Resolution Planning Guidance for Eight Large, Complex U.S. Banking Organizations, 32856-32871 [2018-15066]
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pursuant to the Bank Holding Company
Act of 1956 (12 U.S.C. 1841 et seq.)
(BHC Act), Regulation Y (12 CFR part
225), and all other applicable statutes
and regulations to become a bank
holding company and/or to acquire the
assets or the ownership of, control of, or
the power to vote shares of a bank or
bank holding company and all of the
banks and nonbanking companies
owned by the bank holding company,
including the companies listed below.
The applications listed below, as well
as other related filings required by the
Board, are available for immediate
inspection at the Federal Reserve Bank
indicated. The applications will also be
available for inspection at the offices of
the Board of Governors. Interested
persons may express their views in
writing on the standards enumerated in
the BHC Act (12 U.S.C. 1842(c)). If the
proposal also involves the acquisition of
a nonbanking company, the review also
includes whether the acquisition of the
nonbanking company complies with the
standards in section 4 of the BHC Act
(12 U.S.C. 1843). Unless otherwise
noted, nonbanking activities will be
conducted throughout the United States.
Unless otherwise noted, comments
regarding each of these applications
must be received at the Reserve Bank
indicated or the offices of the Board of
Governors not later than August 8, 2018.
A. Federal Reserve Bank of Chicago
(Colette A. Fried, Assistant Vice
President) 230 South LaSalle Street,
Chicago, Illinois 60690–1414:
1. Hometown Bancorp, Ltd., Fond du
Lac, Wisconsin; to acquire 100 percent
of the voting shares of United
Community Bank, Poynette, Wisconsin.
B. Federal Reserve Bank of St. Louis
(David L. Hubbard, Senior Manager)
P.O. Box 442, St. Louis, Missouri
63166–2034. Comments can also be sent
electronically to Comments.applications
@stls.frb.org:
1. Cross County Bancshares, Wynne,
Arkansas; to acquire up to 35 percent of
the voting shares of Central Bank, Little
Rock, Arkansas.
2. First Capital, Inc., Corydon,
Indiana; to acquire 5.15 percent of the
voting shares of First Bancorp of
Indiana, Inc., Evansville, Indiana; and
thereby indirectly acquire First Federal
Savings Bank, Evansville, Indiana.
Board of Governors of the Federal Reserve
System, July 11, 2018.
Ann Misback,
Secretary of the Board.
[FR Doc. 2018–15108 Filed 7–13–18; 8:45 am]
BILLING CODE P
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FEDERAL RESERVE SYSTEM
[Docket No. OP–1614]
FEDERAL DEPOSIT INSURANCE
CORPORATION
Resolution Planning Guidance for
Eight Large, Complex U.S. Banking
Organizations
Board of Governors of the
Federal Reserve System (Board) and
Federal Deposit Insurance Corporation
(FDIC).
ACTION: Proposed guidance; request for
comments.
AGENCY:
The Board and the FDIC
(together, the ‘‘Agencies’’) are inviting
comments on proposed guidance for the
2019 and subsequent resolution plan
submissions by the eight largest,
complex U.S. banking organizations
(‘‘Covered Companies’’ or ‘‘firms’’). 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
proposed guidance, which is largely
based on prior guidance issued to these
Covered Companies, describes the
Agencies’ expectations regarding a
number of key vulnerabilities in plans
for an 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 on the Agencies’ review
of these firms’ recent resolution plan
submissions. The Agencies invite public
comment on all aspects of the proposed
guidance.
DATES: Comments should be received
September 14, 2018.
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–1614, by any of the following
methods:
• Agency Website: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Email: regs.comments@
federalreserve.gov. 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
SUMMARY:
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Reserve System, 20th Street and
Constitution Avenue NW, Washington,
DC 20551.
All public comments will be made
available on the Board’s website at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfms
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 in Room 3515, 1801 K Street NW
(between 18th and 19th Street NW),
between 9:00 a.m. and 5:00 p.m. on
weekdays.
FDIC: You may submit comments 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: comments@fdic.gov. Include
‘‘Proposed 165(d) Guidance for the
Domestic Firms’’ on the subject line of
the message.
• Mail: Robert E. Feldman, 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
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: Michael Hsu, Associate
Director, (202) 452–4330, Division of
Supervision and Regulation, Jay
Schwarz, Senior Counsel, (202) 452–
2970, Will Giles, Senior Counsel, (202)
452–3351, or Steve Bowne, Senior
Attorney, (202) 452–3900, Legal
Division. Users of Telecommunications
Device for the Deaf (TDD) may call (202)
263–4869.
FDIC: Mike J. Morgan, Corporate
Expert, mimorgan@fdic.gov, CFI
Oversight Branch, Division of Risk
Management Supervision; Alexandra
Steinberg Barrage, Associate Director,
Resolution Strategy and Policy, Office of
Complex Financial Institutions,
abarrage@fdic.gov; David N. Wall,
Assistant General Counsel, dwall@
fdic.gov; Pauline E. Calande, Senior
Counsel, pcalande@fdic.gov; or Celia
Van Gorder, Supervisory Counsel,
cvangorder@fdic.gov, Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC
20429.
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SUPPLEMENTARY INFORMATION:
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I. Background
Section 165(d) of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5365(d)) and
the jointly issued implementing
regulation, 12 CFR part 243 and 12 CFR
part 381 (‘‘the Rule’’), requires certain
financial companies to report
periodically to the Board and the FDIC
their plans for rapid and orderly
resolution under the U.S. Bankruptcy
Code in the event of material financial
distress or failure.
Among other requirements, the Rule
requires each financial company’s
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. The Rule also
requires that resolution plans include a
confidential section that contains
confidential supervisory and proprietary
information submitted to the Board and
the FDIC (together, the ‘‘Agencies’’), and
a section that the Agencies make
available to the public. Public sections
of resolution plans can be found on the
Agencies’ websites.1
Objectives of the Resolution Planning
Process
The goal of the Dodd-Frank Act
resolution planning process is to help
ensure that a firm’s failure would not
have serious adverse effects on financial
stability in the United States.
Specifically, the resolution planning
process requires firms to demonstrate
that they have adequately assessed the
challenges that their structure and
business activities pose to resolution
and that they have taken action to
address those issues. Management
should also consider resolvability as
part of day-to-day decision making,
particularly those related to structure,
business activities, capital and liquidity
allocation, and governance. In addition,
firms are expected to maintain a
meaningful set of options for selling
operations and business lines to
generate resources and to allow for
restructuring under stress, including
through the sale or wind down of
discrete businesses that could further
minimize the direct impact of distress or
failure on the broader financial system.
While these measures cannot guarantee
1 See the public sections of resolution plans
submitted to the Agencies at
www.federalreserve.gov/bankinforeg/
resolutionplans.htm and www.fdic.gov/regulations/
reform/resplans/.
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that a firm’s resolution would be simple
or smoothly executed, these
preparations can help ensure that the
firm could be resolved under
bankruptcy without government support
or imperiling the broader financial
system.
The Rule describes an iterative
process aimed at strengthening the
resolution planning capabilities of each
financial institution. With respect to the
eight largest, complex U.S. banking
organizations (‘‘Covered Companies’’ or
‘‘firms’’),2 the Agencies have previously
provided guidance and other feedback.3
In general, the feedback was intended to
assist firms in their development of
future resolution plan submissions and
to provide additional clarity with
respect to the expectations against
which the Agencies will evaluate the
resolution plan submissions. The
Agencies are now proposing to update
aspects of prior guidance based on the
Agencies’ review of the firms’ recent
resolution plan submissions.4 The
Agencies reviewed the 2017 Plans and
issued a letter to each firm indicating
that it had taken important steps to
enhance its resolvability and facilitate
its orderly resolution in bankruptcy.5 As
a result of those reviews and following
the Agencies’ joint decisions in
December 2017, the Agencies identified
four areas where more work may need
to be done to improve the resolvability
of the firms.6 As described below, the
Agencies are proposing updates to two
2 Bank of America Corporation, The Bank of New
York Mellon Corporation, Citigroup Inc., the
Goldman Sachs Group, Inc., JPMorgan Chase & Co.,
Morgan Stanley, State Street Corporation and Wells
Fargo & Company.
3 This includes Guidance for 2013 § 165(d)
Annual Resolution Plan Submissions by Domestic
Covered Companies that Submitted Initial
Resolution Plans in 2012; detailed guidance and
firm-specific feedback in August 2014 and February
2015 for the development of firms’ 2015 resolution
plan submissions; and Guidance for 2017 § 165(d)
Annual Resolution Plan Submissions by Domestic
Covered Companies that Submitted Resolution
Plans in July 2015, including the frequently asked
questions that were published in response to the
Guidance for the 2017 Plan Submissions (taken
together, ‘‘prior guidance’’).
4 Each firm’s resolution strategy is designed to
have the parent company recapitalize and provide
liquidity resources to its material entity subsidiaries
prior to entering bankruptcy proceedings. This
strategy calls for material entities to be provided
with sufficient capital and liquidity resources to
allow them to avoid multiple competing
insolvencies and maintain continuity of operations
throughout resolution.
5 See Letters dated December 19, 2017, from the
Board and FDIC to Bank of America Corporation,
The Bank of New York Mellon Corporation,
Citigroup Inc., the Goldman Sachs Group, Inc.,
JPMorgan Chase & Co., Morgan Stanley, State Street
Corporation and Wells Fargo & Company, available
at https://www.federalreserve.gov/supervisionreg/
resolution-plans.htm.
6 Id.
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areas of the guidance regarding
payment, clearing, and settlement
services and derivatives and trading
activities. The Agencies intend to
provide additional information on the
two other areas: Intra-group liquidity
and internal loss absorbing capacity.
The Agencies invite public comment on
all aspects of the proposed guidance.
II. Overview of the Proposed Guidance
The proposed guidance is organized
into six substantive areas, consistent
with the guidance the Agencies
provided to Covered Companies in
April 2016 to assist in the development
of their 2017 resolution plans, Guidance
for 2017 § 165(d) Annual Resolution
Plan Submissions by Domestic Covered
Companies that Submitted Resolution
Plans in July 2015 (‘‘2016 Guidance’’).7
These areas are:
1. Capital
2. Liquidity
3. Governance mechanisms
4. Operational
5. Legal entity rationalization and
separability
6. Derivatives and trading activities
Each area is important to firms in
resolution as each plays a part in
helping to ensure that the firm can be
resolved in an orderly manner. The
guidance would describe the Agencies’
expectations for each of these areas.
The proposed guidance is largely
consistent with the 2016 Guidance,
which the Covered Companies used to
develop their 2017 resolution plan
submissions. Accordingly, the firms
have already incorporated significant
aspects of the proposed guidance into
their resolution planning. The proposal
would update the derivatives and
trading activities (DER), and payment,
clearing, and settlement activities (PCS)
areas of the 2016 Guidance based on the
Agencies’ review of the Covered
Companies’ 2017 plans. It would also
make minor clarifications to certain
areas of the 2016 Guidance. In general,
the proposed revisions to the guidance
are intended to streamline the firms’
submissions and to provide additional
clarity. The proposed guidance is not
meant to limit firms’ consideration of
additional 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.
Capital: The ability to provide
sufficient capital to material entities
without disruption from creditors is
7 Available at: https://www.federalreserve.gov/
newsevents/pressreleases/files/
bcreg20160413a1.pdf and at https://www.fdic.gov/
news/news/press/2016/pr16031b.pdf.
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important in order to ensure that
material entities can continue to provide
critical services and maintain critical
operations as the firm 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 material entities within the firm
(resolution capital adequacy and
positioning or RCAP). The proposal also
describes expectations regarding a
methodology for periodically estimating
the amount of capital that may be
needed to support each material entity
after the bankruptcy filing (resolution
capital execution need or RCEN).
Liquidity: A firm’s ability to reliably
estimate and meet its liquidity needs
prior to, and in, resolution is important
to the execution of a Covered
Company’s resolution strategy in that it
enables the firm to respond quickly to
demands from stakeholders and
counterparties, including regulatory
authorities in other jurisdictions and
financial market utilities. Maintaining
sufficient and appropriately-positioned
liquidity also allows the subsidiaries to
continue to operate while the firm is
being resolved in accordance with the
firm’s preferred resolution strategy.8
Governance Mechanisms: An
adequate governance structure with
triggers capable of identifying the onset
of financial stress events is important to
ensure that there is sufficient time to
allow firms to prepare for resolution,
and to ensure the timely execution of
their preferred resolution strategies. The
governance mechanism section
proposes expectations that firms have
playbooks that detail the board and
senior management actions necessary to
execute the firm’s preferred 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 senior
management and the board, to address
the successful recapitalization of
subsidiaries prior to the parent’s
bankruptcy to the extent called for by
the firm’s preferred resolution strategy,
and to address how the firm would
ensure the timely execution of a
bankruptcy filing. The proposal also
describes the expectations that firms
identify and analyze potential legal
challenges to the provision of capital
8 The Agencies are currently taking steps to better
understand the purpose and treatment of the firms’
inter-affiliate transactions. The Agencies do not
expect the firms to make major changes to their
RLAP and RLEN models until after the Agencies
have completed this review and provided further
feedback.
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and liquidity to subsidiaries that would
precede the parent’s bankruptcy filing,
and any defenses and mitigants to such
challenges. In addition, the proposal
describes expectations that firms
incorporate any developments from this
analysis in their governance playbooks.
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
preferred 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 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 and actionable
operations that could be sold or
transferred in resolution to provide
meaningful optionality for the
resolution strategy under a range of
potential failure scenarios.
Operational: The development and
maintenance of operational capabilities
is important to support and enable
execution of a firm’s preferred
resolution strategy, including providing
for the continuation of critical
operations and preventing or mitigating
adverse impacts on U.S. financial
stability. The proposed operational
capabilities include:
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 legal entity basis, and that ensure data
integrity and reliability;
Developing a clear set of actions to be
taken to maintain payment, clearing and
settlement activities and to maintain
access to financial market utilities, as
further discussed below; and
Maintaining an actionable plan to
ensure the continuity of all of the shared
and outsourced services that their
critical operations rely on.
In addition, the proposed guidance
provides that a firm should analyze and
address legal issues that may arise in
connection with emergency motions the
firm anticipates filing at the outset of its
bankruptcy case seeking relief needed to
pursue its preferred resolution strategy,
including legal precedent and
evidentiary support the firm expects to
provide in support of such motions, key
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regulatory actions, and contingency
arrangements.
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 derivatives and
trading activities and with the
implementation of their preferred
strategies, as further discussed below.
Question 1: Do the topics in the
proposed guidance discussed above
represent the key vulnerabilities of the
Covered Companies in resolution? If
not, what key vulnerabilities are not
captured?
III. Proposed Changes to Prior
Guidance
In addition to making some
clarifications, this proposal differs from
prior guidance in that it reflects
enhancements informed by the
Agencies’ review of the Covered
Companies 2017 plans in the areas of
DER and PCS.
The following description
summarizes the changes relative to the
topics outlined in the 2016 Guidance to
which the Agencies are seeking
comment and, where relevant, provides
additional detail:
Operational: Payment, Clearing, and
Settlement Activities
The provision of PCS by firms,
financial market utilities (FMUs), and
agent banks is an essential component
of the U.S. financial system, and
maintaining the continuity of PCS
services is important for the orderly
resolution of firms. Prior guidance from
the Agencies indicated that a firm’s
resolution plan submissions should
describe arrangements to facilitate
continued access to PCS services
through the firm’s resolution.
Based upon recent resolution plan
submissions and the Agencies’
engagement with the firms, the Agencies
believe that the firms have developed
capabilities to identify and consider the
risks associated with continuity of
access to PCS services in resolution. All
of the firms described methodologies to
identify key FMUs and agent banks
based on quantitative and qualitative
criteria and included playbooks for
identified key FMUs or agent banks.
These playbooks described potential
adverse actions that could be taken by
the FMU or agent bank, described
possible contingency arrangements, and
discussed the operational and financial
impacts of such actions or
arrangements, all of which were
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enhanced by the firms’ direct
communications with these FMUs and
agent banks. The proposed PCS
guidance clarifies the expectations of
the Agencies with respect to a firm’s
capabilities to maintain continued
access to PCS services through a
framework. Considering the firms’
earlier resolution plan submissions, the
firms have the methodologies and
capabilities in place to address these
expectations.
Framework. The proposal states that
firms should demonstrate capabilities
for maintaining continued access to PCS
services through a framework that
incorporates the identification of key
clients,9 FMUs, and agent banks, using
both quantitative 10 and qualitative
criteria, and the development of a
playbook for each key FMU and agent
bank. The proposed guidance builds
upon existing guidance by specifying
that the framework should consider key
clients (which may include affiliates of
the firm) and agent banks. The Agencies
note that, although the existing
guidance did not expressly suggest the
identification of key agent banks and
playbooks for such agent banks, the
firms considered agent bank
relationships and each provided a
playbook for at least one key agent bank
in its most recent resolution plan
submission. Because agent bank
relationships may essentially replicate
PCS services provided by FMUs, the
Agencies propose to revise the PCS
guidance to include the identification
and development of playbooks for key
agent banks.
In applying the framework, the firm
would be expected to consider its role
as a user and/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 through its own
membership in that FMU or through the
membership of another firm 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 through the firm’s
membership in or relationship with that
service provider. A firm also would be
a provider if it delivers PCS services
critical to a client through the firm’s
9 A client is an individual or entity, including
affiliates of the firm, that relies upon continued
access to the firm’s PCS services and any related
credit or liquidity offered in connection with those
services. As a result, key clients may not necessarily
be limited to wholesale clients.
10 Examples of quantitative criteria include not
only the aggregate volumes and values of all
transactions processed through an FMU but also
assets under custody with an agent bank, the value
of cash and securities settled through an agent bank,
and extensions of intraday credit.
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own operations in a manner similar to
an FMU.
The proposal provides that a firm’s
framework should take into account the
various relationships the firm and its
key clients have with those key FMUs
and agent banks by providing a mapping
of material entities, critical operations,
core business lines, and key clients to
key FMUs and agent banks. This
framework would be expected to
consider both direct relationships (e.g.,
firm’s direct membership in the FMU,
firm provides key clients with critical
PCS services through its own
operations, firm’s contractual
relationship with an agent bank) and
indirect relationships (e.g., firm
provides its clients with access to the
relevant FMU or agent bank through the
firm’s membership in or relationship
with that FMU or agent bank).
By developing and evaluating these
activities and relationships through a
framework that incorporates the
elements above, a firm should be able to
consider the issue of maintaining
continuity of PCS services in a
systematic manner.
Question 2: Is the guidance
sufficiently clear with respect to the
following concepts: Scope of PCS
services, user vs. provider, 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 firms 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?
Playbooks for Continued Access to
PCS Services. Firms also would be
expected to provide a playbook for each
key FMU and agent bank that addresses
financial considerations and includes
operational detail that would assist the
firm in maintaining continued access to
PCS services for itself and its clients in
stress and in resolution. Under the
proposal, each key FMU and agent bank
playbook would be expected to provide
analysis of the financial and operational
impact to the firm’s material entities
and key clients due to a loss of access
to the FMU or agent bank. Each
playbook also should discuss any
possible alternative arrangements that
would allow the firm and its key clients
to maintain continued access to PCS
services in resolution. However, the
firm is not expected to incorporate a
scenario in which it loses FMU or agent
bank access into its preferred resolution
strategy or its RLEN/RCEN estimates.
Firms communicated with key FMUs
and agent banks in preparing their most
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recent resolution plan submissions and
indicated that such communication was
helpful in refining their analysis
concerning potential adverse actions
and contingency arrangements. Firms
would be expected to continue to
engage with key FMUs, agent banks, and
clients, and playbooks would be
expected to reflect any feedback
received during such ongoing outreach.
Firms are encouraged to continue
engaging with each other, key FMUs
and agent banks, and other stakeholders
to identify possible initiatives or
additional ways to support continued
access to PCS services.
The proposed guidance differentiates
the type of information to be included
in a firm’s key FMU and 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. Under the proposal, each
playbook for an individual FMU or
agent bank should include, at a
minimum, a description of the firm’s
relationship as a user with the key FMU
or agent bank and an identification and
mapping of PCS services to the
associated material entities, 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 agent bank in a period
of stress for the firm or upon the firm’s
resolution.11 Playbooks submitted as
part of the firms’ most recent resolution
plan submissions mapped the PCS
services provided to material entities,
critical operations, and core business
lines at a fairly granular level, which
enhanced the utility of these playbooks.
In discussing the potential range of
adverse actions that a key FMU or agent
bank could take, each playbook would
be expected to address the operational
and financial impact of such actions on
each material entity and discuss
contingency arrangements that the firm
may initiate in response to such actions
by the key FMU or key agent bank.
Operational impacts may include effects
11 Potential adverse actions may include
increased collateral and margin requirements and
enhanced reporting and monitoring.
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on governance mechanisms or resource
allocation (including human resources),
as well as any expected enhanced
communication with key stakeholders
(e.g., regulators, FMUs and agent banks).
Financial impacts may include those
directly associated with liquidity or any
additional costs incurred by the firm as
a result of such adverse actions and
contingency arrangements. The
proposed PCS guidance specifies that
each playbook should discuss PCSrelated liquidity sources and uses in
business-as-usual (BAU), in stress, and
in the resolution period. Each firm
would be expected to determine the
relevant measurement points, and this
information would be presented by
currency type (with U.S. dollar
equivalent) and by material entity. Each
playbook also would be expected to
describe any account features that might
restrict the firm’s ready access to its
intraday liquidity sources, the firm’s
ability to control intraday liquidity
outflows, and the firm’s capabilities to
identify and prioritize time-specific
payments.
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
key clients that rely upon PCS services
provided by the firm in its playbook for
the relevant FMU or agent bank.
Playbooks would be expected to
describe the scale and manner in which
the firm’s material entities, critical
operations, and core business lines
provide PCS services and any related
credit or liquidity offered by the firm in
connection with such services. Similar
to the playbook content expected of
users of PCS services, each playbook
would be expected to include a
mapping of the PCS services provided to
each material entity, critical operation,
core business line, and key clients. In
the case where a firm is a provider of
PCS services through its own
operations, the firm would expected to
produce a playbook for the material
entity that provides those services, and
the playbook would focus on continuity
of access for its key clients.
The proposal states that playbooks
should discuss the potential range of
contingency arrangements available to
the firm to minimize disruption to its
provision of PCS services to its clients
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 the
firm’s key clients to maintain continued
access to critical PCS services. The
playbook also would be expected to
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describe the range of contingency
actions that the firm may take
concerning its provision of intraday
credit to key clients 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 preferred resolution strategy,
the firm would be expected to describe
its reasons for not taking any
contingency action.
Under the proposal, a firm should
communicate the potential impacts of
implementation of any identified
contingency arrangements or
alternatives to its key clients, and
playbooks should describe the firm’s
methodology for determining whether it
should provide any additional
communication to some or all key
clients (e.g., due to the client’s usage of
that access and/or related extensions of
credit), as well as the expected timing
and form of such communication. The
Agencies note that in their most recent
submissions, all of the firms addressed
the issue of client communications and
provided descriptions of planned or
existing client communications, with
some firms submitting specific samples
of such communication. Firms would be
expected to consider any benefit of
communicating this information in
multiple forms (e.g., verbal, written) and
at multiple time periods (e.g., BAU,
stress, some point in time in advance of
taking contingency actions) in order to
provide adequate notice to key clients of
the action and the potential impact on
the client of that action. In making
decisions concerning communications
to its key clients, the proposal states that
firms also should consider any benefit
of tailoring communications to different
subsets of clients (e.g., based on
different 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 of intraday credit or
liquidity.12 Such sample contracts or
agreements may be particularly
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.
Question 3: Are the Agencies’
expectations with respect to playbook
content for firms that are users or
12 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.
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providers (or both) of PCS services
sufficiently clear? What additional
clarifications, alternatives, or additional
information, if any, should the Agencies
consider?
Question 4: Should the guidance
indicate that providers of PCS activities
are expected to expressly consider
particular contingency arrangements
(e.g., methods to transfer client activity
to other firms with whom the clients
have relationships, alternate agent bank
relationships)? Should the guidance
also indicate that firms should expressly
consider particular actions they may
take concerning the provision of
intraday credit to affiliate and thirdparty clients, such as requiring prefunding? If so, what particular actions
should these firms address?
Question 5: Specifically for users of
PCS activities, should the guidance
indicate that firms are expected to
expressly include particular PCS-related
liquidity sources and uses such as client
pre-funding, or specific abilities to
control intraday liquidity inflows and
outflows (e.g., throttling or prioritizing
of payments)? If so, what particular
sources and uses should firms be
expected to include?
Question 6: Specifically for providers
of PCS services are the Agencies’
expectations concerning a firm’s
communication to its key clients
(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 firms to communicate this
information at specific times or in
specific formats?
Derivatives and Trading Activities
This section of the proposed guidance
is intended to explain expectations for
Bank of America Corporation, Citigroup
Inc., The Goldman Sachs Group, Inc., JP
Morgan Chase & Co., Morgan Stanley,
and Wells Fargo & Company (each, a
‘‘dealer firm’’).13
The size, scope, complexity, and
opacity of a firm’s global derivatives and
trading activities may present
13 Dealer firms share many quantitative and
qualitative characteristics. For example, each dealer
firm is a Covered Company that (as of December 31,
2017) (i) has total derivatives notional values
greater than $5 trillion, (ii) has global gross market
value of derivatives greater than $20 billion, (iii)
has a sum of global trading assets and trading
liabilities greater than $110 billion (each on the
basis of a 3-year rolling average), (iv) is subject to
the GSIB Surcharge and all components of the
CCAR quantitative assessment (i.e., global market
shock and counterparty default scenario
components), and (v) is parent to a designated
primary dealer.
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significant risk to resolvability. To
facilitate an orderly resolution, a dealer
firm should be able to demonstrate the
ability to stabilize and de-risk its
derivatives and trading activities during
resolution without posing a threat to
U.S. financial stability. Therefore, dealer
firms have developed capabilities to
identify and mitigate the risks
associated with their derivatives and
trading activities and with the
implementation of their preferred
resolution strategies. These capabilities
seek to facilitate a dealer firm’s
planning, preparedness, and execution
of an orderly resolution. The proposed
guidance would clarify the Agencies’
expectations with respect to such
capabilities and a firm’s analysis of its
preferred strategy. The proposed
guidance also would eliminate the
expectations of the 2016 Guidance that
a dealer firm’s resolution plan include
separate passive and active wind-down
scenario analyses, the agency-specified
data templates, and rating agency
playbooks.
Over the past several years, the
Agencies have engaged significantly
with dealer firms to assess their
resolution capabilities and to provide
feedback with respect to their resolution
preparedness. As a group, dealer firms
have made meaningful improvements
over previous resolution plan
submissions. These improvements
include efforts by dealer firms to
enhance their resolution capabilities
related to derivatives and trading
activities and to integrate those
capabilities with their business-as-usual
practices. The expectations set out in
this section of the proposed guidance
reflect many of those improvements. As
described in more detail below, this
section of the proposed guidance is
organized in five subsections. The first
four of the subsections describe
expectations for resolution capabilities
that are commensurate with the size,
scope and complexity of a firm’s
derivatives portfolios and should help
assure that dealer firms maintain the
operational preparedness to implement
an orderly resolution. The fifth
subsection—derivatives stabilization
and de-risking strategy—describes
expectations for a dealer firm’s analysis
of its approach to managing its
derivatives portfolios in an orderly
resolution.
Booking practices. To minimize
uncertainty and avoid excessive
complexity and opacity that can
frustrate a firm’s resolution
preparedness, a dealer firm’s resolution
capabilities should include booking
practices commensurate with the size,
scope and complexity of a firm’s
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derivatives portfolios. Dealer firms are
currently developing booking practices
that provide timely and up-to-date
information regarding the structure,
risks and resource needs associated with
the management of its derivatives
activities under a broad range of
potential stress and failure scenarios.
Therefore, the proposed guidance would
clarify the capabilities a dealer firm is
expected to have related to its booking
practices, including descriptions of its
comprehensive booking model
framework and demonstrations of its
ability to identify, assess, and report on
each entity with derivatives portfolios (a
‘‘derivatives entity’’).14
Inter-affiliate risk monitoring and
controls. Affiliates of a derivatives
entity may be forced to discontinue a
trading relationship with that
derivatives entity during resolution,
which poses risks to the orderly
resolution of a firm. The proposal
describes the Agencies’ expectations
that a dealer firm address this risk by
being able to provide timely
transparency into the current risk
transfers between affiliates and the
resolvability risks related to such
transfers, including expectations
regarding an inter-affiliate market risk
framework that enables the firm to
monitor and limit the exposures a
derivatives entity that is a material
entity could experience in an extreme
resolution scenario.
Portfolio segmentation and
forecasting. The ability to quickly and
reliably identify problematic derivatives
positions and portfolios is critical to
minimizing uncertainty and forecasting
resource needs to enable an orderly
resolution. Each dealer firm has
developed various modeling approaches
that are used to evidence the adequacy
of the capabilities and resources needed
to execute its preferred resolution
strategy. The utility of these modeled
results is often affected by the scope of
readily available data on the underlying
characteristics of a dealer firm’s
derivatives portfolios. Therefore, the
proposal confirms that a dealer firm
should have the capabilities to produce
analysis that reflects granular portfolio
segmentation and differentiation of
assumptions taking into account tradelevel characteristics. Similarly, the
proposed guidance also provides
additional detail regarding other
segmentation and forecasting related
capabilities that the dealer firm’s
resolution plan should describe and
14 Consistent with prior guidance, ‘‘derivatives
entities’’ should include both material and nonmaterial entities, in part because non-material
entities, in the aggregate, may represent significant
exposures.
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demonstrate. These capabilities include
(i) a method and supporting systems
capabilities for categorizing and ranking
the ease of exit for its derivatives
positions (‘‘ease of exit’’ position
analysis), (ii) the systems capabilities to
apply the firm’s exit cost methodology
to its firm-wide derivatives portfolio
(application of exit cost methodology),
(iii) capabilities to assess the operational
resources and forecast the costs related
to its current derivatives activities
(analysis of operational capacity), and
(iv) a method to apply sensitivity
analyses to the key drivers of the
derivatives-related costs and liquidity
flows under its preferred resolution
strategy (sensitivity analysis).
Prime brokerage customer account
transfers. The rapid withdrawal from a
firm by prime brokerage clients can
contribute to a disorderly resolution.
Dealer firms’ resolution plans should
address the risk that during a resolution
the firm’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
dealer firms should have the capabilities
to facilitate the orderly transfer of prime
brokerage account balances to peer
prime brokers and describes the
Agencies’ related expectations in greater
detail. In particular, the proposed
guidance clarifies that a dealer firm’s
resolution plan should describe and
demonstrate its ability to segment and
analyze the quality and composition of
such account balances and to rank
account balances according to their
potential transfer speed.
Derivatives stabilization and derisking strategy. A key risk to the orderly
resolution of a dealer firm is a volatile
and risky derivatives portfolio. In the
event of material financial distress or
failure, the resolvability risks related to
a dealer firm’s derivatives and trading
activities would be a key obstacle to the
firm’s rapid and orderly resolution.
Dealer firms’ resolution plans should
address this obstacle. The proposed
guidance confirms that a dealer firm’s
plan should provide a detailed analysis
of the strategy to stabilize and de-risk its
derivatives portfolios (‘‘derivatives
strategy’’) and provides additional detail
regarding the Agencies’ expectations.15
In particular, the proposed guidance
clarifies that a dealer firm should
incorporate into its derivatives strategy
15 Subject to the certain constraints, a firm’s
derivatives strategy may take the form of a goingconcern 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 executability of the chosen
strategy.
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assumptions consistent with the lack of
access to the bilateral OTC derivatives
market at the start of its resolution
period. The proposed guidance also
confirms or clarifies expectations
related to other elements that should be
addressed in the firm’s analysis of its
derivatives strategy, including the
incorporation of resource needs into
RLEN and RCEN (forecast of resource
needs), an analysis of any potential
derivatives portfolio remaining after the
resolution period (potential residual
derivatives portfolio), and the impact
(including on non-U.S. jurisdictions)
from the assumed failure of a material
derivatives entity (non-surviving
material entity analysis).16
Question 7: Do the proposed changes
relative to the 2016 Guidance provide
sufficient clarity or are additional
clarifications required?
Consolidation of Existing Guidance
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In addition to the 2016 Guidance, the
Agencies have also issued: the Guidance
for 2013 § 165(d) Annual Resolution
Plan Submissions by Domestic Covered
Companies that Submitted Initial
Resolution Plans in 2012 (the ‘‘2013
Guidance’’); firm-specific feedback
letters issued in 2014 and 2016; and the
February 2015 staff communication
regarding the 2016 plan submissions.
The Agencies are considering
consolidating all applicable guidance
into a single document, which would
provide the public with one source of
applicable guidance to which to refer.
The Agencies would also expect to
incorporate aspects of the Resolution
Plan Frequently Asked Questions issued
May 2017 that may remain applicable.17
For example, the Agencies could add a
section to the proposed guidance that
includes the aspects of the 2013
Guidance that should remain
applicable, such as the plan format
description in the ‘‘Format of 2013
Plan’’ and ‘‘Additional Format and
Content Guidance’’ sections, some of the
central assumptions and stress scenarios
in the ‘‘Assumptions’’ and ‘‘Stress
Scenarios’’ sections, the process for
addressing expected global cooperation
described in the ‘‘Global Cooperation’’
section, and the considerations for
16 From the perspective of protecting U.S.
financial stability, the risk of adverse regulatory
actions that could impede an orderly resolution
increases where a material entity’s failure would
have extraordinary impacts on local markets.
Therefore, analysis of non-surviving material
entities located in a non-U.S. jurisdiction should
contemplate the impact on local markets.
17 https://www.fdic.gov/resauthority/
2017faqsguidance.pdf; https://
www.federalreserve.gov/publications/files/
resolution-plan-faqs.pdf.
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identifying material entities in the
‘‘Material Entities’’ section.
Question 8: Should the Agencies
consolidate all applicable guidance? If
so, which aspects of the other guidance
warrant inclusion, additional
clarification or modification?
IV. Paperwork Reduction Act
Certain provisions of the Rule contain
‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act (‘‘PRA’’) of
1995 (44 U.S.C. 3501 through 3521). In
accordance with the requirements of the
PRA, 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. The Agencies
believe that the proposed changes to the
2016 Guidance would not result in an
increase in information collection
burden to the Covered Companies. The
Agencies invite public comment on this
assessment.
TEXT OF PROPOSED RESOLUTION
PLANNING GUIDANCE FOR EIGHT
LARGE, COMPLEX U.S. BANKING
ORGANIZATIONS
Resolution Planning Guidance for Eight
Large, Complex U.S. Banking
Organizations
I. Introduction
II. Capital
a. Resolution Capital Adequacy and
Positioning (RCAP)
b. Resolution Capital Execution Need
(RCEN)
III. Liquidity
a. Resolution Liquidity Adequacy and
Positioning (RLAP)
b. Resolution Liquidity Execution Need
(RLEN)
IV. Governance Mechanisms
a. Playbooks and Triggers
b. Pre-Bankruptcy Parent Support
V. Operational
a. Payment, Clearing, and Settlement
Activities
b. Managing, Identifying, and Valuing
Collateral
c. Management Information Systems
d. Shared and Outsourced Services
e. Legal Obstacles Associated with
Emergency Motions
VI. Legal Entity Rationalization and
Separability
a. Legal Entity Rationalization Criteria
(LER Criteria)
b. Separability
VII. Derivatives and Trading Activities
a. Booking Practices
b. Inter-Affiliate Risk Monitoring and
Controls
c. Portfolio Segmentation and Forecasting
d. Prime Brokerage Customer Account
Transfers
e. Derivatives Stabilization and De-risking
Strategy
VIII. Public Section
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I. Introduction
Resolution Plan Requirement: Section
165(d) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(12 U.S.C. 5365(d)) requires certain
financial companies (‘‘Covered
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’’) the
Companies’ 18 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 (the ‘‘Rule’’)
implementing the provisions of Section
165(d), 12 CFR parts 243 and 381.19
Certain Covered Companies meeting
criteria set out in the Rule must file a
resolution plan (‘‘Plan’’) annually or at
a different time period specified by the
Agencies.
Overview of Guidance Document:
This document is intended to assist the
eight current U.S. Global Systemically
Important Banks (‘‘GSIBs’’ or ‘‘firms’’) 20
in further developing their preferred
resolution strategies. The document
describes the expectations of the
Agencies regarding these firms’
resolution plans, and highlights 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 the preferred
strategy.21
This document is organized around a
number of key vulnerabilities in
resolution (i.e., capital; liquidity;
governance mechanisms; operational;
legal entity rationalization and
separability; and derivatives and trading
activities) that apply across resolution
plans. Additional vulnerabilities or
18 Capitalized terms not defined herein have the
meaning set forth in the Rule.
19 76 Fed. Reg. 67323 (November 1, 2011)
20 Bank of America Corporation, the Bank of New
York Mellon Corporation, Citigroup Inc., the
Goldman Sachs Group, Inc., JPMorgan Chase & Co.,
Morgan Stanley, State Street Corporation and Wells
Fargo & Company.
21 The 2013 Guidance, the 2014 Letter, and the
2015 Communication, as described in the 2016
letters to the firms, continue to be applicable
(relevant dates should be updated appropriately),
except to the extent superseded or supplemented by
the provisions of this document. See Letters dated
April 12, 2016, from the Board and FDIC to Bank
of America Corporation, The Bank of New York
Mellon Corporation, Citigroup Inc., the Goldman
Sachs Group, Inc., JPMorgan Chase & Co., Morgan
Stanley, State Street Corporation, and Wells Fargo
& Company, available at https://
www.federalreserve.gov/supervisionreg/resolutionplans.htm.
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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
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.
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II. CAPITAL
Resolution Capital Adequacy and
Positioning (RCAP): To help ensure that
a firm’s material entities 22 could
operate while the parent company is in
bankruptcy, the firm should have an
adequate amount of loss-absorbing
capacity to recapitalize those material
entities. Thus, a firm should have
outstanding a minimum amount of total
loss-absorbing capital, as well as a
minimum amount of long-term debt, to
help ensure that the firm has adequate
capacity to meet that need at a
consolidated level (external TLAC).23
A firm’s external TLAC should be
complemented by appropriate
positioning of additional loss-absorbing
capacity within the firm (internal
TLAC). The positioning of a firm’s
internal TLAC should balance the
certainty associated with prepositioning internal TLAC directly at
material entities with the flexibility
provided by holding recapitalization
resources at the parent (contributable
resources) to meet unanticipated losses
at material entities. That balance should
take account of both pre-positioning at
material entities and holding resources
at the parent, and the obstacles
associated with each. Accordingly, the
firm should not rely exclusively on
either full pre-positioning or parent
contributable resources to recapitalize
any material entity. The plan should
describe the positioning of internal
TLAC within the firm, along with
analysis supporting such positioning.
Finally, to the extent that prepositioned internal TLAC at a material
entity is in the form of intercompany
22 The terms ‘‘material entities,’’ ‘‘critical
operations,’’ and ‘‘core business lines’’ have the
same meaning as in the Agencies’ Rule.
23 82 Fed. Reg. 8266 (January 24, 2017).
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debt and there are one or more entities
between that material entity and the
parent, the firm should mitigate
uncertainty related to potential creditor
challenge; for example, by ensuring that
the seniority and tenor of the
intercompany debt is the same between
all entities in the chain.
Resolution Capital Execution Need
(RCEN): To support the execution of the
firm’s resolution strategy, material
entities need to be recapitalized to a
level that allows them to operate or be
wound down in an orderly manner
following the parent company’s
bankruptcy filing. The firm should have
a methodology for periodically
estimating the amount of capital that
may be needed to support each material
entity after the bankruptcy filing
(RCEN). The firm’s positioning of
internal TLAC should be able to support
the RCEN estimates. In addition, the
RCEN estimates should be incorporated
into the firm’s governance framework to
ensure that the parent company files for
bankruptcy at a time that enables
execution of the preferred strategy.
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,24
consistent with the firm’s resolution
strategy. However, the methodology is
not required to produce aggregate losses
that are greater than the amount of
external TLAC that would be required
for the firm under the Board’s rule.25
The RCEN methodology should be
calibrated such that recapitalized
material entities have sufficient capital
to maintain market confidence as
required under the preferred 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.
Material entities 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.
24 The resolution period begins immediately after
the parent company bankruptcy filing and extends
through the completion of the preferred resolution
strategy.
25 See 12 CFR 252.60–.65; 82 Fed. Reg. 8266
(January 24, 2017).
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III. LIQUIDITY
The firm should have the liquidity
capabilities necessary to execute its
preferred resolution strategy, including
those described in SR Letter 14–1.26 For
resolution purposes, these capabilities
should include having an appropriate
model and process for estimating and
maintaining sufficient liquidity at or
readily available to material entities and
a methodology for estimating the
liquidity needed to successfully execute
the resolution strategy, as described
below.
Resolution Liquidity Adequacy and
Positioning (RLAP): With respect to
RLAP, the firm should be able to
measure the stand-alone liquidity
position of each material entity
(including material entities that are nonU.S. branches)—i.e., the high-quality
liquid assets (HQLA) at the 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 and risk
of the firm. The model should balance
the reduction in frictions associated
with holding liquidity directly at
material entities with the flexibility
provided by holding HQLA at the parent
available to meet unanticipated
outflows at material entities. Thus, the
firm should not rely exclusively on
either full pre-positioning or the parent.
The model 27 should ensure that the
parent holding company holds
sufficient HQLA (inclusive of its
deposits at the U.S. branch of the lead
bank subsidiary) to cover the sum of all
stand-alone material entity net liquidity
deficits. The stand-alone net liquidity
position of each material entity (HQLA
less net outflows) should be measured
using the firm’s internal liquidity stress
test assumptions and should treat interaffiliate exposures in the same manner
as third-party exposures. For example,
an overnight unsecured exposure to an
affiliate should be assumed to mature.
Finally, the firm should not assume that
a net liquidity surplus at one material
entity could be moved to meet net
26 SR Letter 14–1, ‘‘Heightened Supervisory
Expectations for Recovery and Resolution
Preparedness for Certain Large Bank Holding
Companies—Supplemental Guidance on
Consolidated Supervision Framework for Large
Financial Institutions’’ (Jan. 24, 2014), available at
https://www.federalreserve.gov/bankinforeg/
srletters/sr1401.pdf.
27 ‘‘Model’’ refers to the set of calculations
estimating the net liquidity surplus/deficit at each
legal entity and for the firm in aggregate based on
assumptions regarding available liquidity, e.g.,
HQLA, and third-party and interaffiliate net
outflows.
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liquidity deficits at other material
entities or to augment parent resources.
Additionally, the RLAP methodology
should take into account (A) the daily
contractual mismatches between
inflows and outflows; (B) the daily
flows from movement of cash and
collateral for all inter-affiliate
transactions; and (C) the daily stressed
liquidity flows and trapped liquidity as
a result of actions taken by clients,
counterparties, key financial market
utilities (FMUs), and foreign
supervisors, among others.
Resolution Liquidity Execution Need
(RLEN): The firm should have a
methodology for estimating the liquidity
needed after the parent’s bankruptcy
filing to stabilize the surviving material
entities and to allow those entities to
operate post-filing. The RLEN estimate
should be incorporated into the firm’s
governance framework to ensure that
the firm files for bankruptcy in a timely
way, i.e., prior to the firm’s HQLA
falling below the RLEN estimate.
The firm’s RLEN methodology should:
(A) Estimate the minimum operating
liquidity (MOL) needed at each material
entity to ensure those entities could
continue to operate post-parent’s
bankruptcy filing and/or to support a
wind-down strategy;
(B) Provide daily cash flow forecasts
by material entity 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;
and
(D) Estimate the minimum amount of
liquidity required at each material entity
to meet the MOL and peak needs noted
above, which would inform the firm’s
board(s) of directors of when they need
to take resolution-related actions.
The MOL estimates should capture
material entities’ intraday liquidity
requirements, operating expenses,
working capital needs, and inter-affiliate
funding frictions to ensure that material
entities could operate without
disruption during the resolution.
The peak funding needs estimates
should be projected for each material
entity and cover the length of time the
firm expects it would take to stabilize
that material entity. 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
material entities could operate postfiling consistent with regulatory
requirements, market expectations, and
the firm’s post-failure strategy. These
forecasts should inform the RLEN
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estimate, i.e., the minimum amount of
HQLA required to facilitate the
execution of the firm’s strategy. The
RLEN estimate should be tied to the
firm’s governance mechanisms and be
incorporated into the playbooks as
discussed below to assist the board of
directors in taking timely resolutionrelated actions.
IV. GOVERNANCE MECHANISMS
Playbooks and Triggers: A firm
should identify the governance
mechanisms that would ensure
execution of required board actions at
the appropriate time (as anticipated
under the firm’s preferred strategy) and
include pre-action triggers and existing
agreements for such actions.
Governance playbooks should detail the
board and senior management actions
necessary to facilitate the firm’s
preferred strategy and to mitigate
vulnerabilities, and should incorporate
the triggers identified below. The
governance playbooks should also
include a discussion of (A) the firm’s
proposed communications strategy, both
internal and external; (B) the boards of
directors’ fiduciary responsibilities 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; and (D)
any employee retention policy. All
responsible parties and timeframes for
action should be identified. Governance
playbooks should be updated
periodically for all entities whose
boards of directors would need to act in
advance of the commencement of
resolution proceedings under the firm’s
preferred strategy.
The firm should demonstrate that key
actions will be taken at the appropriate
time in order to mitigate financial,
operational, legal, and regulatory
vulnerabilities. To ensure that these
actions will occur, the firm should
establish clearly identified triggers
linked to specific actions for:
(A) The escalation of information to
senior management and the board(s) to
potentially take the corresponding
actions at each stage of distress postrecovery leading eventually to the
decision to file for bankruptcy;
(B) Successful recapitalization of
subsidiaries prior to the parent’s filing
for bankruptcy and funding of such
entities during the parent company’s
bankruptcy to the extent the preferred
strategy relies on such actions or
support; and
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(C) The timely execution of a
bankruptcy filing and related pre-filing
actions.28
These triggers should be based, at a
minimum, on capital, liquidity, and
market metrics, and should incorporate
the firm’s methodologies for forecasting
the liquidity and capital needed to
operate as required by the preferred
strategy following a parent company’s
bankruptcy filing. Additionally, the
triggers and related actions should be
specific.
Triggers linked to firm actions as
contemplated by the firm’s preferred
strategy should identify when and
under what conditions the firm,
including the parent company and its
material entities, would transition from
business-as-usual conditions to a stress
period and from a stress period to the
runway and recapitalization/resolution
periods. 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 ensure that resources
are available and can be downstreamed,
if anticipated by the firm’s strategy, and
with adequate time for the preparation
of the bankruptcy petition and first-day
motions, necessary stakeholder
communications, and requisite board
actions. Triggers identifying the onset of
the runway and recapitalization/
resolution periods, and the associated
escalation procedures and actions,
should be discussed directly in the
governance playbooks.
Pre-Bankruptcy Parent Support: The
resolution plan should include a
detailed legal analysis of the potential
state law and bankruptcy law challenges
and mitigants to planned provision of
capital and liquidity to the subsidiaries
prior to the parent’s bankruptcy filing
(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
28 Key pre-filing actions include the preparation
of any emergency motion required to be decided on
the first day of the firm’s bankruptcy. See
‘‘OPERATIONAL—Legal Obstacles Associated with
Emergency Motions,’’ below.
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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 preferred resolution strategy.
As noted, the analysis should include
mitigants to the potential challenges to
the planned Support. The plan should
include the mitigant(s) to such
challenges that the firm considers most
effective. In identifying appropriate
mitigants, the firm should consider the
effectiveness of a contractually binding
mechanism (CBM), pre-positioning of
financial resources in material entities,
and the creation of an intermediate
holding company. Moreover, if the plan
includes a CBM, the firm should
consider whether it is appropriate that
the CBM should have the following: (A)
clearly defined triggers; (B) triggers that
are synchronized to the firm’s liquidity
and capital methodologies; (C) perfected
security interests in specified collateral
sufficient to fully secure all Support
obligations on a continuous basis
(including mechanisms for adjusting the
amount of collateral as the value of
obligations under the agreement or
collateral assets fluctuates); and (D)
liquidated damages provisions or other
features designed to make the CBM
more enforceable. The firm also should
consider related actions or agreements
that may enhance the effectiveness of a
CBM. A copy of any agreement and
documents referenced therein (e.g.,
evidence of security interest perfection)
should be included in the resolution
plan.
The governance playbooks included
in the resolution plan should
incorporate any developments from the
firm’s analysis of potential legal
challenges regarding the Support,
including any Support approach(es) the
firm has implemented. If the firm
analyzed and addressed an issue noted
in this section in a prior plan
submission, the plan may reproduce
that analysis and arguments and should
build upon it to at least the extent
described above. In preparing the
analysis of these issues, firms may
consult with law firms and other experts
on these matters. The Agencies do not
object to appropriate collaboration
between firms, including through trade
organizations and with the academic
community, to develop analysis of
common legal challenges and available
mitigants.
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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,29 or both, of PCS services.
A firm should demonstrate
capabilities 30 for continued access to
PCS services essential to an orderly
resolution through a framework to
support such access by:
• Identifying key clients,31 FMUs,
and agent banks, using both quantitative
(volume and value) 32 and qualitative
criteria;
• Mapping material entities, critical
operations, core business lines, and key
clients to both key FMUs and agent
banks; and
• Developing a playbook for each key
FMU and agent bank reflecting the
firm’s role(s) as a user and/or provider
of PCS services.
The framework should address both
direct relationships (e.g., firm’s direct
membership in the FMU, firm provides
key clients with critical PCS services
through its own operations, firm’s
contractual relationship with an agent
bank) and indirect relationships (e.g.,
firm provides its clients with access to
the relevant FMU or agent bank through
the firm’s membership to or relationship
with that FMU or agent bank).
Playbooks for Continued Access to
PCS Services. The firm is expected to
provide a playbook for each key FMU
and agent bank that addresses
considerations that would assist the
firm and its clients in maintaining
continued access to PCS services in the
period leading up to and including the
firm’s resolution. While the firm is not
expected to incorporate a scenario in
29 A firm is a user of PCS services if it uses the
services of a financial market utility (FMU) through
its membership in that FMU or an agent bank. A
firm is a provider of PCS services if it provides its
clients with access to an FMU or agent bank
through the firm’s membership to or relationship
with that service provider (including providing PCS
services to its client as an agent bank) or if it
provides key clients with critical PCS services (e.g.,
the suspension or termination of such services
would impact the key client’s continued access to
PCS services) through the firm’s own operations.
30 These capabilities may include those described
in SR Letter 14–1.
31 For purposes of this section V, a client is an
individual or entity, including affiliates of the firm,
that relies upon continued access to the firm’s PCS
services and any related credit or liquidity offered
in connection with those services.
32 Examples of quantitative criteria include not
only the aggregate volumes and values of all
transactions processed through an FMU but also
assets under custody with an agent bank, the value
of cash and securities settled through an agent bank,
and extensions of intraday credit.
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which it loses FMU or agent bank access
into its preferred resolution strategy or
its RLEN/RCEN estimates, each
playbook should provide analysis of the
financial and operational impact to the
firm’s material entities and key clients
due to loss of access to the FMU or
agent bank. Each playbook also should
discuss any possible alternative
arrangements that would allow the firm
and its key clients continued access to
PCS services in resolution. The firm
should continue to engage with key
FMUs, agent banks and clients, and
playbooks should reflect any feedback
received during such ongoing outreach.
Content Related to Users of PCS
Services. Individual FMU and agent
bank playbooks should include at a
minimum:
• Description of the firm’s
relationship as a user with the key FMU
or agent bank and the identification and
mapping of PCS services to material
entities, 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 agent bank when the
firm is in resolution,33 the operational
and financial impact of such actions on
each material entity, 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
• 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
material entity.
Æ PCS Liquidity Sources: These may
include the amounts of intraday
extensions of credit, liquidity buffer,
inflows from FMU participants, and
client prefunded amounts in BAU, in
stress, and in the resolution period. The
playbook should also describe intraday
credit arrangements (e.g., facilities of the
FMU, agent bank, or a central bank) and
any similar custodial arrangements that
allow ready access to a firm’s funds for
PCS-related FMU and agent bank
obligations (including margin
requirements) in various currencies,
including placements of firm liquidity
at central banks, FMUs, and agent
banks.
Æ PCS Liquidity Uses: These may
include firm and client margin, prefunding and intraday extensions of
credit, including incremental amounts
required during resolution.
33 Potential adverse actions may include
increased collateral and margin requirements and
enhanced reporting and monitoring.
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Æ 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 should also
describe any account features that might
restrict the firm’s ready access to its
liquidity sources.
Content Related to Providers of PCS
Services. Individual FMU and agent
bank playbooks 34 should include at a
minimum:
• Identification and mapping of PCS
services to the material entities, 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 that rely upon the
firm to provide those 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 its clients, including
the viability of transferring client
activity and any related assets, as well
as any alternative arrangements that
would allow the firm’s key clients
continued access to critical PCS services
if the firm could no longer provide such
access (e.g., due to the firm’s loss of
FMU or agent bank access), and the
financial and operational impacts of
such arrangements;
• Description of the range of
contingency actions that the firm may
take concerning its provision of intraday
credit to clients, 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 clients to
designate or appropriately pre-position
liquidity, including through pre-funding
of settlement activity, for PCS-related
FMU and agent bank obligations at
specific material entities of the firm
(e.g., direct members of FMUs) or any
similar custodial arrangements that
allow ready access to clients’ funds for
such obligations in various currencies;
(ii) delaying or restricting client PCS
activity; and (iii) restricting, imposing
conditions upon (e.g., requiring
collateral), or eliminating the provision
of intraday credit or liquidity to clients;
and
34 Where a firm is a provider of PCS services
through the firm’s own operations, the firm is
expected to produce a playbook for the material
entity that provides those services, including
contingency arrangements to permit the firm’s key
clients to maintain continued access to PCS
services.
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• Description of how the firm will
communicate to its key clients 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 (e.g., due to the
client’s BAU usage of that access and/
or related intraday credit or liquidity),
and the expected timing and form of
such communication.
Managing, Identifying, and Valuing
Collateral: The firm should have the
capabilities described in SR Letter 14–
1 related to managing, identifying, and
valuing the collateral that it receives
from and posts to external parties and
its affiliates. Specifically, the firm
should:
• Be able to query and provide
aggregate statistics for all qualified
financial contracts concerning crossdefault 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 interbranch 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.35
Management Information Systems:
The firm should have the management
information systems (MIS) capabilities
to readily produce data on a legal entity
basis and have controls to ensure data
integrity and reliability, as described in
SR Letter 14–1. The firm also should
perform a detailed analysis of the
35 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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specific types of financial and risk data
that would be required to execute the
preferred resolution strategy and how
frequently the firm would need to
produce the information, with the
appropriate level of granularity.
Shared and Outsourced Services: The
firm should maintain a fully actionable
implementation plan to ensure the
continuity of shared services that
support critical operations and robust
arrangements to support the continuity
of shared and outsourced services. The
firm should (A) maintain an
identification of all shared services that
support critical operations (critical
services); (B) maintain a mapping of
how/where these services support its
core business lines and 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. These SLAs should fully
describe the services provided, reflect
pricing considerations on an arm’slength basis where appropriate, and
incorporate appropriate terms and
conditions to (A) prevent automatic
termination upon certain resolutionrelated events and (B) achieve
continued provision of such services
during resolution. The firm should also
store SLAs in a central repository or
repositories in a searchable format,
develop and document contingency
strategies and arrangements for
replacement of critical shared services,
and complete re-alignment or
restructuring of activities within its
corporate structure. 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
preferred strategy) in such entities
sufficient to cover contract costs,
consistent with the preferred resolution
strategy.
The firm should identify all critical
outsourced services that support critical
operations and 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 despite
continued performance upon the
parent’s bankruptcy filing, and (B)
update contracts to incorporate
appropriate terms and conditions to
prevent automatic termination and
facilitate continued provision of such
services during resolution. Relying on
entities projected to survive during
resolution to avoid contract termination
is insufficient to ensure continuity. In
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the plan, the firm should document the
amendment of any such agreements
governing these services.
Legal Obstacles Associated with
Emergency Motions: The Plan should
address legal issues associated with the
implementation of the stay on crossdefault rights described in Section 2 of
the International Swaps and Derivatives
Association 2015 Universal Resolution
Stay Protocol (Protocol), similar
provisions of any U.S. protocol,36 or
other contractual provisions that
comply with the Agencies’ rules
regarding stays from the exercise of
cross-default rights in qualified
financial contracts, to the extent
relevant.37 Generally, the Protocol
provides two primary methods of
satisfying the stay conditions for
covered agreements for which the
affiliate in Chapter 11 proceedings has
provided a credit enhancement (A)
transferring all such credit
enhancements to a Bankruptcy Bridge
Company (as defined in the Protocol)
(bridge transfer); or (B) having such
affiliate remain obligated with respect to
such credit enhancements in the
Chapter 11 proceeding (elevation).38 A
firm must file a motion for emergency
relief (emergency motion) seeking
approval of an order to effect either of
these alternatives on the first day of its
bankruptcy case.
First-day Issues—For each alternative
the firm selects, the resolution plan
should present the firm’s analysis of
issues that are likely to be raised at the
hearing on the emergency motion and
its best arguments in support of the
emergency motion. A firm should
include supporting legal precedent and
describe the evidentiary support that the
firm would anticipate presenting to the
bankruptcy court — e.g., declarations or
other expert testimony evidencing the
solvency of transferred subsidiaries and
that recapitalized entities have
sufficient liquidity to perform their
ongoing obligations.
For either alternative, the firm should
address all potential significant legal
obstacles identified by the firm. For
36 U.S. protocol has the same meaning as it does
at 12 CFR 252.85(a). See also 12 CFR 382.5(a)
(including a substantively identical definition).
37 See 12 CFR part 47, 252.81-.88, and part 382
(together, the ‘‘QFC stay rules’’). If the firm
complies with the QFC stay rules other than
through adherence to the Protocol, the plan also
should explain how the alternative compliance
method differs from Protocol, how those differences
affect the analysis and other expectations of this
‘‘Legal Obstacles Associated with Emergency
Motions’’ section, and how the firm plans to satisfy
any different conditions or requirements of the
alternative compliance method.
38 Under its terms, the Protocol also provides for
the transfer of credit enhancements to transferees
other than a Bankruptcy Bridge Company.
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example, the firm should address due
process arguments likely to be made by
creditors asserting that they have not
had sufficient opportunity to respond to
the emergency motion given the
likelihood that a creditors’ committee
will not yet have been appointed. The
firm also should consider, and discuss
in its plan, whether it would enhance
the successful implementation of its
preferred strategy to conduct outreach to
interested parties, such as potential
creditors of the holding company and
the bankruptcy bar, regarding the
strategy.
If the firm chooses the bridge transfer
alternative, its analysis and arguments
should address at a minimum the
following potential issues: (A) the legal
basis for transferring the parent holding
company’s equity interests in certain
subsidiaries (transferred subsidiaries) to
a Bankruptcy Bridge Company,
including the basis upon which the
Bankruptcy Bridge Company would
remain obligated for credit
enhancements; (B) the ability of the
bankruptcy court to retain jurisdiction,
issue injunctions, or take other actions
to prevent third parties from interfering
with, or making collateral attacks on (i)
a Bankruptcy Bridge Company, (ii) its
transferred subsidiaries, or (iii) a trust or
other legal entity designed to hold all
ownership interests in a Bankruptcy
Bridge Company (new ownership
entity); and (C) the role of the
bankruptcy court in granting the
emergency motion due to public policy
concerns—e.g., to preserve financial
stability. The firm should also provide
a draft agreement (e.g., trust agreement)
detailing the preferred post-transfer
governance relationships between the
bankruptcy estate, the new ownership
entity, and the Bankruptcy Bridge
Company, including the proposed role
and powers of the bankruptcy court and
creditors’ committee. Alternative
approaches to these proposed posttransfer governance relationships
should also be described, particularly
given the strong interest that parties will
have in the ongoing operations of the
Bankruptcy Bridge Company and the
likely absence of an appointed creditors’
committee at the time of the hearing.
If the firm chooses the elevation
alternative, the analysis and arguments
should address at a minimum the
following potential issues: (A) The legal
basis upon which the parent company
would seek to remain obligated for
credit enhancements; (B) the ability of
the bankruptcy court to retain
jurisdiction, issue injunctions, or take
other actions to prevent third parties
from interfering with, or making
collateral attacks on, the parent in
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bankruptcy or its subsidiaries; and (C)
the role of the bankruptcy court in
granting the emergency motion due to
public policy concerns—e.g., to preserve
financial stability.
Regulatory Implications—The plan
should include a detailed explanation of
the steps the firm would take to ensure
that key domestic and foreign
authorities would support, or not object
to, the emergency motion (including
specifying the expected approvals or
forbearances and the requisite format—
i.e., formal, affirmative statements of
support or, alternatively, ‘‘nonobjections’’). The potential impact on
the firm’s preferred resolution strategy if
a specific approval or forbearance
cannot be timely obtained should also
be detailed.
Contingencies if Preferred Structure
Fails—The plan should consider
contingency arrangements in the event
the bankruptcy court does not grant the
emergency motion—e.g., whether
alternative relief could satisfy the
Transfer Conditions and/or U.S. Parent
debtor-in-possession (DIP) Conditions of
the Protocol; 39 the extent to which
action upon certain aspects of the
emergency motion may be deferred by
the bankruptcy court without interfering
with the resolution; and whether, if the
credit-enhancement-related protections
are not satisfied, there are alternative
strategies to prevent the closeout of
qualified financial contracts with credit
enhancements (or reduce such
counterparties’ incentives to closeout)
and the feasibility of the alternative(s).
Format—If the firm analyzed and
addressed an issue noted in this section
in a prior plan submission, the plan may
incorporate this analysis and arguments
and should build upon it to at least the
extent required above. A bankruptcy
playbook, which includes a sample
emergency motion and draft documents
setting forth the post-transfer
governance terms substantially in the
form they would be presented to the
bankruptcy court, is an appropriate
vehicle for detailing the issues outlined
in this section. In preparing analysis of
these issues, the firm may consult with
law firms and other experts on these
matters. The Agencies do not object to
appropriate collaboration among firms,
including through trade organizations
and with the academic community and
bankruptcy bar, to develop analysis of
common legal challenges and available
mitigants.
39 See Protocol sections 2(b)(ii) and (iii) and
related definitions.
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VI. 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 preferred resolution strategy and
minimize risk to U.S. financial stability
in the event of the firm’s failure. LER
Criteria should consider the best
alignment of legal entities and business
lines to improve the firm’s resolvability
under different market conditions. LER
Criteria should govern the firm’s
corporate structure and arrangements
between legal entities in a way that
facilitates the firm’s resolvability as its
activities, technology, business models,
or geographic footprint change over
time.
Specifically, application of the criteria
should:
(A) Facilitate the recapitalization and
liquidity support of material entities, as
required by the firm’s resolution
strategy. Such criteria should include
clean lines of ownership, minimal use
of multiple intermediate holding
companies, and clean funding pathways
between the parent and material
operating entities;
(B) Facilitate the sale, transfer, or
wind-down of certain discrete
operations within a timeframe that
would meaningfully increase the
likelihood of an orderly resolution of
the firm, including provisions for the
continuity of associated services and
mitigation of financial, operational, and
legal challenges to separation and
disposition;
(C) Adequately protect the subsidiary
insured depository institutions from
risks arising from the activities of any
nonbank subsidiaries of the firm (other
than those that are subsidiaries of an
insured depository institution); and
(D) Minimize complexity that could
impede an orderly resolution and
minimize redundant and dormant
entities.
These criteria should be built into the
firm’s ongoing process for creating,
maintaining, and optimizing its
structure and operations on a
continuous basis.
Separability: The firm should identify
discrete operations that could be sold or
transferred in resolution, which
individually or in the aggregate would
provide meaningful optionality in
resolution under different market
conditions. The actionability of those
options should be supported by the
firm’s criteria and analysis required by
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SR Letter 14–8.40 Additionally, this
analysis should facilitate buyer due
diligence and include carve-out
financial statements, valuation analysis,
and a legal risk assessment. Further, the
firm should establish a data room to
collect and refresh annually the
analyses above, as well as other
information pertinent to a potential
divestiture of the business.
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.
VII. DERIVATIVES AND TRADING
ACTIVITIES
Applicability.
This section of the proposed guidance
applies to Bank of America Corporation,
Citigroup Inc., Goldman Sachs Group,
Inc., JP Morgan Chase & Co., Morgan
Stanley, and Wells Fargo & Company
(each, a ‘‘dealer firm’’).
Booking Practices.
A dealer firm should have booking
practices commensurate with the size,
scope, and complexity of a firm’s
derivatives portfolios,41 including
systems capabilities to track and
monitor market, credit, and liquidity
risk transfers between entities. The
following booking practices-related
capabilities should be addressed in a
dealer firm’s resolution plan:
Derivatives booking framework. A
dealer firm should have a
comprehensive booking model
framework that articulates the
principles, rationales, and approach to
implementing its firm-wide booking
practices. The framework and its
underlying components should be
documented and adequately supported
by internal controls (e.g., procedures,
systems, and processes). Taken together,
the derivatives 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
booked (e.g., legal entity/geography),
(iii) by whom it is booked (e.g.,
business/trading desk); (iv) why it is
booked that way (e.g., drivers/
rationales); and (v) what controls are in
40 SR Letter 14–8, ‘‘Consolidated Recovery
Planning for Certain Large Domestic Bank Holding
Companies’’ (Sept. 25, 2014), available at https://
www.federalreserve.gov/bankinforeg/srletters/
sr1408.pdf.
41 A firm’s derivatives portfolios include its
derivatives positions and linked non-derivatives
trading positions.
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place to monitor and manage those
practices (e.g., governance/information
systems) 42. The dealer firm’s resolution
plan should include detailed
descriptions of the framework and each
of its material components. In
particular, a dealer firm’s resolution
plan should include descriptions of the
documented booking models covering
its firm-wide derivatives portfolio.43
The descriptions should provide clarity
with respect to the underlying trade
flows (e.g., the mapping of trade flows
based on multiple trade characteristics
as decision points that determine on
which entity a trade is booked, if risk is
transferred, and at which entity that risk
is subsequently managed). For example,
a firm may choose to incorporate
decision trees that depict the multiple
trade flows within each documented
booking model.44 Furthermore, a dealer
firm’s resolution plan should describe
its end-to-end trade booking and
reporting processes, including a
description of the current scope of
automation (e.g., automated trade flows
and detective monitoring) for the
systems controls applied to its
documented booking models. The plan
should also discuss why the firm
believes its current (or planned) scope
of automation is sufficient for managing
its derivatives activities and executing
its preferred resolution strategy.45
42 The description of controls should include any
components of the firm-wide market, credit, and
liquidity risk management framework that are
material to the management of its derivatives
practices.
43 The firm should at least document booking
models that, in the aggregate, represent the vast
majority of the firm’s derivatives transactions, e.g.,
booking models that represent no less than 95% of
a dealer firm’s derivatives transactions measured by
firm-wide derivatives notional and by firm-wide
gross market value of derivatives. Presumably, each
asset class/product would have a booking model
that is a function of the firm’s regulatory and risk
management requirements, client’s preference, and
regulatory requirements specifically for the
underlying asset class, and other transaction related
considerations.
44 Some firms use trader mandates or similar
controls to constrain the potential trading strategies
that can be pursued by a business and to monitor
the permissibility of booking activity. However, the
mapping of trader mandates alone, especially those
mandates that grant broad permissibility, may not
provide sufficient distinction between booking
model trade flows.
45 Effective preventative (up-front) and detective
(post-booking) controls embedded in a dealer firm’s
derivatives booking processes can help avoid and/
or timely remediate trades that do not align with a
documented booking model or related risk limits.
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
derivatives booking practices. Nonetheless, nonautomated methods can also be effective when
supported by other internal controls (e.g., robust
detective monitoring and escalation protocols).
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Derivatives entity analysis and
reporting. A dealer firm should have the
ability to identify, assess, and report on
each of its entities (material and nonmaterial) with derivatives portfolios (a
‘‘derivatives entity’’). First, the firm’s
resolution plan should describe its
method (that may include both
qualitative and quantitative criteria) for
evaluating the significance of each
derivatives entity both with respect to
the firm’s current activities and to its
preferred resolution strategy.46 Second,
a dealer firm’s resolution plan should
demonstrate (including through
illustrative samples) its ability to readily
generate current derivatives entity
profiles that (i) cover all derivatives
entities, (ii) are reportable in a
consistent manner, and (iii) include
information regarding current legal
ownership structure, business activities/
volume, and risk profile (including
applicable risk limits).
Inter-Affiliate Risk Monitoring and
Controls.
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A dealer firm should be able to assess
how the management of inter-affiliate
risks can be affected in resolution,
including the potential disruption in the
risk transfers of trades between affiliate
entities. Therefore, a dealer firm should
have capabilities to provide timely
transparency into the management of
risk transfers between affiliates by
maintaining an inter-affiliate market risk
framework, consisting of at least the
following two components 47:
1. A method for measuring,
monitoring, and reporting the market
risk exposures for a given material
derivatives entity resulting from the
termination of a specific counterparty or
a set of counterparties (e.g., all trades
with a specific affiliate or with all
affiliates in a specific jurisdiction) 48;
and
2. A method for identifying,
estimating associated costs of, and
evaluating the effectiveness of, a re46 The firm should leverage any existing methods
and criteria it uses for other entity assessments (e.g.,
legal entity rationalization and/or the prepositioning of internal loss-absorbing resources).
The firm’s method for determining the significance
of derivatives entities is allowed to diverge from the
parameters for material entity designation under the
Resolution Plan Rule (i.e., entities significant to the
activities of a critical operation or core business
line) but should be adequately supported and any
differences should be explained.
47 The inter-affiliate market risk framework is a
supplement to the firm’s systems capabilities to
track and monitor market, credit, and liquidity risk
transfers between entities.
48 Firms may use industry market risk measures
such as statistical risk measures (e.g., VaR or SVaR)
or other risk measures (e.g., worst case scenario or
stress test).
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hedge strategy in resolution put on by
the same material derivatives entity.49
In determining the re-hedge strategy,
the firm should consider whether the
instruments used (and the risk factors
and risk sensitives controlled for) are
sufficiently tied to the material
derivatives entity’s trading and riskmanagement practices to demonstrate
its ability to execute the strategy in
resolution using existing resources (e.g.,
existing traders and systems).
A dealer firm’s resolution plan should
describe and demonstrate its interaffiliate market risk framework
(discussed above). In addition, the
firm’s plan should provide detailed
descriptions of its compression
strategies used for executing its
preferred strategy and how those
strategies would differ from those used
currently to manage its inter-affiliate
derivatives activities. The plan should
also include detailed descriptions of the
firm’s compression capabilities, the
associated risks, and obstacles in
resolution.
Portfolio Segmentation and Forecasting.
A dealer firm should have the
capabilities to produce analysis that
reflects derivatives portfolio
segmentation and differentiation of
assumptions taking into account tradelevel characteristics. More specifically, a
dealer firm should have the systems
capabilities that would allow it to
produce a spectrum of derivatives
portfolio segmentation analysis using
multiple segmentation dimensions,
including (1) legal entity (and material
entities that are branches), (2) trading
desk and/or product, (3) cleared vs.
clearable vs. non-clearable trades, (4)
counterparty type, (5) currency, (6)
maturity, (7) level of collateralization,
and (8) netting set.50 A dealer firm
should also have the capabilities to
segment and analyze the full contractual
maturity (run-off) profile of its external
and inter-affiliate derivatives portfolios.
The dealer firm’s resolution plan should
describe and demonstrate the firm’s
ability to segment and analyze its firm49 A dealer firm’s method may include an
approach to identifying the risk factors and risk
sensitivities, hedging instruments, and risk limits a
derivatives entity would employ in its re-hedge
strategy, and the quantification of any estimated
basis risk that would result from hedging with only
exchange-traded and centrally-cleared instruments
in a severely adverse stress environment.
50 The enumerated segmentation dimensions
represent a minimum set of characteristics for
differentiation of derivatives portfolios but are not
intended as an exhaustive list of relevant
dimensions. With respect to any product/asset
class, a firm may have reasons for not capturing
data on (or not using) one or more of the
enumerated segmentation dimensions, but those
reasons should be explained.
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wide derivatives portfolio using the
relevant segmentation dimensions and
to report the results of such
segmentation and analysis. In addition,
the dealer firm’s resolution plan should
address the following segmentation and
forecasting related capabilities:
‘‘Ease of exit’’ position analysis. A
dealer firm should have, and its
resolution plan should describe and
demonstrate, a method and supporting
systems capabilities for categorizing and
ranking the ease of exit for its
derivatives positions based on a set of
well-defined and consistently applied
segmentation criteria. These capabilities
should cover the firm-wide derivatives
portfolio and the resulting categories
should represent a range in degree of
difficulty (e.g., from easiest to most
difficult to exit). The segmentation
criteria should, at a minimum, reflect
characteristics 51 that the firm believes
could affect the level of financial
incentive and operational effort required
to facilitate the exit of derivatives
portfolios (e.g., to motivate a potential
step-in party to agree to the novation or
an existing counterparty to bilaterally
agree to a termination). Dealer firms
should consider this methodology when
separately identifying and analyzing the
population of derivatives positions that
it will include in the potential residual
portfolio under the firm’s preferred
resolution strategy (discussed below).
Application of exit cost methodology.
Each dealer firm should have a
methodology for forecasting the cost and
liquidity needed to exit positions (e.g.,
terminate/tear-up, sell, novate, and
compress), and the operational
resources related to those exits, under
the specific scenario adopted in the
firm’s preferred resolution strategy. To
help preserve sufficient optionality with
respect to managing and de-risking its
derivatives portfolios in a resolution, a
dealer firm should have the systems
capabilities to apply its exit cost
methodology to its firm-wide
derivatives portfolio, at the
segmentation levels the firm would
likely apply to exit the particular
positions (e.g., valuation segment level).
The dealer firm’s plan should provide
detailed descriptions of the forecasting
methodology (inclusive of any challenge
and validation processes) and data
systems and reporting capabilities. The
firm should also describe and
demonstrate the application of the exit
cost method and systems capabilities to
the firm-wide derivatives portfolio.
51 Examples of characteristics that may affect the
level of financial incentive and operational effort
could include: product, size, clearability, currency,
maturity, level of collateralization, and other risk
characteristics.
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Analysis of operational capacity. In
resolution, a dealer firm should have the
capabilities to forecast the incremental
operational needs and expenses related
to executing specific aspects of its
preferred resolution strategy (e.g.,
executing timely derivatives portfolio
novations). Therefore, a dealer firm
should have, and its resolution plan
should describe and demonstrate, the
capabilities to assess the operational
resources and forecast the costs (e.g.,
monthly expense rate) related to its
current derivatives activities at an
appropriately granular level and the
incremental impact from executing its
preferred resolution strategy.52 In
addition, a dealer firm should have the
ability to manage the logistical and
operational challenges related to
novating (selling) derivatives portfolios
during a resolution, including the
design and adjustment of novation
packages. A dealer firm’s resolution
plan should describe its methodology
and demonstrate its supporting systems
capabilities for timely segmenting,
packaging, and novating derivatives
positions. In developing its
methodology, a dealer firm should
consider the systems capabilities that
may be needed to reliably generate
preliminary novation packages tailored
to the risk appetites of potential step-in
counterparties (buyers), as well as the
novation portfolio profile information
that may be most relevant to such
counterparties.
Sensitivity analysis. A dealer firm
should have a method to apply
sensitivity analyses to the key drivers of
the derivatives-related costs and
liquidity flows under its preferred
resolution strategy. A dealer 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 operational
and financial resource needs under the
preferred resolution strategy. In
addition, using its preferred resolution
strategy as a baseline, the dealer 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.53
52 At
a minimum, a dealer firm should have
separate categories for fixed and variable expenses.
For example, more granular operational expenses
could roll-up into categories for (i) fixedcompensation, (ii) fixed non-compensation, and (iii)
variable cost.
53 For example, key drivers of derivatives-related
costs and liquidity flows might include the timing
of derivatives unwind, cost of capital-related
assumptions (target ROE, discount rate, WAL,
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Prime Brokerage Customer Account
Transfers.
A dealer firm should have the
operational capacity to facilitate the
orderly transfer of prime brokerage
accounts to peer prime brokers in
periods of material financial distress
and in resolution. 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
facilitated by the firm, and the liquidity
of clients’ portfolios. The assessment
should also analyze the risks of and
mitigants to the loss of customer-tocustomer internalization (e.g., the
inability to fund customer longs with
customer shorts), operational
challenges, and insufficient staffing to
effectuate the scale and speed of prime
brokerage account transfers envisioned
under the firm’s preferred resolution
strategy.
In addition, a dealer firm should
describe and demonstrate its ability to
segment and analyze the quality and
composition of prime brokerage
customer 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, and
liquidity of underlying assets). The
capabilities should cover the firm’s
prime brokerage customer 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, at a minimum, reflect
characteristics 54 that the firm believes
could affect the speed at which the
client account balance would be
transferred to an alternate prime broker.
Derivatives Stabilization and De-risking
Strategy.
A dealer firm’s plan should provide a
detailed analysis of the strategy to
stabilize and de-risk its derivatives
portfolios (‘‘derivatives strategy’’) that
has been incorporated into its preferred
resolution strategy.55 In developing its
capital constraints, tax rate), operational cost
reduction rate, and operational capacity for
novations. Other examples of key drivers likely also
include CCP margin flow assumptions and riskweighted assets forecast assumptions.
54 For example, relevant characteristics might
include: product, size, clearability, currency,
maturity, level of collateralization, and other risk
characteristics.
55 Subject to the relevant constraints, a firm’s
derivatives strategy may take the form of a going-
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derivatives strategy, a dealer firm
should apply the following assumption
constraints:
• OTC derivatives market access: At
or before the start of the resolution
period, each derivatives entity should
be assumed to lack an investment-grade
credit rating (e.g., unrated or
downgraded below investment grade).
The derivatives entity should also 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 a result of
the lack of investment grade status, it
should be further assumed that the
derivatives entity has no access to the
bilateral OTC derivatives markets and
must use exchange-traded and/or
centrally-cleared instruments where any
new hedging needs arise during the
resolution period. Nevertheless, a dealer
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.56
• Early exits (break clauses). A dealer
firm should assume that counterparties
(external or affiliates) will exercise any
contractual termination right, consistent
with any rights stayed by the ISDA 2015
Universal Resolution Stay protocol or
other applicable protocols or
amendments 57, (i) that is available to
the counterparty at or following the start
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 goingconcern scenario (e.g., derivatives entities
reestablish investment grade status and do not enter
a wind-down) as its derivatives strategy. Likewise,
a firm may choose to adopt a combination of goingconcern and accelerated de-risking scenarios as its
derivatives strategy. For example, the derivatives
strategy could be a stabilization scenario for the
lead bank entity and an accelerated de-risking
scenario for the broker-dealer entities.
56 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 counterparty, bilateral
OTC trades with the acquiring counterparty; and,
(ii) inter-affiliate counterparties, where the trades
with inter-affiliate counterparties (a) reduce the
credit exposure of each participating counterparty
and (b) do not materially increase the market risk
of any such counterparty on a standalone basis,
after taking into account hedging with exchangetraded and centrally-cleared instruments. The firm
should demonstrate the risk-reducing nature of the
trade on the basis of information that would be
known to the firm at the time of the transaction.
57 For each of the derivatives entities that have
adhered to the Protocol, the dealer firm may assume
that the protocol is in effect for all counterparties
of that derivatives entity (except for any affiliated
counterparty of the derivatives entity that has not
yet adhered to the Protocol).
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of the resolution period; and (ii) if
exercising such right would
economically benefit the counterparty
(‘‘counterparty-initiated termination’’).
• Time horizon: The duration of the
resolution period should be between 12
and 24 months. The resolution period
begins immediately after the parent
company bankruptcy filing and extends
through the completion of the preferred
resolution strategy.
A dealer firm’s analysis of its
derivatives strategy should, at a
minimum, take into account (i) the
starting profile of its derivatives
portfolios (e.g., nature, concentration,
maturity, clearability, and liquidity of
positions); (ii) the profile and function
of the derivatives entities during the
resolution period; (iii) the means,
challenges, and capacity for managing
and de-risking 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 required to adequately
support the firm’s derivatives strategy
should be incorporated into the firm’s
RCEN and RLEN estimates for its overall
preferred resolution strategy. These
include, for example, the costs and/or
liquidity flows resulting from (i) the
close-out of OTC derivatives, (ii) the
hedging of derivatives portfolios, (iii)
the quantified losses that could be incur
due to basis and other risks that would
result from hedging with only exchangetraded and centrally cleared instruments
in a severely adverse stress
environment, and (iv) the operational
costs.
Potential residual derivatives
portfolio. A dealer firm’s resolution plan
should include a method for estimating
the composition of any potential
residual derivatives portfolio
transactions remaining at the end of the
resolution period under its preferred
resolution strategy. The method may be
a combination of approaches (e.g.,
probabilistic and deterministic) but
should demonstrate the dealer firm’s
capabilities related to portfolio
segmentation (discussed above). The
dealer firm’s plan should also provide
detailed descriptions of the trade
characteristics used to identify the
potential residual portfolio and of the
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resulting trades (or categories of
trades).58 A dealer firm should assess
the risk profile of the potential residual
portfolio (including its anticipated size,
composition, complexity,
counterparties) and the potential
counterparty and market impacts of
non-performance on the stability of U.S.
financial markets (e.g., on funding
markets and the underlying asset
markets and on clients and
counterparties).
Non-surviving entity analysis. To the
extent the preferred resolution strategy
assumes a material derivatives entity
enters its own resolution proceeding
after the entry of the parent company
into a bankruptcy proceeding (a ‘‘nonsurviving material derivatives entity’’),
the dealer firm should provide a
detailed analysis of how the nonsurviving material derivatives entity’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 to the orderly
execution of the firm’s preferred
resolution strategy. In particular, the
firm should provide an analysis of the
potential impacts on funding markets
and the underlying asset markets, on
clients and counterparties (including
affiliates), and on the preferred
resolution strategy. If the non-surviving
material derivatives entity is located in,
or provides more than de minimis
services to clients or counterparties
located in, a non-U.S. jurisdiction, then
the analysis should also specifically
consider potential local market impacts.
resources and loss-absorbing capacity of
the firm.
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.
VIII. 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 intragroup 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
Agency for Healthcare Research and
Quality
58 If under the firm’s preferred 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 should
nonetheless be included within the firm’s potential
residual portfolio analysis.
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By the Board of Governors of the Federal
Reserve System, June 28, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC on June 28, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Jean Best,
Assistant Executive Secretary.
[FR Doc. 2018–15066 Filed 7–13–18; 8:45 am]
BILLING CODE P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Meeting of the National Advisory
Council for Healthcare Research and
Quality
Agency for Healthcare Research
and Quality (AHRQ), HHS.
ACTION: Notice of public meeting.
AGENCY:
In accordance with the
Federal Advisory Committee Act, this
notice announces a meeting of the
National Advisory Council for
Healthcare Research and Quality.
DATES: The meeting will be held on
Wednesday, July 18, 2018, from 8:30
a.m. to 2:45 p.m.
ADDRESSES: The meeting will be held at
AHRQ, 5600 Fishers Lane, Rockville,
Maryland, 20857.
FOR FURTHER INFORMATION CONTACT:
Jaime Zimmerman, Designated
Management Official, at the Agency for
Healthcare Research and Quality, 5600
Fishers Lane, Mail Stop 06E37A,
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SUMMARY:
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]]>Agencies
[Federal Register Volume 83, Number 136 (Monday, July 16, 2018)]
[Notices]
[Pages 32856-32871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15066]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1614]
FEDERAL DEPOSIT INSURANCE CORPORATION
Resolution Planning Guidance for Eight Large, Complex U.S.
Banking Organizations
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 2019 and subsequent
resolution plan submissions by the eight largest, complex U.S. banking
organizations (``Covered Companies'' or ``firms''). 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
proposed guidance, which is largely based on prior guidance issued to
these Covered Companies, describes the Agencies' expectations regarding
a number of key vulnerabilities in plans for an 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 on the Agencies' review
of these firms' recent resolution plan submissions. The Agencies invite
public comment on all aspects of the proposed guidance.
DATES: Comments should be received September 14, 2018.
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-1614, by any of the
following methods:
Agency Website: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://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 https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfms
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 in Room 3515,
1801 K Street NW (between 18th and 19th Street NW), between 9:00 a.m.
and 5:00 p.m. on weekdays.
FDIC: You may submit comments 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 ``Proposed 165(d)
Guidance for the Domestic Firms'' on the subject line of the message.
Mail: Robert E. Feldman, 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 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: Michael Hsu, Associate Director, (202) 452-4330, Division of
Supervision and Regulation, Jay Schwarz, Senior Counsel, (202) 452-
2970, Will Giles, Senior Counsel, (202) 452-3351, or Steve Bowne,
Senior Attorney, (202) 452-3900, Legal Division. Users of
Telecommunications Device for the Deaf (TDD) may call (202) 263-4869.
FDIC: Mike J. Morgan, Corporate Expert, [email protected], CFI
Oversight Branch, Division of Risk Management Supervision; Alexandra
Steinberg Barrage, Associate Director, Resolution Strategy and Policy,
Office of Complex Financial Institutions, [email protected]; David N.
Wall, Assistant General Counsel, [email protected]; Pauline E. Calande,
Senior Counsel, [email protected]; or Celia Van Gorder, Supervisory
Counsel, [email protected], Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
[[Page 32857]]
SUPPLEMENTARY INFORMATION:
I. Background
Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5365(d)) and the jointly issued implementing
regulation, 12 CFR part 243 and 12 CFR part 381 (``the Rule''),
requires certain financial companies to report periodically to the
Board and the FDIC their plans for rapid and orderly resolution under
the U.S. Bankruptcy Code in the event of material financial distress or
failure.
Among other requirements, the Rule requires each financial
company's 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. The Rule also requires that resolution plans include
a confidential section that contains confidential supervisory and
proprietary information submitted to the Board and the FDIC (together,
the ``Agencies''), and a section that the Agencies make available to
the public. Public sections of resolution plans can be found on the
Agencies' websites.\1\
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\1\ See the public sections of resolution plans submitted to the
Agencies at www.federalreserve.gov/bankinforeg/resolutionplans.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 firm's failure would not have serious adverse
effects on financial stability in the United States. Specifically, the
resolution planning process requires firms to demonstrate that they
have adequately assessed the challenges that their structure and
business activities pose to resolution and that they have taken action
to address those issues. Management should also consider resolvability
as part of day-to-day decision making, particularly those related to
structure, business activities, capital and liquidity allocation, and
governance. In addition, firms are expected to maintain a meaningful
set of options for selling operations and business lines to generate
resources and to allow for restructuring under stress, including
through the sale or wind down of discrete businesses that could further
minimize the direct impact of distress or failure on the broader
financial system. While these measures cannot guarantee that a firm's
resolution would be simple or smoothly executed, these preparations can
help ensure that the firm could be resolved under bankruptcy without
government support or imperiling the broader financial system.
The Rule describes an iterative process aimed at strengthening the
resolution planning capabilities of each financial institution. With
respect to the eight largest, complex U.S. banking organizations
(``Covered Companies'' or ``firms''),\2\ the Agencies have previously
provided guidance and other feedback.\3\ In general, the feedback was
intended to assist firms in their development of future resolution plan
submissions and to provide additional clarity with respect to the
expectations against which the Agencies will evaluate the resolution
plan submissions. The Agencies are now proposing to update aspects of
prior guidance based on the Agencies' review of the firms' recent
resolution plan submissions.\4\ The Agencies reviewed the 2017 Plans
and issued a letter to each firm indicating that it had taken important
steps to enhance its resolvability and facilitate its orderly
resolution in bankruptcy.\5\ As a result of those reviews and following
the Agencies' joint decisions in December 2017, the Agencies identified
four areas where more work may need to be done to improve the
resolvability of the firms.\6\ As described below, the Agencies are
proposing updates to two areas of the guidance regarding payment,
clearing, and settlement services and derivatives and trading
activities. The Agencies intend to provide additional information on
the two other areas: Intra-group liquidity and internal loss absorbing
capacity. The Agencies invite public comment on all aspects of the
proposed guidance.
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\2\ Bank of America Corporation, The Bank of New York Mellon
Corporation, Citigroup Inc., the Goldman Sachs Group, Inc., JPMorgan
Chase & Co., Morgan Stanley, State Street Corporation and Wells
Fargo & Company.
\3\ This includes Guidance for 2013 Sec. 165(d) Annual
Resolution Plan Submissions by Domestic Covered Companies that
Submitted Initial Resolution Plans in 2012; detailed guidance and
firm-specific feedback in August 2014 and February 2015 for the
development of firms' 2015 resolution plan submissions; and Guidance
for 2017 Sec. 165(d) Annual Resolution Plan Submissions by Domestic
Covered Companies that Submitted Resolution Plans in July 2015,
including the frequently asked questions that were published in
response to the Guidance for the 2017 Plan Submissions (taken
together, ``prior guidance'').
\4\ Each firm's resolution strategy is designed to have the
parent company recapitalize and provide liquidity resources to its
material entity subsidiaries prior to entering bankruptcy
proceedings. This strategy calls for material entities to be
provided with sufficient capital and liquidity resources to allow
them to avoid multiple competing insolvencies and maintain
continuity of operations throughout resolution.
\5\ See Letters dated December 19, 2017, from the Board and FDIC
to Bank of America Corporation, The Bank of New York Mellon
Corporation, Citigroup Inc., the Goldman Sachs Group, Inc., JPMorgan
Chase & Co., Morgan Stanley, State Street Corporation and Wells
Fargo & Company, available at https://www.federalreserve.gov/supervisionreg/resolution-plans.htm.
\6\ Id.
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II. Overview of the Proposed Guidance
The proposed guidance is organized into six substantive areas,
consistent with the guidance the Agencies provided to Covered Companies
in April 2016 to assist in the development of their 2017 resolution
plans, Guidance for 2017 Sec. 165(d) Annual Resolution Plan
Submissions by Domestic Covered Companies that Submitted Resolution
Plans in July 2015 (``2016 Guidance'').\7\ These areas are:
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\7\ Available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a1.pdf and at https://www.fdic.gov/news/news/press/2016/pr16031b.pdf.
1. Capital
2. Liquidity
3. Governance mechanisms
4. Operational
5. Legal entity rationalization and separability
6. Derivatives and trading activities
Each area is important to firms in resolution as each plays a part
in helping to ensure that the firm can be resolved in an orderly
manner. The guidance would describe the Agencies' expectations for each
of these areas.
The proposed guidance is largely consistent with the 2016 Guidance,
which the Covered Companies used to develop their 2017 resolution plan
submissions. Accordingly, the firms have already incorporated
significant aspects of the proposed guidance into their resolution
planning. The proposal would update the derivatives and trading
activities (DER), and payment, clearing, and settlement activities
(PCS) areas of the 2016 Guidance based on the Agencies' review of the
Covered Companies' 2017 plans. It would also make minor clarifications
to certain areas of the 2016 Guidance. In general, the proposed
revisions to the guidance are intended to streamline the firms'
submissions and to provide additional clarity. The proposed guidance is
not meant to limit firms' consideration of additional 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.
Capital: The ability to provide sufficient capital to material
entities without disruption from creditors is
[[Page 32858]]
important in order to ensure that material entities can continue to
provide critical services and maintain critical operations as the firm
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
material entities within the firm (resolution capital adequacy and
positioning or RCAP). The proposal also describes expectations
regarding a methodology for periodically estimating the amount of
capital that may be needed to support each material entity after the
bankruptcy filing (resolution capital execution need or RCEN).
Liquidity: A firm's ability to reliably estimate and meet its
liquidity needs prior to, and in, resolution is important to the
execution of a Covered Company's resolution strategy in that it enables
the firm to respond quickly to demands from stakeholders and
counterparties, including regulatory authorities in other jurisdictions
and financial market utilities. Maintaining sufficient and
appropriately-positioned liquidity also allows the subsidiaries to
continue to operate while the firm is being resolved in accordance with
the firm's preferred resolution strategy.\8\
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\8\ The Agencies are currently taking steps to better understand
the purpose and treatment of the firms' inter-affiliate
transactions. The Agencies do not expect the firms to make major
changes to their RLAP and RLEN models until after the Agencies have
completed this review and provided further feedback.
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Governance Mechanisms: An adequate governance structure with
triggers capable of identifying the onset of financial stress events is
important to ensure that there is sufficient time to allow firms to
prepare for resolution, and to ensure the timely execution of their
preferred resolution strategies. The governance mechanism section
proposes expectations that firms have playbooks that detail the board
and senior management actions necessary to execute the firm's preferred
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 senior
management and the board, to address the successful recapitalization of
subsidiaries prior to the parent's bankruptcy to the extent called for
by the firm's preferred resolution strategy, and to address how the
firm would ensure the timely execution of a bankruptcy filing. The
proposal also describes the expectations that firms identify and
analyze potential legal challenges to the provision of capital and
liquidity to subsidiaries that would precede the parent's bankruptcy
filing, and any defenses and mitigants to such challenges. In addition,
the proposal describes expectations that firms incorporate any
developments from this analysis in their governance playbooks.
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 preferred 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 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 and
actionable operations that could be sold or transferred in resolution
to provide meaningful optionality for the resolution strategy under a
range of potential failure scenarios.
Operational: The development and maintenance of operational
capabilities is important to support and enable execution of a firm's
preferred resolution strategy, including providing for the continuation
of critical operations and preventing or mitigating adverse impacts on
U.S. financial stability. The proposed operational capabilities
include:
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 legal entity basis, and that
ensure data integrity and reliability;
Developing a clear set of actions to be taken to maintain payment,
clearing and settlement activities and to maintain access to financial
market utilities, as further discussed below; and
Maintaining an actionable plan to ensure the continuity of all of
the shared and outsourced services that their critical operations rely
on.
In addition, the proposed guidance provides that a firm should
analyze and address legal issues that may arise in connection with
emergency motions the firm anticipates filing at the outset of its
bankruptcy case seeking relief needed to pursue its preferred
resolution strategy, including legal precedent and evidentiary support
the firm expects to provide in support of such motions, key regulatory
actions, and contingency arrangements.
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 derivatives and trading activities and with the
implementation of their preferred strategies, as further discussed
below.
Question 1: Do the topics in the proposed guidance discussed above
represent the key vulnerabilities of the Covered Companies in
resolution? If not, what key vulnerabilities are not captured?
III. Proposed Changes to Prior Guidance
In addition to making some clarifications, this proposal differs
from prior guidance in that it reflects enhancements informed by the
Agencies' review of the Covered Companies 2017 plans in the areas of
DER and PCS.
The following description summarizes the changes relative to the
topics outlined in the 2016 Guidance to which the Agencies are seeking
comment and, where relevant, provides additional detail:
Operational: Payment, Clearing, and Settlement Activities
The provision of PCS by firms, financial market utilities (FMUs),
and agent banks is an essential component of the U.S. financial system,
and maintaining the continuity of PCS services is important for the
orderly resolution of firms. Prior guidance from the Agencies indicated
that a firm's resolution plan submissions should describe arrangements
to facilitate continued access to PCS services through the firm's
resolution.
Based upon recent resolution plan submissions and the Agencies'
engagement with the firms, the Agencies believe that the firms have
developed capabilities to identify and consider the risks associated
with continuity of access to PCS services in resolution. All of the
firms described methodologies to identify key FMUs and agent banks
based on quantitative and qualitative criteria and included playbooks
for identified key FMUs or agent banks. These playbooks described
potential adverse actions that could be taken by the FMU or agent bank,
described possible contingency arrangements, and discussed the
operational and financial impacts of such actions or arrangements, all
of which were
[[Page 32859]]
enhanced by the firms' direct communications with these FMUs and agent
banks. The proposed PCS guidance clarifies the expectations of the
Agencies with respect to a firm's capabilities to maintain continued
access to PCS services through a framework. Considering the firms'
earlier resolution plan submissions, the firms have the methodologies
and capabilities in place to address these expectations.
Framework. The proposal states that firms should demonstrate
capabilities for maintaining continued access to PCS services through a
framework that incorporates the identification of key clients,\9\ FMUs,
and agent banks, using both quantitative \10\ and qualitative criteria,
and the development of a playbook for each key FMU and agent bank. The
proposed guidance builds upon existing guidance by specifying that the
framework should consider key clients (which may include affiliates of
the firm) and agent banks. The Agencies note that, although the
existing guidance did not expressly suggest the identification of key
agent banks and playbooks for such agent banks, the firms considered
agent bank relationships and each provided a playbook for at least one
key agent bank in its most recent resolution plan submission. Because
agent bank relationships may essentially replicate PCS services
provided by FMUs, the Agencies propose to revise the PCS guidance to
include the identification and development of playbooks for key agent
banks.
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\9\ A client is an individual or entity, including affiliates of
the firm, that relies upon continued access to the firm's PCS
services and any related credit or liquidity offered in connection
with those services. As a result, key clients may not necessarily be
limited to wholesale clients.
\10\ Examples of quantitative criteria include not only the
aggregate volumes and values of all transactions processed through
an FMU but also assets under custody with an agent bank, the value
of cash and securities settled through an agent bank, and extensions
of intraday credit.
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In applying the framework, the firm would be expected to consider
its role as a user and/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 through its own membership in that FMU or through the
membership of another firm 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 through
the firm's membership in or relationship with that service provider. A
firm also would be a provider if it delivers PCS services critical to a
client through the firm's own operations in a manner similar to an FMU.
The proposal provides that a firm's framework should take into
account the various relationships the firm and its key clients have
with those key FMUs and agent banks by providing a mapping of material
entities, critical operations, core business lines, and key clients to
key FMUs and agent banks. This framework would be expected to consider
both direct relationships (e.g., firm's direct membership in the FMU,
firm provides key clients with critical PCS services through its own
operations, firm's contractual relationship with an agent bank) and
indirect relationships (e.g., firm provides its clients with access to
the relevant FMU or agent bank through the firm's membership in or
relationship with that FMU or agent bank).
By developing and evaluating these activities and relationships
through a framework that incorporates the elements above, a firm should
be able to consider the issue of maintaining continuity of PCS services
in a systematic manner.
Question 2: Is the guidance sufficiently clear with respect to the
following concepts: Scope of PCS services, user vs. provider, 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 firms 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?
Playbooks for Continued Access to PCS Services. Firms also would be
expected to provide a playbook for each key FMU and agent bank that
addresses financial considerations and includes operational detail that
would assist the firm in maintaining continued access to PCS services
for itself and its clients in stress and in resolution. Under the
proposal, each key FMU and agent bank playbook would be expected to
provide analysis of the financial and operational impact to the firm's
material entities and key clients due to a loss of access to the FMU or
agent bank. Each playbook also should discuss any possible alternative
arrangements that would allow the firm and its key clients to maintain
continued access to PCS services in resolution. However, the firm is
not expected to incorporate a scenario in which it loses FMU or agent
bank access into its preferred resolution strategy or its RLEN/RCEN
estimates.
Firms communicated with key FMUs and agent banks in preparing their
most recent resolution plan submissions and indicated that such
communication was helpful in refining their analysis concerning
potential adverse actions and contingency arrangements. Firms would be
expected to continue to engage with key FMUs, agent banks, and clients,
and playbooks would be expected to reflect any feedback received during
such ongoing outreach. Firms are encouraged to continue engaging with
each other, key FMUs and agent banks, and other stakeholders to
identify possible initiatives or additional ways to support continued
access to PCS services.
The proposed guidance differentiates the type of information to be
included in a firm's key FMU and 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. Under the proposal, each
playbook for an individual FMU or agent bank should include, at a
minimum, a description of the firm's relationship as a user with the
key FMU or agent bank and an identification and mapping of PCS services
to the associated material entities, 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 agent bank in a period of stress for the firm or upon the firm's
resolution.\11\ Playbooks submitted as part of the firms' most recent
resolution plan submissions mapped the PCS services provided to
material entities, critical operations, and core business lines at a
fairly granular level, which enhanced the utility of these playbooks.
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\11\ 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 agent bank could take, each playbook would be expected to address
the operational and financial impact of such actions on each material
entity and discuss contingency arrangements that the firm may initiate
in response to such actions by the key FMU or key agent bank.
Operational impacts may include effects
[[Page 32860]]
on governance mechanisms or resource allocation (including human
resources), as well as any expected enhanced communication with key
stakeholders (e.g., regulators, FMUs and agent banks). Financial
impacts may include those directly associated with liquidity or any
additional costs incurred by the firm as a result of such adverse
actions and contingency arrangements. The proposed PCS guidance
specifies that each playbook should discuss PCS-related liquidity
sources and uses in business-as-usual (BAU), in stress, and in the
resolution period. Each firm would be expected to determine the
relevant measurement points, and this information would be presented by
currency type (with U.S. dollar equivalent) and by material entity.
Each playbook also would be expected to describe any account features
that might restrict the firm's ready access to its intraday liquidity
sources, the firm's ability to control intraday liquidity outflows, and
the firm's capabilities to identify and prioritize time-specific
payments.
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 key clients that rely upon PCS services provided
by the firm in its playbook for the relevant FMU or agent bank.
Playbooks would be expected to describe the scale and manner in which
the firm's material entities, critical operations, and core business
lines provide PCS services and any related credit or liquidity offered
by the firm in connection with such services. Similar to the playbook
content expected of users of PCS services, each playbook would be
expected to include a mapping of the PCS services provided to each
material entity, critical operation, core business line, and key
clients. In the case where a firm is a provider of PCS services through
its own operations, the firm would expected to produce a playbook for
the material entity that provides those services, and the playbook
would focus on continuity of access for its key clients.
The proposal states that playbooks should discuss the potential
range of contingency arrangements available to the firm to minimize
disruption to its provision of PCS services to its clients 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 the
firm's key clients to maintain continued access to critical PCS
services. The 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 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 preferred resolution
strategy, the firm would be expected to describe its reasons for not
taking any contingency action.
Under the proposal, a firm should communicate the potential impacts
of implementation of any identified contingency arrangements or
alternatives to its key clients, and playbooks should describe the
firm's methodology for determining whether it should provide any
additional communication to some or all key clients (e.g., due to the
client's usage of that access and/or related extensions of credit), as
well as the expected timing and form of such communication. The
Agencies note that in their most recent submissions, all of the firms
addressed the issue of client communications and provided descriptions
of planned or existing client communications, with some firms
submitting specific samples of such communication. Firms would be
expected to consider any benefit of communicating this information in
multiple forms (e.g., verbal, written) and at multiple time periods
(e.g., BAU, stress, some point in time in advance of taking contingency
actions) in order to provide adequate notice to key clients of the
action and the potential impact on the client of that action. In making
decisions concerning communications to its key clients, the proposal
states that firms also should consider any benefit of tailoring
communications to different subsets of clients (e.g., based on
different 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 of intraday credit or
liquidity.\12\ Such sample contracts or agreements may be particularly
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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\12\ 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.
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Question 3: Are the Agencies' expectations with respect to playbook
content for firms that are users or providers (or both) of PCS services
sufficiently clear? What additional clarifications, alternatives, or
additional information, if any, should the Agencies consider?
Question 4: Should the guidance indicate that providers of PCS
activities are expected to expressly consider particular contingency
arrangements (e.g., methods to transfer client activity to other firms
with whom the clients have relationships, alternate agent bank
relationships)? Should the guidance also indicate that firms should
expressly 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 5: Specifically for users of PCS activities, should the
guidance indicate that firms are expected to expressly include
particular PCS-related liquidity sources and uses such as client pre-
funding, or specific abilities to control intraday liquidity inflows
and outflows (e.g., throttling or prioritizing of payments)? If so,
what particular sources and uses should firms be expected to include?
Question 6: Specifically for providers of PCS services are the
Agencies' expectations concerning a firm's communication to its key
clients (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 firms to communicate this
information at specific times or in specific formats?
Derivatives and Trading Activities
This section of the proposed guidance is intended to explain
expectations for Bank of America Corporation, Citigroup Inc., The
Goldman Sachs Group, Inc., JP Morgan Chase & Co., Morgan Stanley, and
Wells Fargo & Company (each, a ``dealer firm'').\13\
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\13\ Dealer firms share many quantitative and qualitative
characteristics. For example, each dealer firm is a Covered Company
that (as of December 31, 2017) (i) has total derivatives notional
values greater than $5 trillion, (ii) has global gross market value
of derivatives greater than $20 billion, (iii) has a sum of global
trading assets and trading liabilities greater than $110 billion
(each on the basis of a 3-year rolling average), (iv) is subject to
the GSIB Surcharge and all components of the CCAR quantitative
assessment (i.e., global market shock and counterparty default
scenario components), and (v) is parent to a designated primary
dealer.
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The size, scope, complexity, and opacity of a firm's global
derivatives and trading activities may present
[[Page 32861]]
significant risk to resolvability. To facilitate an orderly resolution,
a dealer firm should be able to demonstrate the ability to stabilize
and de-risk its derivatives and trading activities during resolution
without posing a threat to U.S. financial stability. Therefore, dealer
firms have developed capabilities to identify and mitigate the risks
associated with their derivatives and trading activities and with the
implementation of their preferred resolution strategies. These
capabilities seek to facilitate a dealer firm's planning, preparedness,
and execution of an orderly resolution. The proposed guidance would
clarify the Agencies' expectations with respect to such capabilities
and a firm's analysis of its preferred strategy. The proposed guidance
also would eliminate the expectations of the 2016 Guidance that a
dealer firm's resolution plan include separate passive and active wind-
down scenario analyses, the agency-specified data templates, and rating
agency playbooks.
Over the past several years, the Agencies have engaged
significantly with dealer firms to assess their resolution capabilities
and to provide feedback with respect to their resolution preparedness.
As a group, dealer firms have made meaningful improvements over
previous resolution plan submissions. These improvements include
efforts by dealer firms to enhance their resolution capabilities
related to derivatives and trading activities and to integrate those
capabilities with their business-as-usual practices. The expectations
set out in this section of the proposed guidance reflect many of those
improvements. As described in more detail below, this section of the
proposed guidance is organized in five subsections. The first four of
the subsections describe expectations for resolution capabilities that
are commensurate with the size, scope and complexity of a firm's
derivatives portfolios and should help assure that dealer firms
maintain the operational preparedness to implement an orderly
resolution. The fifth subsection--derivatives stabilization and de-
risking strategy--describes expectations for a dealer firm's analysis
of its approach to managing its derivatives portfolios in an orderly
resolution.
Booking practices. To minimize uncertainty and avoid excessive
complexity and opacity that can frustrate a firm's resolution
preparedness, a dealer firm's resolution capabilities should include
booking practices commensurate with the size, scope and complexity of a
firm's derivatives portfolios. Dealer firms are currently developing
booking practices that provide timely and up-to-date information
regarding the structure, risks and resource needs associated with the
management of its derivatives activities under a broad range of
potential stress and failure scenarios. Therefore, the proposed
guidance would clarify the capabilities a dealer firm is expected to
have related to its booking practices, including descriptions of its
comprehensive booking model framework and demonstrations of its ability
to identify, assess, and report on each entity with derivatives
portfolios (a ``derivatives entity'').\14\
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\14\ Consistent with prior guidance, ``derivatives entities''
should include both material and non-material entities, in part
because non-material entities, in the aggregate, may represent
significant exposures.
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Inter-affiliate risk monitoring and controls. Affiliates of a
derivatives entity may be forced to discontinue a trading relationship
with that derivatives entity during resolution, which poses risks to
the orderly resolution of a firm. The proposal describes the Agencies'
expectations that a dealer firm address this risk by being able to
provide timely transparency into the current risk transfers between
affiliates and the resolvability risks related to such transfers,
including expectations regarding an inter-affiliate market risk
framework that enables the firm to monitor and limit the exposures a
derivatives entity that is a material entity could experience in an
extreme resolution scenario.
Portfolio segmentation and forecasting. The ability to quickly and
reliably identify problematic derivatives positions and portfolios is
critical to minimizing uncertainty and forecasting resource needs to
enable an orderly resolution. Each dealer firm has developed various
modeling approaches that are used to evidence the adequacy of the
capabilities and resources needed to execute its preferred resolution
strategy. The utility of these modeled results is often affected by the
scope of readily available data on the underlying characteristics of a
dealer firm's derivatives portfolios. Therefore, the proposal confirms
that a dealer firm should have the capabilities to produce analysis
that reflects granular portfolio segmentation and differentiation of
assumptions taking into account trade-level characteristics. Similarly,
the proposed guidance also provides additional detail regarding other
segmentation and forecasting related capabilities that the dealer
firm's resolution plan should describe and demonstrate. These
capabilities include (i) a method and supporting systems capabilities
for categorizing and ranking the ease of exit for its derivatives
positions (``ease of exit'' position analysis), (ii) the systems
capabilities to apply the firm's exit cost methodology to its firm-wide
derivatives portfolio (application of exit cost methodology), (iii)
capabilities to assess the operational resources and forecast the costs
related to its current derivatives activities (analysis of operational
capacity), and (iv) a method to apply sensitivity analyses to the key
drivers of the derivatives-related costs and liquidity flows under its
preferred resolution strategy (sensitivity analysis).
Prime brokerage customer account transfers. The rapid withdrawal
from a firm by prime brokerage clients can contribute to a disorderly
resolution. Dealer firms' resolution plans should address the risk that
during a resolution the firm'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 dealer firms should have the capabilities to facilitate the
orderly transfer of prime brokerage account balances to peer prime
brokers and describes the Agencies' related expectations in greater
detail. In particular, the proposed guidance clarifies that a dealer
firm's resolution plan should describe and demonstrate its ability to
segment and analyze the quality and composition of such account
balances and to rank account balances according to their potential
transfer speed.
Derivatives stabilization and de-risking strategy. A key risk to
the orderly resolution of a dealer firm is a volatile and risky
derivatives portfolio. In the event of material financial distress or
failure, the resolvability risks related to a dealer firm's derivatives
and trading activities would be a key obstacle to the firm's rapid and
orderly resolution. Dealer firms' resolution plans should address this
obstacle. The proposed guidance confirms that a dealer firm's plan
should provide a detailed analysis of the strategy to stabilize and de-
risk its derivatives portfolios (``derivatives strategy'') and provides
additional detail regarding the Agencies' expectations.\15\ In
particular, the proposed guidance clarifies that a dealer firm should
incorporate into its derivatives strategy
[[Page 32862]]
assumptions consistent with the lack of access to the bilateral OTC
derivatives market at the start of its resolution period. The proposed
guidance also confirms or clarifies expectations related to other
elements that should be addressed in the firm's analysis of its
derivatives strategy, including the incorporation of resource needs
into RLEN and RCEN (forecast of resource needs), an analysis of any
potential derivatives portfolio remaining after the resolution period
(potential residual derivatives portfolio), and the impact (including
on non-U.S. jurisdictions) from the assumed failure of a material
derivatives entity (non-surviving material entity analysis).\16\
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\15\ Subject to the certain constraints, a firm'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 executability of the chosen strategy.
\16\ From the perspective of protecting U.S. financial
stability, the risk of adverse regulatory actions that could impede
an orderly resolution increases where a material entity's failure
would have extraordinary impacts on local markets. Therefore,
analysis of non-surviving material entities located in a non-U.S.
jurisdiction should contemplate the impact on local markets.
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Question 7: Do the proposed changes relative to the 2016 Guidance
provide sufficient clarity or are additional clarifications required?
Consolidation of Existing Guidance
In addition to the 2016 Guidance, the Agencies have also issued:
the Guidance for 2013 Sec. 165(d) Annual Resolution Plan Submissions
by Domestic Covered Companies that Submitted Initial Resolution Plans
in 2012 (the ``2013 Guidance''); firm-specific feedback letters issued
in 2014 and 2016; and the February 2015 staff communication regarding
the 2016 plan submissions. The Agencies are considering consolidating
all applicable guidance into a single document, which would provide the
public with one source of applicable guidance to which to refer. The
Agencies would also expect to incorporate aspects of the Resolution
Plan Frequently Asked Questions issued May 2017 that may remain
applicable.\17\ For example, the Agencies could add a section to the
proposed guidance that includes the aspects of the 2013 Guidance that
should remain applicable, such as the plan format description in the
``Format of 2013 Plan'' and ``Additional Format and Content Guidance''
sections, some of the central assumptions and stress scenarios in the
``Assumptions'' and ``Stress Scenarios'' sections, the process for
addressing expected global cooperation described in the ``Global
Cooperation'' section, and the considerations for identifying material
entities in the ``Material Entities'' section.
---------------------------------------------------------------------------
\17\ https://www.fdic.gov/resauthority/2017faqsguidance.pdf;
https://www.federalreserve.gov/publications/files/resolution-plan-faqs.pdf.
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Question 8: Should the Agencies consolidate all applicable
guidance? If so, which aspects of the other guidance warrant inclusion,
additional clarification or modification?
IV. Paperwork Reduction Act
Certain provisions of the Rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (``PRA'') of 1995 (44 U.S.C. 3501 through 3521). In
accordance with the requirements of the PRA, 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.
The Agencies believe that the proposed changes to the 2016 Guidance
would not result in an increase in information collection burden to the
Covered Companies. The Agencies invite public comment on this
assessment.
TEXT OF PROPOSED RESOLUTION PLANNING GUIDANCE FOR EIGHT LARGE, COMPLEX
U.S. BANKING ORGANIZATIONS
Resolution Planning Guidance for Eight Large, Complex U.S. Banking
Organizations
I. Introduction
II. Capital
a. Resolution Capital Adequacy and Positioning (RCAP)
b. Resolution Capital Execution Need (RCEN)
III. Liquidity
a. Resolution Liquidity Adequacy and Positioning (RLAP)
b. Resolution Liquidity Execution Need (RLEN)
IV. Governance Mechanisms
a. Playbooks and Triggers
b. Pre-Bankruptcy Parent Support
V. Operational
a. Payment, Clearing, and Settlement Activities
b. Managing, Identifying, and Valuing Collateral
c. Management Information Systems
d. Shared and Outsourced Services
e. Legal Obstacles Associated with Emergency Motions
VI. Legal Entity Rationalization and Separability
a. Legal Entity Rationalization Criteria (LER Criteria)
b. Separability
VII. Derivatives and Trading Activities
a. Booking Practices
b. Inter-Affiliate Risk Monitoring and Controls
c. Portfolio Segmentation and Forecasting
d. Prime Brokerage Customer Account Transfers
e. Derivatives Stabilization and De-risking Strategy
VIII. Public Section
I. Introduction
Resolution Plan Requirement: Section 165(d) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (12 U.S.C. 5365(d)) requires
certain financial companies (``Covered 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'') the
Companies' \18\ 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 (the ``Rule'') implementing the
provisions of Section 165(d), 12 CFR parts 243 and 381.\19\ Certain
Covered Companies meeting criteria set out in the Rule must file a
resolution plan (``Plan'') annually or at a different time period
specified by the Agencies.
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\18\ Capitalized terms not defined herein have the meaning set
forth in the Rule.
\19\ 76 Fed. Reg. 67323 (November 1, 2011)
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Overview of Guidance Document: This document is intended to assist
the eight current U.S. Global Systemically Important Banks (``GSIBs''
or ``firms'') \20\ in further developing their preferred resolution
strategies. The document describes the expectations of the Agencies
regarding these firms' resolution plans, and highlights 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 the preferred
strategy.\21\
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\20\ Bank of America Corporation, the Bank of New York Mellon
Corporation, Citigroup Inc., the Goldman Sachs Group, Inc., JPMorgan
Chase & Co., Morgan Stanley, State Street Corporation and Wells
Fargo & Company.
\21\ The 2013 Guidance, the 2014 Letter, and the 2015
Communication, as described in the 2016 letters to the firms,
continue to be applicable (relevant dates should be updated
appropriately), except to the extent superseded or supplemented by
the provisions of this document. See Letters dated April 12, 2016,
from the Board and FDIC to Bank of America Corporation, The Bank of
New York Mellon Corporation, Citigroup Inc., the Goldman Sachs
Group, Inc., JPMorgan Chase & Co., Morgan Stanley, State Street
Corporation, and Wells Fargo & Company, available at https://www.federalreserve.gov/supervisionreg/resolution-plans.htm.
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This document is organized around a number of key vulnerabilities
in resolution (i.e., capital; liquidity; governance mechanisms;
operational; legal entity rationalization and separability; and
derivatives and trading activities) that apply across resolution plans.
Additional vulnerabilities or
[[Page 32863]]
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 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): To help ensure
that a firm's material entities \22\ could operate while the parent
company is in bankruptcy, the firm should have an adequate amount of
loss-absorbing capacity to recapitalize those material entities. Thus,
a firm should have outstanding a minimum amount of total loss-absorbing
capital, as well as a minimum amount of long-term debt, to help ensure
that the firm has adequate capacity to meet that need at a consolidated
level (external TLAC).\23\
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\22\ The terms ``material entities,'' ``critical operations,''
and ``core business lines'' have the same meaning as in the
Agencies' Rule.
\23\ 82 Fed. Reg. 8266 (January 24, 2017).
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A firm's external TLAC should be complemented by appropriate
positioning of additional loss-absorbing capacity within the firm
(internal TLAC). The positioning of a firm's internal TLAC should
balance the certainty associated with pre-positioning internal TLAC
directly at material entities with the flexibility provided by holding
recapitalization resources at the parent (contributable resources) to
meet unanticipated losses at material entities. That balance should
take account of both pre-positioning at material entities and holding
resources at the parent, and the obstacles associated with each.
Accordingly, the firm should not rely exclusively on either full pre-
positioning or parent contributable resources to recapitalize any
material entity. The plan should describe the positioning of internal
TLAC within the firm, along with analysis supporting such positioning.
Finally, to the extent that pre-positioned internal TLAC at a
material entity is in the form of intercompany debt and there are one
or more entities between that material entity and the parent, the firm
should mitigate uncertainty related to potential creditor challenge;
for example, by ensuring that the seniority and tenor of the
intercompany debt is the same between all entities in the chain.
Resolution Capital Execution Need (RCEN): To support the execution
of the firm's resolution strategy, material entities need to be
recapitalized to a level that allows them to operate or be wound down
in an orderly manner following the parent company's bankruptcy filing.
The firm should have a methodology for periodically estimating the
amount of capital that may be needed to support each material entity
after the bankruptcy filing (RCEN). The firm's positioning of internal
TLAC should be able to support the RCEN estimates. In addition, the
RCEN estimates should be incorporated into the firm's governance
framework to ensure that the parent company files for bankruptcy at a
time that enables execution of the preferred strategy.
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,\24\ consistent
with the firm's resolution strategy. However, the methodology is not
required to produce aggregate losses that are greater than the amount
of external TLAC that would be required for the firm under the Board's
rule.\25\ The RCEN methodology should be calibrated such that
recapitalized material entities have sufficient capital to maintain
market confidence as required under the preferred 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. Material entities 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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\24\ The resolution period begins immediately after the parent
company bankruptcy filing and extends through the completion of the
preferred resolution strategy.
\25\ See 12 CFR 252.60-.65; 82 Fed. Reg. 8266 (January 24,
2017).
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III. LIQUIDITY
The firm should have the liquidity capabilities necessary to
execute its preferred resolution strategy, including those described in
SR Letter 14-1.\26\ For resolution purposes, these capabilities should
include having an appropriate model and process for estimating and
maintaining sufficient liquidity at or readily available to material
entities and a methodology for estimating the liquidity needed to
successfully execute the resolution strategy, as described below.
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\26\ SR Letter 14-1, ``Heightened Supervisory Expectations for
Recovery and Resolution Preparedness for Certain Large Bank Holding
Companies--Supplemental Guidance on Consolidated Supervision
Framework for Large Financial Institutions'' (Jan. 24, 2014),
available at https://www.federalreserve.gov/bankinforeg/srletters/sr1401.pdf.
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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 material entity (including material entities that are
non-U.S. branches)--i.e., the high-quality liquid assets (HQLA) at the
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 and risk of the firm. The model should
balance the reduction in frictions associated with holding liquidity
directly at material entities with the flexibility provided by holding
HQLA at the parent available to meet unanticipated outflows at material
entities. Thus, the firm should not rely exclusively on either full
pre-positioning or the parent. The model \27\ should ensure that the
parent holding company holds sufficient HQLA (inclusive of its deposits
at the U.S. branch of the lead bank subsidiary) to cover the sum of all
stand-alone material entity net liquidity deficits. The stand-alone net
liquidity position of each 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 an affiliate should be assumed to mature. Finally, the firm
should not assume that a net liquidity surplus at one material entity
could be moved to meet net
[[Page 32864]]
liquidity deficits at other material entities or to augment parent
resources.
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\27\ ``Model'' refers to the set of calculations estimating the
net liquidity surplus/deficit at each legal entity and for the firm
in aggregate based on assumptions regarding available liquidity,
e.g., HQLA, and third-party and interaffiliate net outflows.
---------------------------------------------------------------------------
Additionally, the RLAP methodology should take into account (A) the
daily contractual mismatches between inflows and outflows; (B) the
daily flows from movement of cash and collateral for all inter-
affiliate transactions; and (C) the daily stressed liquidity flows and
trapped liquidity as a result of actions taken by clients,
counterparties, key financial market utilities (FMUs), and foreign
supervisors, among others.
Resolution Liquidity Execution Need (RLEN): The firm should have a
methodology for estimating the liquidity needed after the parent's
bankruptcy filing to stabilize the surviving material entities and to
allow those entities to operate post-filing. The RLEN estimate should
be incorporated into the firm's governance framework to ensure that the
firm files for bankruptcy in a timely way, i.e., prior to the firm's
HQLA falling below the RLEN estimate.
The firm's RLEN methodology should:
(A) Estimate the minimum operating liquidity (MOL) needed at each
material entity to ensure those entities could continue to operate
post-parent's bankruptcy filing and/or to support a wind-down strategy;
(B) Provide daily cash flow forecasts by material entity 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; and
(D) Estimate the minimum amount of liquidity required at each
material entity to meet the MOL and peak needs noted above, which would
inform the firm's board(s) of directors of when they need to take
resolution-related actions.
The MOL estimates should capture material entities' intraday
liquidity requirements, operating expenses, working capital needs, and
inter-affiliate funding frictions to ensure that material entities
could operate without disruption during the resolution.
The peak funding needs estimates should be projected for each
material entity and cover the length of time the firm expects it would
take to stabilize that material entity. 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 material entities could operate post-filing 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. The RLEN estimate should be tied to the firm's
governance mechanisms and be incorporated into the playbooks as
discussed below to assist the board of directors in taking timely
resolution-related actions.
IV. GOVERNANCE MECHANISMS
Playbooks and Triggers: A firm should identify the governance
mechanisms that would ensure execution of required board actions at the
appropriate time (as anticipated under the firm's preferred strategy)
and include pre-action triggers and existing agreements for such
actions. Governance playbooks should detail the board and senior
management actions necessary to facilitate the firm's preferred
strategy and to mitigate vulnerabilities, and should incorporate the
triggers identified below. The governance playbooks should also include
a discussion of (A) the firm's proposed communications strategy, both
internal and external; (B) the boards of directors' fiduciary
responsibilities 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; and (D) any employee retention policy. All
responsible parties and timeframes for action should be identified.
Governance playbooks should be updated periodically for all entities
whose boards of directors would need to act in advance of the
commencement of resolution proceedings under the firm's preferred
strategy.
The firm should demonstrate that key actions will be taken at the
appropriate time in order to mitigate financial, operational, legal,
and regulatory vulnerabilities. To ensure that these actions will
occur, the firm should establish clearly identified triggers linked to
specific actions for:
(A) The escalation of information to senior management and the
board(s) to potentially take the corresponding actions at each stage of
distress post-recovery leading eventually to the decision to file for
bankruptcy;
(B) Successful recapitalization of subsidiaries prior to the
parent's filing for bankruptcy and funding of such entities during the
parent company's bankruptcy to the extent the preferred strategy relies
on such actions or support; and
(C) The timely execution of a bankruptcy filing and related pre-
filing actions.\28\
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\28\ Key pre-filing actions include the preparation of any
emergency motion required to be decided on the first day of the
firm's bankruptcy. See ``OPERATIONAL--Legal Obstacles Associated
with Emergency Motions,'' below.
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These triggers should be based, at a minimum, on capital,
liquidity, and market metrics, and should incorporate the firm's
methodologies for forecasting the liquidity and capital needed to
operate as required by the preferred strategy following a parent
company's bankruptcy filing. Additionally, the triggers and related
actions should be specific.
Triggers linked to firm actions as contemplated by the firm's
preferred strategy should identify when and under what conditions the
firm, including the parent company and its material entities, would
transition from business-as-usual conditions to a stress period and
from a stress period to the runway and recapitalization/resolution
periods. 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 ensure that resources are
available and can be downstreamed, if anticipated by the firm's
strategy, and with adequate time for the preparation of the bankruptcy
petition and first-day motions, necessary stakeholder communications,
and requisite board actions. Triggers identifying the onset of the
runway and recapitalization/resolution periods, and the associated
escalation procedures and actions, should be discussed directly in the
governance playbooks.
Pre-Bankruptcy Parent Support: The resolution plan should include a
detailed legal analysis of the potential state law and bankruptcy law
challenges and mitigants to planned provision of capital and liquidity
to the subsidiaries prior to the parent's bankruptcy filing (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
[[Page 32865]]
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
preferred resolution strategy.
As noted, the analysis should include mitigants to the potential
challenges to the planned Support. The plan should include the
mitigant(s) to such challenges that the firm considers most effective.
In identifying appropriate mitigants, the firm should consider the
effectiveness of a contractually binding mechanism (CBM), pre-
positioning of financial resources in material entities, and the
creation of an intermediate holding company. Moreover, if the plan
includes a CBM, the firm should consider whether it is appropriate that
the CBM should have the following: (A) clearly defined triggers; (B)
triggers that are synchronized to the firm's liquidity and capital
methodologies; (C) perfected security interests in specified collateral
sufficient to fully secure all Support obligations on a continuous
basis (including mechanisms for adjusting the amount of collateral as
the value of obligations under the agreement or collateral assets
fluctuates); and (D) liquidated damages provisions or other features
designed to make the CBM more enforceable. The firm also should
consider related actions or agreements that may enhance the
effectiveness of a CBM. A copy of any agreement and documents
referenced therein (e.g., evidence of security interest perfection)
should be included in the resolution plan.
The governance playbooks included in the resolution plan should
incorporate any developments from the firm's analysis of potential
legal challenges regarding the Support, including any Support
approach(es) the firm has implemented. If the firm analyzed and
addressed an issue noted in this section in a prior plan submission,
the plan may reproduce that analysis and arguments and should build
upon it to at least the extent described above. In preparing the
analysis of these issues, firms may consult with law firms and other
experts on these matters. The Agencies do not object to appropriate
collaboration between firms, including through trade organizations and
with the academic community, to develop analysis of common legal
challenges and available mitigants.
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,\29\ or both, of PCS services.
A firm should demonstrate capabilities \30\ for continued access to PCS
services essential to an orderly resolution through a framework to
support such access by:
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\29\ A firm is a user of PCS services if it uses the services of
a financial market utility (FMU) through its membership in that FMU
or an agent bank. A firm is a provider of PCS services if it
provides its clients with access to an FMU or agent bank through the
firm's membership to or relationship with that service provider
(including providing PCS services to its client as an agent bank) or
if it provides key clients with critical PCS services (e.g., the
suspension or termination of such services would impact the key
client's continued access to PCS services) through the firm's own
operations.
\30\ These capabilities may include those described in SR Letter
14-1.
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Identifying key clients,\31\ FMUs, and agent banks, using
both quantitative (volume and value) \32\ and qualitative criteria;
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\31\ For purposes of this section V, a client is an individual
or entity, including affiliates of the firm, that relies upon
continued access to the firm's PCS services and any related credit
or liquidity offered in connection with those services.
\32\ Examples of quantitative criteria include not only the
aggregate volumes and values of all transactions processed through
an FMU but also assets under custody with an agent bank, the value
of cash and securities settled through an agent bank, and extensions
of intraday credit.
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Mapping material entities, critical operations, core
business lines, and key clients to both key FMUs and agent banks; and
Developing a playbook for each key FMU and agent bank
reflecting the firm's role(s) as a user and/or provider of PCS
services.
The framework should address both direct relationships (e.g.,
firm's direct membership in the FMU, firm provides key clients with
critical PCS services through its own operations, firm's contractual
relationship with an agent bank) and indirect relationships (e.g., firm
provides its clients with access to the relevant FMU or agent bank
through the firm's membership to or relationship with that FMU or agent
bank).
Playbooks for Continued Access to PCS Services. The firm is
expected to provide a playbook for each key FMU and agent bank that
addresses considerations that would assist the firm and its clients in
maintaining continued access to PCS services in the period leading up
to and including the firm's resolution. While the firm is not expected
to incorporate a scenario in which it loses FMU or agent bank access
into its preferred resolution strategy or its RLEN/RCEN estimates, each
playbook should provide analysis of the financial and operational
impact to the firm's material entities and key clients due to loss of
access to the FMU or agent bank. Each playbook also should discuss any
possible alternative arrangements that would allow the firm and its key
clients continued access to PCS services in resolution. The firm should
continue to engage with key FMUs, agent banks and clients, and
playbooks should reflect any feedback received during such ongoing
outreach.
Content Related to Users of PCS Services. Individual FMU and agent
bank playbooks should include at a minimum:
Description of the firm's relationship as a user with the
key FMU or agent bank and the identification and mapping of PCS
services to material entities, 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 agent bank when the firm is in
resolution,\33\ the operational and financial impact of such actions on
each material entity, 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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\33\ 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
material entity.
[cir] PCS Liquidity Sources: These may include the amounts of
intraday extensions of credit, liquidity buffer, inflows from FMU
participants, and client prefunded amounts in BAU, in stress, and in
the resolution period. The playbook should also describe intraday
credit arrangements (e.g., facilities of the FMU, agent bank, or a
central bank) and any similar custodial arrangements that allow ready
access to a firm's funds for PCS-related FMU and agent bank obligations
(including margin requirements) in various currencies, including
placements of firm liquidity at central banks, FMUs, and agent banks.
[cir] PCS Liquidity Uses: These may include firm and client margin,
pre-funding and intraday extensions of credit, including incremental
amounts required during resolution.
[[Page 32866]]
[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 should also describe any account features that might restrict
the firm's ready access to its liquidity sources.
Content Related to Providers of PCS Services. Individual FMU and
agent bank playbooks \34\ should include at a minimum:
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\34\ Where a firm is a provider of PCS services through the
firm's own operations, the firm is expected to produce a playbook
for the material entity that provides those services, including
contingency arrangements to permit the firm's key clients to
maintain continued access to PCS services.
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Identification and mapping of PCS services to the material
entities, 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
that rely upon the firm to provide those 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 its clients, including the viability of transferring client
activity and any related assets, as well as any alternative
arrangements that would allow the firm's key clients continued access
to critical PCS services if the firm could no longer provide such
access (e.g., due to the firm's loss of FMU or agent bank access), and
the financial and operational impacts of such arrangements;
Description of the range of contingency actions that the
firm may take concerning its provision of intraday credit to clients,
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 clients to designate or appropriately pre-
position liquidity, including through pre-funding of settlement
activity, for PCS-related FMU and agent bank obligations at specific
material entities of the firm (e.g., direct members of FMUs) or any
similar custodial arrangements that allow ready access to clients'
funds for such obligations in various currencies; (ii) delaying or
restricting client PCS activity; and (iii) restricting, imposing
conditions upon (e.g., requiring collateral), or eliminating the
provision of intraday credit or liquidity to clients; and
Description of how the firm will communicate to its key
clients 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 (e.g., due
to the client's BAU usage of that access and/or related intraday credit
or liquidity), and the expected timing and form of such communication.
Managing, Identifying, and Valuing Collateral: The firm should have
the capabilities described in SR Letter 14-1 related to managing,
identifying, and valuing the collateral that it receives from and posts
to external parties and its 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.\35\
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\35\ 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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Management Information Systems: The firm should have the management
information systems (MIS) capabilities to readily produce data on a
legal entity basis and have controls to ensure data integrity and
reliability, as described in SR Letter 14-1. The firm also should
perform a detailed analysis of the specific types of financial and risk
data that would be required to execute the preferred resolution
strategy and how frequently the firm would need to produce the
information, with the appropriate level of granularity.
Shared and Outsourced Services: The firm should maintain a fully
actionable implementation plan to ensure the continuity of shared
services that support critical operations and robust arrangements to
support the continuity of shared and outsourced services. The firm
should (A) maintain an identification of all shared services that
support critical operations (critical services); (B) maintain a mapping
of how/where these services support its core business lines and
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. These 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. The firm should also store SLAs in a
central repository or repositories in a searchable format, develop and
document contingency strategies and arrangements for replacement of
critical shared services, and complete re-alignment or restructuring of
activities within its corporate structure. 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 preferred strategy) in such
entities sufficient to cover contract costs, consistent with the
preferred resolution strategy.
The firm should identify all critical outsourced services that
support critical operations and 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 despite
continued performance upon the parent's bankruptcy filing, and (B)
update contracts to incorporate appropriate terms and conditions to
prevent automatic termination and facilitate continued provision of
such services during resolution. Relying on entities projected to
survive during resolution to avoid contract termination is insufficient
to ensure continuity. In
[[Page 32867]]
the plan, the firm should document the amendment of any such agreements
governing these services.
Legal Obstacles Associated with Emergency Motions: The Plan should
address legal issues associated with the implementation of the stay on
cross-default rights described in Section 2 of the International Swaps
and Derivatives Association 2015 Universal Resolution Stay Protocol
(Protocol), similar provisions of any U.S. protocol,\36\ or other
contractual provisions that comply with the Agencies' rules regarding
stays from the exercise of cross-default rights in qualified financial
contracts, to the extent relevant.\37\ Generally, the Protocol provides
two primary methods of satisfying the stay conditions for covered
agreements for which the affiliate in Chapter 11 proceedings has
provided a credit enhancement (A) transferring all such credit
enhancements to a Bankruptcy Bridge Company (as defined in the
Protocol) (bridge transfer); or (B) having such affiliate remain
obligated with respect to such credit enhancements in the Chapter 11
proceeding (elevation).\38\ A firm must file a motion for emergency
relief (emergency motion) seeking approval of an order to effect either
of these alternatives on the first day of its bankruptcy case.
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\36\ U.S. protocol has the same meaning as it does at 12 CFR
252.85(a). See also 12 CFR 382.5(a) (including a substantively
identical definition).
\37\ See 12 CFR part 47, 252.81-.88, and part 382 (together, the
``QFC stay rules''). If the firm complies with the QFC stay rules
other than through adherence to the Protocol, the plan also should
explain how the alternative compliance method differs from Protocol,
how those differences affect the analysis and other expectations of
this ``Legal Obstacles Associated with Emergency Motions'' section,
and how the firm plans to satisfy any different conditions or
requirements of the alternative compliance method.
\38\ Under its terms, the Protocol also provides for the
transfer of credit enhancements to transferees other than a
Bankruptcy Bridge Company.
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First-day Issues--For each alternative the firm selects, the
resolution plan should present the firm's analysis of issues that are
likely to be raised at the hearing on the emergency motion and its best
arguments in support of the emergency motion. A firm should include
supporting legal precedent and describe the evidentiary support that
the firm would anticipate presenting to the bankruptcy court -- e.g.,
declarations or other expert testimony evidencing the solvency of
transferred subsidiaries and that recapitalized entities have
sufficient liquidity to perform their ongoing obligations.
For either alternative, the firm should address all potential
significant legal obstacles identified by the firm. For example, the
firm should address due process arguments likely to be made by
creditors asserting that they have not had sufficient opportunity to
respond to the emergency motion given the likelihood that a creditors'
committee will not yet have been appointed. The firm also should
consider, and discuss in its plan, whether it would enhance the
successful implementation of its preferred strategy to conduct outreach
to interested parties, such as potential creditors of the holding
company and the bankruptcy bar, regarding the strategy.
If the firm chooses the bridge transfer alternative, its analysis
and arguments should address at a minimum the following potential
issues: (A) the legal basis for transferring the parent holding
company's equity interests in certain subsidiaries (transferred
subsidiaries) to a Bankruptcy Bridge Company, including the basis upon
which the Bankruptcy Bridge Company would remain obligated for credit
enhancements; (B) the ability of the bankruptcy court to retain
jurisdiction, issue injunctions, or take other actions to prevent third
parties from interfering with, or making collateral attacks on (i) a
Bankruptcy Bridge Company, (ii) its transferred subsidiaries, or (iii)
a trust or other legal entity designed to hold all ownership interests
in a Bankruptcy Bridge Company (new ownership entity); and (C) the role
of the bankruptcy court in granting the emergency motion due to public
policy concerns--e.g., to preserve financial stability. The firm should
also provide a draft agreement (e.g., trust agreement) detailing the
preferred post-transfer governance relationships between the bankruptcy
estate, the new ownership entity, and the Bankruptcy Bridge Company,
including the proposed role and powers of the bankruptcy court and
creditors' committee. Alternative approaches to these proposed post-
transfer governance relationships should also be described,
particularly given the strong interest that parties will have in the
ongoing operations of the Bankruptcy Bridge Company and the likely
absence of an appointed creditors' committee at the time of the
hearing.
If the firm chooses the elevation alternative, the analysis and
arguments should address at a minimum the following potential issues:
(A) The legal basis upon which the parent company would seek to remain
obligated for credit enhancements; (B) the ability of the bankruptcy
court to retain jurisdiction, issue injunctions, or take other actions
to prevent third parties from interfering with, or making collateral
attacks on, the parent in bankruptcy or its subsidiaries; and (C) the
role of the bankruptcy court in granting the emergency motion due to
public policy concerns--e.g., to preserve financial stability.
Regulatory Implications--The plan should include a detailed
explanation of the steps the firm would take to ensure that key
domestic and foreign authorities would support, or not object to, the
emergency motion (including specifying the expected approvals or
forbearances and the requisite format--i.e., formal, affirmative
statements of support or, alternatively, ``non-objections''). The
potential impact on the firm's preferred resolution strategy if a
specific approval or forbearance cannot be timely obtained should also
be detailed.
Contingencies if Preferred Structure Fails--The plan should
consider contingency arrangements in the event the bankruptcy court
does not grant the emergency motion--e.g., whether alternative relief
could satisfy the Transfer Conditions and/or U.S. Parent debtor-in-
possession (DIP) Conditions of the Protocol; \39\ the extent to which
action upon certain aspects of the emergency motion may be deferred by
the bankruptcy court without interfering with the resolution; and
whether, if the credit-enhancement-related protections are not
satisfied, there are alternative strategies to prevent the closeout of
qualified financial contracts with credit enhancements (or reduce such
counterparties' incentives to closeout) and the feasibility of the
alternative(s).
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\39\ See Protocol sections 2(b)(ii) and (iii) and related
definitions.
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Format--If the firm analyzed and addressed an issue noted in this
section in a prior plan submission, the plan may incorporate this
analysis and arguments and should build upon it to at least the extent
required above. A bankruptcy playbook, which includes a sample
emergency motion and draft documents setting forth the post-transfer
governance terms substantially in the form they would be presented to
the bankruptcy court, is an appropriate vehicle for detailing the
issues outlined in this section. In preparing analysis of these issues,
the firm may consult with law firms and other experts on these matters.
The Agencies do not object to appropriate collaboration among firms,
including through trade organizations and with the academic community
and bankruptcy bar, to develop analysis of common legal challenges and
available mitigants.
[[Page 32868]]
VI. 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 preferred resolution strategy and minimize risk to
U.S. financial stability in the event of the firm's failure. LER
Criteria should consider the best alignment of legal entities and
business lines to improve the firm's resolvability under different
market conditions. LER Criteria should govern the firm's corporate
structure and arrangements between legal entities in a way that
facilitates the firm's resolvability as its activities, technology,
business models, or geographic footprint change over time.
Specifically, application of the criteria should:
(A) Facilitate the recapitalization and liquidity support of
material entities, as required by the firm's resolution strategy. Such
criteria should include clean lines of ownership, minimal use of
multiple intermediate holding companies, and clean funding pathways
between the parent and material operating entities;
(B) Facilitate the sale, transfer, or wind-down of certain discrete
operations within a timeframe that would meaningfully increase the
likelihood of an orderly resolution of the firm, including provisions
for the continuity of associated services and mitigation of financial,
operational, and legal challenges to separation and disposition;
(C) Adequately protect the subsidiary insured depository
institutions from risks arising from the activities of any nonbank
subsidiaries of the firm (other than those that are subsidiaries of an
insured depository institution); and
(D) Minimize complexity that could impede an orderly resolution and
minimize redundant and dormant entities.
These criteria should be built into the firm's ongoing process for
creating, maintaining, and optimizing its structure and operations on a
continuous basis.
Separability: The firm should identify discrete operations that
could be sold or transferred in resolution, which individually or in
the aggregate would provide meaningful optionality in resolution under
different market conditions. The actionability of those options should
be supported by the firm's criteria and analysis required by SR Letter
14-8.\40\ Additionally, this analysis should facilitate buyer due
diligence and include carve-out financial statements, valuation
analysis, and a legal risk assessment. Further, the firm should
establish a data room to collect and refresh annually the analyses
above, as well as other information pertinent to a potential
divestiture of the business.
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\40\ SR Letter 14-8, ``Consolidated Recovery Planning for
Certain Large Domestic Bank Holding Companies'' (Sept. 25, 2014),
available at https://www.federalreserve.gov/bankinforeg/srletters/sr1408.pdf.
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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.
VII. DERIVATIVES AND TRADING ACTIVITIES
Applicability.
This section of the proposed guidance applies to Bank of America
Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase
& Co., Morgan Stanley, and Wells Fargo & Company (each, a ``dealer
firm'').
Booking Practices.
A dealer firm should have booking practices commensurate with the
size, scope, and complexity of a firm's derivatives portfolios,\41\
including systems capabilities to track and monitor market, credit, and
liquidity risk transfers between entities. The following booking
practices-related capabilities should be addressed in a dealer firm's
resolution plan:
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\41\ A firm's derivatives portfolios include its derivatives
positions and linked non-derivatives trading positions.
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Derivatives booking framework. A dealer firm should have a
comprehensive booking model framework that articulates the principles,
rationales, and approach to implementing its firm-wide booking
practices. The framework and its underlying components should be
documented and adequately supported by internal controls (e.g.,
procedures, systems, and processes). Taken together, the derivatives
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 booked (e.g., legal entity/geography), (iii) by whom
it is booked (e.g., business/trading desk); (iv) why it is booked that
way (e.g., drivers/rationales); and (v) what controls are in place to
monitor and manage those practices (e.g., governance/information
systems) \42\. The dealer firm's resolution plan should include
detailed descriptions of the framework and each of its material
components. In particular, a dealer firm's resolution plan should
include descriptions of the documented booking models covering its
firm-wide derivatives portfolio.\43\ The descriptions should provide
clarity with respect to the underlying trade flows (e.g., the mapping
of trade flows based on multiple trade characteristics as decision
points that determine on which entity a trade is booked, if risk is
transferred, and at which entity that risk is subsequently managed).
For example, a firm may choose to incorporate decision trees that
depict the multiple trade flows within each documented booking
model.\44\ Furthermore, a dealer firm's resolution plan should describe
its end-to-end trade booking and reporting processes, including a
description of the current scope of automation (e.g., automated trade
flows and detective monitoring) for the systems controls applied to its
documented booking models. The plan should also discuss why the firm
believes its current (or planned) scope of automation is sufficient for
managing its derivatives activities and executing its preferred
resolution strategy.\45\
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\42\ The description of controls should include any components
of the firm-wide market, credit, and liquidity risk management
framework that are material to the management of its derivatives
practices.
\43\ The firm should at least document booking models that, in
the aggregate, represent the vast majority of the firm's derivatives
transactions, e.g., booking models that represent no less than 95%
of a dealer firm's derivatives transactions measured by firm-wide
derivatives notional and by firm-wide gross market value of
derivatives. Presumably, each asset class/product would have a
booking model that is a function of the firm's regulatory and risk
management requirements, client's preference, and regulatory
requirements specifically for the underlying asset class, and other
transaction related considerations.
\44\ Some firms use trader mandates or similar controls to
constrain the potential trading strategies that can be pursued by a
business and to monitor the permissibility of booking activity.
However, the mapping of trader mandates alone, especially those
mandates that grant broad permissibility, may not provide sufficient
distinction between booking model trade flows.
\45\ Effective preventative (up-front) and detective (post-
booking) controls embedded in a dealer firm's derivatives booking
processes can help avoid and/or timely remediate trades that do not
align with a documented booking model or related risk limits. 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 derivatives booking
practices. Nonetheless, non-automated methods can also be effective
when supported by other internal controls (e.g., robust detective
monitoring and escalation protocols).
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[[Page 32869]]
Derivatives entity analysis and reporting. A dealer firm should
have the ability to identify, assess, and report on each of its
entities (material and non-material) with derivatives portfolios (a
``derivatives entity''). First, the firm's resolution plan should
describe its method (that may include both qualitative and quantitative
criteria) for evaluating the significance of each derivatives entity
both with respect to the firm's current activities and to its preferred
resolution strategy.\46\ Second, a dealer firm's resolution plan should
demonstrate (including through illustrative samples) its ability to
readily generate current derivatives entity profiles that (i) cover all
derivatives entities, (ii) are reportable in a consistent manner, and
(iii) include information regarding current legal ownership structure,
business activities/volume, and risk profile (including applicable risk
limits).
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\46\ The firm should leverage any existing methods and criteria
it uses for other entity assessments (e.g., legal entity
rationalization and/or the pre-positioning of internal loss-
absorbing resources). The firm's method for determining the
significance of derivatives entities is allowed to diverge from the
parameters for material entity designation under the Resolution Plan
Rule (i.e., entities significant to the activities of a critical
operation or core business line) but should be adequately supported
and any differences should be explained.
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Inter-Affiliate Risk Monitoring and Controls.
A dealer firm should be able to assess how the management of inter-
affiliate risks can be affected in resolution, including the potential
disruption in the risk transfers of trades between affiliate entities.
Therefore, a dealer firm should have capabilities to provide timely
transparency into the management of risk transfers between affiliates
by maintaining an inter-affiliate market risk framework, consisting of
at least the following two components \47\:
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\47\ The inter-affiliate market risk framework is a supplement
to the firm's systems capabilities to track and monitor market,
credit, and liquidity risk transfers between entities.
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1. A method for measuring, monitoring, and reporting the market
risk exposures for a given material derivatives entity resulting from
the termination of a specific counterparty or a set of counterparties
(e.g., all trades with a specific affiliate or with all affiliates in a
specific jurisdiction) \48\; and
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\48\ Firms may use industry market risk measures such as
statistical risk measures (e.g., VaR or SVaR) or other risk measures
(e.g., worst case scenario or stress test).
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2. A method for identifying, estimating associated costs of, and
evaluating the effectiveness of, a re-hedge strategy in resolution put
on by the same material derivatives entity.\49\
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\49\ A dealer firm's method may include an approach to
identifying the risk factors and risk sensitivities, hedging
instruments, and risk limits a derivatives entity would employ in
its re-hedge strategy, and the quantification of any estimated basis
risk that would result from hedging with only exchange-traded and
centrally-cleared instruments in a severely adverse stress
environment.
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In determining the re-hedge strategy, the firm should consider
whether the instruments used (and the risk factors and risk sensitives
controlled for) are sufficiently tied to the material derivatives
entity's trading and risk-management practices to demonstrate its
ability to execute the strategy in resolution using existing resources
(e.g., existing traders and systems).
A dealer firm's resolution plan should describe and demonstrate its
inter-affiliate market risk framework (discussed above). In addition,
the firm's plan should provide detailed descriptions of its compression
strategies used for executing its preferred strategy and how those
strategies would differ from those used currently to manage its inter-
affiliate derivatives activities. The plan should also include detailed
descriptions of the firm's compression capabilities, the associated
risks, and obstacles in resolution.
Portfolio Segmentation and Forecasting.
A dealer firm should have the capabilities to produce analysis that
reflects derivatives portfolio segmentation and differentiation of
assumptions taking into account trade-level characteristics. More
specifically, a dealer firm should have the systems capabilities that
would allow it to produce a spectrum of derivatives portfolio
segmentation analysis using multiple segmentation dimensions, including
(1) legal entity (and material entities that are branches), (2) trading
desk and/or product, (3) cleared vs. clearable vs. non-clearable
trades, (4) counterparty type, (5) currency, (6) maturity, (7) level of
collateralization, and (8) netting set.\50\ A dealer firm should also
have the capabilities to segment and analyze the full contractual
maturity (run-off) profile of its external and inter-affiliate
derivatives portfolios. The dealer firm's resolution plan should
describe and demonstrate the firm's ability to segment and analyze its
firm-wide derivatives portfolio using the relevant segmentation
dimensions and to report the results of such segmentation and analysis.
In addition, the dealer firm's resolution plan should address the
following segmentation and forecasting related capabilities:
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\50\ The enumerated segmentation dimensions represent a minimum
set of characteristics for differentiation of derivatives portfolios
but are not intended as an exhaustive list of relevant dimensions.
With respect to any product/asset class, a firm may have reasons for
not capturing data on (or not using) one or more of the enumerated
segmentation dimensions, but those reasons should be explained.
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``Ease of exit'' position analysis. A dealer firm should have, and
its resolution plan should describe and demonstrate, a method and
supporting systems capabilities for categorizing and ranking the ease
of exit for its derivatives positions based on a set of well-defined
and consistently applied segmentation criteria. These capabilities
should cover the firm-wide derivatives portfolio and the resulting
categories should represent a range in degree of difficulty (e.g., from
easiest to most difficult to exit). The segmentation criteria should,
at a minimum, reflect characteristics \51\ that the firm believes could
affect the level of financial incentive and operational effort required
to facilitate the exit of derivatives portfolios (e.g., to motivate a
potential step-in party to agree to the novation or an existing
counterparty to bilaterally agree to a termination). Dealer firms
should consider this methodology when separately identifying and
analyzing the population of derivatives positions that it will include
in the potential residual portfolio under the firm's preferred
resolution strategy (discussed below).
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\51\ Examples of characteristics that may affect the level of
financial incentive and operational effort could include: product,
size, clearability, currency, maturity, level of collateralization,
and other risk characteristics.
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Application of exit cost methodology. Each dealer firm should have
a methodology for forecasting the cost and liquidity needed to exit
positions (e.g., terminate/tear-up, sell, novate, and compress), and
the operational resources related to those exits, under the specific
scenario adopted in the firm's preferred resolution strategy. To help
preserve sufficient optionality with respect to managing and de-risking
its derivatives portfolios in a resolution, a dealer firm should have
the systems capabilities to apply its exit cost methodology to its
firm-wide derivatives portfolio, at the segmentation levels the firm
would likely apply to exit the particular positions (e.g., valuation
segment level). The dealer firm's plan should provide detailed
descriptions of the forecasting methodology (inclusive of any challenge
and validation processes) and data systems and reporting capabilities.
The firm should also describe and demonstrate the application of the
exit cost method and systems capabilities to the firm-wide derivatives
portfolio.
[[Page 32870]]
Analysis of operational capacity. In resolution, a dealer firm
should have the capabilities to forecast the incremental operational
needs and expenses related to executing specific aspects of its
preferred resolution strategy (e.g., executing timely derivatives
portfolio novations). Therefore, a dealer firm should have, and its
resolution plan should describe and demonstrate, the capabilities to
assess the operational resources and forecast the costs (e.g., monthly
expense rate) related to its current derivatives activities at an
appropriately granular level and the incremental impact from executing
its preferred resolution strategy.\52\ In addition, a dealer firm
should have the ability to manage the logistical and operational
challenges related to novating (selling) derivatives portfolios during
a resolution, including the design and adjustment of novation packages.
A dealer firm's resolution plan should describe its methodology and
demonstrate its supporting systems capabilities for timely segmenting,
packaging, and novating derivatives positions. In developing its
methodology, a dealer firm should consider the systems capabilities
that may be needed to reliably generate preliminary novation packages
tailored to the risk appetites of potential step-in counterparties
(buyers), as well as the novation portfolio profile information that
may be most relevant to such counterparties.
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\52\ At a minimum, a dealer firm should have separate categories
for fixed and variable expenses. For example, more granular
operational expenses could roll-up into categories for (i) fixed-
compensation, (ii) fixed non-compensation, and (iii) variable cost.
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Sensitivity analysis. A dealer firm should have a method to apply
sensitivity analyses to the key drivers of the derivatives-related
costs and liquidity flows under its preferred resolution strategy. A
dealer 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 operational and financial resource needs
under the preferred resolution strategy. In addition, using its
preferred resolution strategy as a baseline, the dealer 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.\53\
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\53\ For example, key drivers of derivatives-related costs and
liquidity flows might include the timing of derivatives unwind, cost
of capital-related assumptions (target ROE, discount rate, WAL,
capital constraints, tax rate), operational cost reduction rate, and
operational capacity for novations. Other examples of key drivers
likely also include CCP margin flow assumptions and risk-weighted
assets forecast assumptions.
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Prime Brokerage Customer Account Transfers.
A dealer firm should have the operational capacity to facilitate
the orderly transfer of prime brokerage accounts to peer prime brokers
in periods of material financial distress and in resolution. 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 facilitated by the
firm, and the liquidity of clients' portfolios. The assessment should
also analyze the risks of and mitigants to the loss of customer-to-
customer internalization (e.g., the inability to fund customer longs
with customer shorts), operational challenges, and insufficient
staffing to effectuate the scale and speed of prime brokerage account
transfers envisioned under the firm's preferred resolution strategy.
In addition, a dealer firm should describe and demonstrate its
ability to segment and analyze the quality and composition of prime
brokerage customer 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, and
liquidity of underlying assets). The capabilities should cover the
firm's prime brokerage customer 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, at a minimum, reflect
characteristics \54\ that the firm believes could affect the speed at
which the client account balance would be transferred to an alternate
prime broker.
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\54\ For example, relevant characteristics might include:
product, size, clearability, currency, maturity, level of
collateralization, and other risk characteristics.
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Derivatives Stabilization and De-risking Strategy.
A dealer firm's plan should provide a detailed analysis of the
strategy to stabilize and de-risk its derivatives portfolios
(``derivatives strategy'') that has been incorporated into its
preferred resolution strategy.\55\ In developing its derivatives
strategy, a dealer firm should apply the following assumption
constraints:
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\55\ Subject to the relevant constraints, a firm'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.,
derivatives entities reestablish investment grade status and do not
enter a 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 derivatives strategy. For example, the
derivatives strategy could be a stabilization scenario for the lead
bank entity and an accelerated de-risking scenario for the broker-
dealer entities.
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OTC derivatives market access: At or before the start of
the resolution period, each derivatives entity should be assumed to
lack an investment-grade credit rating (e.g., unrated or downgraded
below investment grade). The derivatives entity should also 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 a result of the lack of
investment grade status, it should be further assumed that the
derivatives entity has no access to the bilateral OTC derivatives
markets and must use exchange-traded and/or centrally-cleared
instruments where any new hedging needs arise during the resolution
period. Nevertheless, a dealer 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.\56\
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\56\ 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 counterparty,
bilateral OTC trades with the acquiring counterparty; and, (ii)
inter-affiliate counterparties, where the trades with inter-
affiliate counterparties (a) reduce the credit exposure of each
participating counterparty and (b) do not materially increase the
market risk of any such counterparty on a standalone basis, after
taking into account hedging with exchange-traded and centrally-
cleared instruments. The firm should demonstrate the risk-reducing
nature 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 dealer firm should assume
that counterparties (external or affiliates) will exercise any
contractual termination right, consistent with any rights stayed by the
ISDA 2015 Universal Resolution Stay protocol or other applicable
protocols or amendments \57\, (i) that is available to the counterparty
at or following the start
[[Page 32871]]
of the resolution period; and (ii) if exercising such right would
economically benefit the counterparty (``counterparty-initiated
termination'').
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\57\ For each of the derivatives entities that have adhered to
the Protocol, the dealer firm may assume that the protocol is in
effect for all counterparties of that derivatives entity (except for
any affiliated counterparty of the derivatives entity that has not
yet adhered to the Protocol).
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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 parent company bankruptcy filing and extends through the
completion of the preferred resolution strategy.
A dealer firm's analysis of its derivatives strategy should, at a
minimum, take into account (i) the starting profile of its derivatives
portfolios (e.g., nature, concentration, maturity, clearability, and
liquidity of positions); (ii) the profile and function of the
derivatives entities during the resolution period; (iii) the means,
challenges, and capacity for managing and de-risking 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 required to adequately support the firm's derivatives
strategy should be incorporated into the firm's RCEN and RLEN estimates
for its overall preferred resolution strategy. These include, for
example, the costs and/or liquidity flows resulting from (i) the close-
out of OTC derivatives, (ii) the hedging of derivatives portfolios,
(iii) the quantified losses that could be incur 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) the operational costs.
Potential residual derivatives portfolio. A dealer firm's
resolution plan should include a method for estimating the composition
of any potential residual derivatives portfolio transactions remaining
at the end of the resolution period under its preferred resolution
strategy. The method may be a combination of approaches (e.g.,
probabilistic and deterministic) but should demonstrate the dealer
firm's capabilities related to portfolio segmentation (discussed
above). The dealer firm's plan should also provide detailed
descriptions of the trade characteristics used to identify the
potential residual portfolio and of the resulting trades (or categories
of trades).\58\ A dealer firm should assess the risk profile of the
potential residual portfolio (including its anticipated size,
composition, complexity, counterparties) and the potential counterparty
and market impacts of non-performance on the stability of U.S.
financial markets (e.g., on funding markets and the underlying asset
markets and on clients and counterparties).
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\58\ If under the firm's preferred 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 should nonetheless be included within the firm's
potential residual portfolio analysis.
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Non-surviving entity analysis. To the extent the preferred
resolution strategy assumes a material derivatives entity enters its
own resolution proceeding after the entry of the parent company into a
bankruptcy proceeding (a ``non-surviving material derivatives
entity''), the dealer firm should provide a detailed analysis of how
the non-surviving material derivatives entity'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 to the orderly execution of the firm's
preferred resolution strategy. In particular, the firm should provide
an analysis of the potential impacts on funding markets and the
underlying asset markets, on clients and counterparties (including
affiliates), and on the preferred resolution strategy. If the non-
surviving material derivatives entity is located in, or provides more
than de minimis services to clients or counterparties located in, a
non-U.S. jurisdiction, then the analysis should also specifically
consider potential local market impacts.
VIII. 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 firm.
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.
By the Board of Governors of the Federal Reserve System, June
28, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC on June 28, 2018.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie Jean Best,
Assistant Executive Secretary.
[FR Doc. 2018-15066 Filed 7-13-18; 8:45 am]
BILLING CODE P
