Webinar on CASS Resolution Packs Now Available to Watch Online

If you have an interest in Cass Resolution Packs and missed the Webinar which took place on 21 June with Derivsource, a video of the presentation is now online and available here.

The presentation provides a brief background to CASS RP and summarises the law in this area before explaining in detail the practicalities and challenges of creating a CASS Resolution Pack.  Template Cass Resolution Packs in MS Word and MS Excel are both shown, together with an online demonstration of a bespoke CASS RP database (for information on this, please see our CASS RP website).

Ending “Too-Big-To-Fail”: FSB Progress Report to the G20

Last week, the leaders of the G20 met in Los Cabos, to discuss, among other things, the progress of financial regulatory reform, a key aim of which is to address the issue of financial institutions which are ‘too-big-to-fail.  The Financial Stability Board (“FSB”), tasked with overseeing this reform programme, published a report detailing progress in the implementation of the G20 recommendations.

The FSB report addressed three main areas:

  • Improving the capacity to resolve firms in crisis;
  • Improving the intensity and effectiveness of systemically important financial institution (“SIFI”) supervision; and
  • Extending the SIFI framework.

Improving the capacity to resolve firms in crisis

General

The FSB Key Attributes of Effective Resolution Regimes for Financial Institutions outlines the essential elements of any resolution regime, highlighting the following requirements:

  • the establishment of Crisis Management Groups (CMGs);
  • the elaboration of recovery and resolution plans (RRPs);
  • the conduct of resolvability assessments;
  • the adoption of institution-specific cross-border cooperation agreements (COAGs); and
  • the establishment of cooperation arrangements with jurisdictions that are hosts to systemic operations of a G-SIFI but are not represented on its CMG.

Crisis Management Groups and RRPs

The FSB reported that 24 out of 29 G-SIFIs have established CMGs, of which a few have discussed resolution strategies and ‘started to develop operational plans to implement them.’  However, the FSB concedes that, in many cases, the work of CMGs and the development of RRPs is restricted by the absence of ‘clearly articulated resolution strategies’, and has given priority to resolving this matter by the end of 2012.

Resolvability Assessments

The aim of a resolvability assessment is to highlight obstacles to resolution.  Again, there is an acknowledgement that the development of resolution strategies is a precondition of effective resolvability assessments.  The FSB concludes that such assessments should be conducted from Q1 2013, after the development of the necessary resolution strategies.

Institution-specific cooperation agreements

The FSB report states that no institution-specific cooperation agreements have been agreed to date.  This is due, in part, to the lack of developed resolution strategies and also due to the difficulties of sharing information across jurisdictions.  Therefore, the FSB will examine obstacles to the exchange of information with a view to developing minimum common terms and content for information sharing to be included within cooperation agreements by early 2013.

Cooperation with Non-CMG host jurisdictions

The FSB acknowledges that channels of communication need to exist between a CMG and host authorities that are not represented in the CMG, and proposes to develop further guidance on the matter.

Improving the intensity and effectiveness of SIFI supervision

More intense and effective supervision of SIFIs is posited as a key pillar of the FSB’s financial reform framework, and focuses on four key areas:

  • Holding supervisors to higher standards;
  • Improving supervisory tools and methods;
  • Enhancing the effectiveness of supervisory colleges; and
  • Improving firms’ risk data aggregation capabilities.

The consensus is that progress is being made in these areas, but that more work is needed. The development of uniform principles of banking supervision, (based on the BCBS’s Core Principles for Effective Banking Supervision) is underway, with a projected publication date of autumn 2012. Significantly, on the subject of improving supervisory tools and methods, the FSB concludes that ‘while resources at supervisory authorities have increased since the financial crisis, the pace of increase has not been commensurate with higher regulatory and supervisory demands.’ The report also highlights the relative lack of expertise across supervisory bodies, and the need to improve the risk measurement capabilities of supervisory colleges.  Finally, the FSB is compiling guidelines concerning firms’ risk aggregation capabilities, to be published by the end of the year, with firms being expected to begin implementation in 2016.

Extending the SIFI Framework

Domestic Systemically Important Banks (“D-SIBs”)

At the 2011 G20 summit, it was proposed that the G-SIFI framework, addressing the issue of ‘too-big-to-fail’, should be extended to cover D-SIBs. Whereas the G-SIB framework considers the global impact of banking failures, by realigning the framework, it is hoped that the externalities of bank failure at the local level can be identified and addressed. The Basel Committee on Banking Supervision (“BCBS”), in collaboration with the FSB, is in the process of developing a D-SIB framework which is compatible with that of the G-SIB, facilitates home-host coordination and improves D-SIB loss absorbency. The findings of the FSB and BCBS will be presented to the G20 Finance Ministers and Central Governors meeting in November 2012.

Global Systemically Important Insurers (“G-SIIs”)

The report further notes that the International Association of Insurance Supervisors (“IAIS”) was tasked with the ‘development of an assessment methodology for the identification of G-SIIs’ and has made significant progress to this end, publishing a paper on policy measures that should apply to G-SIIs.  A consolidated paper on the assessment methodology and the policy measures will be delivered to the G20 in April 2013, with an initial list of G-SIIs being produced soon thereafter. For more information on this aspect, please see the post on this blog entitled “Recovery and Resolution Plans for Globally Systemically Important Insurers by Mid-2014” dated 7 June 2012.

Non-bank G-SIFIs

In recognition of the fact that non-bank G-SIFIs can also cause widespread disruption to the global financial system, G20 leaders asked the FSB, with the International Organisation of Securities Commission (“IOSCO”) to design a methodology for identifying such institutions.  However, no date was given by which IOSCO is due to report.

RRPs for CCPs within the EU by the end of 2012

On 26 June 2012, the FSA published a speech on the issue of derivatives reform given by David Lawton, Acting Director of Markets, to the IDX International Derivatives Expo in London.

Mr Lawton noted that good progress had been made in reforming derivatives markets, but that issues were outstanding in four main areas:

  • rules for bilateral collateralisation of uncleared trades;
  • recovery and resolution plans for central counterparty clearing houses (CCPs);
  • promoting consistent cross-border application of requirements; and
  • ensuring the readiness of firms, both financial and non-financial, which are not currently clearing OTC derivative trades.

Mandatory clearing will increase the amount of risk concentrated in CCPs.  In turn, this brings into focus the importance of effective recovery and resolution planning for CCPs, which will be the subject legislation at an EU level before the end of 2012.  In addition, the Committee on Payment and Settlement Systems (CPSS) and International Organisation of Securities Commissions (IOSCO) are due to publish a consultation paper on this issue.  This is likely to be based on the FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”, which were published in October 2011.  The consultation paper will seek to identify whether and how each Key Attribute applies to a Financial Market Infrastructure (FMI) and what special guidance may be needed for FMIs, authorities and other parties.

The text of the speech is available here.

EU Banking Union Proposals by Autumn 2012

On 22 June 2012, the European Commission published an updated version of its memorandum on an EU banking union.

The memorandum states that the President of the European Council, Herman Van Rompuy, will present a report on the matter to the next European Council, scheduled to be held on 28-29 June.  Following this, proposals from the EU Commission to implement:

  • a more integrated and direct EU system for the supervision of cross-border banks;
  • a common deposit guarantee fund; and
  • a common resolution fund

could be forthcoming as early as the Autumn of 2012.

The EU Commission memorandum is available here.

G20 Leaders Declaration – Los Cabos 18-19 June 2012

On 20 June 2012, the G20 published its leaders’ declaration following the close of the Los Cabos summit.  The declaration was wide-ranging, but on the subject of economic stabilisation and the global recovery, the G20 affirmed its support for the ‘consideration of a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance’ within the EU.

More specifically, the G20 also provided guidance on the future timetable for financial sector reform:

  • reiterating its commitment to make national resolution regimes consistent with the FSB Key Attributes of Effective Resolution Regimes;
  • supporting the ongoing development of recovery and resolution plans and institution-specific cross-border cooperation agreements for all G-SIFIs;
  • reiterating its commitment to strengthen the intensity and effectiveness of the supervision of SIFIs and requesting the FSB to report on progress in this area in November 2012 at the G20 Finance Ministers and Central Bank Governors’ meeting;
  • welcoming progress on the development of a common framework for the identification of, and policy measures relating to, domestic systemically important banks (D-SIBs);
  • Requesting the FSB and the International Association of Insurance Supervisors (IAIS) to complete their work on identification and policy measures for global systemically important insurers by April 2013;
  • looking forward to the preparation by the FSB and the International Organization of Securities Commissions (IOSCO) of methodologies to identify other systemically important non-bank financial entities by end-2012;
  • calling on the Committee on Payment and Settlement Systems (CPSS) and IOSCO to continue their work on systemically important market infrastructures; and
  • requesting the IAIS to continue its work to develop a common framework for the supervision of internationally active insurance groups by end-2013.

The full declaration can be found here.

 

Support Increases for a Single EU Bank Supervisor

The political desire to form a supranational European “banking union,” to extend a lifeline to the floundering monetary union, has been demonstrated by EU leaders’ support for the appointment of a single EU bank supervisor.  It is likely that this proposal will be discussed as early as next week at the forthcoming EU summit and will be specifically referred to within the G20 communique published at the close of the G20 summit in Los Cabos, albeit in aspirational terms.

This new-found political impetus has been necessitated, in part, by negative market reaction to the recent €100bn bailout of Spanish banks. French President, François Hollande, supported by the governments of Italy, Spain and Austria, is calling for the use of the Eurozone rescue fund to ‘bail-out’ struggling banks, while simultaneously pushing for ECB oversight of cross-border banks.

Although German Chancellor, Angela Merkel, supports such pan-European supervision, her resistance to changes to the bail-out scheme remains.  Germany is reluctant take the lion’s share of the risk of underwriting €5tn of household deposits and continues to insist that rescue funds are directed via loans to Member State so that national governments remain accountable.  Concerns also remain as to whether the ECB would provide an adequate mechanism for supranational bank bail-outs.

Support Grows for a Central EU Bank Resolution Authority

EU Commission President, Jose Manuel Barroso has joined the growing call for all banks within the 27 Members States of the EU to be subject to a single cross-border supervisor, a single EU-wide deposit guarantee scheme and a single rescue fund.  According to Mr Barroso, legislation could be in place as soon as 2013.

The UK and Germany are seen to be rather more cautious.  The UK is supportive of the idea in principle, but sees the issue of central regulation as one which relates to banks within the single currency area only and not the entire EU.  However, it will be relieved to hear that Mr Barroso believes that the UK should be able to opt out of the plan if it so chooses.  For its part, Germany also largely supports European banking regulation but is wary of the risk that it will end up supporting banks in the weaker EU periphery countries, seeing the issue as being inextricably linked to the more fundamental issue of greater fiscal union.

An FT interview with Mr Barros is available here:

http://www.ft.com/cms/s/0/ccb2fda0-b3cd-11e1-8b03-00144feabdc0.html#axzz1xflk5QrY

(subscription required)

Webinar on CASS RP: 21 June 2012

With the 1 October 2012 deadline for CASS RP beginning to loom large, DRS, in association with Derivsource, is giving a free webinar on the law and practice relating to CASS RP on 21 June 2012 (10 am EST / 3pm BST).  We will be looking at such topics as:

  • Background to CASS RP (CP11/16 and PS12/1)
  • The challenges of creating a CASS RP
  • Maintaining a CASS RP
  • The links between CASS RP and RRP.

You can register for the event here:

https://deriv.webex.com/mw0306ld/mywebex/default.do?nomenu=true&siteurl=deriv&service=6&rnd=0.32208606094562064&main_url=https%3A%2F%2Fderiv.webex.com%2Fec0605ld%2Feventcenter%2Fevent%2FeventAction.do%3FtheAction%3Ddetail%26confViewID%3D660867327%26%26%26%26siteurl%3Dderiv

Recovery and Resolution Plans for Globally Systemically Important Insurers by Mid-2014

Introduction

On 31 May 2012 The International Association of Insurance Supervisors (the “IAIS”) published a consultation paper (endorsed by the FSB) concerning its proposed assessment methodology for the identification of globally systemically important insurers (“G-SIIs”), being any insurer “whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity”.

The Assessment Methodology

The assessment methodology is based broadly on that used to identify globally systemically important banks (“G-SIBs”) but tailored to the insurance industry.  In developing the methodology, the IAIS took account of the apparent absence of evidence to suggest that traditional insurance business either generates or amplifies systemic risk.  Accordingly, in determining whether an insurer is a G-SII, more emphasis is placed on those insurers who participate in non-traditional and non-insurance activities, such as derivatives.

The proposed assessment methodology involves three steps:

  • Collection of data;
  • Methodical assessment; and
  • Supervisory judgment and validation.

Collection of data

To ensure the quality and relevance of underlying data, the IAIS based is assessment on data requested from 48 of the largest insurance groups active across 13 jurisdictions as of year-end 2010.

Methodical Assessment

The IAIS proposes to measure ‘systemic importance’ in terms of the impact that distress or failure of an insurer might have on the global financial system and the wider economy rather than in terms of the probability of a failure of the insurer in question.  An indicator-based approach based on the five categories listed below is proposed.  This will provide a first indication of the relative importance of each insurer under consideration.  Within each category are a number of indicators the purpose of which is to capture the degree and nature of each insurer’s systemic importance.

Category

Indicator 

Size

Total assets

Total revenues

Global Activity 

Revenues derived outside of home country

Number of countries

Interconnectedness 

Intra-financial assets

Intra-financial liabilities

Reinsurance

Derivatives

Large exposures

Turnover

Level 3 Assets (i.e. assets the fair value of which cannot be   determined by using observable measures)

Non-traditional   and Non-insurance Activities 

Non-policy holder liabilities   and non-insurance revenues

Derivatives trading (notional CDS protection sold)

Short-term funding

Financial guarantees

Variable annuities

Intra-group commitments

Substitutability

Premiums for specific business lines

In addition, it seems likely that the final methodology will incorporate additional factors, such as:

  • The amount (in economic terms) of derivatives trading without hedging purposes; and
  • The liquidity of insurance liabilities.

Relevant Importance of each Category

The two most important categories for assessing the systemic importance of insurers are:

  • Non-traditional insurance and non-insurance activities – because the longer timeframe over which insurance liabilities can normally be managed (which is considered to be a mitigating factor in assessing systemic risk) may not be present; and
  • Interconnectedness – because of the strong connections between the insurance and banking sectors.

Calculating Systemic Importance

The Assessment Methodology will be used to calculate a systemic importance ranking of all of the 48 insurance companies under consideration.  The overall score for a particular insurer is calculated as the sum of all of the weighted category scores for that insurer.  In turn, each category score is calculated as the amount that the insurer in question represents with respect to that category as a proportion of the entire sample for the category in question, after weightings are applied.  Within a category, all indicators are given an equal weighting.  As a result, category weightings are very important to the calculation.  The weightings assigned to each category are:

Category

Weighting

Non-traditional insurance and non-insurance activities

40%-50%

Interconnectedness

30%-40%

Size

5%-10%

Global Activity

5%-10%

Substitutability

5%-10%

At this point a number of methodologies will be employed in order to determine the cut-off point between G-SIIs and non-G-SIIs, one being a comparison of publicly available data which is common to all of the insurers under consideration as well as G-SIBs.

Supervisory Judgment and Validation

The Supervisory judgment and validation stage introduces both a qualitative as well as an quantitative assessment, in recognition of the fact that no single methodology can perfectly measure systemic importance across all global financial institutions.  Additional analysis will be conducted in order to validate the results of the indicator-based approach conducted under the “Methodical Assessment” section.  This analysis (the “IFS Assessment”) divides the business portfolio of an insurer into:

  • Traditional insurance;
  • Semi-traditional insurance;
  • Non-traditional insurance;
  • Non-insurance financial; and
  • Industrial activities.

Again, risk weightings are used to calculate systemic importance, the highest ratings being allocated to the “Non-insurance financial” and “Non-traditional insurance” categories.  The findings are then compared to the results from the indicator-based approach to provide a check on their reasonableness and to assist informed discussions with relevant group-wide supervisors.  Based on these assessments and discussions, the IAIS will determine if additional analysis is required, or whether an insurer should be added to the list of G-SII candidates.  Once a candidate list is finalised, the IAIS will make recommendations as to which insurers should be regarded as G-SIIs to the FSB, who will ultimately make the decision.

Policy Measures for G-SIIs

The IAIS will develop policy measures to be applied to G-SIIs, which will be the subject of a separate consultation exercise later on this year.  The measures are likely to include:

  • More intensive and co-ordinated supervision of SIFIs;
  • A requirement to develop Recovery and Resolution Plans on the basis set out in the FSB’s “Key Attributes for Effective Resolution Regimes”; and
  • Higher loss absorbency for SIFIs to reflect the greater risks that these institutions pose to the global financial system.

Timeline

An initial list of G-SIIs is expected from the FSB in the first half of 2013 and a revised list of G-SIIs is to be published in November every year.  The IAIS expects that the G-SII measures would be applied with an 18 month time lag compared to those for G-SIBs due to the different overall timetable concerning the G-SIFI insurance project.  This would mean that Recovery and Resolution Plans would be expected to be in place by mid-2014 for G-SIIs compared with the end of 2012 for G-SIBs.

The IAIS consultation paper is open for comment until 31 July 2012.  The consultation paper, press release and FAQ document are all available here:

http://www.iaisweb.org/Consultations-918

 

EU Commission to Publish Proposals for Bank Recovery and Resolution Today

Today, the EU Commission will publish its proposals for Bank Recovery and Resolution.  According to the FT, this initiative which will be presented as an “embryonic version of the much vaunted banking union”, ultimately involving the possible creation of a single EU supervisor, deposit guarantee scheme and resolution authority.

The article can be viewed here:

http://www.ft.com/cms/s/0/50028acc-af28-11e1-a8a7-00144feabdc0.html

(subscription required).