FSB to Commence Peer Reviews on RRP Implementation in July 2012

On 30 May 2012, the Financial Stability Board published a press release following its meeting in Hong Kong on 29-30 May 2012, the purpose of which was to discuss vulnerabilities currently affecting the global financial system and the progress in authorities’ ongoing work to strengthen global financial regulation.

Amongst the topics discussed were measures designed to further develop the regulatory regime for systemically important financial institutions (“SIFIs”), specifically:

  • extending the framework to domestic systemically important banks, and
  • establishing a process to ensure consistent implementation of policy measures for global SIFIs, particularly with respect to resolvability.

The FSB recognised the need to establish international guidance on common terms for information sharing and the handling of client assets on resolution.  Additionally, it confirmed that, from July, it will commence the first in an iterative series of peer reviews on the implementation of the recommendations documented in its “Key Attributes of Effective Resolution Regimes for Financial Institutions” guidance.

The press release is available here:


The FSB’s “Key Attributes” guidance is available here:


EU Commission to Propose New Framework for Bank Recovery and Resolution on 6 June 2012

On 25 May 2012, the EU Commission released an agenda document detailing its proposal for bank recovery and resolution, to be published on 6 June 2012.  The key elements of the proposal are:

  • The proposal will be based on prevention and reducing the risk of bank failure, a key aspect of which will be the power to intervene at an early stage before problems within a bank become critical;
  • National authorities and the European Banking Authority will have appropriate tools to ensure coordination of procedures, particularly with respect to cross-border banking groups;
  • The framework will provide for credible resolution tools, including “bail-in” measures; and
  • Sufficient funds should be available to finance resolution, but this should focus on ensuring the continuity of critical functions and not bailing-out failing institutions.

The agenda document is available here.

EU Retreats from Minimum Bail-In Debt Requirement

Below is a link to an interesting article which appeared in the Financial Times last week.  The suggestion is that the latest version of the EU Directive on establishing a framework for the recovery and resolution of credit institutions and investment firms (the “RRP Directive”) will not set a minimum level of “bail-in” debt to be maintained by all banks within the EU.  Rather, national authorities will have discretion to set requirements in this area.  If this is the case the EU seems to have pre-empted the results of the consultation exercise contained within its own recent “Discussion paper on the debt write-down tool – bail-in”.  The discussion paper invited comment on this very issue, detailed within the discussion paper as simply one possible option with respect to bail-in, noting the risk that such a system, if not correctly implemented, has the capacity to undermine the effectiveness of the RRP framework and create an uneven playing field within the Internal Market.  In addition, this development would represent a departure from earlier drafts of the RRP Directive which suggested that institutions would be required to maintain a level of bail-in debt equal to at least 10% of the total liabilities of the institution that did not qualify as own funds.

Beyond this, it seems as though the “bail-in” regime will not come into force until 2018.  Again, this is in contrast to the EU discussion paper on bail-in which concluded the EU banking system would not be prejudiced if this regime were introduced as early as 2015.

The article can be found here:


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CASS Resolution Packs: The 1 October 2012 Deadline Looms


Any UK firm which is subject to CASS 6 (custody rules) and/or CASS 7 (client money rules) is obliged to have a CASS Resolution Pack in place by 1 October 2012.

CASS Resolution Packs form part of the FSA’s wider review of the client assets regime in the UK and represent the point where the client money rules meet resolution planning.  The rules require a firm to collate certain information regarding its handling of client money and safe custody assets that would be of use to an insolvency practitioner in the event of the firm’s failure.  The purpose of the rules is to facilitate the return of client money and safe custody assets to clients more quickly than is currently the case.

Creating a CASS Resolution Pack

In theory, a CASS Resolution Pack should be relatively straightforward to produce.  Broadly speaking, the exercise breaks down fairly neatly into four main areas:

  • analysis of the institutions with which client money or safe custody assets have been placed by the firm;
  • analysis of the documentation in place with the firm’s clients;
  • identification of the employees of the firm who are critical or important to the performance of the firm’s CASS obligations; and
  • third parties and systems on which the firm is reliant for performance of its CASS obligations.

Practical Issues to Bear in Mind

Although the theory behind CASS Resolution Packs is easy to understand, the reality of CASS Resolution Pack creation is sometimes rather different.  Some firms are currently unaware of the location of all of the documentation required as part of a CASS Resolution Pack – a necessary first step in preparing the pack itself.  In addition, the CASS Resolution Pack rules require firms to have arrangements in place to ensure that electronic systems which are important to CASS compliance remain operational and accessible following the firm’s failure.  As such, all such contracts will require review and it may be necessary to approach the vendors of any such systems with a view to renegotiation of contractual terms – a process which often proves protracted.

Questions also remain as to the form the CASS Resolution Pack should take.  PS12/6, the FSA’s Policy Statement on CASS Resolution Packs, is silent on this issue.  CASS Resolution Packs in both Word and Excel formats exist, and databases designed specifically for the task of creating a CASS Resolution Pack are being developed.  All formats have their pros and cons.  The key factors to consider in choosing the form of a CASS Resolution Pack are:

  • size of the firm – the larger the CASS operation of the firm the more robust the CASS Resolution Pack needs to be due to the sheer volume of documentation which must be assimilated into the pack itself and the requirement for collaborative input from multiple users in order to bring the pack together;
  • ease of maintenance – any change of circumstances which renders the content of a document forming part of the CASS Resolution Pack inaccurate must be corrected within 5 Business Days.  In reality, CASS Resolution Packs for Large CASS firms are likely to be in a constant state of updating and any solution chosen by such firms must be robust enough to accommodate this;
  • flexibility – it seems likely that the rules on CASS Resolution Packs will have to be amended in the future to accommodate any changes resulting from the FSA’s general review of the UK CASS regime.

Cass Resolution Packs in Word are relatively quick and cheap to create.  However, they are not well suited to collaborative working in terms of data input and suffer from issues associated with maintaining data integrity.  I wouldn’t recommend using Word for any but the smallest firms.  Excel is definitely a step forward as data can more readily be filtered and analysed.  Again, however, the problems associated with sharing of Excel workbooks is well known and data validation is difficult to maintain over time and between multiple users.  Bespoke databases do not suffer from these problems but clearly entail greater expense and a longer lead time to develop.  However, on balance, I believe that they are the most appropriate solution, at least for CASS Large firms.

The FSA has made clear in its 2012-13 Business Plan that the protection of client assets sits right at the top of its agenda and it will be increasing scrutiny of firms in this area, particularly those that are systemically important.  Following the MF Global fiasco, one can only assume that regulatory oversight in this area will increase yet further.  As such, there is clear value for firms in getting CASS Resolution Pack planning right.  With just over four months left until the rules come into force, there is still enough time to complete the process, but please don’t expect this to be something that can just be cobbled together at the last minute.

The FSA’s policy statement on CASS Resolution Packs can be downloaded via this link:



BoE, FSA and FDIC Plan “Top Down” Bail-In of Seven G-SIFIs

Below is a link to an FT article published this morning which discusses the progress being made by authorities in the UK and the US on the drafting of resolution plans for seven of the twenty-nine G-SIFIs, including Goldman Sachs, JP Morgan and Barclays.

Of more interest is the fact that the UK and US still seem to be blazing the trail with respect to finalising resolution plans with “the sceptics in Europe and Asia” bringing up the rear.


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European Banking Authority Publishes Discussion Paper on Template for Recovery Plans

On 15 May 2012 the EBA published a discussion paper regarding recovery plans.  This purpose of the discussion paper is to present some preliminary ideas on what the key elements of a recovery plan should be and to advance a possible template for recovery plans, taking into account the “Key Attributes of Effective Resolution Regimes for Financial Institutions” already published by the Financial Stability Board (FSB).

The implementation of specific recovery and resolution planning requirements within the EU remains the responsibility of Member States.  Accordingly, the ‘template’ within the EBA discussion paper does not take the form of a draft document, but rather serves as a basis from which an EU view on the essential elements of a recovery plan can be developed.  Fortunately for deposit taking institutions within the UK, the EBA’s proposals remain consistent with the detailed data requirements of the FSA which form the central plank of CP11/16 (and more recently FS12/1).

The discussion paper is open for comments until 15 June 2012 and can be found here:



FSA Publishes Feedback Statement FS12/1 on Recovery and Resolution Plans


On 10 May 2012, the FSA published Feedback Statement FS12/1 on Recovery and Resolution Plans.  The main purpose of FS12/1 is to provide an update to the market on the current state of the RRP process.

Proposed Date of Final RRP Rules

A Policy Statement with final RRP rules will be published by the FSA no later than autumn 2012.  The final rules are expected to be based on the contents of FS12/1, so firms should pay particular attention to the “RRP Information Pack” which supplements FS12/1 and sets out detailed informational requirements on RRP.  Publication has been delayed so as to allow the final rules to be aligned with other regulatory initiatives, including the:

  • EU Recovery and Resolution Directive;
  • EU Commission Technical Discussion Paper on ‘bail-in’;
  • FSB’s final rules on the Key Attributes of Effective Resolution Regimes; and
  • legislation that will follow the ICB white paper and consultation paper to be published during the summer of 2012.

In the meantime, the FSA will also consult as to whether the final RRP rules should apply to a wider set of firms – specifically UK branches of non-EEA firms.

Proposed changes to RRP Rules

The FSA makes reference to a number of changes between the requirements of the “RRP Information Pack” which supplements FS12/1 and the “RRP Guidance Pack for Firms” which constituted part of CP11/16, including: 

  • the merger of recovery plans and Contingency Funding Plans so as to reduce unnecessary duplication;
  • the provision of additional information by firms to the FSA on issued debt so as to assist in the development of ‘bail-in’ strategies;
  • revisions to the ‘Interbank Exposures’ and ‘Derivatives and Securities Financing’ templates which form part of the data collection requirements of the RRP rules;
  • additional information concerning the triggers for resolution and the actions that are required when resolution triggers are met; and
  • the identification of new economic functions for the purposes of RRP Modules 4 and 5.

Deadline for Submission of RRPs

The deadlines for submission of RRPs are as follows:

Type of Firm

Informational Requirement


UK headquartered G-SIFIs that have been part of the FSA’s pilot exercise

Module 1-6

30 June 2012

Non-UK headquartered G-SIFIs

Module 1-4

30 June 2012

Non-UK headquartered G-SIFIs

Module 5-6

End of 2012

Small and medium sized firms

No uniform requirement

Supervisors will discuss deadlines with individual firms

Firms which have not yet been contacted with respect to their particular RRP submission deadline date should expect to hear from the FSA during the second half of 2012.  The FSA will normally aim to give three months’ notice of the requirement to submit an RRP.

Progress Report on Resolution Planning

On 3 May 2012, Paul Tucker, Deputy Governor of the Bank of England and Chair of the FSB’s Resolution Steering Group gave a progress report on Resolution Planning at the Institute for Law and Finance Conference in Frankfurt.  Mr Tucker discussed a number of issues which will be of interest to those involved in recovery and resolution planning.

The appropriate trigger for resolution

Mr Tucker stated that a firm should go into resolution “when its time is up”, which he described as being the point at which its recovery strategies have been exhausted and it has been unable to reverse its decline.  Specifically, this should occur when the bank no longer meets the criteria for being authorised and when there is no reasonable prospect of it doing so again.

 Resolving Systemically Important Financial Institutions

Mr Tucker noted that the traditional approach to resolution, involving the separation of good assets from bad assets, faces a number of problems with respect to SIFIs doing business in multiple markets and jurisdictions.  As such, resolution authorities are exploring how to execute ‘top-down’ resolutions of complex groups, employing bail-in of debt issued by the holding company or top-level operating company.

The resolution of deposit-funded international commercial banking groups

Bail-in does not work particularly well in the case of commercial banks that are funded entirely or largely from insured deposits rather than debt issuances due to the absence of bond-holders to bail in.  In addition, the usual approach of separating good assets from bad may not be suitable for complex cross-border commercial banking groups and may result in the excess destruction of value, particularly to a deposit insurer.  One possible solution proposed by Mr Tucker was to bail in the deposit insurer.  In doing so, the deposit insurer would know ex-ante how much it stood to lose, rather than having to wait until the end of an insolvency process.  This particular suggestion is also advocated within the recent EU Commission discussion paper on Bail-in, and would seem to be a sensible proposal.

Creditor Waterfalls

Thankfully, Mr Tucker gave his support to the proposition that, whatever the resolution tool employed, creditors should be affected in the same was as in a standard insolvency situation.  It may be that he is not a fan of the “sequential bail-in model” described in the EU Commission’s discussion paper.  Under this option, “long-term” liabilities are subject to bail-in before “short-term liabilities”, the dividing line being drawn with respect to instruments which have an original maturity of one year.  It would seem that this option does little more than layer additional complexity and scope for arbitrage on a situation which is already likely to be prove incredibly difficult to administer in ways that nobody can quite yet imagine.  Simplicity is definitely the order of the day here.

The full text of the speech can be found here:



European Update on RRP

On 4 May 2012, the EU Commission published an updated document setting out its regulatory agenda and timetable for the period between 30 April 2012 and 31 December 2012.

The document confirms that June 2012 is the anticipated month for both the legislative initiative on a framework for bank recovery and resolution, and for the publication of a consultation document on possible initiatives to strengthen recovery and resolution arrangements applicable to financial institutions other than banks and large investment firms e.g. hedge funds.

The document can be found here: http://ec.europa.eu/atwork/programmes/

Mervyn King: Taking Away the Punchbowl

Last night Sir Mervyn King gave the 2012 BBC Today Programme Lecture on current issues facing the global economy.  The speech gave an interesting insight into the relative importance of RRP with respect to the Bank’s future plans.

Sir Mervyn detailed the priorities for the Bank of England in making the banking system safer, dubbed the “three R’s”:

  • Regulation: forcing banks to be better capitalised
  • Resolution: making sure that badly run banks can fail safely
  • Restructuring: implementing the findings of the ICB

Unfortunately, there was bad news for anyone hoping that banking would become an easier environment in which to operate in future.  Next year, responsibility for regulating banks in the UK returns to the Bank of England and Sir Mervyn sees an important aspect of the Bank’s job as being “to take away the punchbowl just as the next party is getting going”.  Moreover, he fully accepts that his pre-emptive strikes on the punchbowl will affect the man on the street as well as bankers.  Does that make him a partypooper?  Probably not.  More like a parent with a genuine right to be concerned.  Let’s just hope that, in requiring us all to be abstemious, the Bank recognises that everyone stands to benefit from a good party.

Read the full speech at: