Guidance for Resolution Plan Submissions of Certain Foreign-Based Covered Companies
| Published date | 18 March 2020 |
| Citation | 85 FR 15449 |
| Record Number | 2020-05513 |
| Section | Notices |
| Court | Federal Deposit Insurance Corporation,Federal Reserve System |
Federal Register, Volume 85 Issue 53 (Wednesday, March 18, 2020)
[Federal Register Volume 85, Number 53 (Wednesday, March 18, 2020)]
[Notices]
[Pages 15449-15474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-05513]
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FEDERAL DEPOSIT INSURANCE CORPORATION
RIN 3064-ZA15
FEDERAL RESERVE SYSTEM
[Docket No. OP-1699]
Guidance for Resolution Plan Submissions of Certain Foreign-Based
Covered Companies
AGENCY: Board of Governors of the Federal Reserve System (Board) and
Federal Deposit Insurance Corporation (FDIC).
ACTION: Proposed guidance; request for comments.
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SUMMARY: The Board and the FDIC (together, the ``agencies'') are
inviting comments on proposed guidance for the 2021 and subsequent
resolution plan submissions by certain foreign banking organizations
(``FBOs''). The proposed guidance is meant to assist these firms in
developing their resolution plans, which are required to be submitted
pursuant to Section 165(d) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ``Dodd-Frank Act''). The scope of
application of the proposed guidance would be FBOs that are triennial
full filers and whose intermediate holding companies (``U.S. IHCs'')
have a score of 250 or more under the second methodology (``method 2'')
of the global systemically important bank (``GSIB'') surcharge
framework. The proposed guidance, which is largely based on prior
guidance, describes the agencies' expectations regarding a number of
key vulnerabilities in plans for a rapid and orderly resolution under
the U.S. Bankruptcy Code (i.e., capital; liquidity; governance
mechanisms; operational; legal entity rationalization and separability;
and derivatives and trading activities). The proposed guidance also
updates certain aspects of prior guidance based, in part, on the
agencies' review of certain FBOs' most recent resolution plan
submissions and changes to the resolution planning rule. The agencies
invite public comment on all aspects of the proposed guidance.
DATES: Comments should be received on or before May 5, 2020.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to both agencies. Comments should be directed to:
Board: You may submit comments, identified by Docket No. OP-1699,
by any of the following methods:
Agency website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments will be made available on the Board's website
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfms as
submitted, unless modified for technical reasons or to remove personal
information at the commenter's request. Accordingly, comments will not
be edited to remove any identifying or contact information. Public
comments may also be viewed electronically or in paper form in Room
146, 1709 New York Avenue NW, Washington, DC 20006, between 9:00 a.m.
and 5:00 p.m. on weekdays.
FDIC: You may submit comments, identified by RIN 3064-ZA15, by any
of the following methods:
Agency website: https://www.fdic.gov/regulations/laws/federal. Follow the instructions for submitting comments on the Agency
website.
Email: [email protected]. Include ``RIN 3064-ZA15'' on the
subject line of the message.
Mail: Executive Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th Street NW, Washington, DC
20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street NW Building (located on F Street) on business days
between 7 a.m. and 5 p.m.
Public Inspection: All comments received, including any
personal information provided, will be posted generally without change
to https://www.fdic.gov/regulations/laws/federal.
FOR FURTHER INFORMATION CONTACT:
Board: Mona Elliot, Deputy Associate Director, (202) 452-4688,
Division of Supervision and Regulation, Laurie Schaffer, Deputy General
Counsel, (202) 452-2272, Jay Schwarz, Special Counsel, (202) 452-2970,
Steve Bowne, Senior Counsel, (202) 452-3900, or Sarah Podrygula,
Attorney (202) 912-4658, Legal Division. Users of Telecommunications
Device for the Deaf (TDD) may call (202) 263-4869.
FDIC: Alexandra Steinberg Barrage, Associate Director, Policy and
Data Analytics, [email protected]; Heidilynne Schultheiss, Chief,
Resolution Strategy Section, [email protected]; Yan Zhou, Chief,
Supervisory Programs Section, [email protected]; Ronald W. Crawley, Jr.,
Senior Resolution Policy Specialist, [email protected], Division of
Complex Institution Supervision and Resolution; David N. Wall,
Assistant General Counsel, [email protected]; Celia Van Gorder,
Supervisory Counsel, [email protected]; or Esther Rabin, Counsel,
[email protected], Legal Division, Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Overview of the Proposed Guidance
III. Proposed Changes From Prior Guidance
IV. Paperwork Reduction Act
V. Text of the Proposed Guidance
I. Background
Section 165(d) of the Dodd-Frank Act \1\ and the jointly issued
implementing regulation \2\ require certain financial companies,
including certain foreign-based firms, to report periodically to the
Board and the FDIC their plans for rapid and orderly resolution under
the U.S. Bankruptcy Code (the ``Bankruptcy Code'') in the event of
material financial distress or failure. With respect to a covered
company \3\ that is organized or incorporated in a jurisdiction other
than the United States or that is an FBO, the Rule requires that the
firm's U.S. resolution plan include specified information with respect
to the
[[Page 15450]]
subsidiaries, branches, and agencies, and identified critical
operations and core business lines, as applicable, that are domiciled
in the United States or conducted in whole or material part in the
United States.\4\ The Rule also requires, among other things, each
financial company's full resolution plan to include a strategic
analysis of the plan's components, a description of the range of
specific actions the company proposes to take in resolution, and a
description of the company's organizational structure, material
entities, and interconnections and interdependencies.\5\ In addition,
the Rule requires that all resolution plans include a confidential
section that contains any confidential supervisory and proprietary
information submitted to the Board and the FDIC and a section that the
agencies make available to the public. Public sections of resolution
plans can be found on the agencies' websites.\6\
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\1\ 12 U.S.C. 5365(d).
\2\ 12 CFR part 243 and 12 CFR part 381 (the ``Rule''), as
amended.
\3\ The terms ``covered company,'' ``material entities,''
``identified critical operations,'' ``core business lines,'' and
similar terms used throughout the proposal all have the same meaning
as in the Rule.
\4\ 12 CFR 243.5(a)(2)(i); 12 CFR 381.5(a)(2)(i).
\5\ Under the Rule, all filers must submit a full resolution
plan, either every other time a resolution plan submission is
required or as a firm's initial resolution plan submission. See 12
CFR 243.4(a)(5)-(6), (b)(4)-(5), and (c)(4)-(5); 12 CFR 381.4(a)(5)-
(6), (b)(4)-(5), and (c)(4)-(5).
\6\ The public sections of resolution plans submitted to the
agencies are available at https://www.federalreserve.gov/supervisionreg/resolution-plans.htm and www.fdic.gov/regulations/reform/resplans/.
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Objectives of the Resolution Planning Process
The goal of the Dodd-Frank Act resolution planning process is to
help ensure that a covered company's failure would not have serious
adverse effects on financial stability in the United States.
Specifically, the resolution planning process requires covered
companies to demonstrate that they have adequately assessed the
challenges that their structures and business activities pose to
resolution and that they have taken action to address those issues. For
FBOs, the resolution planning process focuses on their U.S.
subsidiaries and operations.
The agencies believe that the preferred resolution outcome for many
FBOs is a successful home country resolution using a single point of
entry (``SPOE'') resolution strategy where U.S. material entities are
provided with sufficient capital and liquidity resources to allow them
to stay out of resolution proceedings and maintain continuity of
operations throughout the parent's resolution. However, since support
from the foreign parent in stress cannot be ensured, the Rule provides
that the U.S. resolution plan for foreign-based covered companies
should specifically address a scenario where the U.S. operations
experience material financial distress and not assume that the covered
company takes resolution actions outside the United States that would
eliminate the need for any U.S. subsidiaries to enter resolution
proceedings.\7\ Nonetheless, the Rule also provides firms with
appropriate flexibility to construct a U.S. resolution strategy in a
way that is not inconsistent with a firm's global resolution strategy,
as long as those assumptions support the firms' U.S. resolution
strategy and adhere to the assumptions articulated in the Rule.
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\7\ 12 CFR 243.4(h)(3); 12 CFR 381.4(h)(3). Presently, the U.S.
resolution strategy of each firm that would be subject to the
proposed guidance is a U.S. SPOE resolution strategy, which is
designed to have the U.S. IHC recapitalize and provide financial
resources to its material entity subsidiaries prior to entering U.S.
bankruptcy proceedings.
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Recent Developments
Implementation of the Rule has been an iterative process aimed at
strengthening the resolution planning capabilities of financial
institutions subject to the Rule. The agencies have previously provided
guidance and other feedback on several occasions to certain FBOs.\8\ In
general, the guidance and feedback were intended to assist the
recipients in their development of future resolution plan submissions
and to provide additional clarity with respect to the agencies'
expectations for the filers' future progress.
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\8\ See infra III. Consolidation of Prior Guidance.
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The agencies are now proposing to update aspects of the Guidance
for 2018 Sec. 165(d) Annual Resolution Plan Submissions By Foreign-
based Covered Companies that Submitted Resolution Plans in July 2015
(``2018 FBO guidance'').\9\ The 2018 FBO guidance was provided to four
FBOs.\10\
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\9\ Available at www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170324a21.pdf and www.fdic.gov/resauthority/2018subguidance.pdf.
\10\ Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, and
UBS AG.
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Several developments inform the proposed guidance:
The agencies' review of certain FBOs' most recent
resolution plan submissions and the issuance of individual letters
communicating the agencies' views on and shortcomings contained in the
2018 resolution plans filed by the firms subject to the 2018 FBO
guidance (``2018 feedback letters''); \11\
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\11\ Available at www.federalreserve.gov/newsevents/pressreleases/bcreg20181220c.htm.
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Revisions to the content related to payment, clearing, and
settlement activities (``PCS'') and derivatives and trading activities
(``DER'') in the updated guidance for the resolution plan submissions
by the eight largest, most complex U.S. banking organizations in
February 2019 (``2019 domestic guidance''); \12\ and
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\12\ Final Guidance for the 2019, 84 FR 1438 (February 4, 2019).
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The 2019 amendments to the Rule (``2019 revisions'').\13\
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\13\ Resolution Plans Required, 84 FR 59194 (November 1, 2019).
The amendments became effective on December 31, 2019.
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In December 2018, the agencies issued the 2018 feedback letters,
which communicated their views on and identified shortcomings contained
in the 2018 resolution plans filed by the firms subject to the 2018 FBO
guidance. These letters also described the meaningful resolvability
improvements made by the FBOs. The FBOs that received this feedback are
expected to address their shortcomings and complete the enhancement
initiatives described in their 2018 resolution plans by July 1, 2020,
as provided in the 2018 feedback letters and confirmed by the letters
issued to the firms on July 26, 2019.\14\ The review of the resolution
plan submissions that resulted in the 2018 feedback letters helped to
inform changes to the 2018 FBO guidance, as described below.
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\14\ See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190726a.htm. For clarity, the shortcoming(s)
and the remaining project(s) identified for each firm that would be
subject to the proposed guidance in its 2018 feedback letter should
be addressed as set forth in each firm's respective 2018 feedback
letter, notwithstanding the consolidation of all relevant prior
guidance into the proposed guidance.
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In February 2019, the agencies released the 2019 domestic guidance,
which reiterated the agencies' expectations for eight domestic firms
regarding several elements of their resolution plans and made material
updates to guidance relating to PCS and DER. As described below, the
agencies are proposing updates to the 2018 FBO guidance regarding PCS
and DER, which will more closely align the agencies' expectations in
these areas with the expectations described in the 2019 domestic
guidance, taking into account issues specific to FBOs. The 2019
domestic guidance also consolidated all prior guidance applicable to
the eight firms to which it was directed. In the consultation period
for the 2019 domestic guidance, the agencies received comments
supporting the consolidation efforts and subsequently indicated their
intent to similarly consolidate and request public comment on the 2018
FBO guidance. Accordingly, the agencies are proposing to consolidate
and supersede all prior
[[Page 15451]]
resolution planning guidance that has been directed to the FBOs to
which this guidance is proposed to apply (``Specified FBOs'' or
``firms'').
More recently, in November 2019, the agencies finalized the 2019
revisions, which amended the Rule to address changes to the Dodd-Frank
Act made by the Economic Growth, Regulatory Relief, and Consumer
Protection Act (``EGRRCPA'') \15\ and improve certain aspects of the
Rule based on the agencies' experience implementing the Rule since its
adoption. Among other things, the 2019 revisions modified the scope of
application of the resolution planning requirement, the frequency of
resolution plan submissions, informational content requirements
(primarily through the introduction of new plan types), and the Rule's
procedures for the identification of critical operations. Consistent
with EGRRCPA, the 2019 revisions applied the resolution planning
requirement to financial institutions that would be subject to category
I, II, or III standards under the ``domestic tailoring rule'' or the
``foreign banking organization rule'' (together with the domestic
tailoring rule, the ``tailoring rules'') \16\ and certain other covered
companies.
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\15\ Public Law 115-174 (2018).
\16\ See Prudential Standards for Large Bank Holding Companies,
Savings and Loan Holding Companies, and Foreign Banking
Organizations, 84 FR 59032 (November 1, 2019); Changes to
Applicability Thresholds for Regulatory Capital and Liquidity
Requirements, 84 FR 59230 (November 1, 2019).
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Under the 2019 revisions and the proposed scope of guidance, each
Specified FBO would be a triennial full filer and will be required to
submit a resolution plan every three years, alternating between a full
resolution plan and a targeted resolution plan. The 2019 revisions
require all triennial full filers to submit a targeted resolution plan
on or before July 1, 2021, followed by a full resolution plan in 2024.
In addition, the agencies indicated in the 2019 revisions that they
would strive to provide final general guidance at least a year before
the next resolution plan submission date of firms to which the general
guidance is directed. The 2019 revisions also provided certain
technical changes, including the clarification that FBOs should not
assume that the foreign parent company takes resolution actions outside
of the United States that would eliminate the need for any U.S.
subsidiaries to enter into resolution proceedings.
International Cooperation on Resolution Planning
The 2018 feedback letters also noted the importance of the
agencies' engagement with non-U.S. regulators. The Specified FBOs are
subject to their home country resolvability expectations, in addition
to section 165(d) of the Dodd-Frank Act and the Rule. Resolution of the
U.S. operations of a firm domiciled outside the United States with
significant global activities (i.e., the Specified FBOs) will require
substantial coordination between home and host country authorities. The
agencies identified three areas in the 2018 feedback letters (legal
entity rationalization; PCS; and derivatives booking practices) where
enhanced cooperation between the agencies and each firm's home
regulatory authorities would maximize resolvability under both the U.S.
and home country resolution strategies.\17\ The agencies will continue
to coordinate with non-U.S. authorities regarding these and other
resolution matters (e.g., resources in resolution, communications),
including developments in the U.S. and home country resolution
capabilities of the Specified FBOs.
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\17\ Available at www.federalreserve.gov/newsevents/pressreleases/bcreg20181220c.htm.
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Capital and Liquidity
The agencies received several comments on an array of resolution
capital and liquidity issues during consideration of the 2019 domestic
guidance, but declined to adopt any modifications in the final
version.\18\ Instead, the agencies indicated that they would continue
to consider those comments, coordinate with non-U.S. regulators, and
provide additional information in the future on those topics. The
agencies continue to evaluate the capital and liquidity guidance and
expect that any future actions in these areas, whether guidance or
rules, would be adopted through notice and comment procedures, which
would provide an opportunity for public input. The agencies further
expect to collaborate in taking such actions in a manner consistent
with the Board's Total Loss-Absorbing Capacity rule.\19\ Therefore, the
capital and liquidity sections of the proposed guidance remain
unchanged from the 2018 FBO guidance with the exception of two minor
clarifications to the capital section.
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\18\ See 84 FR 1442-43 (discussing, among other things, (i)
tailoring liquidity flow assumptions; (ii) avoiding false positive
resolution triggers; and (iii) other requests).
\19\ See generally Total Loss-Absorbing Capacity, Long-Term
Debt, and Clean Holding Company Requirements for Systemically
Important U.S. Bank Holding Companies and Intermediate Holding
Companies of Systemically Important Foreign Banking Organizations,
82 FR 8266 (January 24, 2017).
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II. Overview of the Proposed Guidance
The proposed guidance begins with a description of the proposed
scoping methodology and is then organized into eight substantive areas,
consistent with the 2018 FBO guidance. These areas are:
1. Capital
2. Liquidity
3. Governance mechanisms
4. Operational
5. Branches
6. Group resolution plan
7. Legal entity rationalization and separability
8. Derivatives and trading activities
The proposed guidance is tailored for the Specified FBOs as
compared to the U.S. GSIBs to account for differences between U.S.
GSIBs and FBOs' U.S. footprints and operations. Each substantive area
is important to firms in implementing their U.S. resolution strategy,
as each plays a part in helping to ensure that the firms can be
resolved in a rapid and orderly manner. The proposed guidance would
describe the agencies' expectations for each of these areas.
The proposal is largely consistent with the 2018 FBO guidance and
the 2019 domestic guidance. Accordingly, the agencies expect that the
FBOs that would be Specified FBOs under the proposal have already
incorporated significant aspects of the proposed guidance into their
resolution planning. With respect to the 2019 domestic guidance, the
proposed guidance differs in certain respects, given the circumstances
under which a foreign-based covered company's U.S. resolution plan is
most likely to be relevant.
As noted above, the proposal would update the PCS and DER areas of
the 2018 FBO guidance to reflect the agencies' review of certain
Specified FBOs' 2018 resolution plans and revisions contained in the
2019 domestic guidance. It would also make minor clarifications to
certain areas of the 2018 FBO guidance in light of the 2019 revisions.
In general, the proposed revisions to the guidance are intended to
streamline the firms' submissions and to provide additional clarity. In
addition, the proposed guidance would consolidate all guidance
applicable to the Specified FBOs into a single document, which would
provide the public with one source of applicable guidance to which to
refer. The proposed guidance is not meant to limit firms' consideration
of additional
[[Page 15452]]
vulnerabilities or obstacles that might arise based on a firm's
particular structure, operations, or resolution strategy and that
should be factored into the firm's submission.
Scope of Application
The agencies are proposing to apply the guidance to FBOs whose
material financial distress or failure would present the greatest
potential to disrupt U.S. financial stability. Specifically, the
agencies are proposing to use the method 2 calculation of the GSIB
surcharge framework for determining the applicability of this proposed
guidance. Accordingly, the proposed guidance would apply to FBOs that
are triennial full filers \20\ and whose U.S. IHCs have a method 2 GSIB
score of 250 or more.\21\ The agencies seek comment on all aspects of
the proposed scoping methodology.
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\20\ Currently, there are no FBOs that are triennial reduced
filers and whose IHCs have method 2 scores of 250 or more. The
agencies do not intend for the proposed guidance to apply to such an
FBO.
\21\ The Specified FBOs as of the date of this proposal would be
Barclays PLC, Credit Suisse Group AG, and Deutsche Bank AG.
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In proposing a scoping methodology, the agencies seek to provide a
framework that is clear, predictable, and based on publicly reported
quantitative data. Large bank holding companies, including FBOs' U.S.
IHCs, already submit to the Board periodic public reports on their GSIB
indicator scores. Since relevant data has been collected in comparable
form for U.S. GSIBs, FBOs, and other banking organizations in the U.S.,
a small number of FBOs (those FBOs that currently are expected to be
Specified FBOs) have had consistently high method 2 GSIB scores that
persist both in comparison to U.S. GSIBs and other FBOs during the
periods for which data is available.
These comparably high method 2 scores have largely been driven by a
reliance on short term wholesale funding (STWF). The STWF factor
indicates the potential for significant liquidity outflows and large-
scale funding runs associated with STWF in times of stress. Such
funding runs may complicate the ability of an FBO to undergo an orderly
resolution in times of stress, generating both safety and soundness and
financial stability risks. While the agencies believe that there are
compelling justifications for using a standalone risk-based measure of
STWF as a basis for having heightened expectations for resolution
planning, the agencies also understand that a single indicator may not
account for other factors that are relevant to the resolvability of an
FBO.
In contrast, method 2 of the GSIB surcharge framework is designed
to provide a single, comprehensive, integrated assessment of a large
bank holding company's systemic footprint. Specifically, the method 2
score assesses a financial institution's asset size,
interconnectedness, complexity (including over-the-counter derivatives
trading), cross-jurisdictional activity, and reliance on STWF--all
important factors in considering resolvability. Thus, the agencies
believe that this methodology is an appropriate mechanism for
determining the scope of applicability of the proposed guidance.
The agencies believe that a method 2 GSIB score of 250 or more
indicates that an FBO has certain characteristics that could present
barriers to a rapid and orderly resolution. For example, a firm that
funds a large percentage of its assets with STWF--as noted above, a
measure that suggests that a banking organization is more vulnerable to
large-scale funding runs and thus increased resolvability risk--would
have a method 2 GSIB score of 250 or more. Moreover, a substantial
majority of U.S. GSIBs, which are the subject of heightened
expectations regarding resolution planning,\22\ have a GSIB method 2
score of 250 or more, suggesting the need to apply heightened
resolution expectations to FBOs that present comparable resolvability
challenges. In addition, the proposed guidance would only apply to FBOs
with U.S. IHCs because those are the FBOs with the largest consolidated
U.S. operations that are subject to resolution under the Bankruptcy
Code.
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\22\ See 2019 domestic guidance.
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The agencies are not proposing to use the tailoring rules and the
accompanying framework for sorting financial institutions into certain
tailoring categories, other than to confirm that a firm is a triennial
full filer. Several factors for determining a financial institution's
tailoring category are important in the context of resolution and the
application of this proposed guidance to the Specified FBOs. However,
the tailoring rules and tailoring categories were developed to
determine application of a broad range of enhanced prudential
standards, including the general operation of resolution plan
submissions, and were not focused on determining which covered
companies should be subject to more detailed resolution planning
guidance in light of longer resolution planning cycles and the need for
greater coordination between home and host regulators.
Question [*]: Is the proposed scope of applicability of the
proposed guidance appropriate? Should the agencies adopt a different
methodology for determining the scope of the proposed guidance? For
example, should the proposed guidance apply to FBOs whose U.S.
operations have a systemic risk profile (as assessed by the method 1
GSIB score) that is similar to the systemic risk profile of the U.S.
financial institutions that are assigned to Category I under the
Board's tailoring rules? Should the proposed guidance apply to FBOs
that are subject to Category II standards (based on the firm's
combined U.S. operations) under the Board's tailoring rules? Should
the proposed guidance apply to FBOs that have exposure of a certain
level (in the range of $50 to $100 billion) in one or more of the
risk-based indicators identified in the Board's tailoring rules,
such as nonbank assets and/or STWF? If the agencies adopt a
different scope of application than what is being proposed, should
the agencies also modify the content of the guidance, for example by
removing certain sections of the guidance? Commenters are invited to
explain in detail the basis for their positions.
Question [*]: Should the agencies outline in the final guidance
their methodology and process for determining the FBOs to which the
guidance should apply? Should the agencies specify in the final
guidance an implementation period for any FBO that did not receive
the 2018 FBO guidance, but to which the final guidance will apply?
If so, should the implementation period be fixed or subject to
adjustment by the agencies?
Capital: The ability to provide sufficient capital to U.S. non-
branch material entities without disruption from creditors is important
to ensure that such material entities can continue to provide critical
services and maintain identified critical operations as the U.S. IHC is
resolved. The proposal describes expectations concerning the
appropriate positioning of capital and other loss-absorbing instruments
(e.g., debt that the parent may forgive or convert to equity) among the
U.S. IHC and its subsidiaries (resolution capital adequacy and
positioning or RCAP).\23\ The proposal also describes expectations
regarding a methodology for periodically estimating the amount of
capital that may be needed to support each U.S. IHC subsidiary after
the U.S. IHC's bankruptcy filing (resolution capital execution need or
RCEN).
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\23\ The proposal also would make consistent with the 2019
domestic guidance expectations about intercompany debt.
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Liquidity: A firm's ability to reliably estimate and meet the
liquidity needs of the U.S. IHC and its subsidiaries prior to, and in,
resolution (resolution liquidity execution need or RLEN) is important
to the execution of a Specified FBO's U.S. resolution strategy.
Maintaining sufficient and appropriately-positioned liquidity also
[[Page 15453]]
allows the U.S. IHC subsidiaries to continue to operate while the U.S.
IHC is being resolved in accordance with the firm's U.S. resolution
strategy. The proposal also describes expectations concerning a
methodology for measuring the stand-alone liquidity position of each
U.S. non-branch material entity.
Governance Mechanisms: An adequate governance structure with
triggers that identify the onset, continuation, and increase of
financial stress is important to ensure that there is sufficient time
to communicate and coordinate with the foreign parent regarding the
provision of financial support and other key actions. The governance
mechanisms section proposes expectations that firms have playbooks that
describe the board and senior management actions of the U.S. non-branch
material entities necessary to execute the firm's U.S. resolution
strategy. In addition, the proposal describes expectations that firms
have triggers that are linked to specific actions outlined in these
playbooks to ensure the timely escalation of information to both U.S.
IHC and foreign parent governing bodies. The proposal also describes
the expectations that firms identify and analyze potential legal
challenges to planned U.S. IHC support mechanisms, and any defenses and
mitigants to such challenges.
Currently, certain Specified FBOs have relied on contractually
binding mechanisms (``CBMs'') to ensure that sufficient capital and
liquidity is timely provided to material entity subsidiaries prior to
the U.S. IHC commencing a bankruptcy case. These structures are
designed, in part, to mitigate potential legal challenges to the
provision of such support.\24\ With respect to legal challenges, the
certain Specified FBOs assume, therefore, that creditors in a
bankruptcy case of the U.S. IHC would exist and would bring a creditor
challenge action in any bankruptcy case of the U.S. IHC.
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\24\ The U.S. GSIBs previously adopted CBMs for similar
purposes.
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Certain Specified FBOs have developed either (i) a secured support
agreement whereby 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; \25\ or (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 that subsidiary prior to the U.S. IHC's
bankruptcy. Under this second approach, the subsidiary would, using the
funds derived from the equity investment, provide capital and liquidity
support to U.S. material entities.
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\25\ FBOs operating in the United States with U.S. non-branch
assets of $50 billion or more, such as the firms that would be
Specified FBOs under the proposed guidance, are required to
consolidate certain U.S. subsidiaries under a single, top-tier
intermediate holding company. 12 CFR 252.153. In this circumstance,
the U.S. IHC would be the entity that enters into a secured support
agreement with its U.S. subsidiaries. Separately, some U.S.-based
financial institutions have established an intermediate holding
company to facilitate the flow of capital and liquidity to material
entities prior to bankruptcy.
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Neither the proposed guidance nor the Rule recommend a specific
strategy for ensuring that support is timely provided to material
entity subsidiaries and reducing the risk of a successful legal
challenge to pre-bankruptcy resolution-related actions. The agencies
continue to evaluate the efficacy of CBMs for the Specified FBOs as
tools to address each of these objectives. The agencies seek comment on
the benefits and costs and relative advantages and disadvantages of
each CBM approach for the Specified FBOs.
Question [*]: Is each CBM approach described above effective as
a potential mitigant to potential legal challenges in the case of a
U.S. IHC bankruptcy? Is each effective in ensuring the provision of
capital and liquidity support to material entities in periods of
financial stress? What are the benefits and costs and relative
advantages and disadvantages associated with each of the CBM
approaches?
Question [*]: Does each of the aforementioned CBM approaches
appropriately balance the certainty associated with pre-positioning
capital directly at U.S. IHC subsidiaries with the flexibility
provided by holding recapitalization resources at the U.S. IHC
(contributable resources) to meet unanticipated losses at the U.S.
IHC subsidiaries? Does each of the aforementioned CBM approaches
provide sufficient confidence that appropriate levels of capital and
liquidity will be timely provided to material entity subsidiaries?
Does the absence of a perfected security interest under the equity
purchase arrangement materially affect the likelihood that resources
would be available to material entity subsidiaries under that
approach? Why or why not?
Question [*]: Are there alternative CBM approaches that would
provide equivalent or greater effectiveness in the provision of
capital and liquidity to material entities in periods of financial
stress? Should the agencies prescribe a specific CBM approach or
provide additional guidance on the subject, or neither?
Question [*]: Does the existence of a CBM that follows either of
the aforementioned CBM approaches have the potential to facilitate
or pose a potential conflict with a Specified FBO's home country
global resolution strategy? If so, are there alternative approaches
that would mitigate the conflict while providing sufficient
confidence that appropriate levels of capital and liquidity will be
timely provided to material entity subsidiaries?
Operational: The development and maintenance of operational
capabilities is important to support and enable successful execution of
a firm's U.S. resolution strategy, including providing for the
continuation of identified critical operations and preventing or
mitigating adverse impacts on U.S. financial stability. The proposed
operational capabilities include:
Developing a framework and playbooks that consider
contingency actions and alternative arrangements to be taken to
maintain payment, clearing, and settlement activities and to maintain
access to financial market utilities (``FMUs''), as further discussed
below;
Possessing fully developed capabilities related to
managing, identifying, and valuing the collateral that is received
from, and posted to, external parties and its affiliates;
Having management information systems that readily produce
key data on financial resources and positions on a U.S. legal entity
basis, and that ensure data integrity and reliability; and
Maintaining an actionable plan to ensure the continuity of
all of the shared and outsourced services on which identified critical
operations rely.
In addition, the proposed guidance outlines expectations that
firms' plans should reflect the current state of how the early
termination of qualified financial contracts could impact resolution of
the firm's U.S. operations.
Branches: U.S. branches of FBOs, while legally distinct from a U.S.
IHC, can play a critical role in a firm's U.S. operations. Therefore,
the proposal describes expectations regarding the mapping of
interconnections and interdependencies between a U.S. branch that is a
material entity and other material entities, core business lines, or
identified critical operations. In addition, the Specified FBOs would
be expected to show how branches would continue to facilitate the
firm's FMU access for identified critical operations and to meet
funding needs. The proposal also outlines expectations that the
Specified FBOs analyze the effects on the firm's FMU access and
identified critical operations of the cessation of operations of any
U.S. branch that is significant to the activities of an identified
critical operation.
[[Page 15454]]
Group Resolution Plan: As noted above, the agencies recognize the
preferred resolution outcome for the Specified FBOs is a successful
home country resolution. U.S. operations of an FBO are often highly
interconnected with the broader, global operations of the financial
institution. The proposal outlines expectations for these firms to
detail how resolution planning for U.S. domiciled entities or
activities is integrated into the foreign-based covered company's
overall resolution or other contingency planning process.
Legal Entity Rationalization and Separability: It is important that
firms maintain a structure that facilitates orderly resolution. To
achieve this, the proposal states that a firm should develop criteria
supporting the U.S. resolution strategy and integrate them into day-to-
day decision making processes. The criteria would be expected to
consider the best alignment of legal entities and business lines and
facilitate resolvability of U.S. operations as a firm's activities,
technology, business models, or geographic footprint change over time.
In addition, the proposed guidance provides that the firm should
identify discrete U.S. operations that could be sold or transferred in
resolution.
Derivatives and Trading Activities: It is important that a firm's
derivatives and trading activities can be stabilized and de-risked
during resolution without causing significant market disruption. As
such, firms should have capabilities to identify and mitigate the risks
associated with their U.S. derivatives and trading activities
(including those activities originated from the U.S. entities (as
defined below) and booked directly into a non-U.S. affiliate) and with
the implementation of their preferred strategies, as further discussed
below.
III. Proposed Changes From Prior Guidance
The proposed guidance contains modifications and clarifications
informed by the agencies' review of the certain Specified FBOs' 2018
plans, particularly in the areas of DER and PCS. Generally, the
agencies' expectations for the Specified FBOs' resolution plan
submissions are consistent with their expectations for the U.S. GSIBs'
resolution plan submissions, with appropriate tailoring to reflect the
firms' foreign parents and their different organizational structures
and operations. In addition, the proposed guidance would provide
certain clarifications to address the 2019 revisions and changes within
the financial industry. The following summarizes the changes relative
to the 2018 FBO guidance to which the agencies are seeking comment:
Scope
The agencies have eliminated from the 2018 FBO guidance the
paragraph indicating that the expectations apply to certain Specified
FBOs. As indicated above, the agencies are proposing to scope
application of the proposed guidance by reference to a pre-existing
framework for determining systemic risk. Specifically, the proposed
guidance would apply to FBOs that are triennial full filers and whose
U.S. IHCs have a method 2 GSIB score of 250 or more. The agencies also
are considering the appropriate implementation period for any FBO that
becomes subject to the forthcoming final guidance and that was not a
recipient of the 2018 FBO guidance.
Operational: Payment, Clearing, and Settlement Activities
The provision of PCS services by firms, FMUs, and agent banks is an
essential component of the U.S. financial system, and maintaining the
continuity of access to PCS services is important for the orderly
resolution of the Specified FBOs' U.S. material entities, identified
critical operations, and core business lines. Based upon the review of
recent resolution plan submissions and the agencies' engagement with
the firms, the agencies believe that the firms that would be Specified
FBOs under the proposed guidance generally have continued to develop
capabilities to identify and consider the risks associated with
continuity of access to PCS services in a resolution under their U.S.
resolution strategies. These capabilities are described in the firms'
resolution plan methodologies and are included in playbooks for key
FMUs and key agent banks.
The 2018 FBO guidance indicated that the resolution plan submission
of an FBO to which the 2018 guidance applied should describe
arrangements to facilitate continued access to PCS services through
those FBOs' resolution. The agencies are now proposing guidance that
clarifies the agencies' expectations with respect to the Specified
FBOs' capabilities to maintain continued access to PCS services. First,
the proposal would state that firms should develop frameworks that
articulate their strategies for continued access to PCS services to
focus the firms' consideration of this issue. Second, the proposed
guidance would provide clarity regarding firms' playbooks for retaining
access to PCS services. Finally, the proposal would distinguish between
expectations related to users and providers of PCS services, to reflect
the different financial and operational considerations associated with
each activity. The agencies believe that the firms that would be
Specified FBOs under the proposed guidance generally have methodologies
and capabilities in place to address the expectations in this proposal.
Framework. The framework through which a firm maintains continued
access to PCS services should incorporate the identification of key
clients of a firm's U.S. operations,\26\ as well as key FMUs and key
agent banks for a firm's U.S. material entities, identified critical
operations, and core business lines, using both quantitative \27\ and
qualitative criteria, and playbooks for each key FMU and key agent
bank. The proposed guidance builds upon existing guidance by specifying
that the framework should consider key clients of the firm's U.S.
operations (which may include affiliates of the firm), key FMUs, and
key agent banks.\28\ The agencies note that, while the 2018 FBO
guidance does not expressly suggest the identification of and
development of playbooks for key agent banks, the firms that would be
Specified FBOs under the proposed guidance generally considered agent
bank relationships in their most recent resolution plan submissions,
with each providing a playbook for at least one key agent bank. Because
agent
[[Page 15455]]
bank relationships may replicate PCS services provided by FMUs or
facilitate access to FMUs, the agencies are proposing to expressly
include the development of playbooks for key agent banks.
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\26\ A client is an individual or entity, including affiliates
of the firm, to whom the firm provides PCS services and, if credit
or liquidity is offered, any related credit or liquidity offered in
connection with those services. In an effort to provide additional
clarity, the proposed guidance clarifies that a firm should consider
any related credit or liquidity offered in connection with those
services only if credit or liquidity is offered. Although this
clarification is not expressly included in the 2019 domestic
guidance, the agencies' expectation concerning the identification of
key clients remains the same for both those U.S. banking
organizations and the Specified FBOs.
\27\ In identifying entities as key, examples of quantitative
criteria may include: For a client, transaction volume/value, market
value of exposures, assets under custody, usage of PCS services, and
if credit or liquidity is offered, any extension of related intraday
credit or liquidity; for an FMU, the aggregate volumes and values of
all transactions processed through such FMU; and, for an agent bank,
assets under custody, the value of cash and securities settled, and
extensions of intraday credit.
\28\ The agencies note that several footnotes have been modified
from the corresponding footnotes in the 2019 domestic guidance.
Compare 84 FR 1452 nn. 13-14 with V. Payment, Clearing, and
Settlement Activities nn. 19-20. These modifications were made for
clarification purposes and do not reflect a difference in
expectations between Specified FBOs and the eight largest, complex
U.S. banking organizations regarding the identification of key
clients, key FMUs, and key agent banks.
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In applying the framework, a firm would be expected to consider its
role as a user or a provider of PCS services. The proposal refers to a
user of PCS services as a firm that accesses the services of an FMU
directly through its own membership in that FMU or indirectly through
the membership of another entity, including an affiliate, that provides
PCS services on an agency basis. A firm is a provider of PCS services
under the proposed guidance if it provides its clients with access to
an FMU or agent bank directly through the firm's membership in or
relationship with that service provider, or indirectly through the
firm's relationship with another entity, including a U.S. or non-U.S.
affiliate or branch, that provides the firm with PCS services on an
agency basis. A firm also would be a provider if it delivers PCS
services to a client through the firm's own operations in the United
States in a manner similar to an FMU.
The proposal provides that a firm's framework should take into
account certain relevant relationships by providing a mapping of U.S.
material entities, identified critical operations, core business lines,
and key clients of the firm's U.S. operations to key FMUs and key agent
banks. This framework would be expected to consider both direct
relationships (e.g., a firm's direct membership in the FMU, a firm's
provision of such key clients of the firm's U.S. operations with PCS
services through its own operations in the United States, or a firm's
contractual relationship with an agent bank) and indirect relationships
(e.g., a firm indirectly accesses PCS services through its relationship
with another entity, including U.S. and non-U.S. affiliates and
branches, that provides the firm with PCS services on an agency basis).
The agencies are not proposing to limit the framework to direct
relationships and non-affiliates, since continuity of access in a
resolution scenario to directly accessed and indirectly accessed PCS
activities, including through affiliates, is likely to be essential to
the rapid and orderly resolution of a Specified FBO.
By developing and evaluating these activities and relationships
through a framework that incorporates the elements of the proposed
guidance, a firm should be able to consider the issue of maintaining
continuity of access to PCS services in a comprehensive manner.
Question [ ]. Is the proposed guidance sufficiently clear with
respect to the following concepts: scope of PCS services, user vs.
provider, and direct vs. indirect relationships? What additional
clarifications or alternatives concerning the proposed framework or
its elements, if any, should the agencies consider? For instance,
would further examples of ways that a Specified FBO may act as
provider of PCS services be useful? Should the agencies consider
further distinguishing between providers based on the type of PCS
service they provide?
Question [ ]. Is the proposed guidance sufficiently clear
concerning expectations related to PCS services provided by a
Specified FBO's U.S. material entities, whether branches or non-
branches? Should the agencies consider applying different
expectations for U.S. material entities based on whether they are
branches or non-branch entities? If so, what should be the basis for
such differing expectations, and what additional clarifications or
alternatives should the agencies consider?
Playbooks for Continued Access to PCS Services. Under the proposal,
it is expected that a firm would provide a playbook for each key FMU
and key agent bank, whether there is a direct relationship or an
indirect relationship (including indirect arrangements through any U.S.
or non-U.S. affiliate or branch) between the firm and each key FMU and
key agent bank. A Specified FBO also would be expected to provide a
playbook for each key FMU and key agent bank that, among other things,
includes financial and operational detail that would support continued
access to PCS services for the firm and key clients of its U.S.
operations under the firm's U.S. resolution strategy.\29\
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\29\ However, the firm is not expected to incorporate a scenario
in which it loses key FMU or key agent bank access into its U.S.
resolution strategy or its RLEN and RCEN estimates.
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The proposed guidance differentiates the type of information to be
included in a firm's key FMU and key agent bank playbooks based on
whether a firm is a user of PCS services with respect to that FMU or
agent bank, a provider of PCS services with respect to that FMU or
agent bank, or both. To the extent a firm is both a user and a provider
of PCS services with respect to a particular FMU or agent bank, the
firm would be expected to provide the described content for both users
and providers of PCS services. A firm would be able to do so either in
the same playbook or in separate playbooks included in its resolution
plan submission.
Content related to Users of PCS Services. Each playbook for an
individual key FMU or key agent bank should include a description of
the firm's direct or indirect relationship as a user with the key FMU
or key agent bank and an identification and mapping of PCS services to
the associated U.S. material entities, identified critical operations,
and core business lines that use those PCS services, as well as a
discussion of the potential range of adverse actions that could be
taken by that key FMU or key agent bank when the firm is in resolution
under its U.S. resolution strategy.\30\ Playbooks submitted as part of
the 2018 resolution plan submissions generally mapped the PCS services
provided to U.S. material entities, identified critical operations, and
core business lines at a granular level, which enhanced the utility of
these playbooks.
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\30\ Examples of potential adverse actions may include increased
collateral and margin requirements and enhanced reporting and
monitoring.
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In discussing the potential range of adverse actions that a key FMU
or key agent bank could take, each playbook would be expected to
address the operational and financial impact of such actions on each
U.S. material entity, identified critical operation, and core business
line, and discuss contingency arrangements that the firm could initiate
in response to such adverse actions by the key FMU or key agent bank.
Operational impacts could include effects on governance mechanisms or
resource allocation (including human resources) of the Specified FBO's
U.S. operations, as well as any expected enhanced communication with
key stakeholders (e.g., regulators, FMUs, agent banks). Financial
impacts could include those directly associated with liquidity or any
additional costs incurred by the firm as a result of such adverse
actions and contingency arrangements.
Content related to Providers of PCS Services. Under the proposal, a
firm that is a direct or indirect provider of PCS services would be
expected to identify, in its playbook for the relevant key FMU or key
agent bank, key clients of its U.S. operations that rely upon PCS
services provided by the firm's U.S. material entities, identified
critical operations, and core business lines. Playbooks would be
expected to describe the scale and way in which the firm's U.S.
material entities, identified critical operations, and core business
lines provide PCS services and any related credit or liquidity that may
be offered by the firm in connection with such services. Similar to the
content expected of users of PCS services, each playbook would be
expected to include a mapping of the PCS services provided to
[[Page 15456]]
each U.S. material entity, identified critical operation, and core
business line, as well as key clients of the firm's U.S. operations. If
a firm provides PCS services through its own U.S. operations, the firm
would be expected to produce a playbook for the U.S. material entity
that provides those services, and the playbook would focus on
continuity of access for key clients of the firm's U.S. operations.
The proposal states that playbooks should discuss the potential
range of contingency actions available to the firm to minimize
disruption to its provision of PCS services to key clients of its U.S.
operations and the financial and operational impacts of such
arrangements. Contingency arrangements may include viable transfer of
client activity and any related assets or any alternative arrangements
that would allow key clients of the firm's U.S. operations to maintain
continued access to PCS services. Each playbook also would be expected
to describe the range of contingency actions that the firm may take
concerning its provision of intraday credit to key clients of its U.S.
operations and to provide analysis quantifying the potential liquidity
that the firm could generate by taking each such action in stress and
in the resolution period. To the extent a firm would not take any such
actions as part of its U.S. resolution strategy, the firm would be
expected to describe its reasons for not taking any contingency action.
Under the proposal, a Specified FBO should communicate the
potential impacts of implementation of any identified contingency
arrangements or alternatives to key clients of its U.S. operations, and
playbooks should describe the firm's methodology for determining
whether it should provide any additional communication to some or all
such key clients of its U.S. operations (e.g., due to the client's BAU
usage of that access or related extensions of credit), as well as the
expected timing and form of such communication. The agencies note that,
in the most recent submissions of the firms that would be Specified
FBOs under the proposed guidance, these firms generally addressed the
issue of client communications and provided descriptions of planned or
existing client communications. A firm would be expected to consider
any benefit of communicating this information in multiple forms (e.g.,
verbal or written) and at multiple time periods (e.g., business as
usual, stress, or some point in time in advance of taking contingency
actions) in order to provide adequate notice to key clients of its U.S.
operations of the action and the potential impact on the client of that
action.
In making decisions concerning communications to such key clients
of its U.S. operations, the proposal states that the firm also should
consider tailoring communications to different subsets of clients
(e.g., based on levels of activity or credit usage) in form, timing, or
both. Playbooks may include sample client contracts or agreements
containing provisions related to the firm's provision, if any, of
intraday credit or liquidity.\31\ Such sample contracts or agreements
may be important to the extent that the firm believes those documents
sufficiently convey to clients the contingency arrangements available
to the firm and the potential impacts of implementing such contingency
arrangements.
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\31\ If these sample client contracts or agreements are included
separately as part of the firm's resolution plan submission, they
may be incorporated into the playbook by reference.
Question [ ]. Are the expectations with respect to playbook
content for firms that are direct or indirect users or providers (or
both) of PCS services sufficiently clear? What additional
clarifications, alternatives, or additional information, if any,
should the agencies consider?
Question [ ]. Should the guidance indicate that providers of PCS
activities are expected to consider particular contingency
arrangements (e.g., methods to transfer client activity to other
firms with whom the clients have relationships, alternate agent bank
relationships, etc.)? Should the guidance also indicate that firms
should consider particular actions they may take concerning the
provision of intraday credit to affiliate and third-party clients,
such as requiring pre-funding? If so, what particular actions should
these firms address?
Question [ ]. Specifically for direct and indirect users of PCS
activities, should the guidance indicate that firms are expected to
include PCS-related liquidity sources and uses, such as client pre-
funding, or specific abilities to control intraday liquidity inflows
and outflows, such as throttling or prioritizing of payments? If so,
what particular sources and uses should firms be expected to
include?
Question [ ]. Specifically for providers of PCS services, are
the agencies' expectations concerning a firm's communication to key
clients of its U.S. operations (including affiliates, as applicable)
of the potential impacts of implementation of identified contingency
arrangements sufficiently clear? What additional clarifications, if
any, should the agencies consider? Should the agencies expect the
firm to communicate this information to key clients of the U.S.
operations at specific times or in specific formats?
Capabilities. Similar to prior guidance, the proposal includes
expectations concerning a Specified FBO's capabilities for
understanding and tracking its obligations and exposures associated
with PCS activities, including contractual obligations and commitments.
The proposed guidance indicates that those expectations would apply
with respect to the obligations and exposures associated with PCS
activities for each U.S. material entity, whether a branch or non-
branch, as any such entity may provide access to PCS services.
Question [ ]. Are the agencies' expectations concerning these
capabilities sufficiently clear? What additional clarifications, if
any, should the agencies consider?
Operational: Qualified Financial Contracts
The 2018 FBO guidance indicated that the FBOs that were the subject
of the 2018 FBO guidance could discuss in their resolution plan
submissions the deployment and impact of certain International Swaps
and Derivatives Association (``ISDA'') protocol developments on their
resolution plans. The Specified FBOs may use those ISDA protocols to
comply with the qualified financial contract stay rules of the Board,
Office of the Comptroller of the Currency, and FDIC (``QFC Stay
Rules'').\32\ As firms may comply with the QFC Stay Rules by amending
contracts directly, if desired, rather than using the ISDA protocols,
and because those ISDA protocols are final and open for adherence, the
agencies are proposing to remove language in the guidance related to
these developments. The agencies propose to retain an expectation that
firms' plans reflect the current state of how the early termination of
qualified financial contracts could impact the resolution of the firm's
U.S. operations.
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\32\ 12 CFR part 47 (Office of the Comptroller of the Currency);
12 CFR part 252, subpart I (Board); and 12 CFR part 382 (FDIC).
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Legal Entity Rationalization and Separability
The separability section of the proposed guidance has been updated
to provide additional specificity on actionability and generally aligns
with the agencies' expectations as described in the 2019 domestic
guidance. A firm's separability options should be actionable and should
identify impediments and related mitigation strategies in advance. The
proposed guidance notes that the Specified FBOs should consider
potential consequences to U.S. financial stability of executing each
separability option, while also noting that detail and analysis should
be
[[Page 15457]]
commensurate with each Specified FBO's U.S. risk profile and
operations.
The proposed guidance has also been updated to reflect revised
expectations around maintaining active virtual data rooms for
separability options that involve a sale of U.S. operations or
businesses (``objects of sale''). Consistent with expectations
described in the 2019 domestic guidance, firms would be expected to
have the capability to populate a data room with information pertinent
to a potential divestiture in a timely manner, rather than to maintain
an active data room. The agencies would expect to test this capability
by asking firms to produce selected sale-related materials within a
certain timeframe as part of future resolution plan reviews.
Derivatives and Trading Activities
The size, scope, complexity, and potential for opacity of a
Specified FBO's U.S. derivatives and trading activities \33\ may
present significant risk to the resolvability of the firm's U.S.
entities.\34\ Based on the agencies' review of these firms' most recent
resolution plan submissions,\35\ the agencies have observed that the
firms that would be Specified FBOs under the proposed guidance are
increasingly booking U.S. derivatives and trading activities that
originate from U.S. entities \36\ into non-U.S. affiliates. As a
result, the booking of U.S. derivatives and trading activities
regularly occurs across jurisdictions and creates interconnections and
interdependencies among and between the U.S. entities and non-U.S.
affiliates of firms that would be Specified FBOs under the proposed
guidance.\37\ It can be difficult for the agencies to evaluate a firm's
U.S. derivatives and trading activities, and related risks to U.S.
financial stability during the execution of the firm's U.S. resolution
strategy, without considering these activities on a broader basis
(e.g., a cross-jurisdictional, business line basis). This is
particularly true for the firm's U.S. derivatives and trading
activities originated from U.S. entities that are booked directly into
a non-U.S. affiliate. Greater transparency into these activities is
important because the U.S. entities have ongoing responsibilities for
U.S. derivatives and trading activities originated from U.S. entities
such as management of client relationships, transaction settlement,
management of risk limits, and maintenance of access to U.S. FMUs, in
the period leading-up to and during execution of the U.S. resolution
strategy.
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\33\ ``U.S. derivatives and trading activities'', means all
derivatives and trading activities that are: (1) Related to a firm's
identified critical operations or core business lines, including any
such activities booked directly into a non-U.S. affiliate; (2)
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 (as
defined below); or (3) both of the foregoing. A firm should identify
its U.S. derivatives and trading activities pursuant to a
methodology and justify the methodology used.
\34\ ``U.S. entities'' means U.S. IHC subsidiaries and material
entity branches.
\35\ Each of the 2018 resolution plans of the firms that would
be Specified FBOs under the proposed guidance identifies certain
U.S. derivatives and trading activities (including U.S. prime
brokerage services) as an identified critical operation or core
business line.
\36\ Activities ``originated'' from U.S. entities are those
activities transacted or arranged by, or on behalf of those U.S.
entities and their clients and counterparties, including any such
activity for which the U.S. entity is compensated (directly or
indirectly) by a non-U.S. affiliate. These activities also include,
for example, those that are sourced or executed through personnel
employed by or acting on behalf a U.S. entity. The agencies would
expect that a U.S. entity that is significant to the origination of
activities for an identified critical operation or core business
line would be designated as a U.S. material entity.
\37\ The Rule requires a Specified FBO to identify, describe in
detail, and map to the legal entity the interconnections and
interdependencies among the U.S. subsidiaries, branches and
agencies, and between those entities and the identified critical
operations and core business lines of the Specified FBO, and any
foreign-based affiliate. See 12 CFR 243.5(a)(2)(i); 12 CFR
381.5(a)(2)(i).
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Uncertainty about the execution risk, allocation of losses, and
impact on clients and counterparties of the U.S. entities could
contribute to a loss of confidence in the firm's U.S. resolution
strategy. To facilitate an orderly resolution of its U.S. entities, a
Specified FBO should be able to demonstrate the ability to monitor and
manage its U.S. derivatives and trading activities in the period
leading-up to and during execution of the U.S. resolution strategy
without risk of a serious adverse effect on U.S. financial stability.
The firms that would be Specified FBOs under the proposed guidance have
been developing certain capabilities to identify and mitigate the risks
associated with their U.S. derivatives and trading activities and with
the implementation of their U.S. resolution strategies. These
capabilities seek to facilitate a firm's planning, preparedness, and
execution of an orderly resolution of its U.S. entities. Notably, they
also may facilitate a home-country led strategy.\38\
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\38\ An SPOE strategy has been identified as the preferred group
resolution strategy for each of the firms that would be Specified
FBOs under the proposed guidance. See supra Objectives of the
Resolution Planning Process.
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The proposed guidance would clarify the agencies' expectations with
respect to such capabilities and a firm's analysis of its U.S.
resolution strategy. The proposed guidance also would eliminate the
expectations of the 2018 FBO guidance that a firm's U.S. resolution
plan include separate passive and active wind-down scenario analyses,
the agency-specified data templates, and rating agency playbooks, which
is consistent with the 2019 domestic guidance. In addition, relative to
the 2019 domestic guidance, the proposed guidance would modify certain
expectations for the Specified FBOs to reflect better the structures
and business activities of the firms that would be Specified FBOs under
the proposed guidance, including the size and complexity of their U.S.
derivatives and trading activities and the associated risks to the
orderly resolution of their U.S. entities. In particular, the proposed
modifications would change the scope of activities covered by the
Booking Practices subsection from derivatives portfolios \39\ to U.S.
derivatives and trading activities.\40\ The proposal would also replace
the Inter-Affiliate Risk Monitoring and Controls subsection with a new
U.S. Activities Monitoring subsection to place an appropriate focus on
the firm's ability to provide timely transparency into the U.S.
derivatives and trading activities, regardless of where the
transactions are booked. Finally, in consideration of the relatively
smaller size and less complex nature of the derivatives positions
booked directly into U.S. IHC subsidiaries of the firms that would be
Specified FBOs under the proposed guidance, the proposal would
eliminate the ``ease of exit'' position analysis, ``application of exit
cost methodology,'' and ``analysis of operational capacity''
subsections.\41\ As described in more detail below, the proposed
derivatives and trading activities guidance is organized into five
subsections.
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\39\ A firm's derivatives portfolios include its derivatives
positions and linked non-derivatives trading positions.
\40\ This modification would extend the scope of the booking
practices beyond derivatives portfolios to include, for example,
securities financing transactions originated from the firm's U.S.
prime brokerage business on behalf of a U.S. client but booked
directly into a non-U.S. affiliate.
\41\ While this modification would eliminate the more detailed
expectations in subsections on ``application of exit cost
methodology'' and ``analysis of operational capacity,'' similar
considerations specific to the analysis of a firm's derivatives
strategy are still captured within the ``derivatives stabilization
and de-risking strategy'' section.
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Booking practices. To minimize uncertainty, complexity, and opacity
around cross-jurisdictional booking practices that could frustrate a
firm's resolution preparedness, a firm's resolution capabilities should
include booking practices for its U.S. derivatives
[[Page 15458]]
and trading activities that are commensurate with the size, scope, and
complexity of a firm's U.S. derivatives and trading activities. A firm
should have booking practices that provide timely and up-to-date
information regarding the structure of and risks associated with the
management of its U.S. derivatives and trading activities. In addition
to providing transparency with respect to those positions booked into
U.S. entities, the booking framework should provide transparency with
respect to U.S. derivatives and trading activities booked directly to
non-U.S. affiliates. As noted above, due to the cross-border nature of
these activities, it can be difficult to evaluate the activities and
the related risk in the period leading-up to and during the execution
of the firm's U.S. resolution strategy without considering certain
activities on a cross-jurisdictional, business line basis.\42\
Therefore, the proposed guidance would clarify the capabilities a firm
is expected to have related to its booking practices, including
descriptions of its booking model framework and demonstrations of its
ability to identify, assess, and report on each U.S. entity that
originates or otherwise conducts (in whole or in material part) any
significant aspect of the firm's U.S. derivatives or trading
activities.
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\42\ The scope of the proposed guidance is larger and broader
for a Specified FBO relative to the 2019 domestic guidance and
includes, for example, account balances and securities financing
transactions related to prime brokerage services and other
derivatives trading businesses because a Specified FBO's U.S
resolution plan may not provide a full (global) legal entity view of
its U.S. derivatives and trading activities originated from U.S.
entities. In order to understand better the potential risk in
resolution (e.g., potential impacts on the stability of U.S.
financial markets), the agencies need to understand the material
interconnections and interdependencies among and between the firm's
U.S. entities and its non-U.S. affiliates that are created through
its U.S. derivatives and trading activities, including those
positions originated from the U.S. entities and booked directly into
a non-U.S. affiliate.
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U.S. activities monitoring. The booking, funding, and risk transfer
arrangements \43\ underlying a firm's U.S. derivatives and trading
activities create interconnections and interdependencies among and
between a firm's U.S. entities and their non-U.S. affiliates that, if
disrupted, could affect materially the funding or operations of the
U.S. entities that conduct the U.S. derivative and trading activities
or their clients and counterparties. As noted above, the U.S. entities
may maintain ongoing responsibilities for U.S. derivatives and trading
activities originated from U.S. entities in the period leading-up to
and during the execution of the firm's U.S. resolution strategy and a
lack of transparency into how these activities are managed could create
uncertainty that may impact negatively the orderly resolution of the
firm's U.S. entities.
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\43\ Risk transfer arrangements often apply to a range of
services and activities (e.g., trading, management, sales,
infrastructure) that are provided, conducted, or used by U.S.
entities. The relevant services and activities include those
conducted in whole or in material part in the United States. In some
instances, risk transfer arrangements may account for a material
portion of the U.S. IHC's revenue. Disruption to these risk transfer
arrangements could result in unexpected losses to or disruption of
U.S. operations.
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For example, through their derivatives and trading activities, the
firms that would be Specified FBOs under the proposed guidance provide
trade execution, hedging, securities financing, custody, clearing, and
related services for banking firms, hedge funds and other institutional
clients and counterparties. Many of these clients and counterparties
rely on the firm's execution and financing services to support their
participation in U.S. financial markets. The derivatives and trading
activities that are originated from the firm's U.S. entities, and then
booked to the firm's non-U.S. affiliates, create operational and
financial connectivity with the firm's non-U.S. entities; as a client's
assets, positions and balances can be booked to or utilized by numerous
U.S. and non-U.S. affiliates. In resolution, the U.S. entities may
continue to have responsibilities for managing U.S. client
relationships and facilitating the unwind of client positions, the
settlement of client liabilities, and the transfer of client accounts,
regardless of the entity within the global firm to which those
positions or assets have been booked.
The rapid withdrawal of client account balances, may have negative
impacts (e.g., loss of internalization) on the funding or operations of
the firm and its affiliates. Yet, the untimely transfer or other
prolonged disruptions in the clients' ability to execute transactions
may have negative impacts to those clients or the U.S. financial
markets in which they participate. Therefore, the proposal clarifies
the agencies' expectations that a firm address this risk by being able
to provide timely transparency into the management of its U.S.
derivatives and trading activities, including those originated from
U.S. entities and booked directly into non-U.S. affiliates. A firm also
should be able to assess the potential impact on the firm's clients and
counterparties engaged in U.S. derivatives and trading activities and
related risk transfer arrangements among and between the U.S. entities
and non-U.S. affiliates.
Prime brokerage customer account transfers. The rapid withdrawal
from a firm by U.S. prime brokerage clients can contribute to a
disorderly resolution. The firm's resolution plan should address the
risk that during a resolution, the firm's U.S. prime brokerage clients
may seek to withdraw or transfer customer accounts balances in rates
significantly higher than normal business conditions. The proposed
guidance confirms that a firm should have the capabilities to
facilitate the orderly transfer of U.S. prime brokerage account
balances \44\ to peer prime brokers and describes the agencies' related
expectations in greater detail. In particular, the proposed guidance
clarifies that a firm's U.S. resolution plan should describe and
demonstrate its ability to segment and analyze the quality and
composition of such account balances.
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\44\ ``U.S. prime brokerage account'' or ``U.S. prime brokerage
account balances'' should include the account positions and balances
of a client of the U.S. prime brokerage business, regardless of
where the positions or balances are booked.
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Portfolio segmentation. The ability to identify quickly and
reliably problematic derivatives positions and portfolios is critical
to minimizing uncertainty and estimating resource needs to enable an
orderly resolution of the firm's U.S. entities. The proposal confirms
that a firm should have the capabilities to produce analyses that
reflect granular portfolio segmentation, taking into account trade-
level characteristics and at an entity level, for any derivatives
portfolio of a U.S. entity.
Derivatives stabilization and de-risking strategy. A key risk to
the orderly resolution of the firm's U.S. entities is a volatile and
risky derivatives portfolio. In the event of material financial
distress or failure, the resolvability risks related to a firm's U.S.
derivatives and trading activities could be a key obstacle to the
firm's rapid and orderly resolution of any U.S. IHC subsidiary with a
derivatives portfolio. The firms' resolution plans should address this
obstacle. The proposed guidance confirms that a firm's plan should
provide a detailed analysis of its strategy to stabilize and de-risk
any derivatives portfolio of any U.S. IHC subsidiary that continues to
operate after the U.S. IHC enters into a U.S. bankruptcy proceeding
(U.S. derivatives strategy) and provides additional detail regarding
the agencies' expectations.\45\
[[Page 15459]]
In particular, the proposed guidance clarifies that a firm should
incorporate into its U.S. derivatives strategy assumptions consistent
with a lack of access to the bilateral OTC derivatives market at the
start of its resolution period. The proposed guidance also confirms and
clarifies expectations related to other elements that should be
addressed in the firm's analysis of its U.S. derivatives strategy,
including the incorporation of resource needs into its RLEN and RCEN
estimates (forecasts of resource needs); an analysis of any potential
derivatives portfolio remaining after the resolution period (potential
residual derivatives portfolio); a method to apply sensitivity analyses
to the key drivers of the derivatives-related costs and liquidity flows
under its U.S. derivatives strategy (sensitivity analysis); and the
impact from the assumed failure of a U.S. IHC subsidiary with a
derivatives portfolio (non-surviving entity analysis).
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\45\ Subject to certain constraints, a firm's U.S. derivatives
strategy may take the form of a going concern strategy, an
accelerated de-risking strategy (e.g., active wind-down), or an
alternative, third strategy so long as the firm's U.S. resolution
plan supports adequately the firm's ability to execute the chosen
strategy.
Question [ ]: Should the proposed guidance incorporate a set of
criteria explaining the circumstances under which the expectations
related to derivatives and trading activities apply to firms that
would be Specified FBOs under the proposed guidance? If so, what
criteria would be the most relevant indicators of a derivatives and
trading portfolio that may pose risks to the orderly resolution of a
firm? For example, should the agencies consider some or all of the
following indicia: being a foreign GSIB subject to U.S. Internal
TLAC requirements, having an identified critical operation or a core
business line related to U.S. derivatives and trading activities, or
other indicia?
Question [ ]: Is the proposed guidance sufficiently clear with
respect to the following concepts: U.S. derivatives and trading
activities, activities originated from U.S. entities, risk transfer
arrangements, and U.S. prime brokerage accounts? What additional
clarifications or alternatives concerning the proposed derivatives
and trading practices framework or its elements, if any, should the
agencies consider?
Question [ ]: Is the proposed guidance sufficiently clear
concerning the scope of expectations related to the Booking
Practices and U.S. Activities Monitoring subsections? Should the
agencies consider applying a different scope of expectations for
these subsections? For instance, should the scope of these
subsections only include U.S. derivatives activities, instead of
both U.S. derivatives and trading activities (e.g., securities
financing transactions)? If so, what should be the basis for such
differing expectations, and what additional clarifications or
alternatives should the agencies consider?
Question [ ]: Is the proposed guidance sufficiently clear
concerning the scope of expectations related to the Prime Brokerage
Customer Account Transfers subsection? Should the agencies consider
applying a different scope of expectations for this subsection? For
instance, should the scope of this subsection only apply to account
positions and balances that are booked into U.S. IHC subsidiaries?
If so, what should be the basis for such differing expectations, and
what additional clarifications or alternatives should the agencies
consider?
Question [ ]: Is the proposed guidance sufficiently clear
concerning the scope of expectations related to the Portfolio
Segmentation subsection? Should the agencies consider applying a
different scope of expectations for this subsection? For instance,
should the scope of this subsection only apply to U.S. IHC
subsidiaries with a derivatives portfolio, instead of both U.S. IHC
subsidiaries and U.S. material entity branches with a derivatives
portfolio? If so, what should be the basis for such differing
expectations, and what additional clarifications or alternatives
should the agencies consider?
Format and Structure of Plans
This section has been added to the proposed guidance as part of the
consolidation of the prior guidance with the proposed guidance. The
proposed guidance states the agencies' preferred presentation regarding
the format, assumptions, and structure of resolution plans. Plans
should contain an executive summary, a narrative of the firm's
resolution strategy, relevant technical appendices, and a public
section as detailed in the Rule. The proposed format, structure, and
assumptions are similar to those incorporated into the 2019 domestic
guidance.
Question [*]: Do the topics in the proposed guidance discussed
above represent the key vulnerabilities of the Specified FBOs in
resolution? If not, what key vulnerabilities are not captured?
Question [*]: The proposal incorporates portions of, and is
generally aligned with, the 2018 FBO guidance and components of the
2019 domestic guidance. Are there any components of the proposal
that should be augmented or removed? If so, which provisions? Are
there any elements of the proposed guidance that are not relevant to
the Specified FBOs? If such is the case, commenters are invited to
explain in detail and provide evidence to support their views.
Consolidation of Prior Guidance
In addition to the 2018 FBO guidance, the agencies have also issued
and provided to certain FBOs: The Guidance for 2013 Sec. 165(d) Annual
Resolution Plan Submissions by Foreign-Based Covered Companies that
Submitted Initial Resolution Plans in 2012; firm-specific feedback
letters issued in 2014 and 2018; the February 2015 staff communication
regarding the 2016 plan submissions; and the July 2017 Resolution Plan
Frequently Asked Questions (taken together, ``Prior Guidance''). The
agencies are proposing to consolidate all Prior Guidance into a single
document, which would provide the public with one source of applicable
guidance to which to refer. Under the proposal, Prior Guidance would be
superseded to the extent not incorporated in or appended to the
guidance.
Question [*]: The proposed guidance reflects consolidation of
all applicable Prior Guidance. Should the Agencies consolidate all
applicable Prior Guidance? If so, are there additional aspects of
Prior Guidance that warrant inclusion, additional clarification, or
modification?
Identified Critical Operations
In the 2019 revisions, the agencies adopted a new definition,
``identified critical operations,'' to clarify that critical operations
can be identified by either a covered company or jointly identified by
the agencies.\46\ The agencies are proposing to incorporate this new
definition throughout the proposed guidance where, previously, the term
``critical operations'' was used. This modification does not change the
substance of the proposed guidance.
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\46\ 84 FR 59210; 59218.
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IV. Paperwork Reduction Act
Certain provisions of the proposal contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501-3521) (``PRA''). In accordance
with the requirements of the PRA, the agencies may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (``OMB'') control number.
As detailed above, the proposal is largely consistent with the 2018
FBO guidance. The proposed changes are mainly in the areas of
derivatives and trading activities and payment, clearing and settlement
activities. After considering these proposed changes and any potential
PRA impacts, the agencies have determined that, generally, the proposal
would not revise the reporting requirements that have been previously
cleared by the OMB under the Board's control number (7100-0346) and
under the FDIC's control number (3064-0210). However, as a result of
the proposed guidance, for purposes of the PRA analysis, one covered
company currently categorized in the 2019 revisions as a triennial full
complex foreign filer would be re-categorized as a triennial full
foreign filer. Because of the nature of the split in burden between the
Board and the FDIC, the FDIC will make an adjustment to its PRA
clearance (3064-0210) to account
[[Page 15460]]
for the one-firm shift in category. The proposal would not add any
recordkeeping or third-party disclosure requirements under the PRA. The
agencies invite public comment on this assessment.
Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the Board's and the FDIC's functions, including
whether the information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology;
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information; and
(f) Burden estimates for preparation of the waiver request and the
calculation of any associated reduction in burden.
V. Text of the Proposed Guidance
Guidance for Resolution Plan Submissions of Certain Foreign-Based
Covered Companies
I. Introduction
II. Capital
a. Resolution Capital Adequacy and Positioning (RCAP)
b. Resolution Capital Execution Need (RCEN)
III. Liquidity
a. Capabilities
b. Resolution Adequacy and Positioning (RLAP)
c. Resolution Liquidity Execution Need (RLEN)
IV. Governance Mechanisms
a. Playbooks, Foreign Parent Support, and Triggers
b. Support Within the United States
V. Operational
a. Payment, Clearing and Settlement Activities
b. Managing, Identifying, and Valuing Collateral
c. Management Information Systems
d. Shared and Outsourced Services
e. Qualified Financial Contracts
VI. Branches
VII. Group Resolution Plan
VIII. Legal Entity Rationalization and Separability
IX. Derivatives and Trading Activities
X. Format and Structure of Plans
XI. Public Section
Appendix: Frequently Asked Questions
Guidance for Resolution Plan Submissions of Certain Foreign-based
Covered Companies
I. Introduction
Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5365(d)) requires certain foreign-based
financial companies to report periodically to the Board of Governors of
the Federal Reserve System (the Federal Reserve or Board) and the
Federal Deposit Insurance Corporation (the FDIC) (together the
Agencies) their plans for rapid and orderly resolution in the event of
material financial distress or failure. On November 1, 2011, the
Agencies promulgated a joint rule implementing the provisions of
Section 165(d).\1\ Subsequently, in November 2019, the Agencies
finalized amendments to the joint rule addressing amendments to the
Dodd-Frank Act made by the Economic Growth, Regulatory Relief, and
Consumer Protection Act and improving certain aspects of the joint rule
based on the Agencies' experience implementing the joint rule since its
adoption.\2\ Financial companies meeting criteria set out in the Rule
must file a resolution plan (Plan) according to the schedule specified
in the Rule.
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\1\ 76 FR 67323 (November 1, 2011), codified at 12 CFR parts 243
and 381.
\2\ Resolution Plans Required, 84 FR 59194 (November 1, 2019).
The amendments became effective December 31, 2019. ``Rule'' means
the joint rule as amended in 2019. Capitalized terms not defined
herein have the meanings set forth in the Rule.
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This document is intended to provide guidance to certain foreign
banking organizations regarding development of their respective U.S.
resolution strategies (Specified FBOs or firms). Specifically, the
guidance applies to FBOs that are triennial full filers \3\ and whose
intermediate holding companies required to be formed pursuant to 12 CFR
252 have a method 2 GSIB score of 250 or more. The document is intended
to assist these firms in further developing their U.S. resolution
strategies. The document does not have the force and effect of law.
Rather, it describes the Agencies' expectations and priorities
regarding these firms' Plans and the Agencies' general views regarding
specific areas where additional detail should be provided and where
certain capabilities or optionality should be developed and maintained
to demonstrate that each firm has considered fully, and is able to
mitigate, obstacles to the successful implementation of their U.S.
resolution strategy.\4\
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\3\ See 12 CFR 243.4(b)(1); 12 CFR 381.4(b)(1).
\4\ This guidance consolidates the Guidance for 2018 Sec.
165(d) Annual Resolution Plan Submissions by Foreign-Based Covered
Companies that Submitted Resolution Plans in July 2015; the July
2017 Resolution Plan Frequently Asked Questions; feedback letters
issued to certain foreign-based Covered Companies in December 2018
and in August 2014; the communications the Agencies made to certain
foreign-based Covered Companies in February 2015; and the Guidance
for 2013 Sec. 165(d) Annual Resolution Plan Submissions by Foreign-
Based Covered Companies that Submitted Initial Resolution Plans in
2012 (taken together, prior guidance). To the extent not
incorporated in or appended to this guidance, prior guidance is
superseded.
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The Agencies are providing guidance to the Specified FBOs to assist
their further development of a resolution plan for their U.S.
operations for their July 1, 2021 and subsequent resolution plan
submissions.\5\ The guidance for Specified FBOs differs in certain
respects from the guidance issued in December 2018 for certain U.S.-
based covered companies given the circumstances under which a U.S.
resolution plan is most likely to be relevant. The U.S. resolution plan
for a Specified FBO would address a scenario where the U.S. operations
experience material financial distress and the foreign parent is unable
or unwilling to provide sufficient financial support for the
continuation of U.S. operations, and at least the top tier U.S.
Intermediate Holding Company (U.S. IHC) files for Chapter 11
bankruptcy. Under such a scenario, the Plan should provide for the
rapid and orderly resolution of the Specified FBO's U.S. material
entities and operations.
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\5\ Consistent with prior communications to the firms that would
be Specified FBOs under the proposed guidance, they are required to
submit resolution plans on or before July 1, 2020 that may be
limited to describing changes that those FBOs have made to their
July 2018 resolution plans to address shortcomings identified in
those resolution plans.
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In general, this document is organized around a number of key
vulnerabilities in resolution (e.g., capital; liquidity; governance
mechanisms; operational; legal entity rationalization and separability;
and derivatives and trading activities) that apply across resolution
plans. Additional vulnerabilities or obstacles may arise based on a
firm's particular structure, operations, or resolution strategy. Each
firm is expected to satisfactorily address these vulnerabilities in its
Plan--e.g., by developing sensitivity analysis for certain underlying
assumptions, enhancing capabilities, providing detailed analysis, or
increasing optionality development, as indicated below.
The Agencies will review the Plan to determine if it satisfactorily
addresses
[[Page 15461]]
key potential vulnerabilities, including those detailed below. If the
Agencies jointly decide that these matters are not satisfactorily
addressed in the Plan, the Agencies may determine jointly that the Plan
is not credible or would not facilitate an orderly resolution under the
U.S. Bankruptcy Code.
II. Capital
Resolution Capital Adequacy and Positioning (RCAP): In order to
help ensure that a firm's U.S. non-branch material entities \6\ could
be resolved in an orderly manner, the firm's U.S. IHC should have an
adequate amount of loss-absorbing capacity to execute its U.S.
resolution strategy. Thus, a firm's U.S. IHC should hold total loss-
absorbing capital, as well as long-term debt, to help ensure that the
firm has adequate capacity to meet that need at a consolidated level of
the U.S. IHC (IHC TLAC).\7\
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\6\ The terms ``material entities,'' ``identified critical
operations,'' and ``core business lines'' have the same meaning as
in the Rule. The term ``U.S. material entity'' means any subsidiary,
branch, or agency that is a material entity and is domiciled in the
United States. The term ``U.S. non-branch material entity'' means a
material entity organized or incorporated in the U.S. including, in
all cases, the U.S. IHC. The term ``U.S. IHC subsidiaries'' means
all U.S. non-branch material entities other than the U.S. IHC.
\7\ Total Loss-Absorbing Capacity, Long-Term Debt, and Clean
Holding Company Requirements for Systemically Important U.S. Bank
Holding Companies and Intermediate Holding Companies of Systemically
Important Foreign Banking Organizations, 82 FR 8266 (January 24,
2017).
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A firm's IHC TLAC should be complemented by appropriate positioning
of that loss-absorbing capacity between the U.S. IHC and the U.S. IHC
subsidiaries. The positioning of a firm's IHC TLAC should balance the
certainty associated with pre-positioning internal TLAC directly at
U.S. IHC subsidiaries with the flexibility provided by holding
recapitalization resources at the U.S. IHC (contributable resources) to
meet unanticipated losses at the U.S. IHC subsidiaries. That balance
should take account of both pre-positioning at U.S. IHC subsidiaries
and holding resources at the U.S. IHC, and the obstacles associated
with each. The firm should not rely exclusively on either full pre-
positioning or U.S. IHC contributable resources to execute its U.S.
resolution strategy, unless it has only one U.S. IHC subsidiary that is
an operating subsidiary. The plan should describe the positioning of
internal TLAC among the U.S. IHC and the U.S. IHC subsidiaries, along
with analysis supporting such positioning.
Finally, to the extent that pre-positioned internal TLAC at a U.S.
IHC subsidiary is in the form of intercompany debt and there are one or
more entities between the lender and the borrower, the firm should
structure the instruments so as to ensure that the U.S. IHC subsidiary
can be recapitalized.
Resolution Capital Execution Need (RCEN): To the extent required by
the firm's U.S. resolution strategy, U.S. non-branch material entities
need to be recapitalized to a level that allows for an orderly
resolution. The firm should have a methodology for periodically
estimating the amount of capital that may be needed to support each
U.S. IHC subsidiary after the U.S. IHC bankruptcy filing (RCEN). The
firm's positioning of IHC TLAC should be able to support the RCEN
estimates.
The firm's RCEN methodology should use conservative forecasts for
losses and risk-weighted assets and incorporate estimates of potential
additional capital needs through the resolution period,\8\ consistent
with the firm's resolution strategy for its U.S. operations. The
methodology is not required to produce aggregate losses that are
greater than the amount of IHC TLAC that would be required for the firm
under the Board's final rule.\9\ The RCEN methodology should be
calibrated such that recapitalized U.S. IHC subsidiaries have
sufficient capital to maintain market confidence as required under the
U.S resolution strategy. Capital levels should meet or exceed all
applicable regulatory capital requirements for ``well-capitalized''
status and meet estimated additional capital needs throughout
resolution. U.S. IHC subsidiaries that are not subject to capital
requirements may be considered sufficiently recapitalized when they
have achieved capital levels typically required to obtain an
investment-grade credit rating or, if the entity is not rated, an
equivalent level of financial soundness. Finally, the methodology
should be independently reviewed, consistent with the firm's corporate
governance processes and controls for the use of models and
methodologies.
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\8\ The resolution period begins immediately after the U.S. IHC
bankruptcy filing and extends through the completion of the U.S.
resolution strategy.
\9\ 82 FR 8266 (January 24, 2017).
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III. Liquidity
The firm should have the liquidity capabilities necessary to
execute its U.S resolution strategy, including those described below.
For resolution purposes, these capabilities should include having an
appropriate model and process for estimating and maintaining sufficient
liquidity at--or readily available from the U.S. IHC to--U.S. IHC
subsidiaries, and a methodology for estimating the liquidity needed to
successfully execute the U.S. resolution strategy, as described below.
Capabilities: A firm is expected to have a comprehensive
understanding of funding sources, uses, and risks at material entities
and identified critical operations, including how funding sources may
be affected under stress. For example, a firm should have and describe
its capabilities to:
Evaluate the funding requirements necessary to perform
identified critical operations, including shared and outsourced
services and access to financial market utilities (FMUs); \10\
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\10\ 12 CFR 252.156(g)(3).
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Monitor liquidity reserves and relevant custodial
arrangements by jurisdiction and material entity; \11\
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\11\ 12 CFR 252.156(g)(2).
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Routinely test funding and liquidity outflows and inflows
for U.S. non-branch material entities at the legal entity level under a
range of adverse stress scenarios, taking into account the effect on
intra-day, overnight, and term funding flows between affiliates and
across jurisdictions;
Assess existing and potential restrictions on the transfer
of liquidity between U.S. non-branch material entities; \12\ and
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\12\ Id.
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Develop contingency strategies to maintain funding for
U.S. non-branch material entities and identified critical operations in
the event of a disruption in the Specified FBO's current funding
model.\13\
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\13\ 12 CFR 252.156(e).
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Resolution Liquidity Adequacy and Positioning (RLAP): With respect
to RLAP, the firm should be able to measure the stand-alone liquidity
position of each U.S. non-branch material entity--i.e., the high-
quality liquid assets (HQLA) at the U.S. non-branch material entity
less net outflows to third parties and affiliates--and ensure that
liquidity is readily available to meet any deficits. The RLAP model
should cover a period of at least 30 days and reflect the idiosyncratic
liquidity profile of the U.S. IHC and risk of each U.S. IHC subsidiary.
The model should balance the reduction in frictions associated with
holding liquidity directly at the U.S. IHC subsidiary with the
flexibility provided by holding HQLA at the U.S. IHC or at a U.S. IHC
subsidiary available to meet unanticipated outflows at other U.S. IHC
subsidiaries.\14\ The firm should not
[[Page 15462]]
rely exclusively on either full pre-positioning or U.S. IHC
contributable resources to execute its U.S. resolution strategy, unless
it has only one U.S. IHC subsidiary that is an operating subsidiary.
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\14\ To the extent HQLA is held at the U.S. IHC or at a U.S. IHC
subsidiary, the model must consider whether such funds are freely
available. To be freely available, the HQLA must be free of legal,
regulatory, contractual, and other restrictions on the ability of
the material entity to liquidate, sell, or transfer the asset.
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The model \15\ should ensure that on a consolidated basis the U.S.
IHC holds sufficient HQLA to cover net liquidity outflows of the U.S.
non-branch material entities. The model should also measure the stand-
alone net liquidity positions of each U.S. non-branch material entity.
The stand-alone net liquidity position of each U.S. non-branch material
entity (HQLA less net outflows) should be measured using the firm's
internal liquidity stress test assumptions and should treat inter-
affiliate exposures in the same manner as third-party exposures. For
example, an overnight unsecured exposure to a non-U.S. affiliate should
be assumed to mature. Finally, the firm should not assume that a net
liquidity surplus at any U.S. IHC subsidiary that is a depository
institution could be moved to meet net liquidity deficits at an
affiliate, or to augment U.S. IHC resources, consistent with Regulation
W.
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\15\ ``Model'' refers to the set of calculations required by
Regulation YY that estimate the U.S. IHC's liquidity position.
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Additionally, the RLAP methodology should take into account for
each of the U.S. IHC, U.S. IHC subsidiaries, and any branch that is a
material entity (A) the daily contractual mismatches between their
respective inflows and outflows; (B) their respective daily flows from
movement of cash and collateral for all inter-affiliate transactions;
and (C) their respective daily stressed liquidity flows and trapped
liquidity as a result of actions taken by clients, counterparties, key
FMUs, and foreign supervisors, among others.
In calculating its RLAP estimate, the U.S. IHC should calculate its
liquidity position with respect to its foreign parent, branches and
agencies, and other affiliates (together, affiliates) separately from
its liquidity position with respect to third parties, and should not
offset inflows from affiliated parties against outflows to external
parties. In addition, a U.S. IHC should use cash-flow sources from its
affiliates to offset cash-flow needs of its affiliates only to the
extent that the term of the cash-flow source from its affiliates is the
same as, or shorter than, the term of the cash-flow need of its
affiliates.\16\
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\16\ The U.S. IHC should calculate its cash-flow sources from
its affiliates consistent with the net internal stressed cash-flow
need calculation in Sec. 252.157(c)(2)(iv) of Regulation YY.
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Resolution Liquidity Execution Need (RLEN): The firm should have a
methodology for estimating the liquidity needed after the U.S. IHC's
bankruptcy filing to stabilize any surviving U.S. IHC subsidiaries and
to allow those entities to operate post-filing, in accordance with the
U.S. strategy.
The firm's RLEN methodology should:
(A) Estimate the minimum operating liquidity (MOL) needed at
each U.S. IHC subsidiary to ensure those entities could continue to
operate, to the extent relied upon in the U.S. resolution strategy,
after implementation of the U.S. resolution strategy and/or to
support a wind-down strategy;
(B) Provide daily cash flow forecasts by U.S. IHC subsidiary to
support estimation of peak funding needs to stabilize each entity
under resolution;
(C) Provide a comprehensive breakout of all inter-affiliate
transactions and arrangements that could impact the MOL or peak
funding needs estimates for the U.S. IHC subsidiaries; and
(D) Estimate the minimum amount of liquidity required at each
U.S. IHC subsidiary to meet the MOL and peak needs noted above,
which would inform the provision of financial resources from the
foreign parent to the U.S. IHC, or if the foreign parent is unable
or unwilling to provide such financial support, any preparatory
resolution-related actions.
The MOL estimates should capture U.S. IHC subsidiaries' intraday
liquidity requirements, operating expenses, working capital needs, and
inter-affiliate funding frictions to ensure that U.S. IHC subsidiaries
could operate without disruption during the resolution.
The peak funding needs estimates should be projected for each U.S.
IHC subsidiary and cover the length of time the firm expects it would
take to stabilize that U.S. IHC subsidiary. Inter-affiliate funding
frictions should be taken into account in the estimation process.
The firm's forecasts of MOL and peak funding needs should ensure
that U.S. IHC subsidiaries could operate through resolution consistent
with regulatory requirements, market expectations, and the firm's post-
failure strategy. These forecasts should inform the RLEN estimate,
i.e., the minimum amount of HQLA required to facilitate the execution
of the firm's strategy for the U.S. IHC subsidiaries.
For nonsurviving U.S. IHC subsidiaries, the firm should provide
analysis and an explanation of how the material entity's resolution
could be accomplished within a reasonable period of time and in a
manner that substantially mitigates the risk of serious adverse effects
on U.S. financial stability. For example, if a U.S. IHC subsidiary that
is a broker-dealer is assumed to fail and enter resolution under the
Securities Investor Protection Act (SIPA), the firm should provide an
analysis of the potential impacts on funding and asset markets and on
prime brokerage clients, bearing in mind the objective of an orderly
resolution.
IV. Governance Mechanisms
A firm should identify the governance mechanisms that would ensure
that communication and coordination occurs between the boards of the
U.S. IHC or a U.S. IHC subsidiary and the foreign parent to facilitate
the provision of financial support, or if not forthcoming, any
preparatory resolution-related actions to facilitate an orderly
resolution.
Playbooks, Foreign Parent Support, and Triggers: Governance
playbooks should detail the board and senior management actions of U.S.
non-branch material entities that would be needed under the firm's U.S.
resolution strategy. The governance playbooks should also include a
discussion of (A) the firm's proposed U.S. communications strategy,
both internal and external; \17\ (B) the fiduciary responsibilities of
the applicable board(s) of directors or other similar governing bodies
and how planned actions would be consistent with such responsibilities
applicable at the time actions are expected to be taken; (C) potential
conflicts of interest, including interlocking boards of directors; (D)
any employee retention policy; and (E) any other limitations on the
authority of the U.S. IHC and the U.S. IHC subsidiary boards and senior
management to implement the U.S. resolution strategy. All responsible
parties and timeframes for action should be identified. Governance
playbooks should be updated periodically for each entity whose
governing body would need to act under the firm's U.S. resolution
strategy.
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\17\ External communications include those with U.S. and foreign
authorities and other external stakeholders.
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In order to meet liquidity needs at the U.S. non-branch material
entities, the firm may either fully pre-position liquidity in the U.S.
non-branch material entities or develop a mechanism for planned foreign
parent support, of any amount not pre-positioned, for the successful
execution of the U.S. strategy. Mechanisms to
[[Page 15463]]
support readily available liquidity may include a term liquidity
facility between the U.S. IHC and the foreign parent that can be drawn
as needed and as informed by the firm's RLEN estimates and liquidity
positioning. The plan should include analysis of how the U.S. IHC/
foreign parent facility is funded or buffered for by the foreign
parent. The sufficiency of the liquidity should be informed by the
firm's RLAP and RLEN estimates for the U.S. non-branch material
entities. Additionally, the plan should include analysis of the
potential challenges to the planned foreign parent support mechanism
and associated mitigants. Where applicable, the analysis should discuss
applicable non-U.S. law and cross-border legal challenges (e.g.,
challenges related to enforcing contracts governed by foreign law). The
analysis should identify the mitigant(s) to such challenges that the
firm considers most effective.
The firm should be prepared to increase communication and
coordination at the appropriate time in order to mitigate financial,
operational, legal, and regulatory vulnerabilities. To facilitate this
communication and coordination, the firm should establish clearly
identified triggers linked to specific actions for:
(A) The escalation of information to U.S. senior management,
U.S. risk committee and U.S. governing bodies to potentially take
the corresponding actions as the U.S. operations experience material
financial distress, leading eventually to the decision to implement
the U.S. resolution strategy.
i. Triggers should identify when and under what conditions the
U.S. material entities would transition from business-as-usual
conditions to a stress period.
ii. Triggers should also take into consideration changes in the
foreign parent's condition from business-as-usual conditions through
resolution.
(B) The escalation of information to and discussions with the
appropriate governing bodies to confirm whether the governing bodies
are able and willing to provide financial resources to support U.S.
operations.
i. Triggers should be based on the firm's methodology for
forecasting the liquidity and capital needed to facilitate the U.S.
strategy. For example, triggers may be established that reflect U.S.
non-branch material entities' financial resources approaching RCEN/
RLEN estimates, with corresponding actions to confirm the foreign
parent's financial capability and willingness to provide sufficient
support.
Corresponding escalation procedures, actions, and timeframes should
be constructed so that breach of the triggers will allow prerequisite
actions to be completed. For example, breach of the triggers needs to
occur early enough to provide for communication, coordination, and
confirmation of the provision of resources from the foreign parent.
Support Within the United States: If the plan provides for the
provision of capital and liquidity by a U.S. material entity (e.g., the
U.S. IHC) to its U.S. affiliates prior to the U.S. IHC's bankruptcy
filing (Support), the plan should also include a detailed legal
analysis of the potential state law and bankruptcy law challenges and
mitigants to providing the Support. Specifically, the analysis should
identify potential legal obstacles and explain how the firm would seek
to ensure that Support would be provided as planned. Legal obstacles
include claims of fraudulent transfer, preference, breach of fiduciary
duty, and any other applicable legal theory identified by the firm. The
analysis also should include related claims that may prevent or delay
an effective recapitalization, such as equitable claims to enjoin the
transfer (e.g., imposition of a constructive trust by the court). The
analysis should apply the actions contemplated in the plan regarding
each element of the claim, the anticipated timing for commencement and
resolution of the claims, and the extent to which adjudication of such
claim could affect execution of the firm's U.S. resolution strategy.
The analysis should include mitigants to the potential challenges to
the planned Support. The plan should identify the mitigant(s) to such
challenges that the firm considers most effective.
Furthermore, the plan should describe key motions to be filed at
the initiation of any bankruptcy proceeding related to (as appropriate)
asset sales and other non-routine matters.
V. Operational
Payment, Clearing, and Settlement Activities
Framework. Maintaining continuity of payment, clearing, and
settlement (PCS) services is critical for the orderly resolution of
firms that are either users or providers,\18\ or both, of PCS services.
A firm should demonstrate capabilities for continued access to PCS
services essential to an orderly resolution under its U.S. resolution
strategy through a framework to support such access by:
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\18\ A firm is a user of PCS services if it accesses PCS
services through an agent bank or it uses the services of an FMU
through its membership in that FMU or through an agent bank. A firm
is a provider of PCS services if it provides PCS services to clients
as an agent bank or it provides clients with access to an FMU or
agent bank through the firm's membership in or relationship with
that service provider. A firm is also a provider if it provides
clients with PCS services through the firm's own operations in the
United States (e.g., payment services or custody services).
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Identifying clients,\19\ FMUs, and agent banks as key from
the firm's perspective for the firm's U.S. material entities,
identified critical operations, and core business lines, using both
quantitative (volume and value) \20\ and qualitative criteria;
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\19\ For purposes of this section V, a client is an individual
or entity, including affiliates of the firm, to whom the firm
provides PCS services and, if credit or liquidity is offered, any
related credit or liquidity offered in connection with those
services.
\20\ In identifying entities as key, examples of quantitative
criteria may include: for a client, transaction volume/value, market
value of exposures, assets under custody, usage of PCS services, and
if credit or liquidity is offered, any extension of related intraday
credit or liquidity; for an FMU, the aggregate volumes and values of
all transactions processed through such FMU; and for an agent bank,
assets under custody, the value of cash and securities settled, and
extensions of intraday credit.
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Mapping U.S. material entities, identified critical
operations, core business lines, and key clients of the firm's U.S.
operations to both key FMUs and key agent banks; and
Developing a playbook for each key FMU and key agent bank
essential to an orderly resolution under its U.S. resolution strategy
that reflects the firm's role(s) as a user and/or provider of PCS
services.
The framework should address both direct relationships (e.g., a
firm's direct membership in an FMU, a firm's provision of clients with
PCS services through its own operations in the United States, or a
firm's contractual relationship with an agent bank) and indirect
relationships (e.g., a firm's provision of clients with access to the
relevant FMU or agent bank through the firm's membership in or
relationship with that FMU or agent bank, or a firm's U.S. and non-U.S.
affiliate and branch provision of U.S. material entities and key
clients of the firm's U.S. operations with access to an FMU or agent
bank). The framework also should address the potential impact of any
disruption to, curtailment of, or termination of such direct and
indirect relationships on the firm's U.S. material entities, identified
critical operations, and core business lines, as well as any
corresponding impact on key clients of the firm's U.S. operations.
Playbooks for Continued Access to PCS Services. The firm is
expected to provide a playbook for each key FMU and key agent bank that
addresses considerations that would assist the firm and key clients of
the firm's U.S. operations in maintaining continued access to PCS
services in the period leading up to and including the firm's
resolution under its U.S. resolution
[[Page 15464]]
strategy. Each playbook should provide analysis of the financial and
operational impact of adverse actions that may be taken by a key FMU or
a key agent bank and contingency actions that may be taken by the firm.
Each playbook also should discuss any possible alternative arrangements
that would allow continued access to PCS services for the firm's U.S.
material entities, identified critical operations and core business
lines, and key clients of the firm's U.S. operations, while the firm is
in resolution under its U.S. resolution strategy. The firm is not
expected to incorporate a scenario in which it loses key FMU or key
agent bank access into its U.S. resolution strategy or its RLEN and
RCEN estimates. The firm should continue to engage with key FMUs, key
agent banks, and key clients of the firm's U.S. operations, and
playbooks should reflect any feedback received during such ongoing
outreach.
Content Related to Users of PCS Services. Individual key FMU and
key agent bank playbooks should include:
Descriptions of the firm's relationship as a user,
including through indirect access, with the key FMU or key agent bank
and the identification and mapping of PCS services to the firm's U.S.
material entities, identified critical operations, and core business
lines that use those PCS services;
Discussion of the potential range of adverse actions that
may be taken by that key FMU or key agent bank when the firm is in
resolution under its U.S. resolution strategy,\21\ the operational and
financial impact of such actions on the firm's U.S. material entities,
identified critical operations, and core business lines, and
contingency arrangements that may be initiated by the firm in response
to potential adverse actions by the key FMU or key agent bank; and
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\21\ Examples of potential adverse actions may include increased
collateral and margin requirements and enhanced reporting and
monitoring.
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Discussion of PCS-related liquidity sources and uses in
business-as-usual (BAU), in stress, and in the resolution period,
presented by currency type (with U.S. dollar equivalent) and by U.S.
material entity.
[cir] PCS Liquidity Sources: These may include the amounts of
intraday extensions of credit, liquidity buffer, inflows from FMU
participants, and prefunded amounts of key clients of the firm's U.S.
operations in BAU, in stress, and in the resolution period. The
playbook also should describe intraday credit arrangements (e.g.,
facilities of the key FMU, key agent bank, or a central bank) and any
similar custodial arrangements that allow ready access to a firm's
funds for PCS-related key FMU and key agent bank obligations (including
margin requirements) in various currencies, including placements of
firm liquidity at central banks, key FMUs, and key agent banks.
[cir] PCS Liquidity Uses: These may include margin and prefunding
by the firm and key clients of the firm's U.S. operations, and intraday
extensions of credit, including incremental amounts required during
resolution.
[cir] Intraday Liquidity Inflows and Outflows: The playbook should
describe the firm's ability to control intraday liquidity inflows and
outflows and to identify and prioritize time-specific payments. The
playbook also should describe any account features that might restrict
the firm's ready access to its liquidity sources.
Content Related to Providers of PCS Services.\22\ Individual key
FMU and key agent bank playbooks should include:
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\22\ Where a firm is a provider of PCS services through the
firm's own operations in the United States, the firm is expected to
produce a playbook for the U.S. material entities that provide those
services, addressing each of the items described under ``Content
Related to Providers of PCS Services,'' which include contingency
arrangements to permit the firm's key clients of the firm's U.S.
operations to maintain continued access to PCS services.
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Identification and mapping of PCS services to the firm's
U.S. material entities, identified critical operations, and core
business lines that provide those PCS services, and a description of
the scale and the way in which each provides PCS services;
Identification and mapping of PCS services to key clients
of the firm's U.S. operations to whom the firm's U.S. material
entities, identified critical operations, and core business lines
provide such PCS services and any related credit or liquidity offered
in connection with such services;
Discussion of the potential range of firm contingency
arrangements available to minimize disruption to the provision of PCS
services to key clients of the firm's U.S. operations, including the
viability of transferring activity and any related assets of key
clients of the firm's U.S. operations, as well as any alternative
arrangements that would allow the key clients of the firm's U.S.
operations continued access to PCS services if the firm could no longer
provide such access (e.g., due to the firm's loss of key FMU or key
agent bank access), and the financial and operational impacts of such
arrangements from the firm's perspective;
Descriptions of the range of contingency actions that the
firm may take concerning its provision of intraday credit to key
clients of the firm's U.S. operations, including analysis quantifying
the potential liquidity the firm could generate by taking such actions
in stress and in the resolution period, such as (i) requiring key
clients of the firm's U.S. operations to designate or appropriately
pre-position liquidity, including through prefunding of settlement
activity, for PCS-related key FMU and key agent bank obligations at
specific material entities of the firm (e.g., direct members of key
FMUs) or any similar custodial arrangements that allow ready access to
funds for such obligations in various currencies of key clients of the
firm's U.S. operations; (ii) delaying or restricting PCS activity of
key clients of the firm's U.S. operations; and (iii) restricting,
imposing conditions upon (e.g., requiring collateral), or eliminating
the provision of intraday credit or liquidity to key clients of the
firm's U.S. operations; and
Descriptions of how the firm will communicate to key
clients of the firm's U.S. operations the potential impacts of
implementation of any identified contingency arrangements or
alternatives, including a description of the firm's methodology for
determining whether any additional communication should be provided to
some or all key clients of the firm's U.S. operations (e.g., due to BAU
usage of that access and/or related intraday credit or liquidity of the
key client of the firm's U.S. operations), and the expected timing and
form of such communication.
Capabilities. Firms are expected to have and describe capabilities
to understand, for each U.S. material entity, its obligations and
exposures associated with PCS activities, including contractual
obligations and commitments. For example, firms should be able to:
Track the following items by U.S. material entity and,
with respect to customers, counterparties, and agents and service
providers, by location/jurisdiction:
[cir] PCS activities, with each activity mapped to the relevant
material entities and core business lines;\23\
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\23\ 12 CFR 243.5(e)(12); 12 CFR 381.5(e)(12).
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[cir] Customers and counterparties for PCS activities, including
values and volumes of various transaction types, as well as used and
unused capacity for all lines of credit; \24\
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\24\ Id.
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[[Page 15465]]
[cir] Exposures to and volumes transacted with FMUs, Nostro agents,
and custodians; and \25\
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\25\ 12 CFR 252.156(g).
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[cir] Services provided and service level agreements for other
current agents and service providers (internal and external).\26\
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\26\ 12 CFR 243.5(f)(l)(i); 12 CFR 381.5(f)(1)(i).
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Assess the potential effects of adverse actions by FMUs,
Nostro agents, custodians, and other agents and service providers,
including suspension or termination of membership or services, on the
firm's U.S. operations and customers and counterparties of those U.S.
operations; \27\
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\27\ 12 CFR 252.156(e).
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Develop contingency arrangements in the event of such
adverse actions; \28\ and
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\28\ Id.
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Quantify the liquidity needs and operational capacity
required to meet all PCS obligations, including any change in demand
for and sources of liquidity needed to meet such obligations.
Managing, Identifying, and Valuing Collateral: The firm is expected
to have and describe its capabilities to manage, identify, and value
the collateral that the U.S. non-branch material entities receive from
and post to external parties and affiliates. Specifically, the firm
should:
Be able to query and provide aggregate statistics for all
qualified financial contracts concerning cross-default clauses,
downgrade triggers, and other key collateral-related contract terms--
not just those terms that may be impacted in an adverse economic
environment--across contract types, business lines, legal entities, and
jurisdictions;
Be able to track both firm collateral sources (i.e.,
counterparties that have pledged collateral) and uses (i.e.,
counterparties to whom collateral has been pledged) at the CUSIP level
on at least a t+1 basis;
Have robust risk measurements for cross-entity and cross-
contract netting, including consideration of where collateral is held
and pledged;
Be able to identify CUSIP and asset class level
information on collateral pledged to specific central counterparties by
legal entity on at least a t+1 basis;
Be able to track and report on inter-branch collateral
pledged and received on at least a t+1 basis and have clear policies
explaining the rationale for such inter-branch pledges, including any
regulatory considerations; and
Have a comprehensive collateral management policy that
outlines how the firm as a whole approaches collateral and serves as a
single source for governance.\29\
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\29\ The policy may reference subsidiary or related policies
already in place, as implementation may differ based on business
line or other factors.
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In addition, as of the conclusion of any business day, the firm
should be able to:
Identify the legal entity and geographic jurisdiction
where counterparty collateral is held;
Document all netting and re-hypothecation arrangements
with affiliates and external parties, by legal entity; and
Track and manage collateral requirements associated with
counterparty credit risk exposures between affiliates, including
foreign branches.
At least on a quarterly basis, the firm should be able to:
Review the material terms and provisions of International
Swaps and Derivatives Association Master Agreements and the Credit
Support Annexes, such as termination events, for triggers that may be
breached as a result of changes in market conditions;
Identify legal and operational differences and potential
challenges in managing collateral within specific jurisdictions,
agreement types, counterparty types, collateral forms, or other
distinguishing characteristics; and
Forecast changes in collateral requirements and cash and
non-cash collateral flows under a variety of stress scenarios.
Management Information Systems: The firm should have the management
information systems (MIS) capabilities to readily produce data on a
U.S. legal entity basis (including any U.S. branch) and have controls
to ensure data integrity and reliability, as described below.\30\ The
firm also should perform a detailed analysis of the specific types of
financial and risk data that would be required to execute the U.S.
resolution strategy and how frequently the firm would need to produce
the information, with the appropriate level of granularity.
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\30\ MIS infrastructure projects were expected to be completed
by 2018.
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A firm is expected to have and describe capabilities to produce the
following types of information by material entity on a timely basis:
Financial statements for each material entity (at least
monthly);
External and inter-affiliate credit exposures, both on-
and off-balance sheet, by type of exposure, counterparty, maturity, and
gross payable and receivable;
Gross and net risk positions with internal and external
counterparties;
Guarantees, cross holdings, financial commitments and
other transactions between material entities;
Data to facilitate third-party valuation of assets and
businesses, including risk metrics;
Key third party contracts, including the provider,
provider's location, service(s) provided, legal entities that are a
party to or a beneficiary of the contract, and key contractual rights
(for example, termination and change in control clauses);
Legal agreement information, including parties to the
agreement and key terms and interdependencies (for example, change in
control, collateralization, governing law, termination events,
guarantees, and cross-default provisions);
Service level agreements between affiliates, including the
service(s) provided, the legal entity providing the service, legal
entities receiving the service, and any termination/transferability
provisions;
Licenses and memberships to all exchanges and value
transfer networks, including FMUs;
Key management and support personnel, including dual
hatted employees, and any associated retention agreements;
Agreements and other legal documents related to property,
including facilities, technology systems, software, and intellectual
property rights. The information should include ownership, physical
location, where the property is managed and names of legal entities and
lines of business that the property supports; and
Updated legal records for domestic and foreign entities,
including entity type and purpose (for example, holding company, bank,
broker dealer, and service entity), jurisdiction(s), ownership, and
regulator(s).
Shared and Outsourced Services: The firm should maintain a fully
actionable implementation plan to ensure the continuity of shared
services that support identified critical operations \31\ and robust
arrangements to support the continuity of shared and outsourced
services, including, without limitation, appropriate plans to retain
key personnel relevant to the execution of the firm's strategy. If a
material entity provides shared services that support
[[Page 15466]]
identified critical operations,\32\ and the continuity of these shared
services relies on the assumed cooperation, forbearance, or other non-
intervention of regulator(s) in any jurisdiction, the Plan should
discuss the extent to which the resolution or insolvency of any other
group entities operating in that same jurisdiction may adversely affect
the assumed cooperation, forbearance, or other regulatory non-
intervention. If a material entity providing shared services that
support identified critical operations is located outside of the United
States, the Plan should discuss how the firm will ensure the
operational continuity of such shared services through resolution.
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\31\ ``Shared services that support identified critical
operations'' or ``critical shared services'' are those that support
identified critical operations conducted in whole or in material
part in the United States.
\32\ This should be interpreted to include data access and
intellectual property rights.
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The firm should (A) maintain an identification of all shared
services that support identified critical operations; (B) maintain a
mapping of how/where these services support U.S. core business lines
and identified critical operations; (C) incorporate such mapping into
legal entity rationalization criteria and implementation efforts; and
(D) mitigate identified continuity risks through establishment of
service-level agreements (SLAs) for all critical shared services.
SLAs should fully describe the services provided, reflect pricing
considerations on an arm's-length basis where appropriate, and
incorporate appropriate terms and conditions to (A) prevent automatic
termination upon certain resolution-related events and (B) achieve
continued provision of such services during resolution.\33\ The firm
should also store SLAs in a central repository or repositories located
in or immediately accessible from the U.S. at all times, including in
resolution (and subject to enforceable access arrangements) in a
searchable format. In addition, the firm should ensure the financial
resilience of internal shared service providers by maintaining working
capital for six months (or through the period of stabilization as
required in the firm's U.S. resolution strategy) in such entities
sufficient to cover contract costs, consistent with the U.S. resolution
strategy. The firm should demonstrate that such working capital is held
in a manner that ensures its availability for its intended purpose.
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\33\ The firm should consider whether these SLAs should be
governed by the laws of a U.S. state and expressly subject to the
jurisdiction of a court in the U.S.
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The firm should identify all service providers and critical
outsourced services that support identified critical operations and
identify any that could not be promptly substituted. The firm should
(A) evaluate the agreements governing these services to determine
whether there are any that could be terminated upon commencement of any
resolution despite continued performance; and (B) update contracts to
incorporate appropriate terms and conditions to prevent automatic
termination upon commencement of any resolution proceeding and
facilitate continued provision of such services. Relying on entities
projected to survive during resolution to avoid contract termination is
insufficient to ensure continuity. In the Plan, the firm should
document the amendment of any such agreements governing these services.
The Plan must also discuss arrangements to ensure the operational
continuity of shared services that support identified critical
operations in resolution in the event of the disruption of those shared
services.
A firm is expected to have robust arrangements in place for the
continued provision of shared or outsourced services needed to maintain
identified critical operations. For example, firms should:
Evaluate internal and external dependencies and develop
documented strategies and contingency arrangements for the continuity
or replacement of the shared and outsourced services that are necessary
to maintain identified critical operations.\34\ Examples may include
personnel, facilities, systems, data warehouses, and intellectual
property; and
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\34\ 12 CFR 243.5(g); 12 CFR 381.5(g).
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Maintain current cost estimates for implementing such
strategies and contingency arrangements.
Qualified Financial Contracts: The plan should reflect the current
state of how the early termination of qualified financial contracts
could impact the resolution of the firm's U.S. operations.
Specifically, the plan is expected to reflect the firm's progress in
implementing the applicable domestic and foreign requirements regarding
contractual stays in qualified financial contracts as of the date the
firm submits its plan or as of a specified earlier date.
VI. Branches \35\
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\35\ Note that the PCS framework guidance in Section V. is not
limited to U.S. branches, since continuity of access to PCS
activities, including through non-U.S. branches, is likely to be
essential to the orderly resolution of a firm's U.S. material
entities, identified critical operations, and core business lines.
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Mapping: For each U.S. branch that is a material entity, the Plan
should identify and map the financial and operational interconnections
to identified critical operations, core business lines, and other
material entities. The mapping should also identify any
interconnections that, if disrupted, would materially affect identified
critical operations, core business lines, or U.S. non-branch material
entities, or the U.S. resolution strategy.
Continuity of Operations: If the Plan assumes that federal or state
regulators, as applicable, do not take possession of any U.S. branch
that is a material entity, the Plan must support that assumption.
For any U.S. branch that is significant to the activities of an
identified critical operation, the Plan should describe and demonstrate
how the branch would continue to facilitate FMU access for identified
critical operations and meet funding needs. Such a U.S. branch would
also be required to describe how it would meet supervisory requirements
imposed by state regulators or the appropriate Federal banking agency,
as appropriate, including maintaining a net due to position and
complying with heightened asset maintenance requirements.\36\ In
addition, the plan should describe how such a U.S. branch's third-party
creditors would be protected such that the state regulator or
appropriate Federal banking agency would allow the branch to continue
operations.
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\36\ Firms should take into consideration historical practice,
by applicable regulators, regarding asset maintenance requirements
imposed during stress.
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To maintain appropriate liquidity for the purposes of resolution
planning, a firm should maintain a liquidity buffer sufficient to meet
the net cash outflows for its U.S. branches and agencies on an
aggregate basis for the first 14 days of a 30-day stress horizon. In
determining the aggregate need of the branches and agencies, the firm
should calculate its liquidity position with respect to its foreign
parent, U.S. IHC, and other affiliates separately from its liquidity
position with respect to external parties, and cannot offset inflows
from affiliated parties against outflows to external parties. In
addition, a firm may use cash-flow sources from its affiliates to a
branch or agency to offset cash-flow needs of its affiliates from a
branch or agency only to the extent that the term of the cash-flow
source from the affiliates is the same as, or shorter than, the term of
the cash-flow need of the affiliate. This assumption addresses the
scenario where the head office may be unable or unwilling to return
funds to the branch or agency when those funds are most needed.
Impact of the Cessation of Operations: The firm must provide an
analysis of the impact of the cessation of operations of
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any U.S. branch that is significant to the activities of an identified
critical operation on the firm's FMU access and identified critical
operations, even if such scenario is not contemplated as part of the
U.S. resolution strategy. The analysis should include a description of
how identified critical operations could be transferred to a U.S. IHC
subsidiary or sold in resolution, the obstacles presented by the
cessation of shared services that support identified critical
operations provided by any U.S. branch that is a material entity, and
mitigants that could address such obstacles in a timely manner.
VII. Group Resolution Plan
Consistent with the Rule, a firm's resolution plan should include a
detailed explanation of how resolution planning for the subsidiaries,
branches and agencies, and identified critical operations and core
business lines of the firm that are domiciled in the United States or
conducted in whole or material part in the United States is integrated
into the firm's overall resolution or other contingency planning
process. In particular, the plan should describe the impact on U.S.
operations of executing the global plan.
VIII. Legal Entity Rationalization And Separability
Legal Entity Rationalization Criteria (LER Criteria): A firm should
develop and implement legal entity rationalization criteria that
support the firm's U.S. resolution strategy and minimize risk to U.S.
financial stability in the event of resolution. LER Criteria should
consider the best alignment of legal entities and business lines to
improve the resolvability of U.S. operations under different market
conditions. LER Criteria should govern the corporate structure and
arrangements between the U.S. subsidiaries and U.S. branches in a way
that facilitates resolvability of the firm's U.S. operations as the
firm's U.S. activities, technology, business models, or geographic
footprint change over time.
Specifically, application of the criteria should:
(A) Ensure that the allocation of activities across the firm's
U.S. branches and U.S. non-branch material entities support the
firm's U.S. resolution strategy and minimize risk to U.S. financial
stability in the event of resolution;
(B) Facilitate the recapitalization and liquidity support of
U.S. IHC subsidiaries, as required by the firm's U.S. resolution
strategy. Such criteria should include clean lines of ownership and
clean funding pathways between the foreign parent, the U.S. IHC, and
U.S. IHC subsidiaries;
(C) Facilitate the sale, transfer, or wind-down of certain
discrete operations within a timeframe that would meaningfully
increase the likelihood of an orderly resolution in the United
States, including provisions for the continuity of associated
services and mitigation of financial, operational, and legal
challenges to separation and disposition;
(D) Adequately protect U.S. subsidiary insured depository
institutions from risks arising from the activities of any nonbank
U.S. subsidiaries (other than those that are subsidiaries of an
insured depository institution); and
(E) Minimize complexity that could impede an orderly resolution
in the United States and minimize redundant and dormant entities.
These criteria should be built into the firm's ongoing process for
creating, maintaining, and optimizing the firm's U.S. structure and
operations on a continuous basis.
Separability: The firm should identify discrete U.S. operations
that could be sold or transferred in resolution, which would provide
optionality in resolution under different market conditions. A firm's
separability options should be actionable, and impediments to their
projected mitigation strategies should be identified in advance. Firms
should consider potential consequences for U.S. financial stability of
executing each option, taking into consideration impacts on
counterparties, creditors, clients, depositors, and markets for
specific assets. The level of detail and analysis should vary based on
a firm's risk profile and scope of operations. Additionally,
information systems should be robust enough to produce the required
data and information needed to execute separability options.
Further, the firm should have, and be able to demonstrate, the
capability to populate in a timely manner a data room with information
pertinent to a potential divestiture of the business (including, but
not limited to, carve-out financial statements, valuation analysis, and
a legal risk assessment). Within the plan, the firm should demonstrate
how the firm's LER Criteria and implementation efforts meet the
guidance above. The plan should also provide the separability analysis
noted above. Finally, the plan should include a description of the
firm's legal entity rationalization governance process.
IX. Derivatives And Trading Activities
A Specified FBO's plan should address the following areas.
Booking Practices
A firm should have booking practices commensurate with the size,
scope, and complexity of its U.S. derivatives and trading
activities,\37\ including systems capabilities to track and monitor any
such activities booked directly into a non-U.S. affiliate. The
following booking practices-related capabilities should be addressed in
a firm's resolution plan:
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\37\ ``U.S. derivatives and trading activities'', means all
derivatives and trading activities that are: (1) Related to a firm's
identified critical operations or core business lines, including any
such activities booked directly into a non-U.S. affiliate; (2)
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 (as
defined below); or (3) both of the foregoing. A firm should identify
its U.S. derivatives and trading activities pursuant to a
methodology and justify the methodology used.
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Derivatives and trading booking framework. A firm should have a
comprehensive booking model framework that articulates the principles,
rationales, and approach to implementing its booking practices for all
of its U.S. derivatives and trading activities, including derivatives
and trading activities originated from U.S. entities \38\ that are
booked directly into a non-U.S. affiliate.\39\ The framework and its
underlying components should be documented and adequately supported by
internal controls (e.g., procedures, systems, processes). Taken
together, the booking framework and its components should provide
transparency with respect to (i) what is being booked (e.g., product,
counterparty), (ii) where it is being originated and booked (e.g.,
legal entity, geography), (iii) by whom it is originated and booked
(e.g., business or trading desk), (iv) why it is booked that way (e.g.,
drivers or rationales for that arrangement), and (v) what controls the
firm has in place to monitor and manage those practices (e.g.,
governance or information systems).\40\
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\38\ ``U.S. entities'' means U.S. IHC subsidiaries and material
entity branches.
\39\ Activities ``originated'' from U.S. entities are those
activities transacted or arranged by, or on behalf of those U.S.
entities and their clients and counterparties, including any such
activity for which the U.S. entity is compensated (directly or
indirectly) by a non-U.S. affiliate. These activities also include,
for example, those that are sourced or executed through personnel
employed by or acting on behalf of a U.S. entity. The agencies would
expect that a U.S. entity that is significant to the origination of
activities for an identified critical operation or core business
line would be designated as a U.S. material entity.
\40\ The description of controls should include any components
of any firm-wide market, credit, or liquidity risk management
framework that is material to the management of the firm's U.S.
derivatives and trading activities.
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The firm's resolution plan should include detailed descriptions of
the framework and each of its material components. In particular, a
firm's resolution plan should include
[[Page 15468]]
descriptions of documented booking models covering the full range of
its U.S. derivatives and trading activities.\41\ These descriptions
should provide clarity with respect to the underlying booking flows
(e.g., the mapping of trade flows based on multiple trade
characteristics as decision points that determine on which entity a
trade is directly booked and the applicability of any risk transfer
arrangements). Furthermore, a firm's resolution plan should describe
its end-to-end booking and reporting processes, including a description
of the current scope of automation (e.g., automated trade flows,
detective monitoring) of the systems controls applied to the firm's
documented booking models. The plan should also discuss why the firm
believes its current (or planned) scope of automation is sufficient for
managing its U.S. derivatives and trading activities during the
execution of its U.S. resolution strategy.\42\
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\41\ The booking models should represent the vast majority
(e.g., 95 percent) of a firm's U.S. derivatives and trading
activities, including U.S. derivatives and trading transactions that
are originated from U.S. entities and booked directly into a non-
U.S. affiliate, measured by, for example, trade notional and gross
market value (for derivatives) and client positions and balances
(for prime brokerage client accounts).
\42\ Effective preventative (up-front) and detective (post-
booking) controls embedded in a firm's booking processes can help
avoid and/or timely remediate trades that do not align with a
documented booking model or related risk limit. Firms typically use
a combination of manual and automated control functions. Although
automation may not be best suited for all control functions, as
compared to manual methods, it can improve consistency and
traceability with respect to booking practices. However, non-
automated methods also can be effective when supported by other
internal controls (e.g., robust detective monitoring, escalation
protocols).
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Derivatives and trading entity analysis and reporting. A firm
should have the ability to identify, assess, and report on each U.S.
entity that originates or otherwise conducts (in whole or in material
part) any significant aspect of the firm's U.S. derivatives and trading
activities (a ``derivatives or trading entity''). First, the firm's
resolution plan should describe its method (which may include both
qualitative and quantitative criteria) for evaluating the significance
of each derivatives or trading entity both with respect to the firm's
current U.S. derivatives and trading activities and its U.S. resolution
strategy.\43\ Second, a firm's resolution plan should demonstrate
(including through use of illustrative samples) the firm's ability to
readily generate current derivatives or trading entity profiles that
(i) cover all derivatives or trading entities, (ii) are reportable in a
consistent manner, and (iii) include information regarding current
legal ownership structure, business activities and volume, and risk
profile of the entity (including relevant risk transfer arrangements).
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\43\ The firm should leverage any existing methods and criteria
it uses for other entity assessments (e.g., legal entity
rationalization or the prepositioning of internal loss-absorbing
resources). The firm's method for determining the significance of
derivatives or trading entities may diverge from the parameters for
material entity designation under the Rule (i.e., entities
significant to the activities of an identified critical operation or
core business line); however, any differences should be adequately
supported and explained.
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U.S. Activities Monitoring
A firm should be able to assess how the management of U.S.
derivatives and trading activities could be affected in the period
leading up to and during the execution of its U.S. resolution strategy,
including disruptions that could affect materially the funding or
operations of the U.S. entities that conduct the U.S. derivatives and
trading activities or their clients and counterparties. Therefore, a
firm should have capabilities to provide timely transparency into the
management of its U.S. derivatives and trading activities, including
such activities booked directly into a non-U.S. affiliate, in the
period leading up to and during the execution of its U.S. resolution
strategy by maintaining a monitoring framework for U.S. derivatives and
trading activities, which consists of at least the following two
components:
1. A method for identifying U.S. derivatives and trading
activities, and measuring, monitoring, and reporting on those
activities on a business line and legal entity basis; and
2. A method for identifying, assessing, and reporting the
potential impact on (i) clients and counterparties of U.S. entities
that conduct the U.S. derivatives and trading activities and (ii)
any related risk transfer arrangements \44\ among and between U.S.
entities and their non-U.S. affiliates.
\44\ For example, risk transfer arrangements might include
transfer pricing, profit sharing, loss limiting, or intragroup
hedging arrangements.
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Prime Brokerage Customer Account Transfers
A firm should have the operational capacity to facilitate the
orderly transfer of U.S. prime brokerage accounts,\45\ including
account positions of a client of the firm's U.S. prime brokerage
business that are booked directly into a non-U.S. affiliate, to peer
prime brokers in periods of material financial distress and during the
execution of its U.S. resolution strategy. The firm's plan should
include an assessment of how it would transfer such accounts. This
assessment should be informed by clients' relationships with other
prime brokers, the use of automated and manual transaction processes,
clients' overall long and short positions as facilitated by the firm,
and the liquidity of clients' portfolios. The assessment should also
analyze the risks and loss mitigants of customer-to-customer
internalization (e.g., the inability to fund customer longs with
customer shorts) and operational challenges (including insufficient
staffing) that the firm may experience in effecting the scale and speed
of prime brokerage account transfers envisioned under the firm's U.S.
resolution strategy.
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\45\ ``U.S. prime brokerage account'' or ``U.S. prime brokerage
account balances'' should include the account positions and balances
of a client of the firm's U.S. prime brokerage business, regardless
of where those positions or balances are booked.
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In addition, a firm should describe and demonstrate its ability to
segment and analyze the quality and composition of U.S. prime brokerage
account balances based on a set of well-defined and consistently
applied segmentation criteria (e.g., size, single-prime, platform, use
of leverage, non-rehypothecatable securities, liquidity of underlying
assets). The capabilities should cover U.S. prime brokerage account
balances and the resulting segments should represent a range in
potential transfer speed (e.g., from fastest to longest to transfer,
from most liquid to least liquid). The selected segmentation criteria
should reflect characteristics \46\ that the firm believes could affect
the speed at which the U.S. prime brokerage account would be
transferred to an alternate prime broker.
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\46\ For example, relevant characteristics might include
product, size, clearability, currency, maturity, level of
collateralization, and other risk characteristics.
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Portfolio Segmentation
A firm should have the capabilities to produce analysis that
reflects derivatives portfolio \47\ segmentation and differentiation of
assumptions, taking into account trade-level characteristics. More
specifically, a firm should have systems capabilities that would allow
it to produce a spectrum of derivatives portfolio segmentation analysis
using multiple segmentation dimensions for each U.S. entity with a
derivatives portfolio--namely, (1) trading desk or product, (2) cleared
vs. clearable vs. non-clearable trades, (3) counterparty type, (4)
currency, (5) maturity, (6) level of collateralization, and (7) netting
set.\48\ A firm should also
[[Page 15469]]
have the capabilities to segment and analyze the full contractual
maturity (run-off) profile of the derivatives portfolios in its U.S.
entities. The firm's resolution plan should describe and demonstrate
the firm's ability to segment and analyze the derivatives portfolios
booked into its U.S. entities using the relevant segmentation
dimensions and to report the results of such segmentation and analysis.
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\47\ A firm's derivatives portfolios include its derivatives
positions and linked non-derivatives trading positions.
\48\ The enumerated segmentation dimensions are not intended as
an exhaustive list of relevant dimensions. With respect to any
product or asset class, a firm may have reasons for not capturing
data on (or not using) one or more of the enumerated segmentation
dimensions. In that case, however, the firm should explain those
reasons.
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Derivatives Stabilization and De-Risking Strategy
To the extent the U.S. resolution strategy assumes the continuation
of a U.S. IHC subsidiary with a derivatives portfolio after the entry
of the U.S. IHC into a U.S. bankruptcy proceeding (surviving
derivatives subsidiary), the firm's plan should provide a detailed
analysis of the strategy to stabilize and de-risk any derivatives
portfolio of the surviving derivatives subsidiary (U.S. derivatives
strategy) that has been incorporated into its U.S. resolution
strategy.\49\ In developing its U.S. derivatives strategy, a firm
should apply the following assumption constraints:
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\49\ Subject to the relevant constraints, a firm's U.S.
derivatives strategy may take the form of a going-concern strategy,
an accelerated de-risking strategy (e.g., active wind-down) or an
alternative, third strategy so long as the firm's resolution plan
adequately supports the execution of the chosen strategy. For
example, a firm may choose a going-concern scenario (e.g., surviving
derivatives subsidiary reestablishes investment grade status and
does not enter any wind-down) as its derivatives strategy. Likewise,
a firm may choose to adopt a combination of going-concern and
accelerated de-risking scenarios as its U.S. derivatives strategy.
For example, the U.S. derivatives strategy could be a stabilization
scenario for the U.S. bank entity and an accelerated de-risking
scenario for U.S. broker-dealer entities.
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OTC derivatives market access: At or before the start of
the resolution period, each surviving derivatives subsidiary should be
assumed to lack an investment grade credit rating (e.g., unrated or
downgraded below investment grade). Each surviving derivatives
subsidiary also should be assumed to have failed to establish or
reestablish investment grade status for the duration of the resolution
period, unless the plan provides well-supported analysis to the
contrary. As the subsidiary is not investment grade, it further should
be assumed that each surviving derivatives subsidiary has no access to
bilateral OTC derivatives markets and must use exchange-traded or
centrally cleared instruments for any new hedging needs that arise
during the resolution period. Nevertheless, a firm may assume the
ability to engage in certain risk-reducing derivatives trades with
bilateral OTC derivatives counterparties during the resolution period
to facilitate novations with third parties and to close out inter-
affiliate trades.\50\
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\50\ A firm may engage in bilateral OTC derivatives trades with,
for example, (i) external counterparties, to effect the novation of
the firm's side of a derivatives contract to a new, acquiring
counterparty; and (ii) inter-affiliate counterparties, where the
trades with inter-affiliate counterparties do not materially
increase either the credit exposure of any participating
counterparty or the market risk of any such counterparty on a
standalone basis, after taking into account any hedging with
exchange-traded and centrally-cleared instruments. The firm should
provide analysis to support the risk of the trade on the basis of
information that would be known to the firm at the time of the
transaction.
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Early exits (break clauses): A firm should assume that
counterparties (both external and affiliates) will exercise any
contractual termination or other right, including any rights stayed by
contract (including amendments) or in compliance with the rules
establishing restrictions on qualified financial contracts of the
Board, the FDIC, or the Office of the Comptroller of the Currency \51\
or any other regulatory requirements, (i) that is available to the
counterparty at or following the start of the resolution period; and
(ii) if exercising such right would economically benefit the
counterparty (counterparty-initiated termination).
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\51\ See 12 CFR part 47 (OCC); 252, subpart I (Board); 382
(FDIC).
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Time horizon: The duration of the resolution period should
be between 12 and 24 months. The resolution period begins immediately
after the U.S. IHC bankruptcy filing and extends through the completion
of the U.S. resolution strategy.\52\
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\52\ The firm may consider a resolution period of less than 12
months as long as the length of the resolution period is adequately
supported by the firm's analysis of the size, composition,
complexity, and maturity profile of the derivatives portfolios in
its U.S. IHC subsidiaries.
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A firm's analysis of its U.S. derivatives strategy should take into
account (i) the starting profile of any derivatives portfolio of each
surviving derivatives subsidiary (e.g., nature, concentration,
maturity, clearability, liquidity of positions); (ii) the profile and
function of any surviving derivatives subsidiary during the resolution
period; (iii) the means, challenges, and capacity of the surviving
derivatives subsidiary to manage and de-risk its derivatives portfolios
(e.g., method for timely segmenting, packaging, and selling the
derivatives positions; challenges with novating less liquid positions;
re-hedging strategy); (iv) the financial and operational resources
required to effect the derivatives strategy; and (v) any potential
residual portfolio (further discussed below). In addition, the firm's
resolution plan should address the following areas in the analysis of
its derivatives strategy:
Forecasts of resource needs. The forecasts of capital and liquidity
resource needs of U.S. IHC subsidiaries required to support adequately
the firm's U.S. derivatives strategy should be incorporated into the
firm's RCEN and RLEN estimates for its overall U.S. resolution
strategy. These include, for example, the costs and liquidity flows
resulting from (i) the close-out of OTC derivatives, (ii) the hedging
of derivatives portfolios, (iii) the quantified losses that could be
incurred due to basis and other risks that would result from hedging
with only exchange-traded and centrally cleared instruments in a
severely adverse stress environment, and (iv) operational costs.\53\
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\53\ A firm may choose not to isolate and separately model the
operational costs solely related to executing its derivatives
strategy. However, the firm should provide transparency around
operational cost estimation at a more granular level than material
entity (e.g., business line level within a material entity, subject
to wind-down).
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Sensitivity analysis. A firm should have a method to apply
sensitivity analyses to the key drivers of the derivatives-related
costs and liquidity flows under its U.S. resolution strategy. A firm's
resolution plan should describe its method for (i) evaluating the
materiality of assumptions and (ii) identifying those assumptions (or
combinations of assumptions) that constitute the key drivers for its
forecasts of derivatives-related operational and financial resource
needs under the U.S. resolution strategy. In addition, using its U.S.
resolution strategy as a baseline, the firm's resolution plan should
describe and demonstrate its approach to testing the sensitivities of
the identified key drivers and the potential impact on its forecasts of
resource needs.\54\
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\54\ For example, key drivers of derivatives-related costs and
liquidity flows might include the timing of derivatives unwind, cost
of capital-related assumptions (e.g., target return on equity,
discount rate, weighted average life, capital constraints, tax
rate), operational cost reduction rate, and operational capacity for
novations. Other examples of key drivers likely also include central
counterparty margin flow assumptions and risk-weighted asset
forecast assumptions.
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Potential residual derivatives portfolio. A firm's resolution plan
should include a method for estimating the composition of any potential
residual derivatives portfolio transactions booked in a U.S. IHC
subsidiary remaining at the end of the resolution period under its U.S.
[[Page 15470]]
resolution strategy. The firm's plan also should provide detailed
descriptions of the trade characteristics used to identify such
potential residual portfolio and of the resulting trades (or categories
of trades).\55\ A firm should assess the risk profile of such potential
residual portfolio (including its anticipated size, composition,
complexity, and counterparties), and the potential counterparty and
market impacts of non-performance by the firm on the stability of U.S.
financial markets (e.g., on funding markets, on underlying asset
markets, on clients and counterparties).
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\55\ If, under the firm's U.S. resolution strategy, any
derivatives portfolios are transferred during the resolution period
by way of a line of business sale (or similar transaction), then
those portfolios nonetheless should be included within the firm's
potential residual portfolio analysis.
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Non-surviving entity analysis. To the extent the U.S. resolution
strategy assumes a U.S. IHC subsidiary with a derivatives portfolio
enters its own resolution proceeding after the entry of the U.S. IHC
into a U.S. bankruptcy proceeding (a non-surviving derivatives
subsidiary), the firm should provide a detailed analysis of how the
non-surviving derivatives subsidiary's resolution can be accomplished
within a reasonable period of time and in a manner that substantially
mitigates the risk of serious adverse effects on U.S. financial
stability and on the orderly execution of the firm's U.S. resolution
strategy. In particular, the firm should provide an analysis of the
potential impacts on funding markets, on underlying asset markets, on
clients and counterparties (including affiliates), and on the firm's
U.S. resolution strategy.
X. Format and Structure of Plans
Format of Plan
Executive Summary. The Plan should contain an executive summary
consistent with the Rule, which must include, among other things, a
concise description of the key elements of the firm's U.S. strategy for
an orderly resolution. In addition, the executive summary should
include a discussion of the firm's assessment of any impediments to the
firm's U.S. resolution strategy and its execution, as well as the steps
it has taken to address any identified impediments.
Narrative. The Plan should include a strategic analysis consistent
with the Rule. This analysis should take the form of a concise
narrative that enhances the readability and understanding of the firm's
discussion of its U.S. strategy for rapid and orderly resolution in
bankruptcy or other applicable insolvency regimes (Narrative). The
Narrative also should include a high-level discussion of how the firm
is addressing key vulnerabilities jointly identified by the Agencies.
This is not an exhaustive list and does not preclude identification of
further vulnerabilities or impediments.
Appendices. The Plan should contain a sufficient level of detail
and analysis to substantiate and support the strategy described in the
Narrative. Such detail and analysis should be included in appendices
that are distinct from and clearly referenced in the related parts of
the Narrative (Appendices).
Public Section. The Plan must be divided into a public section and
a confidential section consistent with the requirements of the Rule.
Other Informational Requirements. The Plan must comply with all
other informational requirements of the Rule. The firm may incorporate
by reference previously submitted information as provided in the Rule.
Guidance Regarding Assumptions
1. The Plan should be based on the current state of the applicable
legal and policy frameworks. Pending legislation or regulatory actions
may be discussed as additional considerations.
2. The firm must submit a plan that does not rely on the provision
of extraordinary support by the United States or any other government
to the firm or its subsidiaries to prevent the failure of the firm.
3. The firm should not assume that it will be able to sell
identified critical operations or core business lines, or that
unsecured funding will be available immediately prior to filing for
bankruptcy.
4. The Plan should assume the Dodd-Frank Act Stress Test (DFAST)
severely adverse scenario for the first quarter of the calendar year in
which the Plan is submitted is the domestic and international economic
environment at the time of the firm's failure and throughout the
resolution process.
5. The resolution strategy may be based on an idiosyncratic event
or action. The firm should justify use of that assumption, consistent
with the conditions of the economic scenario.
6. Within the context of the applicable idiosyncratic scenario,
markets are functioning and competitors are in a position to take on
business. If a firm's Plan assumes the sale of assets, the firm should
take into account all issues surrounding its ability to sell in market
conditions present in the applicable economic condition at the time of
sale (i.e., the firm should take into consideration the size and scale
of its operations as well as issues of separation and transfer.)
7. The firm should not assume any waivers of section 23A or 23B of
the Federal Reserve Act in connection with the actions proposed to be
taken prior to or in resolution.
8. The firm may assume that its depository institutions will have
access to the Discount Window only for a few days after the point of
failure to facilitate orderly resolution. However, the firm should not
assume its subsidiary depository institutions will have access to the
Discount Window while critically undercapitalized, in FDIC
receivership, or operating as a bridge bank, nor should it assume any
lending from a Federal Reserve credit facility to a non-bank affiliate.
Financial Statements and Projections
The Plan should include the actual balance sheet for each material
entity and the consolidating balance sheet adjustments between material
entities as well as pro forma balance sheets for each material entity
at the point of failure and at key junctures in the execution of the
resolution strategy. It should also include projected statements of
sources and uses of funds for the interim periods. The pro forma
financial statements and accompanying notes in the Plan must clearly
evidence the failure trigger event; the Plan's assumptions; and any
transactions that are critical to the execution of the Plan's preferred
strategy, such as recapitalizations, the creation of new legal
entities, transfers of assets, and asset sales and unwinds.
Material Entities
Material entities should encompass those entities, including
subsidiaries, branches and agencies (collectively, Offices), which are
significant to the activities of an identified critical operation or
core business line. If the abrupt disruption or cessation of a core
business line might have systemic consequences to U.S. financial
stability, the entities essential to the continuation of such core
business line should be considered for material entity designation.
Material entities should include the following types of entities:
a. Any Office, wherever located, that is significant to the
activities of an identified critical operation.
b. Any Office, wherever located, whose provision or support of
global treasury operations, funding, or liquidity activities (inclusive
of intercompany transactions) is significant to the activities of an
identified critical operation.
[[Page 15471]]
c. Any Office, wherever located, that would provide material
operational support in resolution (key personnel, information
technology, data centers, real estate or other shared services) to the
activities of an identified critical operation.
d. Any Office, wherever located, that is engaged in derivatives
booking activity that is significant to the activities of an identified
critical operation, including those that conduct either the internal
hedge side or the client-facing side of a transaction.
e. Any Office, wherever located, engaged in asset custody or asset
management that are significant to the activities of an identified
critical operation.
f. Any Office, wherever located, holding licenses or memberships in
clearinghouses, exchanges, or other FMUs that are significant to the
activities of an identified critical operation.
For each material entity (including a branch), the Plan should
enumerate, on a jurisdiction-by-jurisdiction basis, the specific
mandatory and discretionary actions or forbearances that regulatory and
resolution authorities would take during resolution, including any
regulatory filings and notifications that would be required as part of
the U.S. resolution strategy, and explain how the Plan addresses the
actions and forbearances. The Plan should describe the consequences for
the firm's U.S. resolution strategy if specific actions in each
jurisdiction were not taken, delayed, or forgone, as relevant.
XI. Public Section
The purpose of the public section is to inform the public's
understanding of the firm's resolution strategy and how it works.
The public section should discuss the steps that the firm is taking
to improve resolvability under the U.S. Bankruptcy Code. The public
section should provide background information on each material entity
and should be enhanced by including the firm's rationale for
designating material entities. The public section should also discuss,
at a high level, the firm's intra-group financial and operational
interconnectedness (including the types of guarantees or support
obligations in place that could impact the execution of the firm's
strategy). There should also be a high-level discussion of the
liquidity resources and loss-absorbing capacity of the U.S. IHC.
The discussion of strategy in the public section should broadly
explain how the firm has addressed any deficiencies, shortcomings, and
other key vulnerabilities that the Agencies have identified in prior
Plan submissions. For each material entity, it should be clear how the
strategy provides for continuity, transfer, or orderly wind-down of the
entity and its operations. There should also be a description of the
resulting organization upon completion of the resolution process.
The public section may note that the resolution plan is not binding
on a bankruptcy court or other resolution authority and that the
proposed failure scenario and associated assumptions are hypothetical
and do not necessarily reflect an event or events to which the firm is
or may become subject.
Appendix: Frequently Asked Questions
In March 2017, the Agencies issued guidance for use in
developing the 2018 resolution plan submissions by certain foreign
banking organizations.
In response to frequently asked questions regarding that
guidance from the recipients of that guidance, Board and FDIC staff
jointly developed answers and provided those answers to the guidance
recipients in 2017 so that they could take this information into
account in developing their next resolution plan submissions.\56\
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\56\ The FAQs represent the views of staff of the Board of
Governors of the Federal Reserve System and the Federal Deposit
Insurance Corporation and do not bind the Board or the FDIC.
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The questions in this Appendix:
Comprise common questions asked by different covered
companies. Not every question is applicable to every firm; not every
aspect of the proposed guidance applies to each firm's preferred
strategy/structure; and
Reflect updated references to correspond to this
proposed guidance for the Specified FBOs (Proposed Guidance).
As indicated below, those questions and answers that are deemed
to be no longer meaningful or relevant have not been consolidated in
this Appendix and are superseded.
Capital
CAP 1. Capital Pre-Positioning and Balance
Q. How should a firm determine the appropriate balance between
resources pre-positioned at the U.S. IHC subsidiaries and held at
the U.S. IHC?
A. The Proposed Guidance addresses this issue in the Capital
section. The Agencies are not prescribing a specific percentage
allocation of resources pre-positioned at the U.S. IHC subsidiaries
versus resources held at the U.S. IHC. In considering the balance
between certainty and flexibility, the Agencies note that the risk
profile of each U.S. IHC subsidiary should inform the
``unanticipated losses'' at the entity, which should be taken into
account in determining the appropriate balance.
CAP 2. Definition of ``Well-Capitalized'' Status
Q. How should firms apply the term ``well-capitalized''?
A. U.S. non-branch material entities must comply with the
capital requirements and expectations of their primary regulator.
U.S. non-branch material entities should be recapitalized to meet
jurisdictional requirements and to maintain market confidence as
required under the U.S. resolution strategy.
CAP 3. RCEN Relationship to DFAST Severely Adverse Scenario
Q. How should the firm's RCEN and RLEN estimates relate to the
DFAST Severely Adverse scenario? Can those estimates be recalibrated
in actual stress conditions?
A. For resolution plan submission purposes, the estimation of
RLEN and RCEN should assume macroeconomic conditions consistent with
the DFAST Severely Adverse scenario. However, the RLEN and RCEN
methodologies should have the flexibility to incorporate
macroeconomic conditions that may deviate from the DFAST Severely
Adverse scenario in order to facilitate execution of the U.S.
resolution strategy.
CAP 4. Not Consolidated
Liquidity
LIQ 1. Inter-Company ``Frictions''
Q. Can the Agencies clarify what kinds of frictions might occur
between affiliates beyond regulatory ring-fencing?
A. Frictions are any impediments to the free flow of funds,
collateral and other transactions between material entities.
Examples include regulatory, legal, financial (i.e., tax
consequences), market, or operational constraints or requirements.
LIQ 2. Distinction Between Liquidity Forecasting Periods
Q1. How long is the stabilization period?
A1. The stabilization period begins immediately after the U.S.
IHC bankruptcy filing and extends until each material entity
reestablishes market confidence. The stabilization period may not be
less than 30 days. The reestablishment of market confidence may be
reflected by the maintaining, reestablishing, or establishing of
investment grade ratings or the equivalent financial condition for
each entity. The stabilization period may vary by material entity,
given differences in regulatory, counterparty, and other stakeholder
interests in each entity.
Q2. How should we distinguish between the runway, resolution,
and stabilization periods on the one hand, and RLAP and RLEN on the
other, in terms of their length, sequencing, and liquidity
thresholds?
A2. The Agencies have not specified a direct mathematical
relationship between the runway period, the RLAP model, and RLEN
model. As noted in prior guidance, firms may assume a runway period
of up to 30 days prior to entering bankruptcy provided the period is
sufficient for management to contemplate the necessary actions
preceding the filing of bankruptcy. The RLAP model should provide
for the adequate sizing and positioning of HQLA at material entities
for
[[Page 15472]]
anticipated net liquidity outflows for a period of at least 30 days.
The RLEN model estimates the liquidity needed after the U.S. IHC's
bankruptcy filing to stabilize the surviving material entities and
to allow those entities to operate post-filing. See ``LIQ 4. RLEN
and Minimum Operating Liquidity (MOL),'' Question 1, for further
detail on the components of the RLEN model.
Q3. What is the resolution period?
A3. The resolution period begins immediately after the U.S.
IHC's bankruptcy filing and extends through the completion of the
U.S. strategy. After the stabilization period (see ``LIQ 2.
Distinction between Liquidity Forecasting Periods,'' Question 1,
regarding ``stabilization period''), financial statements and
projections may be provided at quarterly intervals through the
remainder of the resolution period.
LIQ 3. Inter-Affiliate Transaction Assumptions
Q. Does inter-affiliate funding refer to all kinds of
intercompany transactions, including both unsecured and secured?
A. Yes.
LIQ 4. RLEN and Minimum Operating Liquidity (MOL)
Q1. How should firms distinguish between the minimum operating
liquidity (MOL) and peak funding needs during the RLEN period?
A1. The peak funding needs represent the peak cumulative net
out-flows during the stabilization period. The components of peak
funding needs, including the monetization of assets and other
management actions, should be transparent in the RLEN projections.
The peak funding needs should be supported by projections of daily
sources and uses of cash for each U.S. IHC subsidiary, incorporating
inter-affiliate and third-party exposures. In mathematical terms,
RLEN = MOL + peak funding needs during the stabilization period.
RLEN should also incorporate liquidity execution needs of the U.S.
resolution strategy for derivatives (see Derivatives and Trading
Activities section).
Q2. Should the MOL per entity make explicit the allocation for
intraday liquidity requirements, inter-affiliate and other funding
frictions, operating expenses, and working capital needs?
A2. Yes, the components of the MOL estimates for each surviving
U.S. IHC subsidiary should be transparent and supported.
Q3. Can MOLs decrease as surviving U.S. IHC subsidiaries wind
down?
A3. MOL estimates can decline as long as they are sufficiently
supported by the firm's methodology and assumptions.
LIQ 5. Not Consolidated
LIQ 6. Inter-Affiliate Transactions With Optionality
Q. How should firms treat an inter-affiliate transaction with an
embedded option that may affect the contractual maturity date?
A. For the purpose of calculating a firm's net liquidity
position at a material entity, RLAP and RLEN models should assume
that these transactions mature at the earliest possible exercise
date; this adjusted maturity should be applied symmetrically to both
material entities involved in the transaction.
LIQ 7. Stabilization and Regulatory Liquidity Requirements
Q. As it relates to the RLEN model and actions necessary to re-
establish market confidence, what assumptions should firms make
regarding compliance with regulatory liquidity requirements?
A. Firms should consider the applicable regulatory expectations
for each U.S. IHC subsidiary to achieve the stabilization needed to
execute the U.S. resolution strategy. Firms' assumptions in the RLEN
model regarding the actions necessary to reestablish market
confidence during the stabilization period may vary by U.S. IHC
subsidiary, for example, based on differences in regulatory,
counterparty, other stakeholder interests, and based on the U.S.
resolution strategy for each U.S. IHC subsidiary. See also ``LIQ 2.
Distinction between Liquidity Forecasting Periods.''
LIQ 8. HQLA and Assets Not Eligible as HQLA in RLAP and RLEN Models
Q. The Proposed Guidance states that HQLA should be used to meet
estimated net liquidity deficits in the RLAP model and that the RLEN
estimate should be based on the minimum amount of HQLA required to
facilitate the execution of the firm's U.S. resolution strategy. How
should firms incorporate any expected liquidity value of assets that
are not eligible as HQLA (non-HQLA) into RLAP and RLEN models?
A. A firm's RLAP model should assume that only HQLA are
available to meet net liquidity deficits at U.S. IHC subsidiaries.
For a firm's RLEN model, firms may incorporate conservative
estimates of potential liquidity that may be generated through the
monetization of non-HQLA. The estimated liquidity value of non-HQLA
should be supported by thorough analysis of the potential market
constraints and asset value haircuts that may be required.
Assumptions for the monetization of non-HQLA should be consistent
with the U.S. resolution strategy for each U.S. IHC subsidiary.
LIQ 9. Components of Minimum Operating Liquidity
Q. Do the agencies have particular definitions of the ``intraday
liquidity requirements,'' ``operating expenses,'' and ``working
capital needs'' components of minimum operating liquidity (MOL)
estimates?
A. No. A firm may use its internal definitions of the components
of MOL estimates. The components of MOL estimates should be well-
supported by a firm's internal methodologies and calibrated to the
specifics of each U.S. IHC subsidiary.
LIQ 10. RLEN Model and Net Revenue Recognition
Q. Can firms assume in the RLEN model that cash-based net
revenue generated by U.S. IHC subsidiaries after the U.S. IHC's
bankruptcy filing is available to offset estimated liquidity needs?
A. Yes. Firms may incorporate cash revenue generated by U.S. IHC
subsidiaries in the RLEN model. Cash revenue projections should be
conservatively estimated and consistent with the operating
environment and the U.S. strategy for each U.S. IHC subsidiary.
LIQ 11. RLEN Model and Inter-Affiliate Frictions
Q. Can a firm modify its assumptions regarding one or more
inter-affiliate frictions during the stabilization or post-
stabilization period in the RLEN model?
A. Once a U.S. IHC subsidiary has achieved market confidence
necessary for stabilization consistent with the U.S. resolution
strategy, a firm may modify one or more inter-affiliate frictions,
provided the firm provides sufficient analysis to support this
assumption.
LIQ 12. RLEN Relationship to DFAST Severely Adverse Scenario
(See ``CAP 3. RCEN Relationship to DFAST Severely Adverse Scenario''
in the Capital section.)
LIQ 13. Liquidity Positioning and Foreign Parent Support
Q1. May firms consider available liquidity at the foreign parent
for meeting RLAP and RLEN estimates for U.S. non-branch material
entities?
A1. For a 30-day RLAP model, firms should use the requirements
of Regulation YY in estimating the standalone liquidity position of
each U.S. non-branch material entities. Firms should not rely on
available liquidity at the foreign parent to meet net liquidity
outflows of U.S. non-branch material entities. The firm's RLAP model
should ensure that the consolidated U.S. IHC holds sufficient HQLA
to cover net liquidity outflows of the U.S. non-branch material
entities. For an RLAP model that extends beyond 30 days, firms may
consider (after 30 days) available liquidity at the foreign parent
to meet the needs for U.S. non-branch material entities.
To meet the liquidity needs informed by the RLEN methodology,
firms may either fully pre-position liquidity in the U.S. non-branch
material entities or develop a mechanism for planned foreign parent
support of any amount not pre- positioned for the successful
execution of the U.S. strategy. Mechanisms to support readily
available liquidity may include a term liquidity facility between
the U.S. IHC and the foreign parent that can be drawn as needed. If
a firm's plan relies on foreign parent support, the plan should
include analysis of how the U.S. IHC/foreign parent facility is
funded or buffered for by the foreign parent.
LIQ 14. RLAP Model Time Horizon and Inter-Affiliate Transactions
Q. How should firms treat cash flow sources from affiliates in
the RLAP model for models that use time periods in excess of 30
days, given the affiliate cash flow calculation requirements in
section 252.157(c)(2)(iv) of Regulation YY?
A. An RLAP model that includes time periods beyond 30 days is
not required to adopt the affiliate cash flow calculation
requirements in section 252.157(c)(2)(iv) of Regulation YY for
inter-affiliate cash flows beyond 30 days. However, beyond 30 days,
the RLAP methodology still should take into account for each of the
U.S. IHC, U.S. IHC subsidiaries, and any branch that is a material
entity the considerations detailed in
[[Page 15473]]
(A), (B), and (C) in the RLAP subsection of the Proposed Guidance.
See Resolution Liquidity Adequacy and Positioning (RLAP) section.
LIQ 15. U.S. Branches and Agencies Liquidity Modeling
Q1. Are firms required to develop a RLAP model for U.S. branches
and agencies?
A1. Firms are not required to develop a RLAP model for material
U.S. branches and agencies; however, as described in the Liquidity
section of the Proposed Guidance, a firm should maintain a liquidity
buffer sufficient to meet the net cash outflows for its U.S.
branches and agencies on an aggregate basis for the first 14 days of
a 30-day stress horizon. These expectations are consistent with the
stress testing and liquidity buffer requirements in section
252.157(c)(3) of Regulation YY.
Q2. The Proposed Guidance states that in calculating RLAP
estimates the U.S. IHC should calculate its liquidity position with
respect to its foreign parent, branches and agencies, and other
affiliates separately from its liquidity position with respect to
third parties. How should firms interpret the RLAP requirements
since RLAP is not required for U.S. branches and agencies?
A2. The RLAP estimates for U.S. non-branch material entities
should take into account how cash flows and the stand-alone
liquidity profile may be affected by all inter-affiliate
transactions, which may include the impact on the U.S. non-branch
material entities from flows transacted with U.S. branches and
agencies.
LIQ 16. Material Service Entity Liquidity
Q. Is a standalone liquidity position estimate needed for
material service entities?
A. For material service entities with no other operations other
than providing services only to their affiliates and having no
third-party debt obligations, a standalone liquidity position
estimate is not required.
Operational: Shared Services
OPS SS 1. Not Consolidated
OPS SS 2. Working Capital
Q1. Must working capital be maintained for third party and
internal shared service costs?
A1. Where a firm maintains shared service companies to provide
services to affiliates, working capital should be maintained in
those entities sufficient to permit those entities to continue to
provide services for six months or through the period of
stabilization as required in the firm's U.S. resolution strategy.
Costs related to third-party vendors and inter-affiliate
services should be captured through the working capital element of
the MOL estimate (RLEN).
Q2. When does the six month working capital requirement period
begin?
A2. The measurement of the six month working capital expectation
begins upon the bankruptcy filing of the U.S. IHC. The expectation
for maintaining the working capital is effective upon the July 2018
submission.
OPS SS 3. Not Consolidated
OPS SS 4. Not Consolidated
Operations: Payments, Clearing and Settlement
To the extent relevant, the PCS FAQs have been consolidated into
the updated section of the Proposed Guidance.
Legal Entity Rationalization and Separability
LER 1. Data Room
Q. What information should be in the data room?
A. The Proposed Guidance addresses the data room in the section
regarding Legal Entity Rationalization and Separability. The data
room should contain the necessary information on discrete sales
options to facilitate buyer due diligence. Including only a table of
contents of information that could be provided when needed would not
be sufficient.
Q2. Are firms expected to include in a data room described in
the Proposed Guidance lists of individual employee names and
compensation levels?
A2. The firm should include the necessary information to
facilitate buyer due diligence. In the circumstance where employee
information would be important to buyer due diligence the firm
should demonstrate the capability to provide such information in a
timely manner. For individual employee names and compensation, the
data room may include a representative sample and may have
personally identifiable information redacted.
LER 2. Legal Entity Rationalization Criteria
Q. Is it acceptable to take into account business-related
criteria, in addition to the resolution requirements, so that the
LER Criteria can be used for both resolution planning and business
operations purposes?
A. Yes, LER criteria may incorporate both business and
resolution considerations. In determining the best alignment of
legal entities and business lines to improve the firm's
resolvability under different market conditions, business
considerations should not be prioritized over resolution needs.
LER 3. Creation of Additional Legal Entities
Q. Is the addition of legal entities acceptable, so long as it
is consistent with the LER criteria?
A. Yes.
LER 4. Clean Funding Pathways
Q1. Can you provide additional context around what is meant by
clean lines of ownership and clean funding pathways in the legal
entity rationalization criteria? Additionally, what types of funding
are covered by the requirements?
A1. The funding pathways between the foreign parent, U.S. IHC,
and U.S. IHC subsidiaries should minimize uncertainty in the
provision of funds and facilitate recapitalization. Also, the
complexity of ownership should not impede the flow of funding to a
U.S. non-branch material entity under the firm's U.S. resolution
strategy. Potential sources of additional complexity could include,
for example, multiple intermediate holding companies, tenor
mismatches, or complicated ownership structures (including those
involving multiple jurisdictions or fractional ownerships).
Ownership should be as clean and simple as practicable, supporting
the U.S. strategy and actionable sales, transfers, or wind-downs
under varying market conditions. The clean funding pathways
expectation applies to all funding provided to a U.S. non-branch
material entity regardless of type and should not be viewed solely
to apply to internal TLAC.
Q2. The Proposed Guidance regarding legal entity rationalization
criteria discusses ``clean lines of ownership'' and ``clean funding
pathways.'' Does this statement mean that firms' legal entity
rationalization criteria should require funding pathways and
recapitalization to always follow lines of ownership?
A2. No. However, the firm should identify and address or
mitigate any legal, regulatory, financial, operational, and other
factors that could complicate the recapitalization and/or liquidity
support of U.S. non-branch material entities.
LER 5. Separability Options Information
Q. How should a firm approach inclusion of legal risk
assessments and other buyer due diligence information into
separability options?
A. The legal assessment should consider both buyer and seller
legal aspects that could impede the timely or successful execution
of the divestiture option. Where impediments are identified,
mitigation strategies should be developed.
LER 6. Market Conditions
Q. What is meant by the phrase ``under different market
conditions'' in the Legal Entity Rationalization and Separability
section of the Proposed Guidance?
A. The phrase ``under different market conditions'' is meant to
ensure that a firm has a menu of divestiture options from which at
least some could be executed under different market stresses.
LER 7. Application of Legal Entity Rationalization Criteria
Q1. Which legal entities should be covered under the LER
framework?
A1. The scope of a firm's LER criteria should apply to the
entire U.S. operations.
Q2. To the extent a firm has a large number of similar U.S. non-
material entities (such as single-purpose entities formed for
Community Reinvestment Act purposes), may a firm apply its legal
entity rationalization criteria to these entities as a group, rather
than at the individual entity level?
A2. Yes.
LER 8. Application of LER Criteria.
Q. Under the Proposed Guidance, is there an expectation that the
LER criteria be applied to the legal structure outside of the U.S.
operations (e.g., outside of the U.S. IHC or U.S. branch)?
A. The LER criteria serve to govern the corporate structure and
arrangements between U.S. subsidiaries and U.S. branches in a manner
that facilitates the resolvability of U.S. operations. The Proposed
Guidance is not intended to govern the corporate structure in
jurisdictions outside the U.S.
[[Page 15474]]
The application of the LER criteria should, among other things,
ensure that the allocation of activities across the firm's U.S.
branches and U.S. non-branch material entities support the firm's
U.S. resolution strategy and minimize risk to U.S. financial
stability in the event of resolution.
Moreover, LER works with other components to improve
resolvability. For example, with regard to shared services the firm
should identify all shared services that support identified critical
operations, maintain a mapping of how/where these services support
core business lines and identified critical operations, and include
this mapping into the legal rationalization criteria and
implementation efforts.
Derivatives and Trading Activities
To the extent relevant, the derivatives and trading FAQs have
been consolidated into the updated section of the Proposed Guidance.
Legal
LEG 1. Support Within the United States
Q. Could the Agencies clarify what further legal analysis would
be expected regarding the impact of potential state law and
bankruptcy law challenges and mitigants to the planned provision of
Support?
A. The firms should address developments from the firm's own
analysis of potential legal challenges regarding the Support and
should also address any additional potential legal challenges
identified by the Agencies in the Support within the United States
section of the Proposed Guidance. A legal analysis should include a
detailed discussion of the relevant facts, legal challenges, and
Federal or State law and precedent. The analysis also should
evaluate in detail the legal challenges identified in the Support
within the United States section of the Proposed Guidance, any other
legal challenges identified by the firm, and the efficacy of
potential mitigants to those challenges. Firms should identify each
factual assumption underlying their legal analyses and discuss how
the analyses and mitigants would change if the assumption were not
to hold. Moreover, the analysis need not take the form of a legal
opinion.
LEG 2. Contractually Binding Mechanisms
The Proposed Guidance states that the legal analysis described
under the heading ``Support Within the United States'' should
include mitigants to the potential challenges to the planned Support
and that the plan should identify the mitigant(s) to such challenges
that the firm considers most effective. The Proposed Guidance does
not specifically reference consideration of a contractually binding
mechanism. However, the following questions and answers may be
useful to a firm that chooses to consider a contractually binding
mechanism as a mitigant to the potential challenges to the planned
Support.
Q1. Do the Agencies have any preference as to whether capital is
down-streamed to key subsidiaries (including an IDI subsidiary) in
the form of capital contributions vs. forgiveness of debt?
A1. No. The Agencies do not have a preference as to the form of
capital contribution or liquidity support.
Q2. Should a contractually binding mechanism relate to the
provision of capital or liquidity? What classes of assets would be
deemed to provide capital vs. liquidity?
A2. Contractually binding mechanism is a generic term and
includes the down-streaming of capital and/or liquidity as
contemplated by the U.S. resolution strategy. Furthermore, it is up
to the firm, as informed by any relevant guidance of the Agencies,
to identify what assets would satisfy a U.S. affiliate's need for
capital and/or liquidity.
Q3. Is there a minimum acceptable duration for a contractually
binding mechanism? Would an ``evergreen'' arrangement, renewable on
a periodic basis (and with notice to the Agencies), be acceptable?
A3. To the extent a firm utilizes a contractually binding
mechanism, such mechanism, including its duration, should be
appropriate for the firm's U.S. resolution strategy, including
adequately addressing relevant financial, operational, and legal
requirements and challenges.
Q4. Not consolidated.
Q5. Not consolidated.
Q6. The firm may need to amend its contractually binding
mechanism from time to time resulting potentially from changes in
relevant law, new or different regulatory expectations, etc. Is a
firm able to do this as long as there is no undue risk to the
enforceability (e.g., no signs of financial stress sufficient to
unduly threaten the agreement's enforceability as a result of
fraudulent transfer)?
A6. Yes, however the Agencies should be informed of the proposed
duration of the agreement, as well as any terms and conditions on
renewal and/or amendment. Any amendments should be identified and
discussed as part of the firm's next U.S. resolution plan
submission.
Q7. Not consolidated.
Q8. Should firms include a formal regulatory trigger by which
the Agencies can directly trigger a contractually binding mechanism?
A8. No
General
None of the general FAQs were consolidated.
By order of the Board of Governors of the Federal Reserve
System, March 11, 2020.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on March 5, 2020.
Annmarie H. Boyd,
Assistant Executive Secretary.
[FR Doc. 2020-05513 Filed 3-17-20; 8:45 am]
BILLING CODE 6210-01-P
