FRB and FDIC Raise the Bar in RRP

On 15 April 2013, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) issued a press release providing revised guidance for large US banks and foreign banks with USD 250 billion or more in total nonbank assets in completing their 2013 resolution plan submissions and granting an extension to the filing date for 2013 resolution plans from 1 July 2013 to 1 October 2013.

The revised guidance details the format of submissions and requires firms to provide more detailed information on a wide range of issues pertaining to resolution; including obstacles to resolvability, interconnectedness, funding and liquidity.  In particular, there appears to be an increasing focus on derivatives trading risks, with banks being required to provide information on:

  • processes for obtaining waivers of contractual termination rights from counterparties, particularly with respect to the impact of cross-default clauses;
  • strategies to mitigate the impact of contractual triggers associated with parent company guarantees, cross-default clauses and ratings downgrades or withdrawals;
  • the management of the collateral processes in resolution, particularly with respect to the ability to quickly identify:
    • legal rights to collateral pledged to, pledged by, or held in custody by, the bank; and
    • the amount, level and type of collateral held by jurisdiction and the impact of rehypothecation rights (both on counterparty collateral held by the bank and collateral pledged to counterparties); and
    • quantification of the additional liquidity requirement (both actual and contingent) associated with contractual obligations such as guarantees.

Fortunately, the extraction of key legal and commercial data from derivatives documentation is a process which many banks have already begun to address for internal risk management purposes.  In addition, the revised US requirements largely mirror the UK RRP requirements as documented in FS12/1 and so are not completely without precedent.  Nonetheless, the FRB/FDIC revisions highlight the importance of unlocking the risks inherent in large portfolios of derivative documentation, presenting that information in a manner that can be readily accessed across an entire bank and by a regulator, and establishing robust procedures for the continuing capture of legal and commercial reference data from legal documentation.

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