On March 6, 2020, the Board of Governors of the Federal Reserve and the Federal Deposit Insurance Corporation proposed for public comment resolution plan guidance for certain large foreign banking organizations with significant U.S. operations. 1 The proposed methodology for determining the applicability of the guidance would result in only three foreign banking organizations ("FBOs") being subject to the guidance. 2 The Proposed Guidance would apply to the Specified FBOs' next scheduled July 1, 2021 targeted resolution plan submissions.
The Proposed Guidance is generally consistent with prior guidance issued to the Specified FBOs and UBS AG in December 2018, 3 but includes changes to reflect both the 2019 revisions to the resolution planning rule4 and some aspects of the Agencies' guidance for the 2019 resolution plans of the eight largest, most complex U.S. banks ("U.S. G-SIBs"). 5
As was the case with the 2019 Domestic Guidance, the most substantive changes from prior guidance relate to payment, clearing and settlement activities ("PCS") and derivatives and trading activities ("DER"). The Agencies also propose a generally applicable framework for identifying institutions subject to the Proposed Guidance (as opposed to the 2018 FBO Guidance, which was applied to specifically named institutions) and suggest minor clarifying and technical changes throughout.
- Significantly, the Proposed Guidance would only currently apply to three FBOs: Barclays, Credit Suisse and Deutsche Bank. The Agencies departed from the categories outlined in the recent tailoring rules for enhanced prudential standards and proposed to apply the Proposed Guidance only to FBOs with U.S. intermediate holding companies ("IHCs") that (i) are triennial full filers and (ii) whose IHCs have a score of 250 or more under method 2 of the G-SIB surcharge framework (12 CFR part 217, subpart H). The Agencies noted that the Specified FBOs all have had consistently high method 2 scores compared to both U.S. G-SIBs and other FBOs. These high scores have largely been driven by reliance on short-term wholesale funding ("STWF").
- The Proposed Guidance on capital, liquidity, governance mechanisms, legal entity rationalization criteria and separability remains largely unchanged from prior guidance.
- The Proposed Guidance on PCS and DER
incorporates several changes to reflect the Agencies' review of
2018 resolution plans and new provisions in the 2019 Domestic
- The most significant changes to guidance on PCS services would (i) require additional detail about the use of, or provision of, PCS services and (ii) provide more detailed guidance on playbooks for retaining access to PCS services.
- Changes to guidance on DER would remove prior requirements for separate passive and active wind-down scenario analyses, agency-specified data templates and rating agency playbooks. However, the Proposed Guidance would add requirements for resolution plans to include (i) a booking framework and a modeling framework for U.S. DER (regardless of where the positions are booked), (ii) analysis and reporting of DER of each U.S. entity involved in significant aspects of the firm's U.S. DER, (iii) segmentation analysis for each U.S. entity with a derivatives portfolio and (iv) strategies to stabilize and de-risk derivatives portfolios for surviving U.S. IHC subsidiaries.
- The Proposed Guidance is generally
consistent with the expectations set forth in the 2019 Domestic
Guidance, but varies in certain key areas to address differences
between the U.S. operations of the Specified FBOs and the U.S.
G-SIBs and to adjust the requirements to reflect a Specified
FBO's foreign parent and different organizational structure and
operation. For example:
- The Proposed Guidance does not specifically require the use of contractually binding mechanisms ("CBMs") and related legal challenge analysis but instead refers to the use of parent support mechanisms and potential legal challenges more generally.
- Guidance on DER emphasizes monitoring of hedging activities booked to non-U.S. home banks or affiliates.
- Triggers based on capital and liquidity levels primarily focus on escalating communications within the Specified FBOs' governing bodies. However, the Proposed Guidance does link such triggers to implementation of mechanisms to provide capital and liquidity support to operating subsidiaries.
- Certain included sections are FBOspecific, such as sections on U.S. branches and the incorporation of U.S. resolution strategies into the Specified FBO's global resolution plans.
- Consistent with prior guidance, the Agencies continue to evaluate the efficacy of CBMs generally. They expressed no preference for a specific CBM framework, but did solicit input regarding the relative merits of two approaches.
- Although the Proposed Guidance only applies to the Specified FBOs, the Agencies' expanded emphasis on reporting DER in non-U.S. affiliates could signal an increased focus on such activities for resolution planning by FBOs more broadly.
- The Agencies noted that they expected many Specified FBOs had already incorporated significant portions of the Proposed Guidance into their resolution plans.
- The Agencies reinforced the importance of coordinating home country resolution strategies and analysis with U.S. resolution plans. The Agencies recognized that the preferred resolution strategy for many Specified FBOs is a single point of entry strategy in the home country. Therefore, the Agencies indicate that they sought to provide additional flexibility to the Specified FBOs as compared to the U.S. G-SIBs to ensure that the U.S. resolution strategy does not conflict with the global resolution strategy. However, as in past guidance, the Proposed Guidance requires that the Specified FBOs not assume that actions outside the United States would eliminate the need for U.S. subsidiaries to enter resolution proceedings.
- As with the 2019 Domestic Guidance, the Proposed Guidance would consolidate all applicable guidance into a single document.
- The release for the Proposed Guidance also identified specific questions for comments and required that all comments be submitted on or by May 5, 2020.
The majority of proposed changes from the 2018 FBO Guidance are designed to align certain resolution plan requirements imposed on the U.S. GSIBs and Specified FBOs. Accordingly, we have summarized the key differences between the Proposed Guidance and the 2018 FBO Guidance below and, where relevant, have also indicated where the Proposed Guidance differs from the Agencies' approach in the 2019 Domestic Guidance.
See the Appendix for a table reflecting material changes from the 2018 FBO Guidance.
Developments Influencing the Proposed Guidance
The Agencies acknowledged several developments in resolution planning that influenced the Proposed Guidance.
First, the Agencies note several times that the Proposed Guidance reflects the FBOs' most recent resolution plan submissions and the Agencies' views on the resolution plans and their shortcomings, while also expressing an expectation that the Specified FBOs have already incorporated significant aspects of the Proposed Guidance into their resolution plans.
Second, the 2019 Domestic Guidance contained several material updates to guidance relating to PCS and DER by the U.S. G-SIBs and consolidated all prior resolution planning guidance applicable to the U.S. G-SIBs. As with the Proposed Guidance, the Agencies sought public comment before finalizing the 2019 Domestic Guidance, as promised by Federal Reserve Vice Chairman for Supervision Randal Quarles and Federal Deposit Insurance Corporation Chairman Jelena McWilliams.
Third, in November 2019, the Agencies finalized revisions to the resolution planning rule to address changes to the Dodd-Frank Act made by the Economic Growth, Regulatory Relief, and Consumer Protection Act and to improve aspects of the rule based on the Agencies' experience implementing the rule since its adoption. Under these revisions, each Specified FBO would be a triennial full filer, required to submit a resolution plan every three years, alternating between a full resolution plan and a targeted resolution plan.
Consolidation of Prior Guidance
The Proposed Guidance would consolidate all applicable prior guidance into a single document. Specifically, the Proposed Guidance consolidates (i) the 2018 FBO Guidance; (ii) the Guidance for 2013 §165(d) Annual Resolution Plan Submissions by Foreign-Based Covered Companies that Submitted Initial Resolution Plans in 2012; (iii) firm-specific feedback letters issued in 2014 and 2018; (iv) the February 2015 staff communication regarding the 2016 plan submissions and (v) the July 2017 Resolution Plan Frequently Asked Questions (together, the "Prior Guidance"). Prior Guidance would be superseded for the Specified FBOs to the extent not incorporated in or appended to the final guidance.
Capital and Liquidity
The Proposed Guidance leaves the 2018 FBO Guidance on capital and liquidity virtually unchanged, aside from very minor clarifying and technical edits. The release notes that the Agencies are continuing to evaluate capital and liquidity guidance and expect to collaborate in taking actions in a manner consistent with the Federal Reserve's Total Loss-Absorbing Capacity Rule.
The Proposed Guidance leaves unchanged the 2018 FBO Guidance on governance mechanisms to ensure coordination between a U.S. entity and its foreign parent during resolution, but clarifies that discussion of the Specified FBO's proposed U.S. communications strategy should include external communications with U.S. and foreign authorities and other external stakeholders. The Proposed Guidance also discusses the role of triggers based on the Specified FBO's methodology for forecasting liquidity and capital needed to implement the U.S. resolution strategy, and the role such triggers may play in escalating action and in implementing steps to provided needed capital and liquidity.
Notably, while the Proposed Guidance does not recommend a specific strategy for ensuring that capital and liquidity support to IHC material entity subsidiaries is timely, the release requests comment on the relative merits of two approaches to the use of CBMs. This follows Agency statements in the release of the 2019 Domestic Guidance that noted the Agencies would continue to consider the merits and limitations of CBMs.
In particular, the release describes two CBM approaches that are currently taken by certain Specified FBOs and requests comment on their relative merits: (i) a secured support agreement where the U.S. IHC binds itself to provide pre-bankruptcy support to material entity subsidiaries supported by perfected security interests in collateral granted by the U.S. IHC and (ii) an unsecured equity purchase arrangement under which the U.S. IHC enters into one or more agreements with a material entity subsidiary to purchase additional equity from the subsidiary prior to the U.S. IHC's bankruptcy.
Payment, Clearing and Settlement Activities
- The Agencies significantly revised their prior guidance with respect to PCS services in the 2019 Domestic Guidance. The Agencies increased requirements to provide a more thorough explanation of the methods of interaction with key clients, financial market utilities ("FMUs") and agent banks, including clarifying expectations related to users and providers of PCS services. The Proposed Guidance generally reflects these revisions as applied to the Specified FBOs.
- The Proposed Guidance requires a Specified FBO to identify key clients (including affiliates), FMUs and agent banks of its U.S. material entities. In making these determinations, the firms are directed to use qualitative and quantitative criteria (the latter including, for example, aggregate volumes and values of all transactions processed through an FMU, assets under custody with an agent bank, the value of assets settled through an agent bank and, if credit or liquidity is offered, extensions of intraday credit). Additionally, Specified FBOs should map U.S. material entities, critical operations, core business lines ("CBLs") and key clients of the firm's U.S. operations to both key FMUs and agent banks.
- The Specified FBOs will be required to maintain playbooks for each key FMU and agent bank reflecting the firm's role(s) as a user (including through indirect access) and/or provider of PCS services. Playbooks should also discuss any possible alternative arrangements to continue access to PCS services for the firm's U.S. material entities, identified critical operations and CBLs and key clients of the firm's U.S. operations.
- The Agencies specifically note that the PCS framework described above is not limited to a Specified FBO's U.S. branches given continuity of access to PCS activities through non-U.S. branches is likely to be essential to an orderly resolution of a firm's U.S. operations.
Shared and Outsourced Services
- The Proposed Guidance aligns with the 2019 Domestic Guidance by making clear that arrangements to support the continuity of shared and outsourced services that support critical operations must include appropriate plans to retain key personnel relevant to the firm's strategy.
Qualified Financial Contracts ("QFCs")
- The Proposed Guidance removes language included in prior guidance relating to the development of the ISDA protocols to comply with the QFC Stay Rules, as such protocols have been implemented and are effective for adherents. Nonetheless, the Agencies continue to expect that a Specified FBO's plan reflects the current state of how the early termination of QFCs could impact the resolution of its U.S. operations.
Group Resolution Plan
Aside from very minor clarifying and technical edits, the Proposed Guidance leaves virtually unchanged the 2018 FBO Guidance on requiring descriptions of how the resolution plan for a Specified FBO's U.S. operations fits into its overall resolution process.
Legal Entity Rationalization and Separability
The Proposed Guidance aligns the requirements related to the identification and analysis of separability options with the expectations included in the 2019 Domestic Guidance.
Specified FBOs will be required to provide more detail about potential options to sell or transfer operations in resolution, including addressing potential consequences to U.S. financial stability of executing each option and taking into consideration the impacts on counterparties, creditors, clients, depositors and markets for specific assets. The amount of detail and analysis will vary depending on the Specified FBO's risk profile, and firms should have information systems capable of producing the required data and information.
Specified FBOs will no longer be required to maintain a virtual data room with information pertinent to a potential divestiture. However, they will be required to maintain the capability to populate such a data room in a timely manner. As with the U.S. G-SIBs, the Agencies intend to test this capability as part of future resolution plan reviews.
Derivatives and Trading Activities
The Agencies significantly revised their prior guidance with respect to derivatives activities for U.S. G-SIBs in the 2019 Domestic Guidance. The Proposed Guidance generally reflects these revisions as applied to the Specified FBOs but modifies certain expectations to better reflect the Specified FBOs' activities given the size and complexity of their U.S. DER and associated risks to the resolution of their U.S. entities. In particular, the revised guidance would place an expanded focus on DER booked into non-U.S. affiliates. Similar to the 2019 Domestic Guidance, the Agencies have organized the DER portion in five sections.
The Proposed Guidance would also eliminate requirements in the 2018 FBO Guidance that a Specified FBO's U.S. resolution plan include separate passive and active wind-down analysis, agency-specified data templates and rating agency playbooks.
- The requirements generally align with those imposed by the 2019 Domestic Guidance but are expanded to cover both derivatives and non-derivatives trading activities that are (i) related to a firm's CBL or critical operations (including if booked directly into a non-U.S. affiliate), (ii) conducted on behalf of the firm, its clients or counterparties that are originated from, booked into, traded through or otherwise conducted (in whole or in material part) in a U.S. entity or (iii) both of the foregoing.
- In general, a Specified FBO should have booking practices commensurate with the size, scope and complexity of its DER. The firm's booking model framework should be undergirded by internal controls (e.g., procedures, systems and processes) that can show (i) what is booked, (ii) where it is being originated and booked, (iii) by whom it is originated and booked, (iv) why it is booked that way or rationales for that arrangement and (v) what controls are in place to monitor and manage those practices.
- In addition, Specified FBOs should be able to report on each of its U.S. entities (meaning the U.S. IHC and material entity branches) that originates or otherwise conducts any significant aspect of the firm's U.S. DER.
U.S. Activities Monitoring
- The Proposed Guidance mirrors the expectations included in the 2019 Domestic Guidance subsection Inter-Affiliate Risk Monitoring and Controls but focuses specifically on the relationship between a Specified FBO's U.S. entities and non-U.S. affiliates.
- Specified FBOs must be able to assess how the management of U.S. DER would be affected in the period leading up to, and during, its resolution. A firm's monitoring framework should consist of methods to (i) identify, measure, monitor and report on U.S. DER on a business line and legal entity basis and (ii) identify, assess and report the potential impact on clients, counterparties of the U.S. entities that conduct the U.S. DER and any related risk transfer arrangements among U.S. entities and their non-U.S. affiliates.
Prime Brokerage Customer Account Transfers
- The Proposed Guidance requires that Specified FBOs have the operational capabilities to assist in the transfer of U.S. prime brokerage accounts (including client account positions booked directly into a non-U.S. affiliate) to peer prime brokers in times of material financial distress and during execution of its U.S. resolution strategy. Specified FBOs should also be able to segment U.S. prime brokerage accounts based on characteristics that determine the speed at which accounts could be transferred.
- Similar to the 2019 Domestic Guidance, the Proposed Guidance requires the Specified FBOs to be able to produce portfolio segmentation analysis using a minimum of seven enumerated segmentation dimensions.
- However, the Proposed Guidance would not adopt similar requirements related to "'ease of exit' position analysis," "application of exit cost methodology" and "analysis of operational capacity" subsections of the 2019 Domestic Guidance, given the relatively smaller size and less complex nature of the Specified FBO's derivatives activities.
Derivatives Stabilization and De-risking Strategy
- To the extent a Specified FBO's
U.S. resolution strategy assumes the continuation of a U.S. IHC
subsidiary with a derivatives portfolio after the U.S. IHC enters
bankruptcy proceedings, a Specified FBO's resolution plan must
include a detailed analysis of its plans to stabilize and de-risk
any derivatives portfolio of a surviving derivatives subsidiary
incorporated into its U.S. resolution strategy.
- In assessing their stabilization and de-risking strategies, firms should assume (i) a reduced ability for the U.S. IHC subsidiary to access the OTC derivatives market, (ii) counterparties exercise every contractual termination right available to them (including any rights stayed by contract or the QFC mandatory stay rules) if exercising such right would economically benefit the counterparty and (iii) a time horizon of the resolution period extending between one to two years.
- A firm may consider a time horizon of less than a year if the resolution period is supported by the firm's analysis of its derivatives portfolios in its U.S. IHC subsidiaries.
- The resolution plan should incorporate forecasts of capital and liquidity needs of the U.S. IHC subsidiaries required to support the Specified FBO's U.S. derivatives strategy in the firm's Resolution Capital Execution Need and Resolution Liquidity Execution Need estimates for its overall U.S. resolution strategy.
- The resolution plan should describe a Specified FBO's method for conducting sensitivity analysis to the derivatives-related costs and liquidity flows under its U.S. resolution strategy.
- The resolution plan should include a method for estimating the composition of any residual portfolio of derivatives booked in a U.S. IHC subsidiary remaining after execution of the Specified FBO's U.S. resolution strategy.
- To the extent the Specified FBO's U.S. resolution strategy assumes a U.S. IHC subsidiary with a derivatives portfolio enters its own resolution proceeding after entry of the U.S. IHC in bankruptcy proceedings, the resolution plan should provide analysis of how such resolution can be accomplished within a reasonable period of time and in a manner that substantially mitigates risks to the U.S. financial stability and the firm's U.S. resolution strategy. The analysis should address the impacts of the subsidiary's resolution on funding markets, underlying asset markets, clients and counterparties (including affiliates) and the firm's U.S. resolution strategy.
Format and Structure of Plans
The Proposed Guidance adopts the requirements for the format and structure of the resolution plans from the 2019 Domestic Guidance. These requirements are generally similar to those contained in prior guidance but slightly expand upon the required assumptions addressed in prior guidance, including noting that a firm cannot assume waivers of sections 23A or 23B of the Federal Reserve Act or assume a subsidiary depository institution will have access to the Federal Reserve's Discount Window while critically undercapitalized, in receivership or operating as a bridge bank. A firm may assume that its depository institutions will have access to the Discount Window for a few days after the point of failure.
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1. Proposed Guidance for Resolution Plan Submissions of Certain Foreign-based Covered Companies (Mar. 6, 2020), https://www.fdic.gov/resauthority/fbo-resolution-guidance-proposal.pdf ("Proposed Guidance").
2. As of March 6, 2020, the three are Barclays PLC, Credit Suisse Group AG and Deutsche Bank AG (the "Specified FBOs").
3. Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (the "Agencies"), Guidance for 2018 §165(d) Annual Resolution Plan Submissions by Foreign-based Covered Companies that Submitted Resolution Plans in July 2015 (Mar. 24, 2017), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170324a21.pdf ("2018 FBO Guidance").
4. The Agencies, Resolution Plans Required, 84 Fed. Reg. 59194 (Nov. 1, 2019), https://www.govinfo.gov/content/pkg/FR-2019-11- 01/pdf/2019-23967.pdf.
5. The Agencies, Resolution Planning Guidance for Eight Large, Complex U.S. Banking Organizations (Dec. 20, 2018), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20181220c5.pdf ("2019 Domestic Guidance").
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