On 12 August 2013, the Financial Stability Board published a consultation document regarding the “Application of the Key Attributes of Effective Resolution Regimes to Non-Bank Financial Institutions”, inviting comments by 15 October 2013.
The consultation document proposes draft guidance on how the Key Attributes should be implemented with respect to systemically important non-bank financial institutions. It deals with three main areas:
- The resolution of financial market infrastructure (FMI) and systemically important FMI participants;
- Resolution of insurers; and
- Client asset protection in resolution.
The proposed rules are, to a large extent, little more than the formalisation of existing thought and best practice regarding the resolution of non-bank financial institutions. However, this does not detract from the value of the document. Indeed, it highlights the practical challenge that institutions which are subject to the rules will face in providing the data necessary to facilitate the implementation of resolution measures by regulators.
Both FMIs and insurers will be required to maintain information systems and controls that can promptly produce, both in normal times and during resolution, all data needed for the purposes of timely resolution planning and resolution. In the case of FMIs, this will include:
- Information on direct and indirect stakeholders, such as owners, settlement agents, liquidity providers, linked FMIs and custodians;
- Exposures to each FMI participant (both gross and net);
- Information on the current status of obligations of FMI participants (e.g. whether they have fulfilled their obligations to make default fund contributions);
- FMI participant collateral information, such as:
- holding arrangements; and
- rehypothecation rights; and
- netting arrangements.
Insurers will also be required to generate data regarding:
- sources of funding;
- asset quality and concentration levels; and
- derivatives portfolios.
In addition, any entity holding client money, must have the ability to generate a wide variety of data that would facilitate its speedy return in a resolution scenario. That data must be in a format understandable by an external party such as a resolution authority or an administrator and includes information on:
- the amount, nature and ownership status of client assets held by the firm (directly or indirectly);
- the identity of clients;
- the location of client assets;
- the identity of all relevant depositories;
- the terms and conditions on which client assets are held;
- the applicable type of segregation (e.g. “omnibus” or “individual”);
- the effects of the segregation on client ownership rights;
- applicable client asset protections (particularly where client assets are held in a foreign jurisdictions);
- any waiver, modification or opting out by a client of the client asset protection regime;
- the ownership rights of clients and any potential limitations to those rights;
- the existence and exercise of rehypothecation rights; and
- outstanding loans of client securities arranged by the firm as agent, including details of:
- contract terms; and
- collateral received.
If the experience of banks is anything to go by, the capture, analysis, delivery and updating of this type of data is a significant undertaking. The FSB is clearly laying out its intentions and the direction of travel on this issue. As such, non-bank financial institutions would do well to start analysing their capabilities in these areas, with a view to upgrading their data architectures where necessary.