RRP: PRA Gently Turns the Screw (but to what end?)

Introduction

On 19 December 2013, the Prudential Regulation Authority (PRA) issued Policy Statement PS8/13 together with two Supervisory Statements, SS18/13 on recovery planning, and SS19/13 on resolution planning.  Together, this guidance details the PRA’s final RRP rules for UK banks, building societies and UK designated investment firms. Their publication follows on from the FSA’s original consultation paper (CP11/16) and Feedback Statement (FS12/1).  The final rules are set out in the PRA Rulebook Recovery and Resolution Instrument 2013 (PRA 2013/37), which is annexed to PS8/13 and come into force 1 January 2014.

Single Resolution System- closer to being resolved

MEP’s voted on the 17^th to establish their position on critical details of the single resolution system. During yesterday’s Parliamentary hearing, ECB President Mario Draghi said,

IOSCO Publishes Responses to CPSS/IOSCO Consultative Report on RRP for FMI

On 8 November 2013, the International Organization of Securities Commissions (IOSCO) published links to the public responses it has received to the consultative report published jointly with the Committee on Payment and Settlement Services (CPSS) in August 2013.

Responses include:

• The Alternative Investment Management Association (AIMA) and Managed Funds Association (AIM).
• The European Banking Federation (EBF).

RRP for Non-Banks Moved Forward

On 22 October 2013, the EU Parliament updated it procedural file on the recovery and resolution framework for non-bank institutions.  The indicative first or single reading plenary session scheduled for 13 January 2014 has been moved forward to 9 December 2013.

DB Experience Highlights RRP Challenge

Risk Magazine has published an article in which Deutsche Bank highlights the issues it has experienced in complying with global recovery and resolution plan (RRP) requirements.

This is an all too common story.  The lack of guidance from regulators, absence of globally coordinated regulatory requirements and the move towards subsidiarisation combine to pose a significant challenge to firms which are subject to RRP rules.  From experience, the only real solution lies in the creation of a robust yet flexible data architecture, capable of serving up only that view of information which is necessary for the particular audience and with the capacity to adapt to meet future regulatory developments.

SPE and MPE – which are you?

Introduction

On 14 October, the Bank of England published a speech given by Paul Tucker, Deputy Governor Financial Stability, at the Institute of International Finance 2013 Annual Membership meeting on 12 October 2013 on the subject of ‘too big to fail’.

Mr Tucker made five general points:

1. The US authorities could resolve most US SIFIs right now on a ‘top-down’ basis pursuant to the powers granted under Title II of the Dodd Frank Act;
2. Single Point of Entry (SPE) versus Multiple Point of Entry (MPE) may be the most important innovation in banking policy in decades;
3. There is no such thing as a “bail-in bond”.  Bail in is a resolution tool.  All creditors can face having to absorb losses.  What matters is the creditor hierarchy;
4. Some impediments to smooth cross-border resolution need to be removed; and
5. The resolution agenda is not just about banks and dealers.  It is about central counterparties too, for example.

Reorganisation

Mr Tucker noted that Europe is not far behind the US in its enactment of resolution powers.  However, of more interest to the industry will be his belief that most banking groups will have to undergo some kind of reorganisation, irrespective of the camp into which they fall.  SPE groups will need to establish holding companies from which loss-absorbing bonds can be issued.  In addition, key subsidiaries will need to issue debt to their holding companies that can be written down in times of distress.  MPE groups will need to do more to organise themselves into well-defined regional and functional subgroups.  In addition common services, such as IT will need to be provided by stand-alone entities that can survive the break-up of an MPE group.  Capital requirements for regional subsidiaries forming part of an MPE group may also be higher due to the absence of a parent/holding company that can act as a source of strength through a resolution process.

Bail-in

On the subject to bail-in, creditors of SPE groups will be interested to read Mr Tucker’s comments about how, within the context of a top-down resolution, bonds issued by a holding company will absorb losses before debt issued by an operating subsidiary.  In effect, the holding company’s creditors are structurally subordinated to the operating company’s creditors.

Impediments to Resolution

On the subject to impediments to cross-border resolution, Mr Tucker noted that, in order to provide clarity on its previous ‘in principle’ commitment, the Bank of England needs to set down detailed conditions under which it would step aside and allow US authorities to resolve the UK subsidiaries of a US banking group.  In turn, other resolution authorities, and particularly the US, need to make the same ‘in principle’ commitment as the Bank of England.

Extension of the Resolution Regime

Finally, on the subject of the resolution agenda, Mr Tucker confirmed that CCPs are the most important example of where resolution regimes need to apply.  However, he did not rule out resolution regimes being extended to cover shadow banking, funds and SPVs.

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.

FSB Issues RRP Guidance

On 16 July 2013, the Financial Stability Board (FSB) published the following three papers intended to assist authorities and systemically important financial institutions (SIFIs) in implementing the recovery and resolution planning (RRP) requirements set out under the FSB’s key attributes of effective resolution regimes for financial institutions:

Guidance on developing effective resolution strategies

This paper describes key considerations and pre-conditions for the development and implementation of effective resolution strategies, dealing with such issues as:

• the sufficiency and location of loss absorbing capacity (LAC);
• the position of LAC in the creditor-hierarchy, particularly with respect to insured and uninsured depositors;
• operational and legal structures most likely to ensure continuity of critical functions;
• resolution powers necessary to deliver chosen resolution strategies;
• enforceability, effectiveness and implementation of “bail-in” regimes;
• treatment of financial contracts in resolution, specifically the use of temporary stays on the exercise of contractual close-out rights;
• funding arrangements;
• cross-border cooperation and coordination;
• coordination in the early intervention phase;
• approvals or authorisations needed to implement chosen resolution strategies;
• fall-back options for maintaining essential functions and services in the event that preferred resolution strategies cannot be implemented;
• information systems and data requirements;
• post-resolution strategies;
• single point of entry (SPE) versus multiple point of entry (MPE) resolution strategies; and
• disclosure of resolution strategies and LAC information.

Guidance on identification of critical functions and critical shared services

This guidance is designed to assist authorities and CMGs in their evaluation of the criticality of functions that firms provide to the real economy and financial markets. It aims to promote a common understanding of which functions and shared services are critical by providing shared definitions and evaluation criteria.

After describing the essential elements of a critical function and a critical shared service, the annex to the guidance provides a non-exhaustive list of functions and shared services which could be critical:

Functions

• Deposit taking;
• Lending and Loan Servicing;
• Payments, Clearing, Custody & Settlement;
• Wholesale Funding Markets; and
• Capital Markets and Investments activities.

Shared services

• Finance-related shared services; and
• Operational shared services.

Guidance on Recovery Triggers and Stress Scenarios

This guidance focuses on two specific aspects of recovery plans:

• criteria triggering senior management consideration of recovery actions (“triggers”), specifically:  design and nature, firm’s reactions to breached triggers, and engagement by supervisory and resolution authorities following breached triggers; and
• the severity of hypothetical stress scenarios and the design of stress scenarios generally.

FCA Legislation Update

On 26 April 2013, the FCA published its first Policy Development Update (PDU) for April 2013 which details forthcoming FCA publications relating to a number of areas, including RRP, client assets and EMIR, as detailed below.

High level standards

Initiative	Current Expected Publication Date	Previous Expected Publication Date
Recovery and Resolution Plans: policy statement to CP11/16	Q2 2013	Q2 2013
Policy statement on non-EEA national depositor preference regimes	TBC	–

Business Standards

Initiative	Current Expected Publication Date	Previous Expected Publication Date
Client assets regime – multiple client money pools – policy statement to part 2 of CP12/22	June 2013	Q2 2013
Client assets review – consultation paper	June 2013	–
Review of the client money rules for insurance intermediaries – policy statement to CP12/20	Q3/4 2013	Q3/4 2013
CRD IV – consultation paper on strengthening capital standards	Q3/4 2013	TBC

 

Paul Tucker Speech on Resolution

On 20 May 2013, Paul Tucker, Deputy Governor of Financial Stability at the Bank of England gave a speech entitled “Resolution and future of finance” at the INSOL International World Congress in the Hague.

Within the wider context of discussing solutions to the problem of “too big to fail”, the speech gives a useful summary of the ways in which both “single point of entry” and “multiple point of entry” resolution would operate in practice.  It also touches upon the interaction between resolution regimes and bank structural reform, noting the way in which bank ring-fencing, as will be implemented in the UK via the Financial Services (Banking Reform) Bill, represents a back-up strategy to resolution, under which essential payment services and insured deposits would be provided by a “super-resolvable” ring-fenced and separately capitalised bank.  This, it is believed, should make it easier for the UK authorities to “retreat to maintaining at least the most basic payments services” if a preferred strategy of top-down resolution of a whole group could not be executed.