Can the FSA’s RRP Guidance Survive the Test of Time?

As previously reported on this blog, on 20 February 2013 the FSA published an update to its Recovery and Resolution Planning guidance.  It was announced that, in the future, firms will not have to update their resolution information pack (RRP Modules 3-6) on an annual basis as a matter of process.  Instead, they will only be required to respond to requests for resolution planning information from their supervisors.

It seems difficult to reconcile the FSA’s new position with other RRP guidance.  The FSB’s “Key Attributes” document states clearly[1] that “supervisory and resolution authorities should ensure that RRPs are updated…at least annually or when there are material changes to a firm’s business or structure”, a requirement which is echoed in the draft Recovery and Resolution Directive[2] (RRD).  More generally, given the enormous amount of data processing effort that goes into updating a resolution plan in practice, it is difficult to see how any firm which does not follow processes designed to facilitate the periodic updating of a resolution plan could ever be taken to be in compliance with the “Key Attributes” requirements that it must be able to demonstrate an ability to produce the essential information needed to implement a resolution plan within 24 hours[3] or be capable of delivering sufficiently detailed, accurate and timely information to support an effective resolution[4].

Firms would also be forgiven for being confused as to how best to react to this guidance in light of other regulatory developments which offer incentives for those who are prepared to constantly seek to optimise their resolvability, including:

  • the additional loss-absorbency requirements of Basel III for Global Systemically Important Banks;
  • the Liikanen proposal that structural separation above and beyond that relating to ‘significant’ trading activities should be dependent on the robustness of RRPs; and
  • the Vicker’s recommendation that an additional levy of up to 3% of equity capital be required of a UK banking group that is judged “insufficiently resolvable to remove all risk to the public finances”.

Enhancing resolvability demands a proactive, rather than a reactive, approach to RRP legislation.  By its nature, the assimilation of resolution information is not a process that can be easily mothballed and simply dusted-down as and when required, particularly for firms operating in multiple jurisdictions.  Rather, if it is to mean anything, optimising resolvability requires huge commitment and continued cooperation on the part of both firms and authorities.  In light of the drafting of the “Key Attributes” document and particularly the RRD, it is at least questionable whether the new FSA guidance will survive the test of time.  The message to firms must surely be to note the FSA’s new guidance with interest but to continue on a ‘business as normal’ footing with their RRP preparations.

[1] “Key Attributes”, paragraph 11.10

[2] Article 9(3)

[3] “Key Attributes”, paragraph 12.2(iii)

[4] “Key Attributes”, Annex II, paragraph 4.14

Resolution Planning: Identifying “non-standard terms” in Derivative Documentation


Feedback Statement 12/1 (“FS 12/1”), published by the FSA in May 2012, provides detailed guidance to firms which are subject to the UK’s recovery and resolution planning rules.  In general, FS 12/1 is a superb roadmap document, assisting firms through the detailed data requirements which form the core of recovery and resolution planning.  Unfortunately, there remain a number of areas of FS 12/1 in which clarity is lacking.  One such area appears in the context of Module 3.7 (“Derivatives / Securities Financing”), which forms part of the ‘Group structure & key legal entity information’ section.

Module 3.7

Module 3.7 requires firms to provide information with respect to their derivatives exposures.  Exposures are to be split into three broad categories, being:

  • Exchange traded derivatives;
  • OTC but centrally cleared derivatives; and
  • OTC bilateral derivatives.

Within each category, detailed reporting is required in four main areas:

  • Counterparty details;
  • Exposure data;
  • Collateral data; and
  • Documentation.

Within the “Documentation” section, firms must provide, inter alia, information regarding “non-standard terms”.  Rather unhelpfully, the summary provided by the FSA to explain the background to the data requirement states simply that its purpose is to “determine requirements regarding trade termination etc”.  However, on the plus side, two examples of a “non-standard term” are provided, being:

  • Events of default, and
  • Cross-default clauses.

No other information is provided to assist firms with their submissions.  Additional FSA guidance was expected on 13 August 2012, but this seems unlikely to address this particular issue.  Consequently, many firms, particularly those with large portfolios of derivative documentation, have been left struggling to understand where to draw the line.

Unfortunately, there is no single correct answer to this question.  Nonetheless, it would seem possible to identify two general principles which will assist with the identification of “non-standard terms” in derivative documentation.  I would suggest that these principles are that:

  • an objective, rather than a subjective, measure of what is “non-standard” is appropriate; and
  • clauses should only be regarded as “non-standard” to the extent that they could:
    • have an adverse effect on the application of a resolution tool; or
    • constitute a barrier to resolution.

An objective measure of what is “non-standard”

ISDA negotiation practices have converged significantly over recent years on a number of issues with the result that it is possible to discern a number of ‘industry standard’ positions.  As such, the ISDA negotiation policy of a firm will often represent a good starting place to assist in understanding what can be regarded as ‘standard’.  Clauses in executed documentation which lie outside of an agreed negotiation policy should raise internal flags and merit further investigation.  Inevitably, however, this exercise is of limited assistance as it represents a firm’s subjective view of its own risk tolerance.  Despite the fact that recovery and resolution planning remains a very firm-specific exercise, if assessments of resolvability and the contents of resolution plans are to be meaningful and consistent across EU Member States, a truly objective benchmark is required.  An assessment of the effect of a contractual clause on the ultimate resolvability of a firm creates this objective standard.

“Non-standard” clauses must affect resolvability

The power to transfer, modify or cancel contractual arrangements entered into by a firm under resolution form the essence of the Resolution Powers conferred on resolution authorities pursuant to the draft RRP Directive.  Accordingly, in assessing whether a contractual provision could have an adverse effect on the resolvability of a firm or the application of a resolution tool, one should be primarily concerned with the ability of a resolution authority to transfer or terminate a derivatives transaction so as to help facilitate an orderly wind-down of the firm in question.

Towards defining a set of “non-standard” terms

With this in mind, it is possible to group contractual provisions into three main categories:

  • Probable Non-Standard Terms;
  • Possible Non-Standard Terms; and
  • Unlikely to be Non-Standard Terms.

The Schedule below applies the principals set out above to a number of clauses of the type typically found in derivatives documentation in order to generate the groupings referred to above.  However, it is important to recognise that, whilst an assessment of the effect of a contractual provision on the resolvability of a firm helps to create an objective benchmark regarding what is “standard”, the exact positioning of this benchmark will inevitably change over time.  What could be regarded as a “standard” provision, say, 5 years ago may well not be standard today.  Similarly, what is standard today may not be standard in another 5 years time.  As such, this aspect of recovery and resolution planning must be kept under periodic review.


 Group 1: Probable Non-Standard Terms



Events of Default

Specifically referred to in FS 12/1

Cross-default / Cross-acceleration

Specifically referred to in FS 12/1

Termination Rights Generally

Termination rights should be regarded in the same light as Events of Default 

Ratings Downgrade Clause

Often takes the form of an Event of Default / Additional Termination Event

Material Adverse Change Clause

Often takes the form of an Event of Default / Additional Termination Event

Credit Event Upon Merger linked to specific ratings or other factors

CEUM is a Termination Event under a standard ISDA Master Agreement

Unusual Governing Law


Effective application of resolution tools may be more difficult/impossible in certain jurisdictions which do not recognise the powers of resolution authorities


Group 2: Possible Non-Standard Terms



Undisclosed Agency Arrangements

May make application of the resolution tools more difficult as the identity of the counterparty may be difficult to ascertain



Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution if indemnities are enforced

Illiquid CSA Collateral


Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution in terms of transferring or terminating transactions

ISDA First Method

Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution if a counterparty has a right to ‘walk away’ without making payment

Ratings Dependent CSA Credit Support Amounts

Should not of itself prevent exercise of a resolution tool but may still constitute a barrier to resolution if additional collateral must be posted

Unusually wide definition of “Specified Entities”

Widens the application of ISDA Events of Default and/or Termination Events


Group 3: Unlikely to be Non-Standard Terms



Automatic Early Termination

AET is primarily designed to protect against ‘cherry picking’.  However, in certain circumstances the automatic termination of trades could constitute a barrier to resolution.  Nonetheless, it is placed in Group 3 due to the fact that, under normal circumstances, resolution tools would have been implemented before insolvency (and therefore AET) occurs

Non-daily CSA calls


Should not be effective to prevent the exercise of the resolution tools

Non-zero/large CSA Thresholds/MTAs

Should not be effective to prevent the exercise of the resolution tools

Unusually large/small collateral haircuts

Should not be effective to prevent the exercise of the resolution tools

Non-assignment Provisions

Should not be effective to prevent the exercise of the resolution tools


Seminar on Preparing a Recovery and Resolution Plan

On 13 July 2012, DRS, together with SNR Denton, will be presenting a half-day workshop on the law and practice relating to Living Wills at the British Bankers’ Association headquarters in London.  The latest regulatory guidance on RRP will be discussed, including:

  • The FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” Discussion Paper;
  • The FSA’s Feedback Statement 12/1;
  • The EBA Discussion Paper on a Template for Recovery Plans; and
  • The draft EU Directive Establishing a Framework for the Recovery and Resolution of Credit Institutions.

Specifically, we will be suggesting a template for a recovery plan and discussing some of the practical issues currently facing market participants in completing their RRP submissions as well as some possible solutions.

More information about the event and an online registration form are available here.

Please join us if you can.  If you aren’t able to attend on the day but are nonetheless interested in the subject, just let me know and we’d be happy to make alternative arrangements.  My contact details are on the “About” page of this blog.

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.