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.
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:
Derivatives entity analysis and reporting
Inter-affiliate risk and monitoring controls
Portfolio segmentation and forecasting
Prime brokerage account transfer
Derivatives stabilization and de-risking 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.
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.
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