval and face separate court challenges.

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

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

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see http://www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2018 Deloitte Development LLC. All rights reserved.

CMS Proposes Increase in Home Health Payments for 2019, Lays Groundwork for Implementation of Value-based Payment Provisions

On July 2, 2018, the Centers for Medicare and Medicaid Services (CMS) released a proposed rule that would increase payments to home health agencies (HHAs) by approximately 2.1% for calendar year 2019 and outlines the implementation of policy changes included in the Bipartisan Budget Act of 2018 (BBA) that are intended to hasten the movement to value-based payments in the home health sector.

The proposed rule will be published in the Federal Register on July 12, 2018. Comments are due by August 31, 2018.

Highlights of key provisions of the proposed rule are summarized below.

Related links

Center for Regulatory Strategy

Home Health Prospective Payment System (HH PPS) Unit of Payment

The proposed rule would shorten the standardized episode payment timeframe from 60 days to 30 days, and calls for a closer accounting of resource use. The proposed change would take effect for home health periods of care beginning on or after January 1, 2020.

CMS had proposed shortening the standardized episode timeframe for home health payments from 60 days to 30 days in the proposed rule for 2018, but the agency did not finalize the proposal after receiving strong pushback from stakeholders about potential payment reductions resulting from the policy change. Congress mandated the reduced episode timeframe in the BBA, but required CMS to implement the change in a budget-neutral manner.

Case-Mix Classification System

For the HH PPS case-mix adjustment, the proposed rule would end the use of “therapy thresholds,” which rely on the number of therapy visits provided, in favor of case-mix adjustments based on specific patient characteristics. The proposed change also would take effect for home health periods of care beginning on or after January 1, 2020.

Under the proposed rule, therapy thresholds for home health payments would be replaced by the Patient-Driven Group Model (PDGM). Taking patient information and the practices of home health practitioners into account, the PDGM would make adjustments based on a series of detailed payment categories such as diagnosis, functional level, comorbid conditions, and admissions source. By comparison, the current payment system bases case-mix payment adjustments on a measure of the volume of services provided.

As part of the PDGM model’s move towards more detailed information on services provided, CMS proposes a shift away from estimating costs during a home health episode via the Wage-Weighted Minutes of Care (WWMC), which uses industry-wide Bureau of Labor Statistics (BLS) data on home health providers. In its place, CMS proposes a Cost-Per-Minute plus Non-Routine Supplies (CPM + NRS) methodology derived from the Medicare Cost Report.

The proposed CPM + NRS method is expected to capture a wider variety of costs, and would focus on the specific costs for individual home health providers rather than industry-wide BLS data.

Although the BBA requires CMS to implement the payment changes in a budget neutral manner in the aggregate, individual home health providers could see payment increases or decreases as a result of the changes in payment policy. CMS projects that HHAs that provide more nursing visits (lower margins under the current payment system, which may incentivize overutilization of therapy) could see higher payments under the proposed changes. According to CMS, HHAs that provide more therapy visits relative to nursing visits could see payment decreases under the proposed changes.

Remote Patient Monitoring

CMS proposes to define remote patient monitoring in regulation for the Medicare home health benefit as “the collection of physiologic data (for example, ECG, blood pressure, glucose monitoring) digitally stored and/or transmitted by the patient and/or caregiver to the HHA.”

In addition, the proposed rule would allow the costs of remote monitoring to be reflected on the HHA Medicare cost report in an effort to hasten the adoption of remote patient monitoring technology by HHAs. Although the cost of remote patient monitoring is not separately billable under the HH PPS and could not be used as a substitute for in-person home health services, the proposed rule would allow home health agencies to use remote patient monitoring to support the care planning process.

Importantly, the regulatory definition builds upon CMS’ decision in the Medicare Part B Physician Fee Schedule Update for Calendar Year 2018 to permit separate payment to physicians and other health care providers for the “collection and interpretation of physiologic data digitally stored and/or transmitted by the patient and or caregiver to the physician or other qualified health care professional” under CPT code 99091.

New Home Infusion Therapy Services Becoming Available

Prior to full implementation of the new home infusion therapy benefit in 2021 as required by the 21st Century Cures Act, CMS proposes a temporary transitional payment for home infusion therapy. Home infusion therapy services include related professional services for administering drugs and biologicals through medical infusion pumps, providing training and education, and remote monitoring of the therapy. The proposed rule solicits public comment on elements of the home infusion therapy benefit to inform the structure of the permanent payment system.

The proposed rule also outlines approval and oversight standards for accreditation organizations for home infusion therapy providers.

The Home Health Value-Based Purchasing Model (HHVBP)

As the HHVBP prepares for its fourth year of operation, the proposed rule would refine the measures for the model’s quality and outcomes scoring system. The rule proposes to remove or modify several Outcome and Assessment Information System (OASIS)-based outcome measures and to replace them with two composite measures designed to capture the total change in a home health patient’s capacity for self-care and mobility.

My HealthEData

Consistent with provisions of other Medicare payment rules released in 2018, CMS includes a request for information (RFI) in the HH PPS proposed rule as part of an effort to collect feedback on the potential options to drive interoperability or the sharing of data between health care providers. Specifically, the RFI seeks comment on the possible revision of Medicare conditions of participation related to interoperability.

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

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

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see http://www.deloitte.com/about to learn more about our global network of member firms.

Copyright © 2018 Deloitte Development LLC. All rights reserved.

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

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

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

Related links

Center for Regulatory Strategy

Key takeaways:

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

Moving from development to maintenance and integration

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

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

Increasing focus on derivatives booking practices and ability to unwind activities

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

Booking practices

  • GSIBs will be expected to document booking practices “commensurate with the size, scope, and complexity of a firm’s derivatives portfolios, including systems capabilities to track and monitor market, credit, and liquidity risk transfers between entities
  • There has been a strong emphasis on a firm’s ability to describe booking practices and sustain a broad booking model framework. The Agencies were more prescriptive in their expectations of documentation and content requirements: (i) what is being booked (e.g., product); (ii) where it is being booked (e.g., legal entity/geography); (iii) by whom it is booked (e.g. counterparty); (iv) why it is booked that way (e.g., drivers/rationales); and (v) what controls are in place to monitor and manage those practices (e.g. governance/information systems)
  • The proposed guidance affirms the importance of “completeness” while documenting booking model, and implies that the firms should have a capability to document booking practices outside of derivatives. The Agencies expect firms to explain the rationale behind their booking model as a function of the firm’s risk management requirements, client’s preference, and regulatory requirements
  • The Agencies also proposed that the firms may choose to incorporate decision trees to depict the multiple trade flows within each documented booking model
  • The proposed guidance provides the agencies perspective on preventative and detective controls and how 165(d) Resolution Plans should describe end-to-end trade booking and reporting processes, including a description of the current scope of automation (e.g., automated trade flows and detective monitoring) for the systems controls applied to its documented booking models
  • The guidance further explores expectations of a strong control framework and provides its view points on insufficiencies of broad permissibility controls like Trader Mandate

Derivatives entity analysis and reporting

  • The proposed guidance details how firms should have the ability to identify, assess, and report on each of its entities (material and nonmaterial) with derivatives portfolios (a “derivatives entity”)
  • There is a strong focus on the capability demonstrated by a firm to readily generate reporting related to current derivatives entity profiles that (i) cover all derivatives entities, (ii) are reportable in a consistent manner, and (iii) include information regarding current legal ownership structure, business activities/volume, and risk profile (including applicable risk limits

Inter-affiliate risk and monitoring controls

  • Firms need to provide timely transparency into risk transfers for trades between affiliates and the ability to monitor and limit material derivatives entity exposures in an extreme resolution scenario by maintaining an inter-affiliate market risk framework
  • The Agencies advised that in the case of re-hedging strategy, firms consider instruments  sufficiently tied to the material derivatives entity’s trading and risk-management practices
  • The firm’s should provide detailed descriptions of its compression strategies and how those strategies may differ from those used currently to manage its inter-affiliate derivatives activities
  • There is recognized connectivity to SR14-15 requirements related to BHC’s capabilities for managing, identifying, and valuing the collateral that it receives from and posts to external parties and its affiliates and producing information related to credit exposures both on- and off-balance sheet

Portfolio segmentation and forecasting

  • Whilst each dealer firm has developed various modeling approaches that are used to evidence capability levels, and resources needed to execute its preferred resolution strategy using available data, enhanced capabilities will now be required in relation to: producing analysis on granular portfolio segmentation, differentiation of assumptions taking into account trade-level characteristics, and segmentation and forecasting capabilities
  • The proposed guidance provides additional detail relating to (i) a method and supporting systems capabilities for categorizing and ranking the ease of exit for its derivatives positions (“ease of exit” position analysis), (ii) the systems capabilities to apply the firm’s exit cost methodology to its firm-wide derivatives portfolio (application of exit cost methodology), (iii) capabilities to assess the operational resources and forecast the costs related to its current derivatives activities (analysis of operational capacity), and (iv) a method to apply sensitivity analyses to the key drivers of the derivatives-related costs and liquidity flows under its preferred resolution strategy (sensitivity analysis)

Prime brokerage account transfer

  • In addition to the earlier scope of having operational capacity to facilitate orderly transfer of prime brokerage accounts to peer prime brokers, firms are also expected to segment and analyze the quality and composition of prime brokerage customer account balances based on a set of well-defined and consistently applied segmentation criteria

Derivatives stabilization and de-risking strategy

  • Dealer firms are expected to perform detailed analysis of the strategy to stabilize and de-risk its derivatives portfolios
  • Firms will need to perform detailed analysis of how the non-surviving material derivatives entity’s resolution can be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk of serious adverse effects on US financial stability and to the orderly execution of the firm’s preferred resolution strategy

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

Additional detail required for PCS

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

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

Limited updates on other capabilities

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

Proposed consolidation and industry perspective

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

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

As further developments occur, Deloitte will issue additional updates.

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

Contacts

Marlo Karp
Partner | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Irena Gecas-McCarthy
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Chris Spoth
Managing Director | Deloitte Risk and Financial Advisory Executive Director, Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

David Wright
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

John Corston
Independent Senior Advisor to Deloitte & Touche LLP

Joe Fellerman
Independent Senior Advisor to Deloitte & Touche LLP

Richard Rosenthal
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Sean Hodgkinson
Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Stuart Shroff
Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Arpita Mukherjee
Senior Solution Advisor | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

1 Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Proposed guidance; request for comments” (July 29, 2018), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180629a.pdf

2 Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Agencies announce joint determinations for living wills” (December 19, 2017) available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171219a.htm

3 Deloitte Center for Regulatory Strategy, “FRB, FDIC issue feedback on 2017 US G-SIB resolution plans, find no deficiencies” (December 21, 2017) available at https://regpulseblog.com/2017/12/21/frb-fdic-issue-feedback-on-2017-us-g-sib-resolution-plans-find-no-deficiencies/

4 Board of Governors for the Federal Reserve System and Federal Deposit Insurance Corporation, “Guidance for 2017 §165(d) Annual Resolution Plan Submissions By Domestic Covered Companies that Submitted Resolution Plans in July 2015” (April 13, 2016), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a1.pdf.

5Board of Governors of the Federal Reserve System, Heightened Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies – Supplemental Guidance on Consolidated Supervision Framework for Large Financial Institutions (SR letter 12-17/CA letter 12-14) (January 24, 2014), available at https://www.federalreserve.gov/supervisionreg/srletters/SR1401.htm

6 Office of the Comptroller of Currency, “Mandatory Contractual Stay Requirements for Qualified Financial Contracts – Final Rule” (November 19, 2017), available at https://www.occ.treas.gov/news-issuances/bulletins/2017/bulletin-2017-57.html

7Securities & Exchange Commission, Rule 613 “Consolidated Audit Trail”, 12 CFR 242 (2012), available at https://www.sec.gov/rules/final/2012/34-67457.pdf.

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

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

About Deloitte

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Copyright © 2018 Deloitte Development LLC. All rights reserved.

The growing need for regulatory reporting change management processes

Historically, regulatory reporting requirements were relatively static with the changes incremental in nature. For the most part, reporting requirements were initiated by policymakers through written announcements, regulators websites, and notices in the Federal Register. The new reporting requirements typically had long lead times and the changes managed by corporate finance/ regulatory reporting functions. Because of implementation schedules and technology challenges, often the reporting solutions were siloed and tactical, involving manual processes.

Continue reading “The growing need for regulatory reporting change management processes”

CCAR: A mixed story of surprises and more work to do

The Federal Reserve (“Fed”) released the results of its Comprehensive Capital Analysis and Review (CCAR) for 2018 on June 28.  The results cover 35 bank holding companies (BHCs) and Intermediate Holding Companies (IHCs1) subject to the capital planning and stress test rule.  In addition to the stress test results, the conclusions on the adequacy of the capital planning process for the 18 systemic and complex firms subject to the qualitative portion of the review are also provided.2

Key Facts:

  • The Fed objected to one firm, Deutsche Bank USA, on qualitative grounds, and granted conditional non- objections for three firms, Goldman Sachs, Morgan Stanley and State Street.
  • A record number of firms, six, adjusted their dividend or stock buy-back requests to avoid objection, the so-called mulligan, exceeding the prior record of four firms making adjustments in 2015 (see below).
  • Capital planning internal controls in many instances continue to fall below the Federal Reserve’s supervisory expectations.

The prior week’s release of the Dodd-Frank Act Stress Test (DFAST) results provided more detailed information on the Fed’s stress test.  Compared to CCAR, those results exclude buybacks and capital issuances and hold past common dividends constant.  A link to our take on the DFAST results can be found here.

Continue reading “CCAR: A mixed story of surprises and more work to do”

CMS issues request for information on physician self-referral policy

On June 20, 2018, the Centers for Medicare and Medicaid Services (CMS) released a request for information (RFI) seeking public input on any undue regulatory impact or burden stemming from the physician self-referral law, commonly referred to as the Stark Law.

The RFI will be published in the June 25, 2018, Federal Register. Comments are due by August 24, 2018.

Notably, the RFI follows the inclusion of a proposal in the President’s 2019 budget proposal for a broad statutory exception to the physician self-referral law for financial arrangements under alternative payment models (APMs) and a series of industry roundtables on the self-referral law convened by the House Ways and Means Committee.

Continue reading “CMS issues request for information on physician self-referral policy”

The administration’s blueprint to lower drug prices and reduce consumer costs is likely to be a complicated game of Risk

This article originally ran in the Deloitte Center for Health Solution’s Health Care Current. Click here to subscribe.

Remember the game of Risk? My older brother and his friends used to play it for days—much to my annoyance because I didn’t understand it and wasn’t allowed to play with them. Multiple players sit around a board game making strategic moves that are part diplomacy and part conquest. The game is based on some fairly simple rules, but it incorporates a lot of complex interactions. Setting and negotiating drug prices has always reminded me of a complicated board game where multiple players make strategic moves to reach the end of the game—and patients, much like me as a little sister, do not understand and can’t play the game.

Continue reading “The administration’s blueprint to lower drug prices and reduce consumer costs is likely to be a complicated game of Risk”

2018 Dodd-Frank Act Stress Test (DFAST): Our take

The Federal Reserve (“Fed”) released the results of its Dodd-Frank Act Stress Tests (DFAST) that measure the potential impact of adverse or severely adverse economic conditions on the performance and condition of the 35 Bank Holding Companies (BHCs) and Intermediate Holding Companies (IHCs)1 subject to the rule.  These results will be followed on June 28, 2018 by the Fed’s conclusions regarding the adequacy of bank capital plans as evaluated through the Comprehensive Capital Analysis and Review (CCAR).

Key takeaways for the severely adverse scenario results include:

  • All firms exceeded minimum required capital under stress for the fourth year in a row.
  • This year’s test had a higher stress impact than previous years resulting in lower post-stress minimum capital levels, reversing an improving trend. The increase in stress was evidenced by:
    • Higher loss rates on loans (6.4% vs 5.8%)
    • Higher global market shock (GMS) losses (up 22%)2
    • Lower offsetting tax benefits in loss and recovery periods from the new tax law (32 basis points (bp) on risk-weighted assets (RWA) on average)
    • Declines in other comprehensive income (OCI) (30bp on RWA in aggregate)
  • These more stressful results were somewhat offset by lower growth in risk-weighted assets and higher pre-provision net revenue.
  • Impact from changes in law. In response to provisions in the recently passed regulatory relief legislation (S.2155, Economic Growth, Regulatory Reform, and Consumer Protection Act (“EGRRCPA”)), the Fed excluded the three firms below the $100 billion asset threshold3, and announced they would also exclude those firms from the CCAR results.
  • The supplementary leverage ratio was more constraining than last year. For most firms, post-stress supplemental leverage ratios were closer to minimum levels than last year and all firms exceeded the minimum ratio of 3.0 percent.

Continue reading “2018 Dodd-Frank Act Stress Test (DFAST): Our take”

Federal Reserve Board announces final rule to establish SCCL for US BHCs and FBOs – do you know your counterparty exposure?

On June 14, 2018, the Federal Reserve Board (FRB) unanimously voted to pass the final rule to establish single-counterparty credit limits (SCCL) for covered large US bank holding companies (BHCs) and foreign banking organizations (FBOs). The final rule, which aims to limit the amount of exposure that large banks can maintain with a single counterparty, is generally aligned with the proposed rule issued in March 2016. Also, the rule represents the first instance of the FRB applying the new enhanced prudential standard (EPS) thresholds to specific classes of institutions as prescribed in the recently passed regulatory relief legislation (S.2155, Economic Growth, Regulatory Reform, and Consumer Protection Act).1

Continue reading “Federal Reserve Board announces final rule to establish SCCL for US BHCs and FBOs – do you know your counterparty exposure?”