Single Point of Entry or Multiple Point of Entry: the Choice is Yours?

Here is a link to an article in today’s FT explaining that, following the FSB guidance issued on 16 July 2013 (see this blog post for more detail), banks seem likely to be given more ‘choice’ between single point of entry and multiple point of entry.  This seems to represent a subtle shift away from the previous consensus that had been developing within regulatory circles regarding the benefits of single point of entry over multiple point of entry.  However, the quid pro quo is that banks will have to implement potentially wide-ranging changes in order to make their business models more consistent with their chosen resolution mechanism.

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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.

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 Plans for all G-SIBs by End of June 2013

On 16 February 2013, the finance ministers and central bank governors of the G20 published a communique following the closure of their meeting in Moscow on 15 and 16 February 2013.  Amongst other things, the G20 confirmed that operational resolution plans for all global systemically important banks (G-SIBs) should be developed by the end of June 2013 and resolved to address all impediments to effective home-host cooperation of resolution authorities for internationally active banks.