[Federal Register Volume 85, Number 246 (Tuesday, December 22, 2020)]
[Notices]
[Pages 83557-83582]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28155]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1699]
FEDERAL DEPOSIT INSURANCE CORPORATION
RIN 3064-ZA15
Guidance for Resolution Plan Submissions of Certain Foreign-Based
Covered Companies
AGENCY: Board of Governors of the Federal Reserve System (Board) and
Federal Deposit Insurance Corporation (FDIC).
ACTION: Final guidance.
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SUMMARY: The Board and the FDIC (together, the agencies) are adopting
this final guidance for the 2021 and subsequent resolution plan
submissions by certain foreign banking organizations (FBOs). The final
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 (Dodd-
Frank Act). The final guidance reflects a number of changes to the
proposal in response to comments received by the agencies and further
analysis by the agencies. The scope of application of the final
guidance is FBOs that are Category II firms according to their combined
U.S. operations under the Board's tailoring ruleand are required to
have a U.S. intermediate holding company (IHC) under the Board's
Regulation YY (the Specified FBOs) as published in 84 FR 59032
(November 1, 2019). In addition to the three firms(Barclays PLC, Credit
Suisse Group AG, and Deutsche Bank AG (the Proposed FBOs) that would
have been within the scope of application under the methodology
utilized in the proposal, one additional firm, Mitsubishi UFJ Financial
Group, Inc. (MUFG), is within the scope for application of the final
guidance at the time of its issuance. Consequently, MUFG will have a
transition period to consider the application of the final guidance to
its resolution plan submission, as further described below. The final
guidance 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, branches, legal entity rationalization, and derivatives
and trading activities). The final guidance modifies and clarifies
certain aspects of the proposed guidance based on the agencies'
consideration of comments to the proposal, additional analysis, and
further assessment of the business and risk profiles of the U.S.
operations of large and complex FBOs.
DATES: The final guidance is available on December 22, 2020.
FOR FURTHER INFORMATION CONTACT:
Board: Mona Elliot, Deputy Associate Director, (202) 452-4688,
Catherine Tilford, Deputy Associate Director, (202) 452-5240, Division
of Supervision and Regulation, Laurie Schaffer, Deputy General Counsel,
(202) 452-2272, Jay Schwarz, Special Counsel, (202) 452-2970, Steve
Bowne, Senior Counsel, (202) 452-3900, or Sarah Podrygula, Attorney,
(202) 912-4658, Legal Division; Board of Governors of the Federal
Reserve System, 20th and C Streets NW, Washington, DC 20551.
FDIC: Alexandra Steinberg Barrage, Associate Director, Policy and
Data Analytics, [email protected]; Yan Zhou, Acting Associate Director,
Data Analytics, [email protected]; Catherine Needham, Advisor,
[email protected]; Ronald W. Crawley, Jr., Senior Resolution Policy
Specialist, [email protected], Division of Complex Institution
Supervision and Resolution; David N. Wall, Assistant General Counsel,
[email protected]; Celia Van Gorder, Senior Counsel, 202-898-6749,
[email protected]; or Esther Rabin, Counsel, [email protected], Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
a. Background
b. Proposed Guidance
II. Overview of Comments
III. Final Guidance
a. Scope of Application
b. Transition Period
c. Consolidation of Prior Guidance and Format and Structure of
Plans
d. Capital and Liquidity
e. Governance Mechanisms
f. Operational
g. Branches
h. Group Resolution Plan
i. Legal Entity Rationalization and Separability
j. Derivatives and Trading Activities
k. Additional Comments
IV. Paperwork Reduction Act
V. Final Guidance
I. Introduction
a. Background
Section 165(d) of the Dodd-Frank Act \1\ and the jointly issued
implementing regulation (the Rule) \2\
[[Page 83558]]
require certain financial companies, including certain foreign-based
firms, to report periodically to the agencies their plans for rapid and
orderly resolution under the U.S. Bankruptcy Code (the Bankruptcy Code)
in the event of material financial distress or failure. With respect to
a covered company \3\ that is organized or incorporated in a
jurisdiction other than the United States (other than a bank holding
company) or that is an FBO, the Rule requires that the firm's U.S.
resolution plan include specified information with respect to the
subsidiaries, branches, and agencies, and identified critical
operations and core business lines, as applicable, that are domiciled
in the United States or conducted in whole or material part in the
United States.\4\ The Rule also requires, among other things, each
covered company's full resolution plan to include a strategic analysis
of the plan's components, a description of the range of specific
actions the covered company proposes to take in resolution, and a
description of the covered company's organizational structure, material
entities, and interconnections and interdependencies.\5\ In addition,
the Rule requires that all resolution plans include a confidential
section that contains any confidential supervisory and proprietary
information submitted to the agencies as part of the resolution plan
and a separate section that the agencies make available to the public.
Public sections of resolution plans can be found on the agencies'
websites.\6\
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\1\ 12 U.S.C. 5365(d).
\2\ 12 CFR part 243 and 12 CFR part 381, as amended.
\3\ The terms ``covered company,'' ``material entities,''
``identified critical operations,'' ``core business lines,'' and
similar terms used throughout this guidance all have the same
meaning as in the Rule. See generally 12 CFR 243.2; 12 CFR 381.2.
\4\ 12 CFR 243.5(a)(2)(i); 12 CFR 381.5(a)(2)(i).
\5\ Under the Rule, all filers must submit a full resolution
plan, either every other time a resolution plan submission is
required or as a firm's initial resolution plan submission. See 12
CFR 243.4(a)(5)-(6), (b)(4)-(5), and (c)(4)-(5); 12 CFR 381.4(a)(5)-
(6), (b)(4)-(5), and (c)(4)-(5).
\6\ The public sections of resolution plans submitted to the
agencies are available at https://www.federalreserve.gov/supervisionreg/resolution-plans.htm and www.fdic.gov/regulations/reform/resplans/.
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Objectives of the Resolution Planning Process
The goal of the Dodd-Frank Act resolution planning process is to
help ensure that a covered company's failure would not have serious
adverse effects on financial stability in the United States.
Specifically, the resolution planning process requires covered
companies to demonstrate that they have adequately assessed the
challenges that their structures and business activities pose to an
orderly resolution and that they have taken action to address those
issues. For FBOs, the resolution planning process focuses on their U.S.
subsidiaries and operations.
The agencies recognize that the preferred resolution outcome for
many FBOs is a successful home country resolution using a single point
of entry (SPOE) resolution strategy where U.S. material entities are
provided with sufficient capital and liquidity resources to allow them
to stay out of resolution proceedings and maintain continuity of
operations throughout the parent's resolution. However, because support
from the foreign parent in stress cannot be ensured, the Rule provides
that the U.S. resolution plan for foreign-based covered companies
should specifically address a scenario where the U.S. operations
experience material financial distress, and the plan should not assume
that the covered company takes resolution actions outside the United
States that would eliminate the need for any U.S. subsidiaries to enter
resolution proceedings.\7\ Nonetheless, the Rule also provides firms
with appropriate flexibility to construct a U.S. resolution strategy in
a way that is not inconsistent with a firm's global resolution
strategy, as long as assumptions consistent with the firm's global
strategy support the firm's U.S. resolution strategy and adhere to the
required and prohibited assumptions articulated in the Rule.
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\7\ 12 CFR 243.4(h)(3); 12 CFR 381.4(h)(3).
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Recent Developments
Implementation of the Rule has been an iterative process aimed at
strengthening the resolution planning capabilities of financial
institutions subject to the Rule. The final guidance is based on the
Guidance for 2018 Sec. 165(d) Annual Resolution Plan Submissions By
Foreign-based Covered Companies that Submitted Resolution Plans in July
2015 (2018 FBO guidance).\8\ The 2018 FBO guidance was provided to four
FBOs.\9\ The agencies also have previously provided feedback on several
occasions to the four FBOs that at present are in scope for the final
guidance.\10\ In general, the guidance and feedback were intended to
assist the recipients in their development of future resolution plan
submissions and to provide additional clarity with respect to the
agencies' expectations for the filers' future progress. The 2018 FBO
guidance and the feedback letters were made available to the public.
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\8\ Available at www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170324a21.pdf and www.fdic.gov/resauthority/2018subguidance.pdf.
\9\ Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG, and
UBS AG.
\10\ See infra Section III.c (Consolidation of Prior Guidance).
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Several developments inform the final guidance:
The agencies' consideration of comments to the proposed
guidance (as defined below);
The agencies' review of certain FBOs' 2018 resolution
plans and the issuance of individual letters communicating the
agencies' views on and shortcomings contained in the 2018 resolution
plans filed by the firms subject to the 2018 FBO guidance (2018
feedback letters); \11\
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\11\ Available at www.federalreserve.gov/newsevents/pressreleases/bcreg20181220c.htm.
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Revisions to the content related to payment, clearing, and
settlement (PCS) activities and derivatives and trading activities in
the updated guidance for the resolution plan submissions by the eight
largest, most complex U.S. banking organizations in February 2019 (2019
domestic guidance); \12\
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\12\ Final Guidance for the 2019, 84 FR 1438 (February 4, 2019).
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The 2019 amendments to the Rule (2019 Rule revisions),
which included the clarification that FBOs should not assume that its
foreign parent company takes resolution actions outside of the United
States that would eliminate the need for any U.S. subsidiaries to enter
into resolution proceedings; \13\ and
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\13\ Resolution Plans Required, 84 FR 59194 (November 1, 2019).
The amendments became effective on December 31, 2019.
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An analysis of the current risk profiles of the large,
complex FBOs subject to resolution planning requirements.
The preamble to the 2019 Rule revisions indicated that the agencies
would make any future resolution guidance available for comment,\14\
and in March 2020 the agencies invited comments on proposed guidance
for the 2021 and subsequent resolution plan submissions by certain FBOs
(proposed guidance).\15\
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\14\ 84 FR 59204.
\15\ Guidance for Resolution Plan Submissions of Certain
Foreign-Based Covered Companies, 85 FR 15449 (March 18, 2020).
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Under the 2019 Rule revisions, each Specified FBO will be a
triennial full filer and will be required to submit a resolution plan
every three years, alternating between a full resolution plan and a
targeted resolution plan. The 2019 Rule revisions require all triennial
full filers to submit a targeted resolution plan on or before July 1,
2021, followed by a full resolution plan in 2024. In addition, the
agencies indicated in the 2019 Rule revisions that they would strive to
provide final general guidance at least a year before the next
resolution
[[Page 83559]]
plan submission date of firms to which the general guidance is
directed.
On May 6, 2020, the agencies extended the 2021 resolution plan
submission date for Category II and III firms, including those firms
who are currently Specified FBOs, from July 1 to September 29.\16\ In
accordance with the expectation set out in the preamble to the 2019
Rule revisions, the agencies are further extending the 2021 resolution
plan submission deadline for the firms that are currently Specified
FBOs and were previously subject to the 2018 FBO guidance to December
17, 2021, to provide the firms with sufficient time to develop their
targeted resolution plans in light of the final guidance. In addition,
as discussed in more detail below, a Specified FBO that was not subject
to the 2018 FBO guidance for its most recent resolution plan submission
will not be expected to have taken the final guidance into
consideration in developing its targeted plan submission due in 2021.
Instead, such a firm should consider the final guidance in connection
with developing its next full resolution plan submission due in 2024.
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\16\ See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200506a.htm and https://www.fdic.gov/news/news/press/2020/pr20057.html.
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International Cooperation on Resolution Planning
The 2018 feedback letters also noted the importance of the
agencies' engagement with non-U.S. regulators. The Specified FBOs are
subject to their home country resolvability frameworks, in addition to
section 165(d) of the Dodd-Frank Act and the Rule. Resolution of the
U.S. operations of a firm domiciled outside the United States with
significant global activities (e.g., the Specified FBOs) will require
substantial coordination between home and host country authorities,
just as resolution of the foreign operations of a U.S. G-SIB would. The
agencies identified three areas in the 2018 feedback letters (legal
entity rationalization, PCS, and derivatives booking practices) where
enhanced cooperation between the agencies and each firm's home country
regulatory authorities would maximize resolvability under both the U.S.
and home country resolution strategies.\17\ The agencies will continue
to coordinate with non-U.S. authorities regarding these and other
resolution matters (e.g., resources in resolution, communications),
including developments in the U.S. and home country resolution
capabilities of the Specified FBOs.
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\17\ Available at www.federalreserve.gov/newsevents/pressreleases/bcreg20181220c.htm.
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b. Proposed Guidance
In March 2020, the agencies invited public comment on the proposed
guidance, which was proposed to apply beginning with the subject firms'
2021 resolution plan submissions. The proposed guidance began with a
description of the proposed scoping methodology and was then organized
into eight substantive areas, consistent with the 2018 FBO guidance.
These areas were: Capital, liquidity, governance mechanisms,
operational, branches, group resolution plan, legal entity
rationalization and separability, and derivatives and trading
activities. The proposed guidance described the agencies' proposed
expectations for each of these areas.
The proposal was largely consistent with the 2018 FBO guidance and
the 2019 domestic guidance. Accordingly, the agencies expected that the
Proposed FBOs had already incorporated significant aspects of the
proposed guidance into their resolution planning. With respect to the
2019 domestic guidance, the proposed guidance differed in certain
respects, given the circumstances under which a foreign-based covered
company's U.S. resolution plan is most likely to be relevant. The
proposal was tailored for large, complex FBOs as compared to the U.S.
global systemically important banks (G-SIBs) to account for differences
between U.S. G-SIBs' and FBOs' U.S. footprints and operations. The
proposal updated the PCS and derivatives and trading activities areas
of the 2018 FBO guidance to reflect the agencies' review of certain
FBOs' 2018 resolution plans and revisions contained in the 2019
domestic guidance. It also made minor clarifications to certain areas
of the 2018 FBO guidance in light of the 2019 Rule revisions. In
general, the proposed revisions to the guidance were intended to
streamline the firms' submissions and to provide additional clarity. In
addition, the proposed guidance would have consolidated all guidance
applicable to the Proposed FBOs into a single document, which would
provide the industry and public with one source of applicable guidance
to which to refer.
The agencies invited comments on all aspects of the proposed
guidance. The agencies also specifically requested comments on a number
of issues, including whether the topics in the proposed guidance
represented the key vulnerabilities of the covered companies in
resolution, whether the proposed scope of applicability was
appropriate, and whether the proposed guidance was sufficiently clear.
II. Overview of Comments
The agencies received and reviewed seven comment letters on the
proposed guidance. Commenters included various financial services trade
associations, a financial market utility, and two FBOs. In addition,
the agencies met with industry representatives and FBOs at their
request to discuss issues relating to the proposed guidance.\18\ This
section provides an overview of the general themes raised by
commenters. The comments received on the proposed guidance are further
discussed below in the sections describing the final guidance,
including any changes that the agencies have made to the proposed
guidance in response to comments.
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\18\ Summaries of those meetings and copies of the comments can
be found on each agency's website.
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Further Tailoring of Proposal Due to Reduced Size and Risk
Most commenters suggested that the proposed guidance should be
further tailored for the Proposed FBOs. They asserted that these firms
have reduced the size and systemic risk profiles of their U.S.
operations since resolution guidance was originally issued, and the
guidance should be commensurately streamlined. Therefore, commenters
questioned the appropriateness of issuing guidance to the Proposed
FBOs--which they noted were Category III firms, as calculated using the
assets and activities of each firm's top tier U.S. intermediate holding
company--that would be similar to the guidance provided to the U.S. G-
SIBs, which are Category I covered companies. Commenters argued that,
in some cases, the proposed guidance was even more expansive than the
guidance issued to the U.S. G-SIBs. Certain commenters also stated that
the proposal failed to articulate a clear distinction in the
expectations applicable to Category I firms and to Category II/III
firms. In addition, commenters asserted that the proposal, if
finalized, would have resulted in disparate treatment among firms in
Category II and Category III.
Home Country Considerations
Some commenters disagreed with the proposal's view on resolution
planning for the Proposed FBOs, which these commenters described as
narrowly focused on the resolution of U.S. operations independent of
home country measures or foreign parent support. The commenters noted
that these firms have been subject to extensive home country
frameworks,
[[Page 83560]]
which include global SPOE strategies. These commenters asserted that
the resolution plans for the U.S. operations of these firms should be
considered in this context and should not have requirements equivalent
to the U.S. G-SIBs.
Some commenters cited prior comments by the Vice Chair for
Supervision of the Board in which he encouraged host regulators to
recognize their interests in the success of the foreign parent
company's SPOE strategy and to provide further flexibility for the
parent to move resources as necessary within the organization. The
commenters offered resource pre-placement requirements for FBOs, which
exceed those required by similarly sized U.S. firms, as an example of
how the proposed guidance would be inconsistent with these principles.
Scoping Methodology
The commenters generally opposed the proposed use of the second
methodology (method 2) of the G-SIB surcharge framework as the scoping
methodology for the proposal. The commenters made a number of
assertions about the proposed scoping methodology, including:
Method 2 does not accurately reflect the reduced systemic
risk of the Proposed FBOs due to shortcomings in the metric as applied
to firms other than the U.S. G-SIBs. As a result, the method 2 scores
for the Proposed FBOs are inappropriately inflated.
Method 2 was not intended to be applied to FBOs as a
scoping methodology, but rather was designed to calculate the G-SIB
capital surcharge.
Using method 2 as the scoping methodology for the guidance
would be inconsistent with the approach taken by the agencies to use
the tailoring framework to determine resolution plan submission
requirements, especially since the agencies previously rejected using
the G-SIB surcharge framework for that purpose.
Some commenters suggested a number of alternatives to method 2 as
the scoping methodology. One suggestion was to use the tailoring
categories established for enhanced prudential standards, specifically
having the proposal only apply to Category II firms, as calculated
using the assets and activities of each firm's top tier U.S.
intermediate holding company. Two commenters suggested, as an
alternative, that the agencies use a modified version of method 2 or
method 1 G-SIBs' surcharge scores.
Payment, Clearing, and Settlement Services
Several commenters asserted that the proposed guidance for PCS
services raised issues of extraterritoriality. They argued that the PCS
guidance regarding non-U.S. affiliates should be addressed as part of
the group resolution planning process or supervision and any related
information request would be outside the scope of the Title I
resolution plan requirements. They also proposed that the agencies
obtain this information through home-host supervisor cooperation.
Commenters also argued that the proposed PCS expectations were even
more extensive than the guidance provided to the U.S. G-SIBs on this
topic.
One commenter supported certain portions of the PCS services
section, but also suggested changes, including aligning the guidance
with certain expectations of the European Banking Union's resolution
authority, enhancing communication strategies, and clarifying terms
used in the proposed guidance.
Derivatives and Trading Activities
A number of comments concerning the proposed derivatives guidance
were similar to those made for the PCS section in asserting that the
proposed information requests presented concerns of extraterritoriality
and were outside the scope of the Title I resolution plan requirements.
Commenters argued that the proposal called for strategies regarding and
data on the activities of non-U.S. affiliates and non-U.S.
transactions. They noted that these items are generally addressed in
home country resolution plans or supervision and suggested that the
related information could be requested from home country regulators.
Some commenters maintained that the proposed guidance on derivatives
was broader than the guidance issued to the U.S. G-SIBs and should be
tailored for the Proposed FBOs. For example, the proposal would have
established expectations for non-derivatives trading activities, such
as securities financing transactions.
Contractually Binding Mechanisms
A few commenters provided views concerning contractually binding
mechanisms (CBMs), which are intended to ensure that sufficient capital
and liquidity are provided to material entity subsidiaries in a timely
manner. These commenters generally agreed that the agencies should
continue to allow firms flexibility to create support arrangements that
work best for their structures and global and U.S. resolution plans.
They asserted that, accordingly, the guidance should continue to focus
on the need to mitigate the risks of creditor challenges and on how
well the strategy selected by the firm satisfies the policy objectives
of the agencies, rather than specifying a particular mechanism.
Capital and Liquidity
The agencies received a number of comments on the capital and
liquidity sections of the proposed guidance. With regard to the capital
section of the proposed guidance, commenters argued that the proposal
included expectations that are duplicative of existing capital
requirements and suggested removing the guidance on resolution capital
adequacy and positioning (RCAP) from the final guidance. Most of these
commenters asserted that streamlining the multiple capital measures
would reduce burden on the firms. Further, two commenters asserted that
the proposal would have reduced the flexibility for firms to position
their capital most effectively in stress. With regard to the liquidity
section of the proposed guidance, commenters suggested there is
redundancy between the proposal and existing regulatory requirements
and also recommended removing the guidance on resolution liquidity
adequacy and positioning (RLAP) from the final guidance.
III. Final Guidance
After considering the comments, conducting additional analysis, and
further assessing the business and risk profiles of the U.S. operations
of large and complex FBOs, the agencies are issuing final guidance that
includes certain modifications and clarifications. In particular, the
scope, capital, liquidity, governance mechanisms, PCS, and derivatives
and trading activities sections of the final guidance reflect changes
from the proposed guidance. Other sections, such as group resolution
plan, and sub-sections such as management information systems,
qualified financial contracts (QFCs), and mapping of branch activities,
were determined to be duplicative of existing regulatory requirements
and accordingly, have been eliminated from the guidance. The intent of
these changes is to clarify expectations, more closely align
expectations with the current business and risk profiles of the
Specified FBOs' U.S. operations, and recognize that the preferred
resolution strategy for the Specified FBOs is a successful home country
resolution. The agencies are also eliminating expectations that relate
to information
[[Page 83561]]
that, in the agencies' experience, may be obtained through other
existing and effective mechanisms, such as home/host coordination and
supervisory information sharing. In addition, the final guidance
consolidates all prior resolution planning guidance for the firms in
one document and clarifies that any prior guidance not included in the
final guidance has been superseded. These changes are discussed in more
detail below.
The final 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. Moreover, the final
guidance does not contain certain expectations in the proposed guidance
and in the 2018 FBO guidance, including certain expectations relating
to capital, liquidity, governance mechanisms, PCS, and derivatives and
trading activities. The agencies do not expect that the Specified FBOs'
resolution plans will continue to address the elements that have been
removed from the guidance. However, the agencies note that the
Specified FBOs' resolution plans, like the plans for all covered
companies, are still required to meet all of the informational
requirements of the Rule notwithstanding these changes to the
guidance.\19\
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\19\ See 12 CFR 243.5 and 243.6; 12 CFR 381.5 and 381.6.
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The agencies note that commenters described certain expectations
that are set forth in the guidance as ``requirements.'' The agencies
are clarifying that the final guidance does not have the force and
effect of law. Rather, the final guidance outlines the agencies'
supervisory expectations regarding each subject area covered by the
final guidance.\20\
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\20\ See generally, Interagency Statement Clarifying the Role of
Supervisory Guidance (Sept. 11, 2018), available at https://www.federalreserve.gov/supervisionreg/srletters/sr1805a1.pdf. See
also Role of Supervisory Guidance, 85 FR 70512 (Nov. 5, 2020).
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a. Scope of Application.
The agencies received numerous comments objecting to the scope of
application of the proposed guidance, which proposed using the method 2
G-SIB surcharge framework \21\ to determine the Proposed FBOs.
Specifically, commenters argued that the proposed scope of application
appeared to be inconsistent with the principles of tailoring
established in the Board's tailoring rule.\22\ In addition, commenters
asserted that the method 2 G-SIB framework was not designed to be a
scoping mechanism outside of certain requirements for U.S. G-SIBs, has
never been applicable to IHCs, and inappropriately weights the short-
term wholesale funding (STWF) factor. Commenters also questioned the
proposal's justification for why a method 2 score of 250 was chosen as
the threshold for purposes of scope of application. Furthermore,
several commenters asserted that the proposed guidance did not
adequately recognize that the Proposed FBOs have reduced risk at their
U.S. operations, are smaller and less systemically important than the
U.S. G-SIBs, and are subject to robust global resolution planning
requirements, and so should not be subject to similar expectations as
the U.S. G-SIBs.
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\21\ 12 CFR 217.405.
\22\ Prudential Standards for Large Bank Holding Companies,
Savings and Loan Holding Companies, and Foreign Banking
Organizations, 84 FR 59032 (November 1, 2019).
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Commenters suggested that the agencies consider alternative scoping
methodologies, including those that were discussed in the proposal's
preamble. Some commenters suggested that the agencies adopt a scope
based on the Board's tailoring categories, with some commenters
recommending that the guidance apply only to firms subject to Category
II standards while others recommended that the final guidance should be
similar to expectations for domestic firms subject to Category II and
III standards. Other commenters suggested different potential options
to modify or replace the proposed method 2 G-SIB surcharge framework,
such as using method 1 G-SIB surcharge scores, that the commenters
asserted would more appropriately balance the agencies' guidance
expectations with the actual risk profile of the Proposed FBOs. Even if
an alternative scoping methodology were adopted, some commenters asked
the agencies to consider tailoring the guidance to what they viewed as
the Proposed FBOs' reduced risk and stronger capital and liquidity
positions, and recommended that the final guidance not introduce new
expectations beyond those already in effect.
In their consideration of the commenters' feedback, the agencies
have sought to align resolution plan supervisory expectations with the
current business and risk profiles of the Specified FBOs' U.S.
operations through the simple, transparent, and predictable mechanism
of the Board's tailoring framework. The agencies also acknowledge that
relevant resolution plan information can be obtained via other means,
such as through engagement with home country regulators and supervisory
information sharing. The agencies appreciate the analyses provided by
the commenters that compared the operations of U.S. G-SIBs to the
reduced U.S. footprint of Proposed FBOs with large U.S. operations. The
agencies continue to believe that the scope of heightened resolution
planning expectations applicable to FBOs should align with the
Specified FBOs' systemic risk profile and relevant resolution
challenges, and the final guidance should be consistent with the
principles of national treatment and equality of competitive
opportunity.
The agencies acknowledge commenters' meaningful input on certain
methodological traits in the method 2 G-SIB surcharge framework, in
particular the STWF factor weight, which could distort the liquidity
risk and systemic relevance of FBOs relative to U.S. G-SIBs. Liquidity
risk is just one of several important factors in a resolution scenario,
and the measure of liquidity risk should not solely determine scoping
of the guidance; rather, scoping should be determined holistically.
Therefore, the final guidance applies to FBOs that are subject to
Category II standards according to their combined U.S. operations
pursuant to the Board's tailoring rule \23\ and that are also required
to form IHCs.\24\
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\23\ Category II FBOs are defined as those with (1) >=$700
billion average combined U.S. assets or (2) >=$100 billion average
combined U.S. assets with >=$75b in average cross-jurisdictional
activity.
\24\ The formula defining Category II in the Board's tailoring
rule does not include formation of an IHC as a requirement. The
final guidance diverges from the Board's tailoring rule in this
respect because an IHC formed pursuant to the Board's Regulation YY
indicates the materiality of the FBO's U.S. operations that would go
through bankruptcy under the Bankruptcy Code or other ordinary U.S.
resolution regime. The agencies note that Category II is not limited
to FBOs. The final guidance, however, is directed only to FBOs that
meet the criteria noted above and not to domestic banking
organizations.
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Using the tailoring categories in this context also will promote
uniform scoping between resolution expectations and regulatory
requirements. As stated in the preamble to the Rule, the agencies
believe that the risk-based indicators identified in the Board's
tailoring rule are an effective means of dividing firms into groups for
the purposes of determining the frequency and informational content of
resolution plans. The indicators-based approach for application of
Category II, III, and IV standards provides a simple framework
[[Page 83562]]
that supports the objectives of risk sensitivity and transparency and
thus is an appropriate mechanism for scoping the application of the
final guidance.
Size and operational complexity are also factors in the decision to
apply the guidance to FBOs subject to Category II standards. As
indicated in the preamble to the Board's tailoring rule, the failure or
distress of the U.S. operations of a FBO that is subject to Category II
standards could impose significant costs on the U.S. financial system
and economy. In addition, increased levels of cross-jurisdictional
activity, an indicator for Category II firms, could increase the
operational complexity of a resolution, as it may be more difficult to
resolve or unwind a firm's positions due to the involvement of multiple
jurisdictions and regulatory authorities. As such, FBOs subject to
Category II standards merit the application of more detailed
expectations than those FBOs that are smaller or that do not share the
same indicators of operational risk. The agencies also believe this
modification to the scope appropriately focuses on the largest and most
complex FBOs with U.S. IHCs without losing the focus on cross-
jurisdictional activities.
While the proposal relied only to a limited extent on the Board's
tailoring rule for scoping the proposed guidance--noting that the
tailoring categories were developed to determine application of a broad
range of enhanced prudential standards and were not explicitly focused
on determining which covered companies should be subject to more
detailed resolution planning guidance--the agencies have concluded that
the benefits of employing the tailoring categories--clear, predictable
scoping based on publicly reported quantitative data--outweigh any
concerns related to using them for this purpose.
Consistent with the Rule, the final guidance takes into account a
Specified FBO's entire U.S operations, including branches and agencies
(i.e., combined U.S. operations), when determining scope of
applicability. As discussed in the preamble to the 2019 Rule revisions,
reference to combined U.S. operations is appropriate as the resolution
planning requirement applies to a firm's entire U.S. operations.
Moreover, U.S. branches, agencies, and offices constitute a significant
share of these foreign banking organizations' presence in the United
States and the agencies' experience reviewing resolution plans
demonstrates that there are interconnections and dependencies between a
foreign firm's U.S. branches, agencies, and offices and its U.S.
subsidiaries, core business lines, and critical operations. Thus, the
inclusion of U.S. branches, agencies, and offices in determining the
scope of application of the final guidance is not only consistent with
the Rule, but it is also appropriate in order to measure the
operational complexity and full scope of potential risks to U.S.
financial stability that a FBO may pose.
Finally, while the method 1 G-SIB surcharge score methodology could
potentially address the concerns raised on STWF, the agencies believe
the risk-based indicator approach in the Board's tailoring rule further
simplifies application of the guidance.
b. Transition Period
The proposed guidance did not describe how the guidance would be
applied to FBOs that become covered by its scope, but it did request
comment on the methodology and process for determining the FBOs to
which the guidance should apply, including whether the agencies should
specify an implementation period for any FBOs that are designated as
Specified FBOs under the final guidance. Some commenters requested that
the agencies provide clarity on a transition period for firms that may
newly fall under the scope of the guidance, and, conversely, on an exit
process for firms that may no longer be covered.
To provide certainty to FBOs, the final guidance includes
transition periods for Specified FBOs that were not previously within
the scope of the 2018 FBO guidance and for firms that become Specified
FBOs after December 22, 2020. A firm that is currently a Specified FBO,
but was not previously the subject of guidance for its most recent
resolution plan, will not be expected to have taken the final guidance
into consideration in developing its targeted plan submission due in
2021. Rather, such a firm will be expected to consider the final
guidance in developing its next full resolution plan submission, so
long as the firm is a Specified FBO as of the submission date for that
plan.
The final guidance also states that when an FBO becomes a Specified
FBO, the final guidance will apply to the firm's next resolution plan
submission with a submission date that is at least 12 months after the
time the firm becomes a Specified FBO.\25\ If a Specified FBO ceases to
be subject to Category II standards or to the Board's requirement to
form an intermediate holding company, it will no longer be considered a
Specified FBO, and the guidance will no longer be applicable to that
firm as of the date the firm ceases to be subject to Category II
standards.
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\25\ The plan type for that next submission remains as specified
by the Rule, i.e., a full or targeted resolution plan. See 12 CFR
243.4; 12 CFR 381.4.
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c. Consolidation of Prior Guidance and Format and Structure of Plans
One commenter supported, and no commenters opposed, the agencies'
proposal to consolidate prior guidance. Accordingly, the final guidance
includes, as proposed, a section regarding the format, assumptions, and
structure of resolution plans, which includes the aspects of previous
guidance that remain applicable to resolution planning. In light of the
changes in the final guidance to the areas of capital, liquidity,
governance mechanisms, and separability, the agencies have reviewed the
Frequently Asked Questions (FAQs) contained in the proposed guidance.
The FAQs appended to the final guidance contain those FAQs that
continue to be applicable to resolution planning, with appropriate
modifications to reflect the changes to the final guidance. Consistent
with the proposal, to the extent not incorporated in or appended to the
final guidance, prior guidance \26\ is superseded.
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\26\ In addition to the 2018 FBO guidance, the agencies have
also issued and provided to certain FBOs: The Guidance for 2013
Sec. 165(d) Annual Resolution Plan Submissions by Foreign-Based
Covered Companies that Submitted Initial Resolution Plans in 2012;
the February 2015 staff communication regarding the 2016 plan
submissions; the July 2017 Resolution Plan Frequently Asked
Questions; and feedback letters issued to Barclays PLC, Credit
Suisse Group AG, Deutsche Bank AG, and UBS AG in December 2018 and
in August 2014 and feedback letters issued to Mitsubishi UFJ
Financial Group in July 2019, January 2018, and July 2015.
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d. Capital and Liquidity
While the proposed guidance would have maintained substantially all
of the expectations in the capital and liquidity sections that were
included in the 2018 FBO guidance,\27\ the final guidance, in contrast
to the proposal, does not include expectations for RCAP, RLAP, and
certain liquidity capabilities. These changes were made to more closely
align guidance expectations with the current business and risk profiles
of the Specified FBOs' U.S. operations and in recognition of the
overlap between those concepts and certain other regulatory provisions,
as discussed below. As noted in the proposed guidance, the agencies
continue to evaluate the relationship between the capital and liquidity
sections of the final guidance and other capital and liquidity
regulatory provisions. The agencies expect that any further changes to
the
[[Page 83563]]
remaining guidance in these areas would be adopted following notice and
comment.
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\27\ Section II and Section III of the proposal.
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i. Capital
The final guidance does not include expectations for RCAP but
retains proposed expectations for resolution capital execution need
(RCEN). Several commenters requested that the agencies remove RCAP
expectations from the guidance because of the reduced U.S. systemic
risk of the Proposed FBOs and the potential redundancy with other
regulatory provisions, such as the Board's rule on total loss absorbing
capacity (TLAC). Commenters also suggested that RCAP expectations are
redundant with TLAC requirements for local, bail-in-able resources to
recapitalize an FBO's U.S. operations, and one commenter further
asserted that RCAP constrains a firm's ability to position capital
within the U.S. IHC entities in a manner that allows for the most
flexibility and efficiency in a stress scenario. One commenter
expressed support for maintaining expectations for RCEN. Some
commenters also suggested that the guidance should take into account
the positioning of financial resources in the United States in light of
the positioning of resources in the firm's non-U.S. operations and that
the agencies should reconsider expectations for resource preplacement
within the United States to encourage more flexibility at the
international level.
The final guidance does not include RCAP expectations concerning
the appropriate positioning of capital and other loss-absorbing
instruments among the U.S. IHC and its subsidiaries because existing
TLAC requirements applicable to the U.S. IHC provide a backstop of
resources that is appropriate to the size and complexity of the
Specified FBOs. The final guidance, consistent with one commenter's
recommendation, maintains the RCEN expectations regarding a methodology
for periodically estimating the amount of capital that may be needed to
support each U.S. IHC subsidiary after the U.S. IHC's bankruptcy
filing. RCEN helps the firm and the agencies determine when the U.S.
IHC is approaching a situation where it will not have sufficient
resources to conduct a successful resolution.
Several commenters requested that the agencies reconsider
requirements and expectations for resource preplacement within the
United States, such as internal TLAC requirements applicable to the
U.S. IHC, that are not set by the guidance. As these requirements and
expectations are outside the scope of the guidance, the final guidance
does not address these requests.
ii. Liquidity
The final guidance retains the proposed expectations for resolution
liquidity execution need (RLEN) but does not include expectations for
liquidity capabilities and RLAP. Several commenters requested that the
agencies remove RLAP expectations from the guidance, in consideration
of factors including the reduced U.S. systemic risk of the Proposed
FBOs and potential redundancy with other regulatory provisions, such as
the Net Stable Funding Ratio (NSFR) and internal liquidity stress
testing. One commenter suggested that the agencies conduct an
assessment of the cumulative effect of liquidity and capital
expectations and requirements, specifically between RLEN and NSFR and
between RLAP and TLAC. Another commenter suggested integrating the RLAP
liquidity expectations in the proposal into regulatory liquidity
requirements via the rulemaking process. This commenter also expressed
concern about the potential additive requirements and expectations of
RLAP relative to the NSFR. Finally, one commenter expressed support for
maintaining RLEN expectations.
Like the rationale for eliminating RCAP from the final guidance,
because of the Specified FBOs' relatively simple U.S. legal entity
structures and reduced risk profiles, the final guidance does not
include RLAP expectations concerning the appropriate positioning of
liquidity among the U.S. IHC and its subsidiaries. However, a firm's
ability to reliably estimate and meet the liquidity needs of the U.S.
IHC and its subsidiaries prior to, and in, resolution remains important
to the execution of a Specified FBO's U.S. resolution strategy, as
reflected in the Rule.\28\ The final guidance therefore incorporates
only expectations for RLEN. The final guidance also eliminates
references to RLAP.
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\28\ See 12 CFR 243.5(c)(1)(iii); 12 CFR 381.5(c)(1)(iii).
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The agencies do not believe there will be significant overlap
between RLEN expectations and the NSFR rule because the regulation
implicates long-term liquidity risks and stability of funding sources,
while the guidance focuses on liquidity needs during a resolution
scenario, which are shorter-term in nature. Further, liquidity needs in
a resolution scenario may be driven by highly idiosyncratic factors.
These factors can be incorporated into a firm's RLEN framework, but
would not necessarily be addressed in a standardized measure like the
NSFR. The agencies' decision not to include expectations for RLAP in
the final guidance obviates the need to analyze interaction between
RLAP and TLAC. Separately, the suggestion to incorporate liquidity
expectations into existing regulatory requirements is outside the scope
of the current guidance-making.
e. Governance Mechanisms
i. Playbooks
The proposed guidance outlined an expectation for Proposed FBOs to
develop governance playbooks that detail specific actions that the
board of directors and senior management of U.S. non-branch material
entities would take under the firm's U.S. resolution strategy. The
expectations related to communication and escalation protocols were
contingent on triggers, which are firm-defined financial metrics
reflecting the U.S. IHC's financial condition. In addition, the
proposed guidance called for playbooks to address, among other things,
the fiduciary responsibilities of boards of directors, potential
conflicts of interest, and employee retention policies. One commenter
suggested that the agencies streamline playbook expectations to focus
only on governance and escalation procedures as well as capabilities to
produce key information and data that support timely and informed
decision-making. The commenter argued that outlining details about
specific decisions management would have to make would be of limited
value given that resolution-related actions would be driven by the
circumstances and market conditions present at the time of financial
stress. The agencies are finalizing this aspect of the guidance as
proposed as the agencies believe that the suggested additional
information would have important value in a resolution scenario.
ii. Triggers
The agencies received no comments about the expectations in the
proposed guidance regarding triggers. That said, recognizing that the
preferred resolution outcome for the Specified FBOs is a successful
home country resolution, the final guidance does not include
expectations regarding triggers or escalation protocols based on the
U.S. IHC's financial condition. The final guidance, however, retains
the broader expectation that firms have in place mechanisms to ensure
that timely communication and coordination occurs between and among the
boards of the U.S. IHC, U.S. IHC subsidiaries, and the
[[Page 83564]]
foreign parent to facilitate the provision of financial support.
iii. Potential Mechanisms for Parent Support
Having a structure in place that facilitates the transmission of
resources to an FBO's U.S. material entity subsidiaries and mitigates
against potential legal challenges is an important component for
resolution plans that contemplate the provision of such support.
Neither the proposed guidance nor the Rule endorses a specific strategy
for the provision of such support. Rather, under the proposal, firms
would have been expected to (i) develop a mechanism for planned foreign
parent support of U.S. non-branch material entities to meet those
entities' liquidity needs and (ii) include in their resolution plan
submissions analysis of potential challenges to planned foreign parent
support and associated mitigants. Further, the proposal provided that
if a plan anticipates the provision of capital and liquidity by a U.S.
material entity (e.g., the U.S. IHC) to its U.S. affiliates prior to
the U.S. IHC's bankruptcy filing, the plan should also include a
detailed legal analysis of the potential state law and bankruptcy law
challenges and mitigants to the provision of resources. To date, some
Specified FBOs have relied on CBMs for the timely provision of capital
and liquidity from a U.S. material entity (e.g., the U.S. IHC) to its
U.S. affiliates prior to the U.S. IHC commencing a bankruptcy case and
to mitigate potential legal challenges to the provision of such
support. In addition, the agencies solicited comment on the benefits
and costs and the relative advantages and disadvantages of two
approaches currently used by FBOs to assist the agencies in deciding
whether to endorse a specific approach in finalizing the guidance.
Commenters urged against imposing specific requirements or
expectations regarding CBMs and supported maintaining flexibility for
firms to determine the particular form and structure of CBMs based on a
firm's structure, resolution strategy, and global capital and liquidity
planning needs. Commenters further recommended that the agencies
evaluate CBMs based on their effectiveness in mitigating creditor
challenges. One commenter suggested that the agencies' assessment of
the effectiveness of various CBMs should take into consideration the
nature of the Proposed FBOs, specifically that: (i) All of the Proposed
FBOs in the proposed guidance have global SPOE strategies that do not
contemplate the insolvency of the U.S. IHC or any other U.S. entity;
(ii) internal TLAC requirements have been complied with and incentivize
the firms to recapitalize their U.S. operations to avoid the costs,
operational burdens, and other consequences associated with bankruptcy
proceedings; and (iii) the Board has the authority to trigger the
conversion of internal TLAC in the form of long-term debt into equity
to recapitalize an IHC without the need for a U.S. bankruptcy
proceeding. This commenter also argued that the agencies should provide
a threshold for determining whether a CBM sufficiently mitigates the
risk of creditor challenges that is materially lower than for U.S. BHCs
for which a bankruptcy proceeding is a primary resolution strategy.
This commenter also stated that the agencies had already been provided
with substantial legal analyses supporting the workability of existing
CBMs and urged the agencies to engage with the Proposed FBOs prior to
providing specific requirements regarding CBMs.
One commenter cautioned that the proposed CBM guidance may impede
capital and liquidity placed in the U.S. IHC from being returned to the
parent for efficient deployment globally, and that a CBM developed only
to support a U.S. resolution may trap financial resources in the IHC.
Separately, another commenter requested that the agencies engage with
the Proposed FBOs and consider alternative approaches to ensure the
timely availability of capital and liquidity support. Suggestions
included reducing or amending internal TLAC requirements, allowing use
of internal TLAC to satisfy the demands of Comprehensive Capital
Analysis and Review, and eliminating the requirement in the Rule that
firms must assume the bankruptcy of a U.S. entity.
Consistent with the comments received, and to maintain flexibility
for firms, the agencies are finalizing the guidance without including
additional expectations regarding the use and structure of CBMs. This
lack of specific, additional expectations related to CBMs should not be
interpreted as an expression of the agencies' view on the feasibility
of current support mechanisms. Additionally, no revisions have been
made in response to a comment that urged the agencies to describe, ex
ante, a particular threshold for what constitutes an effective CBM.
Furthermore, the agencies have not made changes in response to the
comment recommending amendments to various rules, as revisions to
regulatory requirements are outside the scope of the present guidance.
The agencies refer to the above discussion about capital and liquidity
in response to concerns about the placement and availability of capital
and liquidity.\29\
---------------------------------------------------------------------------
\29\ See supra Section III.d (Capital and Liquidity).
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In addition, the final guidance removes the expectation for the
resolution plan to include an analysis of the potential challenges to
the planned foreign parent support to U.S. non-branch material
entities, and the planned provision of capital and liquidity by a U.S.
material entity to its U.S. affiliates prior to the U.S. IHC's
bankruptcy filing. This approach gives due consideration to the
arguments put forth by commenters that the Specified FBOs should have
flexibility to determine the particular form and structure of the
framework developed to support its particular resolution strategy and
needs, that the preferred resolution outcome for the Specified FBOs is
a successful home country resolution, and that internal TLAC resources
are available for conversion to support IHC recapitalization outside of
bankruptcy.
f. Operational
i. Payment, Clearing and Settlement Activities
Scope of PCS Activities: Most commenters requested that the scope
of the guidance be limited to U.S. material entities, core business
lines, and critical operations domiciled in the U.S. and resolved under
the U.S. Bankruptcy Code, and that guidance should not include indirect
PCS relationships through non-U.S. affiliates. Commenters contended
that the proposal would subject the Proposed FBOs to expectations that
are essentially the same as, and in some ways more extensive than, the
expectations for PCS activities applicable to U.S. G-SIBs. Commenters
also claimed that the proposal would be potentially extraterritorial in
its coverage of non-U.S. branches and affiliates and contrary to the
Rule and Title I of the Dodd-Frank Act. These commenters also asserted
that because non-U.S. affiliate relationships were covered under home
country regulatory frameworks, inclusion of information about these
relationships in U.S. resolution planning would be duplicative and the
information should be obtained via home-host supervisor cooperation.
One commenter suggested that indirect access to PCS services through
non-U.S. affiliates does not raise significant U.S. resolution
concerns. Another commenter claimed that a U.S. material entity would
not have the ability to distinguish activity specific to its clients
[[Page 83565]]
or counterparties with the indirect financial market utility (FMU), as
this activity is typically subject to netting by the non-U.S.
affiliate, and that a U.S. material entity of a Proposed FBO would not
have the authority to make decisions on contingency actions involving
an FMU that is accessed via a non-U.S. affiliate. These commenters
suggested that the guidance be tailored to fit the Proposed FBOs'
reduced U.S. footprint and their limited role in this space, relative
to U.S. G-SIBs.
As a preliminary matter, the agencies note that the Rule requires
full resolution plan submissions by foreign-based covered companies to
include information on ``the interconnections and interdependencies
among the U.S. subsidiaries, branches, and agencies, and between those
entities and . . . [a]ny foreign-based affiliate.'' \30\ In addition,
each full resolution plan is required to ``identify each trading,
payment, clearing, or settlement system of which the covered company,
directly or indirectly, is a member and on which the covered company
conducts a material number or value amount of trades or transactions.''
\31\ These provisions, together, provide the agencies the authority to
set forth the expectation that a firm's PCS framework address its
indirect access to PCS services through non-U.S. affiliates. The
proposed guidance was therefore consistent with the Rule and Title I of
the Dodd-Frank Act. The agencies reiterate that continuity of access
arrangements provided indirectly by non-U.S. affiliates to support a
Specified FBO's U.S. operations and key clients are an important part
of a Specified FBO's U.S. resolution planning.
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\30\ 12 CFR 243.5(a)(2)(i); 12 CFR 381.5(a)(2)(i).
\31\ 12 CFR 243.5(e)(12); 12 CFR 381.5(e)(12).
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The agencies acknowledge, however, that commenters' feedback that a
non-U.S. affiliate's ability to maintain access to key FMUs and key
agent banks to support indirect PCS relationships through non-U.S.
affiliates may be addressed in the firm's group resolution plan or in
other information provided to home country regulators. As such,
expectations that Specified FBOs submit detailed information related to
non-U.S. affiliates' support of their U.S. operations may be
duplicative. In recognition of this feedback and in an effort to more
closely align expectations with the business and risk profiles of the
Specified FBOs' U.S. operations, the final guidance does not include
expectations that firms provide information regarding indirect access
to key FMUs and agent banks provided by non-U.S. branches and
affiliates. As further suggested by commenters and consistent with
prior statements by the agencies, the agencies expect to engage with
the Specified FBOs and their home country authorities.
Providers of PCS Services: Two commenters recommended clarifying
the term ``provider of PCS services'' to include other key roles in
which a firm may act, and to provide further examples where a firm may
act as provider (or recipient) of PCS services. One commenter also
recommended that the term ``agent bank'' should be clarified to
specifically include ``nostro banks.'' One commenter also suggested
that firms be encouraged to amend their bilateral contracts with agent
banks, including contracts with nostro agents, to facilitate continuity
of access to PCS services. The final guidance does not include
additional clarification or examples as the agencies do not intend the
guidance to be prescriptive. Rather, the final guidance is intended to
provide a firm with flexibility to define and identify PCS services, as
well as the instances where the firm is a provider of such PCS services
to its clients. Regarding the amendment of bilateral contracts, the
agencies believe that the expectations regarding establishment of
service-level agreements (SLAs) in the Shared and Outsourced Services
section of the final guidance address the commenter's suggestions.
One commenter also recommended that the proposal recognize that
many FMUs and agent banks do not implement bilateral SLAs for core
clearing and custody services. The agencies have clarified the final
guidance by adding `as applicable' to the relevant capability in the
guidance text.
Playbooks for Continued Access to PCS Services: One commenter
stated that FMU playbooks should be streamlined to include only
critical information necessary to facilitate an orderly resolution
(e.g., management information, liquidity considerations, key
governance, and responsible parties) and that firms should not be
expected to include information regarding FMU membership rules or
expected behavior. Another commenter stated that to the extent such
critical information had already been provided to the agencies through
prior exam processes, firms should be able to reference such items
instead of including them in playbooks. Separately, another commenter
recommended that the final guidance direct firms to maintain lists of
key resolution contacts for their key FMUs and key agent banks and
provide equivalent contact information to key FMUs and key agent banks.
This commenter also suggested that the guidance put additional emphasis
on the importance of continued firm engagement with key external
stakeholders and that the agencies consider adding expectations for
firm communication with key FMUs and key agent banks during stress and
resolution. The agencies also were encouraged by this commenter to
develop their own communication strategies for key stakeholders and vet
them with relevant firms and FMUs. The commenter further suggested that
firms should identify, ex ante, services they would likely cease to
provide in a resolution and plan for actions they would take to
mitigate any resulting adverse systemic impact. Finally, a commenter
stated that the guidance should recognize that there is specific,
industry-wide default guidance already in place for certain FMUs (e.g.,
central counterparties) that would apply to a Proposed FBO's activities
in a resolution.
The agencies are finalizing these elements of the guidance as
proposed. The expectations in the final guidance call for playbooks
that address specifically how firms would maintain access to PCS
services but that do not necessarily include a discussion of FMU rules
around a member firm's default. The final guidance aims to provide
firms flexibility in determining how they would best maintain access to
PCS services in a stress scenario and to clarify that playbooks are not
expected to include a scenario in which the firm loses access to an
agent bank or FMU. The proposed guidance contained expectations for
firms to engage with key external stakeholders and reflect any feedback
received during such ongoing outreach, and the agencies are retaining
those expectations in the final guidance. To the extent that certain
playbook information may be addressed in other sections of the firm's
submission, the firm may include a specific cross-reference to that
content in the appropriate playbook. While the agencies are not
expecting firms to model expected FMU behaviors, firms are expected to
consider operational and financial resources that would be needed to
respond to adverse actions and execute any contingency arrangement. In
addition, given the joint nature of the resolution plan process, the
final guidance, like the Rule, provides for incorporation of previously
submitted resolution plan information by reference.
The comment suggesting that the agencies develop their own
communication strategies for key stakeholders is not applicable to the
[[Page 83566]]
content in a firm's resolution plan; therefore, no changes have been
made to address the comment. The agencies already proactively engage
with firms and key stakeholders through various fora, including direct
engagement, crisis management groups, and international working groups
focused on crisis management under the Financial Stability Board. The
agencies also encourage firms and their agent banks to continue
engaging and communicating with each other, key FMUs, agent banks, and
clients, and other stakeholders to identify possible ways to support
continued access to PCS services.
While expressing general support for the expectations in the
proposed guidance related to PCS-related Liquidity Sources and Uses, a
commenter suggested that the sentence related to ``PCS Liquidity
Sources'' be revised from ``various currencies'' to ``all currencies
relevant to banks' participation'' in FMUs, to be consistent with
international expectations. The agencies are adopting this suggestion
in the final guidance. The commenter also suggested that the final
guidance clarify that firms should assess their key FMU and key agent
bank liquidity needs in the aggregate so that firms account for the
availability of funds across more than one key FMU or agent bank.
Regarding intraday liquidity, this commenter suggested that the final
guidance be amended to include additional specific expectations for
playbooks beyond describing capabilities to control intraday liquidity
inflows and outflows, and to identify and prioritize time-specific
payments. The agencies are not adopting these suggestions in the final
guidance to allow the Specified FBOs flexibility to tailor and
streamline playbook content based on the actual profile of their PCS
activities relevant to their U.S. operations.
Key Client Contingency Arrangements: Two commenters questioned the
benefit of expectations related to the identification and mapping of
PCS services to key clients and the description of contingency actions
that the firm may take concerning provision of intraday credit to key
clients since most clients have other relationships. Another commenter
suggested that the final guidance contain examples of particular
actions and arrangements that the agencies expect the firms to consider
around the provision of intraday credit to affiliate and third-party
clients. The agencies are not modifying the final guidance in response
to these comments. The final guidance contains expectations that firms
maintain continuity of access to PCS services for key clients in the
Unites States. The final guidance is not prescriptive, and each firm is
expected to determine the relevant contingency actions and arrangements
that are specific to maintaining continuity of access to its PCS
activities. Firms have the discretion to tailor the discussion to
client impacts specific to the PCS services provided by such firms. The
agencies are not modifying provisions related to the identification and
mapping of PCS services to key clients as this information helps the
agencies understand the ecosystem of provision of PCS services.
Adverse Actions: A commenter expressed support for the expectation
for playbooks to assess the range of adverse actions that may be taken
by key FMUs or key agent banks but indicated that the term ``adverse
actions'' may be incorrectly interpreted and suggested using ``risk-
mitigating actions,'' which would be more consistent with a home
country authority's guidance. The agencies are not making any changes
to the final guidance because ``adverse actions'' includes not only
``risk mitigating actions,'' but also a broader set of actions that
could be taken by key FMUs or key agent banks.
Loss of Access: One commenter suggested that there was a
contradiction in the proposed guidance and requested clarification
about whether there was an expectation for a firm to contemplate a
scenario where it loses access to a key FMU or key agent bank. The
agencies are finalizing the guidance as proposed. The final guidance
specifies that a firm is not expected to incorporate a scenario in
which it loses FMU or agent bank access into its U.S. resolution
strategy. However, in support of maintaining continuity of access to
PCS services, playbooks should provide analysis of the financial and
operational impacts to the firm's material entities and key clients due
to adverse actions that may be taken by an FMU or agent bank, and the
contingency actions that may be taken by the filer.
ii. Management Information Systems
The agencies received no comments regarding the management
information systems (MIS) section of the proposed guidance. The
expectations contained in the proposed guidance articulate general
expectations for firms to have the requisite MIS capabilities to
produce timely, accurate financial and risk data on a U.S. legal entity
basis. The agencies determined that the expectations and capabilities
are addressed in the Rule \32\ and thus the final guidance does not
include a section on MIS.
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\32\ See 12 CFR 243.5(f); 12 CFR 381.5(f).
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iii. Managing, Identifying, and Valuing Collateral
The agencies received no comments regarding the managing,
identifying, and valuing collateral section of the proposed guidance
and are finalizing the section as proposed.
iv. Shared and Outsourced Services
The agencies received no comments regarding the shared and
outsourced services section of the proposed guidance and are finalizing
the section as proposed.
v. Qualified Financial Contracts
The agencies received no comments regarding the QFC section of the
proposed guidance, which sets forth expectations for firms to
articulate their progress in implementing requirements regarding
contractual stays in qualified financial contracts. However, the
agencies are not including this sub-section in the final guidance due
to the progress made by the Specified FBOs in complying with the QFC
stay rules of the Board, the Office of the Comptroller of the Currency,
and the FDIC.\33\
---------------------------------------------------------------------------
\33\ 12 CFR part 47 (Office of the Comptroller of the Currency);
12 CFR part 252, subpart I (Board); and 12 CFR part 382 (FDIC).
---------------------------------------------------------------------------
g. Branches
The agencies received no comments regarding the branches section of
the proposed guidance. However, the agencies are removing expectations
from the final guidance that are viewed as duplicative to existing
rules or repeat, without elaboration, components of the Rule.
Specifically, mapping expectations for U.S. branches that are material
entities are specified in the Rule.\34\ In addition, expectations for a
liquidity buffer are addressed in the Board's Regulation YY.\35\
Neither subsection of the proposed guidance was intended to expand upon
or clarify existing rules and thus it is appropriate to remove them
from the final guidance. The remaining parts of the Branches section
regarding expectations for supporting assumptions on continuity of
operations and analyzing the impact of cessation of operations remain
unchanged from the proposed guidance.
---------------------------------------------------------------------------
\34\ See 12 CFR 243.5(a)(2), (g); 12 CFR 381.5(a)(2), (g).
\35\ See 12 CFR 252.
---------------------------------------------------------------------------
h. Group Resolution Plan
The agencies received no comments regarding the group resolution
section of the proposed guidance, which set forth expectations for
firms to address how
[[Page 83567]]
resolution planning in the U.S. is integrated into the group resolution
plan. However, in recognition that the preferred resolution outcome for
many Specified FBOs is a successful home country resolution using an
SPOE resolution strategy, the agencies expect to supplement their
understanding of the impact on U.S. operations of executing a firm's
group resolution plan through international collaboration with home
country regulators and therefore such a section is unnecessary. The
agencies determined that as this item is addressed by the Rule,\36\ the
final guidance does not include a section on group resolution.
---------------------------------------------------------------------------
\36\ See 12 CFR 243.5(a)(2)(ii); 12 CFR 381.5(a)(2)(ii).
---------------------------------------------------------------------------
i. Legal Entity Rationalization and Separability
The agencies received no comments regarding the legal entity
rationalization and separability section of the proposed guidance.
However, consistent with agencies' efforts to more closely align
guidance expectations with the current business and risk profiles of
the Specified FBOs' U.S. operations, the final guidance does not
include the separability expectations, which would have suggested that
firms identify discrete U.S. operations that would be sold or
transferred in a resolution scenario. Given that the U.S. operations of
the Specified FBOs are a subcomponent of a larger FBO, for which the
preferred resolution approach is a home-country SPOE resolution, the
agencies have found that the separability options within the United
States are few and that their inclusion in resolution plans has yielded
limited new insights. Moreover, the agencies expect that such
information is obtainable through international collaboration with home
country regulators. As such, the agencies have eliminated these
expectations from the final guidance.
j. Derivatives and Trading Activities
The agencies received a number of comments on the Derivatives and
Trading Activities section of the proposed guidance. Overall,
commenters supported the proposed elimination of the active and passive
wind-down scenario analyses and rating agency playbooks, and
recommended certain additional modifications and clarifications to
streamline the resolution plan submissions and provide further clarity.
After reviewing the comments, the agencies have adopted final
guidance that includes several adjustments to address matters raised by
the commenters. Specifically, the final guidance does not include
elements from the proposal related to derivatives and trading
activities originated in the U.S. and booked directly to non-U.S.
affiliates. Commenters argued that the derivatives guidance should not
include U.S. derivatives and trading activities or prime brokerage
customer account balances booked directly to non-U.S. affiliates
because they are beyond the scope of the Rule and the information is
better gathered through collaboration with home country regulators.
Commenters suggested that the derivatives guidance focus solely on
derivatives and trading activities and prime brokerage customer account
balances that are booked to U.S. material entities and related to core
business lines and critical operations.\37\ Further, commenters
suggested that the guidance should not include the identification,
assessment, or reporting on risk transfer arrangements with non-U.S.
affiliates and also argued that the proposed guidance would result in
firms having to create reporting processes for activities booked in
non-U.S. affiliates. Commenters also suggested that the proposed
guidance would subject the Proposed FBOs to expectations greater than,
or similar to, those imposed on U.S. G-SIBs and that transactions
booked outside the U.S. fall under the purview of home country
authorities, are best addressed in the global resolution plan, and are
outside the scope of the Rule and Title I of the Dodd-Frank Act.
---------------------------------------------------------------------------
\37\ The agencies note that based on the Specified FBOs' most
recent resolution plans, each of the Specified FBOs identifies
certain U.S. derivatives and trading activities (including U.S.
prime brokerage services) as an identified critical operation or
core business line.
---------------------------------------------------------------------------
As a preliminary matter, similar to the discussion in the PCS
section of this preamble, the agencies note that the Rule requires full
resolution plan submissions by foreign-based covered companies to
include information ``with respect to the subsidiaries, branches and
agencies, and identified critical operations and core business lines,
as applicable, that are domiciled in the United States or conducted in
whole or material part in the United States.'' \38\ This provision
provides the agencies the authority to set forth the expectation that a
resolution plan include information about the firm's derivatives and
trading activities, including derivatives and trading activities
originated from U.S. entities that are booked directly into a non-U.S.
affiliate, because those activities occur in material part in the
United States. Accordingly, the proposed guidance was consistent with
the Rule and Title I of the Dodd-Frank Act.
---------------------------------------------------------------------------
\38\ 12 CFR 243.5(a)(2)(i); 12 CFR 381.5(a)(2)(i). See also 12
CFR 243.5(a)(2)(ii); 12 CFR 381.5(a)(2)(i) (requiring each full
resolution plan to include a ``detailed explanation of how
resolution planning for the subsidiaries, branches and agencies, and
identified critical operations and core business lines of the
foreign-based covered company that are domiciled in the United
States or conducted in whole or material part in the United States
is integrated into the foreign-based covered company's overall
resolution or other contingency planning process.'').
---------------------------------------------------------------------------
However, after considering commenters' views, and in an effort to
more closely align expectations with the current business and risk
profiles of the Specified FBOs, the final guidance does not include
expectations concerning derivatives and trading activities that
originate from U.S. entities but are booked into non-U.S. affiliates.
Because the booking of U.S. derivatives and trading activities
regularly occurs across jurisdictions and creates interconnections and
interdependencies among and between a firm's U.S. entities and its non-
U.S. affiliates, the agencies expect to coordinate with home country
authorities to collect information about derivatives booking activities
that occur across jurisdictions in order to understand any related
risks to the execution of the firm's U.S. resolution strategy. This
approach is consistent with the 2018 Title I feedback letters to some
Specified FBOs, in which the agencies indicated their intent to engage
with the FBO and home authorities regarding derivatives booking
practices.
The agencies also have made several adjustments and clarifications
in the final guidance to address other matters raised by the
commenters. Commenters argued that the proposal inappropriately applied
the derivatives guidance to non-derivatives trading activities (e.g.,
securities financing transactions). The agencies acknowledge that the
Specified FBOs have drastically decreased their exposures to securities
financing transactions, while the U.S. G-SIBs have increased their
exposures. Therefore, the final guidance only covers derivatives and
linked non-derivatives.
Commenters also suggested that a Proposed FBO should be allowed to
define linked non-derivatives trading positions based on its overall
business and resolution strategy trading positions. The agencies agree
with this comment, and the final guidance allows for linked non-
derivatives trading positions to be defined based on the Specified
FBO's overall business and resolution strategy. Finally, some
commenters suggested that the scope for
[[Page 83568]]
the prime brokerage subsection of the proposal was either unclear or
overly broad. As suggested, the final guidance clarifies that a U.S.
prime brokerage client should be a client who signs a prime brokerage
agreement with a U.S. material entity. Further, the agencies are not
finalizing aspects of the proposed guidance regarding requests for
information and reporting related to prime brokerage activities that
are booked to non-U.S. entities, as stated above.
Some commenters recommended the agencies adjust certain
expectations that are not specified in the proposed guidance. The
agencies have determined not to modify the guidance in these instances.
For example, commenters stated that development of a plan for
resolution of positions of non-U.S. affiliates is beyond the scope of
the Rule. The agencies note, as described above, that the proposed
guidance did not set out expectations that the Proposed FBOs develop a
plan for the resolution of derivatives and trading activities booked to
non-U.S. entities. The scope of the stabilization and de-risking
strategy subsection applies only to U.S. derivatives portfolios booked
to U.S. entities.
The agencies received comments related to tailoring derivatives
expectations. For example, commenters suggested the segmentation
analysis and analysis of de-risking strategy provisions of the proposal
were neither warranted nor sufficiently clear for Proposed FBOs because
their derivatives exposures are significantly smaller than those of
U.S. G-SIBs. After considering multiple relevant factors, the agencies
have not modified the guidance in response to these comments. The
ability to identify, quickly and reliably, problematic derivatives
positions and portfolios is foundational to minimizing uncertainty and
estimating resource needs for an orderly resolution of a firm's U.S.
entities. Further, in the event of material financial distress or
failure, the resolvability risks related to a firm's U.S. derivatives
and trading activities could be a key obstacle to the firm's orderly
resolution of any U.S. IHC subsidiary with a derivatives portfolio. As
a result, the final guidance confirms that a firm's plan should provide
a detailed analysis of its strategy to stabilize and de-risk any
derivatives portfolio of any U.S. IHC subsidiary that continues to
operate after the U.S. IHC enters into a U.S. bankruptcy proceeding.
The agencies also note that the portfolio segmentation subsection
applies only to U.S. derivatives positions that are booked to U.S.
entities.
Finally, commenters suggested tailoring the scope of applicability
of the derivatives section using a threshold, such as the Volcker
Rule's proprietary trading categories. The agencies do not believe that
the compliance thresholds and the associated calculation methodology
(total trading assets and liabilities) established under the Volcker
Rule accurately capture the size and complexity of a firm's derivatives
activities for resolution purposes and thus are an inappropriate
scoping mechanism for the guidance. Therefore, the final guidance does
not incorporate compliance thresholds, such as those established by the
Volcker Rule.
k. Additional Comments
i. Comments About the Development of the Proposal
The agencies received several general comments about the
development of the proposed guidance. The agencies have considered
these commenters' input but have made no modifications to the final
guidance.
One commenter claimed that the agencies' proposed guidance did not
reflect internationally agreed upon approaches to home and host
authority responsibility with regard to resolution planning, with the
proposal's continued emphasis on a separate U.S. strategy, which the
commenter argued is largely duplicative of home country requirements.
Other commenters criticized the proposed guidance for not reflecting
any reliance on supervisory colleges and crisis management groups, or
on the capital markets and resolution rules and requirements of the
Securities and Exchange Commission, Financial Industry Regulatory
Authority, or the Commodity Futures Trading Commission.
The agencies do not agree with these comments. Since the enactment
of section 165(d) of the Dodd-Frank Act, the agencies have worked
bilaterally and multilaterally with relevant domestic and foreign
authorities and in various international fora to understand risks to
the firms' orderly resolution under the U.S. Bankruptcy Code, as well
as to share resolution planning expertise. In addition, the agencies
have established resolution-related information-sharing arrangements
with both domestic and foreign authorities in an effort to enhance the
prospects for a successful cross-border resolution of the Specified
FBOs. Moreover, the agencies note that both section 165(d) of the Dodd-
Frank Act and the Rule require all large bank holding companies,
including FBOs, to file resolution plans.
Another commenter encouraged the agencies to consider aligning
their guidance with the resolution-related guidance issued by the
European Single Resolution Board. The agencies recognize that
international coordination in resolution-related matters is important
to ensuring that home and host country regulators have sufficient
understanding of the resolvability of internationally active financial
companies. The purpose and general subject matter of the final guidance
are generally consistent with those of the Single Resolution Board's
Expectations for Banks. Both the final guidance and the Single
Resolution Board document describe the respective authorities'
expectations regarding a number of key vulnerabilities in resolution
(e.g., governance mechanisms, operational, capital, liquidity, and
legal entity rationalization). The agencies will continue to work with
international counterparts to build a shared understanding around
resolution-related matters through participation in firm-specific,
cross-border crisis management groups, as both home authorities and
host authorities.
Other commenters suggested that the proposed guidance did not
adequately recognize foreign parents as sources of strength to the U.S.
operations of Proposed FBOs, but instead appeared to treat the non-U.S.
parent and affiliates only as sources of risk for U.S. material
entities. The agencies understand that the preferred resolution outcome
for many Specified FBOs is a successful home country resolution using a
SPOE resolution strategy where U.S. material entities are provided with
sufficient capital and liquidity resources to allow them to stay out of
resolution proceedings and maintain continuity of operations throughout
the parent's resolution. The Rule balances this recognition with the
concern that support from a foreign parent in stress cannot be ensured.
The final guidance, in turn, lays out expectations that reflect a
number of key vulnerabilities associated with an orderly resolution
under the U.S. Bankruptcy Code.
Certain commenters suggested that the agencies streamline plan
submissions to make the documents more actionable and reduce the time
the agencies may need to review and challenge the submissions. These
commenters also encouraged the agencies to leverage information
provided by firms through existing bank supervision and exam processes
to collect information relevant to the
[[Page 83569]]
agencies' review of resolution planning. The agencies note that the
scope and informational content of resolution plan submissions are
dictated by the Rule. That said, the agencies have endeavored in this
final guidance to tailor expectations for the Specified FBOs'
resolution plans to be commensurate to and address risks posed by key
vulnerabilities of the Specified FBOs in resolution. The agencies also
have made a number of modifications to the final guidance with the
express purpose of streamlining plan expectations and, where
appropriate, leveraging existing supervisory relationships with home
and host country authorities to collaboratively obtain information
about the resolution planning and resolvability of the firms.
ii. Comments About General Concerns With the Proposal
Some commenters asserted that the proposed guidance exceeded the
scope of the Rule or Title I of the Dodd-Frank Act, introduced
definitions and expectations that were inconsistent with the Rule, and
created issues of extraterritoriality and duplication of information
that may already be covered under home country regulations. Some
commenters also objected to expectations pertaining to the
identification, assessment, or reporting of indirect relationships
through non-U.S. affiliates, or risk transfer arrangements with non-
U.S. affiliates. These comments are addressed in the individual
sections of this preamble to which they relate.
Another commenter recommended modifying resolution guidance and
requirements to emphasize firms maintaining resolution capabilities
that remain available during business as usual. This comment generally
aligns with the agencies' approach to resolution planning expectations,
and the final guidance emphasizes that the Specified FBOs should have
effective capabilities and well-developed plans. That said, the
agencies do not believe that any specific revisions are necessary to
respond to this comment; rather, the agencies will continue to
deliberate how to ensure that resolution planning can be facilitated by
and integrated into the firm's business-as-usual practices.
iii. Comments About Resolution Planning Generally
The agencies received several comments about the broader
supervisory landscape related to resolution planning. Certain
commenters recommended that the agencies, in addition to deepening home
and host country regulatory relationships, engage bilaterally with the
Proposed FBOs to clarify outstanding concerns about the resolvability
of the firms' U.S. operations, as well as any concerns about the firms'
reliance on home country resolution strategies.
These comments do not directly relate to the guidance and, as a
result, the agencies are not making any changes to the final guidance.
Relatedly, one commenter asked the agencies to clearly identify
residual concerns with respect to each Proposed FBO and then tie
resolution planning guidance to those concerns. The agencies expect
that overall engagement and ongoing dialog and feedback with each of
the Specified FBOs will continue to provide clarity on any outstanding
concerns with respect to resolution capabilities. The agencies also
note that the final guidance takes into consideration the agencies'
experience in reviewing prior resolution plan submissions. No specific
changes have been made to the final guidance in response to this
comment.
iv. Comments Outside the Scope of Guidance-Making
One commenter requested that the agencies also incorporate that
commenter's thoughts into future changes to guidance for U.S. G-SIBs,
while another commenter argued for the removal of the Proposed FBOs
from the Board's Large Institution Supervision Coordinating Committee
(LISCC) portfolio. The final guidance does not apply to U.S. G-SIBs,
who remain subject to heightened resolution plan supervisory
expectations given their size and risk profile, and the composition of
the LISCC portfolio of firms is similarly outside the scope of this
final guidance. Accordingly, the agencies have not made any changes to
the guidance to address these comments.\39\
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\39\ The agencies note that, on November 6, 2020, the Board
announced that it is updating the list of firms supervised by the
LISCC Program. See https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201106a.htm.
---------------------------------------------------------------------------
IV. Paperwork Reduction Act
Certain provisions of the guidance contain ``collection of
information'' provisions within the meaning of the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501-3521) (PRA). In accordance with the
requirements of the PRA, the agencies may not conduct or sponsor, and a
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The agencies reviewed the final guidance and
determined that it would revise the reporting provisions that have been
previously approved by OMB under the Board's OMB control number 7100-
0346 (Reporting Requirements Associated with Regulation QQ; FR QQ) and
the FDIC's control number 3064-0210 (Reporting Requirements Associated
with Resolution Planning). The Board has reviewed the final guidance
under the authority delegated to the Board by OMB. The agencies'
information collections will be extended for three years, with
revision.
Current Actions
The proposed guidance stated that the proposed changes to the 2018
FBO guidance would not revise the reporting provisions that have been
previously cleared by the OMB under the Board's control number 7100-
0346 and the FDIC's control number 3064-0210. The agencies did not
receive any comments on the PRA determination in the proposed guidance.
However, as indicated above, the final guidance includes certain
modifications and clarifications to the proposed guidance. In
particular, the scope, capital, liquidity, governance mechanisms, PCS,
and derivatives and trading activities sections of the final guidance
reflect changes from the proposal. Other sections or sub-sections, such
as group resolution plan, management information systems, QFCs,
separability, and mapping of branch activities, were determined not to
be necessary as they are duplicative of existing regulatory
requirements or not reflective of the Specified FBOs' current business
models and accordingly have been eliminated from the guidance. The
intent of these changes is to clarify expectations, more closely align
expectations with the current business and risk profiles of the
Specified FBOs' U.S. operations, and recognize that the preferred
resolution strategy for the Specified FBOs is a successful home country
resolution. The final guidance also eliminates expectations for
information that, in the agencies' experience, may be obtained through
other existing and effective mechanisms.
As a result of these changes, the final guidance reduces the
existing estimated burden for a triennial full complex filer from
13,135 hours to 9,916 hours per year. This reduction is driven mainly
by significant reductions in the burdens related to capital, liquidity,
separability, and governance mechanisms. These burden savings are borne
by the Proposed FBOs.
One FBO is no longer classified as a triennial full complex filer
and thus
[[Page 83570]]
saves the total burden associated with filing a triennial full complex
resolution plan. However, another FBO is newly classified as a
triennial full complex filer and must bear the burden. The agencies
estimate the annual burden for this new triennial full complex filer as
9,767 hours per year. This estimate differs from the burden for the
Proposed FBOs for primarily two reasons: (1) The agencies estimate that
the new triennial full complex filer will incur some start-up costs in
preparing its first full resolution plan that is subject to the final
guidance; and (2) the agencies estimate that the burden for the new
triennial full complex filer's 2021 targeted resolution plan will be
less than the burdens for the three Proposed FBOs because the new
triennial complex filer will not be expected to consider the final
guidance for its 2021 targeted resolution plan (unlike the three other
covered companies).
Historically, the Board and the FDIC have split the respondents for
purposes of PRA clearances. As such, the agencies will split the change
in burden as well. The FDIC has agreed to take the burden of the new
triennial full complex filer and one Proposed FBO whereas the Board
will take the burden for the remaining two Proposed FBOs. Specially, as
a result of this split and these revisions, there will be a net
decrease in the overall estimated burden of 6,438 hours for the Board
and 6,587 hours for the FDIC. Therefore, the total Board estimated
burden for its entire information collection (7100-0346) is 209,168
hours and the total FDIC estimated burden for its entire information
collection (3064-0210) is 203,332 hours.
Proposed Information Collection
Title of Information Collection: Reporting Requirements Associated
with Resolution Planning.
Agency Form Number: FR QQ.
Frequency of Response: Biennially, Triennially.
Respondents: Bank holding companies (including any foreign bank or
company that is, or is treated as, a bank holding company under section
8(a) of the International Banking Act of 1978, and meets the relevant
total consolidated assets threshold) with total consolidated assets of
$250 billion or more, bank holding companies with $100 billion or more
in total consolidated assets with certain characteristics, and nonbank
financial firms designated by the Financial Stability Oversight Council
for supervision by the Board.
The following table presents only the change in the estimated
burden hours, as amended by this final guidance, broken out by agency.
The table does not include a discussion of the remaining estimated
burden hours, which remain unchanged.
Table 1--Burden Hour Estimates Under Current Regulations and Under the Final Guidance
----------------------------------------------------------------------------------------------------------------
Estimated
FR QQ Number of Annual Estimated average hours annual burden
respondents frequency per response * hours
----------------------------------------------------------------------------------------------------------------
Board Burdens
----------------------------------------------------------------------------------------------------------------
2019 Rule Revisions:
Triennial Full Complex Foreign.... 2 1 13,135.................. 26,270
-------------------------------------------------------------------------
Board Total................... .............. .............. ........................ 26,270
Final Guidance:
Triennial Full Complex Foreign.... 2 1 9,916................... 19,832
-------------------------------------------------------------------------
Board Total................... .............. .............. ........................ 19,832
----------------------------------------------------------------------------------------------------------------
FDIC Burdens
----------------------------------------------------------------------------------------------------------------
2019 Rule Revisions:
Triennial Full Complex Foreign.... 2 1 13,135.................. 26,270
-------------------------------------------------------------------------
FDIC Total.................... .............. .............. ........................ 26,270
Final Guidance:
Triennial Full Complex Foreign.... 1 1 9,916................... 9,916
Triennial Full Complex Foreign 1 1 ** 9,767................ 9,767
(new).
-------------------------------------------------------------------------
FDIC Total.................... .............. .............. ........................ 19,683
----------------------------------------------------------------------------------------------------------------
* Hours are calculated as the hours to prepare and submit one full resolution plan and one targeted resolution
plan, annualized over 6 years.
** Includes one-time start-up burdens for new triennial full complex foreign filers and excludes guidance-based
burdens for the new triennial full complex filer's 2021 targeted resolution plan, as the filer is not expected
to consider the guidance for that plan.
V. Final Guidance
Guidance for Resolution Plan Submissions of Certain Foreign-Based
Covered Companies
I. Introduction
II. Capital
III. Liquidity
IV. Governance Mechanisms
a. Playbooks
V. Operational
a. Payment, Clearing and Settlement Activities
b. Managing, Identifying, and Valuing Collateral
c. Shared and Outsourced Services
VI. Branches
VII. Legal Entity Rationalization
VIII. Derivatives and Trading Activities
IX. Format and Structure of Plans
X. Public Section
Appendix: Frequently Asked Questions
I. Introduction
Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5365(d)) requires certain financial companies
to report periodically to the Board of Governors of the Federal Reserve
System (the Federal Reserve or Board) and the Federal Deposit Insurance
Corporation (the FDIC) (together the Agencies) their plans for rapid
and orderly resolution in the event of material financial distress or
failure. On November 1, 2011, the Agencies promulgated a joint rule
implementing
[[Page 83571]]
the provisions of Section 165(d).\1\ Subsequently, in November 2019,
the Agencies finalized amendments to the joint rule addressing
amendments to the Dodd-Frank Act made by the Economic Growth,
Regulatory Relief, and Consumer Protection Act and improving certain
aspects of the joint rule based on the Agencies' experience
implementing the joint rule since its adoption.\2\ Financial companies
meeting criteria set out in the Rule must file a resolution plan (Plan)
according to the schedule specified in the Rule.
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\1\ 76 FR 67323 (November 1, 2011), codified at 12 CFR parts 243
and 381.
\2\ Resolution Plans Required, 84 FR 59194 (November 1, 2019).
The amendments became effective December 31, 2019. ``Rule'' means
the joint rule as amended in 2019. Capitalized terms not defined
herein have the meanings set forth in the Rule.
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This document is intended to provide guidance to certain foreign
banking organizations (FBOs) that are required to submit Plans
regarding development of their respective U.S. resolution strategies
(Specified FBOs or firms). Specifically, the guidance applies to any
FBO that is subject to Category II standards according to its combined
U.S. operations in accordance with the Board's tailoring rule \3\ and
that is required to form an intermediate holding company.\4\
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\3\ Prudential Standards for Large Bank Holding Companies,
Savings and Loan Holding Companies, and Foreign Banking
Organizations, 84 FR 59032 (Nov. 1, 2019).
\4\ See 12 CFR part 252.
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When an FBO first becomes a Specified FBO,\5\ this document will
apply to the firm's next resolution plan submission that is due at
least 12 months after the date the firm becomes a Specified FBO. If a
Specified FBO ceases to be subject to Category II standards or to the
Board's requirement to form an intermediate holding company, it will no
longer be a Specified FBO, and this document will no longer apply to
that firm.
---------------------------------------------------------------------------
\5\ See 12 CFR 252.5(c).
---------------------------------------------------------------------------
The document is intended to assist these firms in further
developing their U.S. resolution strategies. The document does not have
the force and effect of law. Rather, it describes the Agencies'
expectations and priorities regarding these firms' Plans and the
Agencies' general views regarding specific areas where additional
detail should be provided and where certain capabilities or optionality
should be developed and maintained to demonstrate that each firm has
considered fully, and is able to mitigate, obstacles to the successful
implementation of their U.S. resolution strategy.\6\
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\6\ This guidance consolidates the Guidance for 2018 Sec.
165(d) Annual Resolution Plan Submissions by Foreign-Based Covered
Companies that Submitted Resolution Plans in July 2015; the July
2017 Resolution Plan Frequently Asked Questions; feedback letters
issued to Barclays PLC, Credit Suisse Group AG, Deutsche Bank AG,
and UBS AG in December 2018 and in August 2014 and feedback letters
issued to Mitsubishi UFJ Financial Group in July 2019, January 2018,
and July 2015; the communications the Agencies made to certain
foreign-based Covered Companies in February 2015; and the Guidance
for 2013 Sec. 165(d) Annual Resolution Plan Submissions by Foreign-
Based Covered Companies that Submitted Initial Resolution Plans in
2012 (taken together, prior guidance). To the extent not
incorporated in or appended to this guidance, prior guidance is
superseded.
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The Agencies are providing guidance to the Specified FBOs to assist
their further development of a resolution plan for their U.S.
operations for their 2021 and subsequent resolution plan submissions.
This guidance for Specified FBOs builds upon the guidance issued in
December 2018 for certain U.S.-based covered companies, taking into
account the circumstances under which a U.S. resolution plan is most
likely to be relevant for an FBO. The U.S. resolution plan for a
Specified FBO would address a scenario where the U.S. operations
experience material financial distress and the foreign parent is unable
or unwilling to provide sufficient financial support for the
continuation of U.S. operations, and at least the top tier U.S.
Intermediate Holding Company (U.S. IHC) files for bankruptcy under
Title 11, United States Code. Under such a scenario, the Plan should
provide for the orderly resolution of the Specified FBO's U.S. material
entities \7\ and operations.
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\7\ The terms ``material entities,'' ``identified critical
operations,'' and ``core business lines'' have the same meaning as
in the Rule. The term ``U.S. material entity'' means any subsidiary,
branch, or agency that is a material entity and is domiciled in the
United States. The term ``U.S. non-branch material entity'' means a
material entity organized or incorporated in the U.S. including, in
all cases, the U.S. IHC. The term ``U.S. IHC subsidiaries'' means
all U.S. non-branch material entities other than the U.S. IHC.
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In general, this document is organized around a number of key
vulnerabilities in resolution (e.g., capital; liquidity; governance
mechanisms; operational; legal entity rationalization; and derivatives
and trading activities) that apply across resolution plans. Additional
vulnerabilities or obstacles may arise based on a firm's particular
structure, operations, or resolution strategy. Each firm is expected to
satisfactorily address these vulnerabilities in its Plan--e.g., by
developing sensitivity analysis for certain underlying assumptions,
enhancing capabilities, providing detailed analysis, or increasing
optionality development, as indicated below.
Under the Rule, the Agencies will review the Plan to determine if
it satisfactorily addresses key potential vulnerabilities, including
those specified 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
The firm should have the capital capabilities necessary to execute
its U.S. resolution strategy, including the model and estimation
process described below.
To the extent required by the firm's U.S. resolution strategy, U.S.
non-branch material entities need to be recapitalized to a level that
allows for an orderly resolution. The firm should have a methodology
for periodically estimating the amount of capital that may be needed to
support each U.S. IHC subsidiary after the U.S. IHC bankruptcy filing
(Resolution Capital Execution Need or RCEN). The firm's positioning of
IHC total loss absorbing capacity (TLAC) \8\ should be able to support
the RCEN estimates.
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\8\ Total Loss-Absorbing Capacity, Long-Term Debt, and Clean
Holding Company Requirements for Systemically Important U.S. Bank
Holding Companies and Intermediate Holding Companies of Systemically
Important Foreign Banking Organizations, 82 FR 8266 (January 24,
2017).
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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,\9\ consistent
with the firm's resolution strategy for its U.S. operations. The
methodology is not required to produce aggregate losses that are
greater than the amount of IHC TLAC that would be required for the firm
under the Board's final rule.\10\ The RCEN methodology should be
calibrated such that recapitalized U.S. IHC subsidiaries have
sufficient capital to maintain market confidence as required under the
U.S resolution strategy. Capital levels should meet or exceed all
applicable regulatory capital requirements for ``well-capitalized''
status and meet estimated additional capital needs throughout
resolution. U.S. IHC subsidiaries that are not subject to capital
requirements may be considered
[[Page 83572]]
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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\9\ The resolution period begins immediately after the U.S. IHC
bankruptcy filing and extends through the completion of the U.S.
resolution strategy.
\10\ 82 FR 8266 (January 24, 2017).
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III. Liquidity
The firm should have the liquidity capabilities necessary to
execute its U.S. resolution strategy. In particular, the firm should
have a methodology for estimating the liquidity needed after the U.S.
IHC's bankruptcy filing to stabilize any surviving U.S. IHC
subsidiaries and to allow those entities to operate post-filing, in
accordance with the U.S. strategy (Resolution Liquidity Execution Need
or RLEN).
The firm's RLEN methodology should:
(A) Estimate the minimum operating liquidity (MOL) needed at each
U.S. IHC subsidiary to ensure those entities could continue to operate,
to the extent relied upon in the U.S. resolution strategy, after
implementation of the U.S. resolution strategy and/or to support a
wind-down strategy;
(B) Provide daily cash flow forecasts by U.S. IHC subsidiary to
support estimation of peak funding needs to stabilize each entity under
resolution;
(C) Provide a comprehensive breakout of all inter-affiliate
transactions and arrangements that could impact the MOL or peak funding
needs estimates for the U.S. IHC subsidiaries; and
(D) Estimate the minimum amount of liquidity required at each U.S.
IHC subsidiary to meet the MOL and peak needs noted above, which would
inform the provision of financial resources from the foreign parent to
the U.S. IHC, or if the foreign parent is unable or unwilling to
provide such financial support, any preparatory resolution-related
actions.
The MOL estimates should capture U.S. IHC subsidiaries' intraday
liquidity requirements, operating expenses, working capital needs, and
inter-affiliate funding frictions to ensure that U.S. IHC subsidiaries
could operate without disruption during the resolution.
The peak funding needs estimates should be projected for each U.S.
IHC subsidiary and cover the length of time the firm expects it would
take to stabilize that U.S. IHC subsidiary. Inter-affiliate funding
frictions should be taken into account in the estimation process.
The firm's forecasts of MOL and peak funding needs should ensure
that U.S. IHC subsidiaries could operate through resolution consistent
with regulatory requirements, market expectations, and the firm's post-
failure strategy. These forecasts should inform the RLEN estimate,
i.e., the minimum amount of high-quality liquid assets (HQLA) required
to facilitate the execution of the firm's strategy for the U.S. IHC
subsidiaries.
For non-surviving U.S. IHC subsidiaries, the firm should provide
analysis and an explanation of how the material entity's resolution
could be accomplished within a reasonable period of time and in a
manner that substantially mitigates the risk of serious adverse effects
on U.S. financial stability. For example, if a U.S. IHC subsidiary that
is a broker-dealer is assumed to fail and enter resolution under the
Securities Investor Protection Act, the firm should provide an analysis
of the potential impacts on funding and asset markets and on prime
brokerage clients, bearing in mind the objective of an orderly
resolution.
IV. Governance Mechanisms
A firm should identify the governance mechanisms that would ensure
that communication and coordination occurs between the boards of the
U.S. IHC or a U.S. IHC subsidiary and the foreign parent to facilitate
the provision of financial support, or if not forthcoming, any
preparatory resolution-related actions to facilitate an orderly
resolution.
Playbooks: Governance playbooks should detail the board and senior
management actions of U.S. non-branch material entities that would be
needed under the firm's U.S. resolution strategy. The governance
playbooks should also include a discussion of (A) the firm's proposed
U.S. communications strategy, both internal and external; \11\ (B) the
fiduciary responsibilities of the applicable board(s) of directors or
other similar governing bodies and how planned actions would be
consistent with such responsibilities applicable at the time actions
are expected to be taken; (C) potential conflicts of interest,
including interlocking boards of directors; (D) any employee retention
policy; and (E) any other limitations on the authority of the U.S. IHC
and the U.S. IHC subsidiary boards and senior management to implement
the U.S. resolution strategy. All responsible parties and timeframes
for action should be identified. Governance playbooks should be updated
periodically for each entity whose governing body would need to act
under the firm's U.S. resolution strategy.
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\11\ External communications include those with U.S. and foreign
authorities and other external stakeholders.
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In order to meet liquidity needs at the U.S. non-branch material
entities, the firm may either fully pre-position liquidity in the U.S.
non-branch material entities or develop a mechanism for planned foreign
parent support, of any amount not pre-positioned, for the successful
execution of the U.S. strategy. Mechanisms to support readily available
liquidity may include a term liquidity facility between the U.S. IHC
and the foreign parent that can be drawn as needed and as informed by
the firm's RLEN estimates and liquidity positioning. The plan should
include analysis of how the U.S. IHC/foreign parent facility is funded
or buffered for by the foreign parent. The sufficiency of the liquidity
should be informed by the firm's RLEN estimate for the U.S. non-branch
material entities.
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,\12\ or both, of PCS services.
A firm should demonstrate capabilities for continued access to PCS
services essential to an orderly resolution under its U.S. resolution
strategy through a framework to support such access by:
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\12\ A firm is a user of PCS services if it accesses PCS
services through an agent bank or it uses the services of an FMU
through its membership in that FMU or through an agent bank. A firm
is a provider of PCS services if it provides PCS services to clients
as an agent bank or it provides clients with access to an FMU or
agent bank through the firm's membership in or relationship with
that service provider. A firm is also a provider if it provides
clients with PCS services through the firm's own operations in the
United States (e.g., payment services or custody services).
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Identifying clients,\13\ financial market utilities
(FMUs), and agent banks as key from the firm's perspective for the
firm's U.S. material entities, identified critical operations, and core
business lines, using both quantitative (volume and value) \14\ and
qualitative criteria;
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\13\ For purposes of this section V, a client is an individual
or entity, including affiliates of the firm, to whom the firm
provides PCS services and, if credit or liquidity is offered, any
related credit or liquidity offered in connection with those
services.
\14\ In identifying entities as key, examples of quantitative
criteria may include: For a client, transaction volume/value, market
value of exposures, assets under custody, usage of PCS services, and
if credit or liquidity is offered, any extension of related intraday
credit or liquidity; for an FMU, the aggregate volumes and values of
all transactions processed through such FMU; and for an agent bank,
assets under custody, the value of cash and securities settled, and
extensions of intraday credit.
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[[Page 83573]]
Mapping U.S. material entities, identified critical
operations, core business lines, and key clients of the firm's U.S.
operations to both key FMUs and key agent banks; and
Developing a playbook for each key FMU and key agent bank
essential to an orderly resolution under its U.S. resolution strategy
that reflects the firm's role(s) as a user and/or provider of PCS
services.
The framework should address direct relationships (e.g., a firm's
direct membership in an FMU, a firm's provision of clients with PCS
services through its own operations in the United States, or a firm's
contractual relationship with an agent bank) and indirect relationships
(e.g., a firm's provision of clients with access to the relevant FMU or
agent bank through the firm's membership in or relationship with that
FMU or agent bank, or a firm's U.S. affiliate and branch provision of
U.S. material entities and key clients of the firm's U.S. operations
with access to an FMU or agent bank). The framework also should address
the potential impact of any disruption to, curtailment of, or
termination of such direct and indirect relationships on the firm's
U.S. material entities, identified critical operations, and core
business lines, as well as any corresponding impact on key clients of
the firm's U.S. operations.
Playbooks for Continued Access to PCS Services. The firm is
expected to provide a playbook for each key FMU and key agent bank that
addresses considerations that would assist the firm and key clients of
the firm's U.S. operations in maintaining continued access to PCS
services in the period leading up to and including the firm's
resolution under its U.S. resolution strategy. Each playbook should
provide analysis of the financial and operational impact of adverse
actions that may be taken by a key FMU or a key agent bank and
contingency actions that may be taken by the firm. Each playbook also
should discuss any possible alternative arrangements that would allow
continued access to PCS services for the firm's U.S. material entities,
identified critical operations and core business lines, and key clients
of the firm's U.S. operations, while the firm is in resolution under
its U.S. resolution strategy. The firm is not expected to incorporate a
scenario in which it loses key FMU or key agent bank access into its
U.S. resolution strategy or its RLEN and RCEN estimates. The firm
should continue to engage with key FMUs, key agent banks, and key
clients of the firm's U.S. operations, and playbooks should reflect any
feedback received during such ongoing outreach.
Content Related to Users of PCS Services. Individual key FMU and
key agent bank playbooks should include:
Descriptions of the firm's relationship as a user,
including through indirect access, with the key FMU or key agent bank
and the identification and mapping of PCS services to the firm's U.S.
material entities, identified critical operations, and core business
lines that use those PCS services;
Discussion of the potential range of adverse actions that
may be taken by that key FMU or key agent bank when the firm is in
resolution under its U.S. resolution strategy,\15\ the operational and
financial impact of such actions on the firm's U.S. material entities,
identified critical operations, and core business lines, and
contingency arrangements that may be initiated by the firm in response
to potential adverse actions by the key FMU or key agent bank; and
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\15\ Examples of potential adverse actions may include increased
collateral and margin requirements and enhanced reporting and
monitoring.
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Discussion of PCS-related liquidity sources and uses in
business-as-usual (BAU), in stress, and in the resolution period,
presented by currency type (with U.S. dollar equivalent) and by U.S.
material entity.
[cir] PCS Liquidity Sources: These may include the amounts of
intraday extensions of credit, liquidity buffer, inflows from FMU
participants, and prefunded amounts of key clients of the firm's U.S.
operations in BAU, in stress, and in the resolution period. The
playbook also should describe intraday credit arrangements (e.g.,
facilities of the key FMU, key agent bank, or a central bank) and any
similar custodial arrangements that allow ready access to a firm's
funds for PCS-related key FMU and key agent bank obligations (including
margin requirements) in all currencies relevant to the firm's
participation, including placements of firm liquidity at central banks,
key FMUs, and key agent banks.
[cir] PCS Liquidity Uses: These may include margin and prefunding
by the firm and key clients of the firm's U.S. operations, and intraday
extensions of credit, including incremental amounts required during
resolution.
[cir] Intraday Liquidity Inflows and Outflows: The playbook should
describe the firm's ability to control intraday liquidity inflows and
outflows and to identify and prioritize time-specific payments. The
playbook also should describe any account features that might restrict
the firm's ready access to its liquidity sources.
Content Related to Providers of PCS Services.\16\ Individual key
FMU and key agent bank playbooks should include:
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\16\ Where a firm is a provider of PCS services through the
firm's own operations in the United States, the firm is expected to
produce a playbook for the U.S. material entities that provide those
services, addressing each of the items described under ``Content
Related to Providers of PCS Services,'' which include contingency
arrangements to permit the firm's key clients of the firm's U.S.
operations to maintain continued access to PCS services.
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Identification and mapping of PCS services to the firm's
U.S. material entities, identified critical operations, and core
business lines that provide those PCS services, and a description of
the scale and the way in which each provides PCS services;
Identification and mapping of PCS services to key clients
of the firm's U.S. operations to whom the firm's U.S. material
entities, identified critical operations, and core business lines
provide such PCS services and any related credit or liquidity offered
in connection with such services;
Discussion of the potential range of firm contingency
arrangements available to minimize disruption to the provision of PCS
services to key clients of the firm's U.S. operations, including the
viability of transferring activity and any related assets of key
clients of the firm's U.S. operations, as well as any alternative
arrangements that would allow the key clients of the firm's U.S.
operations continued access to PCS services if the firm could no longer
provide such access (e.g., due to the firm's loss of key FMU or key
agent bank access), and the financial and operational impacts of such
arrangements from the firm's perspective;
Descriptions of the range of contingency actions that the
firm may take concerning its provision of intraday credit to key
clients of the firm's U.S. operations, including analysis quantifying
the potential liquidity the firm could generate by taking such actions
in stress and in the resolution period, such as (i) requiring key
clients of the firm's U.S. operations to designate or appropriately
pre-position liquidity, including through prefunding of settlement
activity, for PCS-related key FMU and key agent bank obligations at
specific material entities of the firm (e.g., direct members of key
FMUs) or any similar custodial arrangements that allow ready access to
funds for such obligations in all relevant currencies of key clients of
the firm's U.S. operations; (ii) delaying or restricting PCS activity
[[Page 83574]]
of key clients of the firm's U.S. operations; and (iii) restricting,
imposing conditions upon (e.g., requiring collateral), or eliminating
the provision of intraday credit or liquidity to key clients of the
firm's U.S. operations; and
Descriptions of how the firm will communicate to key
clients of the firm's U.S. operations the potential impacts of
implementation of any identified contingency arrangements or
alternatives, including a description of the firm's methodology for
determining whether any additional communication should be provided to
some or all key clients of the firm's U.S. operations (e.g., due to BAU
usage of that access and/or related intraday credit or liquidity of the
key client of the firm's U.S. operations), and the expected timing and
form of such communication.
Capabilities. Firms are expected to have and describe capabilities
to understand, for each U.S. material entity, its obligations and
exposures associated with PCS activities, including contractual
obligations and commitments. For example, firms should be able to:
Track the following items by U.S. material entity and,
with respect to customers, counterparties, and agents and service
providers, by location/jurisdiction:
[cir] PCS activities, with each activity mapped to the relevant
material entities and core business lines; \17\
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\17\ 12 CFR 243.5(e)(12); 12 CFR 381.5(e)(12).
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[cir] Customers and counterparties for PCS activities, including
values and volumes of various transaction types, as well as used and
unused capacity for all lines of credit; \18\
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\18\ Id.
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[cir] Exposures to and volumes transacted with FMUs, nostro agents,
and custodians; and \19\
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\19\ 12 CFR 252.156(g).
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[cir] Services provided and service level agreements, as
applicable, for other current agents and service providers (internal
and external).\20\
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\20\ 12 CFR 243.5(f)(l)(i); 12 CFR 381.5(f)(1)(i).
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Assess the potential effects of adverse actions by FMUs,
nostro agents, custodians, and other agents and service providers,
including suspension or termination of membership or services, on the
firm's U.S. operations and customers and counterparties of those U.S.
operations; \21\
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\21\ 12 CFR 252.156(e).
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Develop contingency arrangements in the event of such
adverse actions; \22\ and
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\22\ Id.
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Quantify the liquidity needs and operational capacity
required to meet all PCS obligations, including any change in demand
for and sources of liquidity needed to meet such obligations.
Managing, Identifying, and Valuing Collateral: The firm is expected
to have and describe its capabilities to manage, identify, and value
the collateral that the U.S. non-branch material entities receive from
and post to external parties and affiliates. Specifically, the firm
should:
Be able to query and provide aggregate statistics for all
qualified financial contracts concerning cross-default clauses,
downgrade triggers, and other key collateral-related contract terms--
not just those terms that may be impacted in an adverse economic
environment--across contract types, business lines, legal entities, and
jurisdictions;
Be able to track both firm collateral sources (i.e.,
counterparties that have pledged collateral) and uses (i.e.,
counterparties to whom collateral has been pledged) at the CUSIP level
on at least a t+1 basis;
Have robust risk measurements for cross-entity and cross-
contract netting, including consideration of where collateral is held
and pledged;
Be able to identify CUSIP and asset class level
information on collateral pledged to specific central counterparties by
legal entity on at least a t+1 basis;
Be able to track and report on inter-branch collateral
pledged and received on at least a t+1 basis and have clear policies
explaining the rationale for such inter-branch pledges, including any
regulatory considerations; and
Have a comprehensive collateral management policy that
outlines how the firm as a whole approaches collateral and serves as a
single source for governance.\23\
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\23\ The policy may reference subsidiary or related policies
already in place, as implementation may differ based on business
line or other factors.
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In addition, as of the conclusion of any business day, the firm
should be able to:
Identify the legal entity and geographic jurisdiction
where counterparty collateral is held;
Document all netting and re-hypothecation arrangements
with affiliates and external parties, by legal entity; and
Track and manage collateral requirements associated with
counterparty credit risk exposures between affiliates, including
foreign branches.
At least on a quarterly basis, the firm should be able to:
Review the material terms and provisions of International
Swaps and Derivatives Association Master Agreements and the Credit
Support Annexes, such as termination events, for triggers that may be
breached as a result of changes in market conditions;
Identify legal and operational differences and potential
challenges in managing collateral within specific jurisdictions,
agreement types, counterparty types, collateral forms, or other
distinguishing characteristics; and
Forecast changes in collateral requirements and cash and
non-cash collateral flows under a variety of stress scenarios.
Shared and Outsourced Services: The firm should maintain a fully
actionable implementation plan to ensure the continuity of shared
services that support identified critical operations \24\ and robust
arrangements to support the continuity of shared and outsourced
services, including, without limitation, appropriate plans to retain
key personnel relevant to the execution of the firm's strategy. If a
material entity provides shared services that support identified
critical operations,\25\ and the continuity of these shared services
relies on the assumed cooperation, forbearance, or other non-
intervention of regulator(s) in any jurisdiction, the Plan should
discuss the extent to which the resolution or insolvency of any other
group entities operating in that same jurisdiction may adversely affect
the assumed cooperation, forbearance, or other regulatory non-
intervention. If a material entity providing shared services that
support identified critical operations is located outside of the United
States, the Plan should discuss how the firm will ensure the
operational continuity of such shared services through resolution.
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\24\ ``Shared services that support identified critical
operations'' or ``critical shared services'' are those that support
identified critical operations conducted in whole or in material
part in the United States.
\25\ This should be interpreted to include data access and
intellectual property rights.
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The firm should (A) maintain an identification of all shared
services that support identified critical operations; (B) maintain a
mapping of how/where these services support U.S. core business lines
and identified critical operations; (C) incorporate such mapping into
legal entity rationalization criteria and implementation efforts; and
(D) mitigate identified continuity risks through establishment of
service-level agreements (SLAs) for all critical shared services.
SLAs should fully describe the services provided, reflect pricing
considerations on an arm's-length basis where appropriate, and
incorporate
[[Page 83575]]
appropriate terms and conditions to (A) prevent automatic termination
upon certain resolution-related events and (B) achieve continued
provision of such services during resolution.\26\ The firm should also
store SLAs in a central repository or repositories located in or
immediately accessible from the U.S. at all times, including in
resolution (and subject to enforceable access arrangements) in a
searchable format. In addition, the firm should ensure the financial
resilience of internal shared service providers by maintaining working
capital for six months (or through the period of stabilization as
required in the firm's U.S. resolution strategy) in such entities
sufficient to cover contract costs, consistent with the U.S. resolution
strategy. The firm should demonstrate that such working capital is held
in a manner that ensures its availability for its intended purpose.
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\26\ The firm should consider whether these SLAs should be
governed by the laws of a U.S. state and expressly subject to the
jurisdiction of a court in the U.S.
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The firm should identify all service providers and critical
outsourced services that support identified critical operations and
identify any that could not be promptly substituted. The firm should
(A) evaluate the agreements governing these services to determine
whether there are any that could be terminated upon commencement of any
resolution despite continued performance; and (B) update contracts to
incorporate appropriate terms and conditions to prevent automatic
termination upon commencement of any resolution proceeding and
facilitate continued provision of such services. Relying on entities
projected to survive during resolution to avoid contract termination is
insufficient to ensure continuity. In the Plan, the firm should
document the amendment of any such agreements governing these services.
The Plan must also discuss arrangements to ensure the operational
continuity of shared services that support identified critical
operations in resolution in the event of the disruption of those shared
services.
A firm is expected to have robust arrangements in place for the
continued provision of shared or outsourced services needed to maintain
identified critical operations. For example, firms should:
Evaluate internal and external dependencies and develop
documented strategies and contingency arrangements for the continuity
or replacement of the shared and outsourced services that are necessary
to maintain identified critical operations.\27\ Examples may include
personnel, facilities, systems, data warehouses, and intellectual
property; and
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\27\ 12 CFR 243.5(g); 12 CFR 381.5(g).
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Maintain current cost estimates for implementing such
strategies and contingency arrangements.
VI. Branches
Continuity of Operations: If the Plan assumes that federal or state
regulators, as applicable, do not take possession of any U.S. branch
that is a material entity, the Plan must support that assumption.
For any U.S. branch that is significant to the activities of an
identified critical operation, the Plan should describe and demonstrate
how the branch would continue to facilitate FMU access for identified
critical operations and meet funding needs. Such a U.S. branch would
also be required to describe how it would meet supervisory requirements
imposed by state regulators or the appropriate Federal banking agency,
as appropriate, including maintaining a net due to position and
complying with heightened asset maintenance requirements.\28\ In
addition, the plan should describe how such a U.S. branch's third-party
creditors would be protected such that the state regulator or
appropriate Federal banking agency would allow the branch to continue
operations.
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\28\ Firms should take into consideration historical practice,
by applicable regulators, regarding asset maintenance requirements
imposed during stress.
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Impact of the Cessation of Operations: The firm must provide an
analysis of the impact of the cessation of operations of any U.S.
branch that is significant to the activities of an identified critical
operation on the firm's FMU access and identified critical operations,
even if such scenario is not contemplated as part of the U.S.
resolution strategy. The analysis should include a description of how
identified critical operations could be transferred to a U.S. IHC
subsidiary or sold in resolution, the obstacles presented by the
cessation of shared services that support identified critical
operations provided by any U.S. branch that is a material entity, and
mitigants that could address such obstacles in a timely manner.
VII. Legal Entity Rationalization
Legal Entity Rationalization Criteria (LER Criteria): A firm should
develop and implement legal entity rationalization criteria that
support the firm's U.S. resolution strategy and minimize risk to U.S.
financial stability in the event of resolution. LER Criteria should
consider the best alignment of legal entities and business lines to
improve the resolvability of U.S. operations under different market
conditions. LER Criteria should govern the corporate structure and
arrangements between the U.S. subsidiaries and U.S. branches in a way
that facilitates resolvability of the firm's U.S. operations as the
firm's U.S. activities, technology, business models, or geographic
footprint change over time.
Specifically, application of the criteria should:
(A) Ensure that the allocation of activities across the firm's U.S.
branches and U.S. non-branch material entities support the firm's U.S.
resolution strategy and minimize risk to U.S. financial stability in
the event of resolution;
(B) Facilitate the recapitalization and liquidity support of U.S.
IHC subsidiaries, as required by the firm's U.S. resolution strategy.
Such criteria should include clean lines of ownership and clean funding
pathways between the foreign parent, the U.S. IHC, and U.S. IHC
subsidiaries;
(C) Facilitate the sale, transfer, or wind-down of certain discrete
operations within a timeframe that would meaningfully increase the
likelihood of an orderly resolution in the United States, including
provisions for the continuity of associated services and mitigation of
financial, operational, and legal challenges to separation and
disposition;
(D) Adequately protect U.S. subsidiary insured depository
institutions from risks arising from the activities of any nonbank U.S.
subsidiaries (other than those that are subsidiaries of an insured
depository institution); and
(E) Minimize complexity that could impede an orderly resolution in
the United States and minimize redundant and dormant entities.
These criteria should be built into the firm's ongoing process for
creating, maintaining, and optimizing the firm's U.S. structure and
operations on a continuous basis.
VIII. Derivatives and Trading Activities
A Specified FBO's plan should address the following areas.
Booking Practices
A firm should have booking practices commensurate with the size,
scope, and complexity of its U.S. derivatives and trading
activities.\29\ The following
[[Page 83576]]
booking practices-related capabilities should be addressed in a firm's
resolution plan:
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\29\ ``U.S. derivatives and trading activities'', means all
derivatives and linked non-derivatives trading activities conducted
on behalf of the firm, its clients, or its counterparties that are
booked into the firm's U.S. IHC subsidiaries and material entity
branches (U.S. entities). The firm may define linked non-derivatives
trading activities based on its overall business and resolution
strategy.
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Derivatives and trading booking framework. A firm should have a
comprehensive booking model framework that articulates the principles,
rationales, and approach to implementing its booking practices for all
of its U.S. derivatives and trading activities. The framework and its
underlying components should be documented and adequately supported by
internal controls (e.g., procedures, systems, processes). Taken
together, the booking framework and its components should provide
transparency with respect to (i) what is being booked (e.g., product,
counterparty), (ii) where it is being originated and booked (e.g.,
legal entity), (iii) by whom it is booked (e.g., business or trading
desk), (iv) why it is booked that way (e.g., drivers or rationales for
that arrangement), and (v) what controls the firm has in place to
monitor and manage those practices (e.g., governance or information
systems).\30\
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\30\ The description of controls should include any components
of any market, credit, or liquidity risk management framework that
is material to the management of the firm's U.S. derivatives and
trading activities.
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The firm's resolution plan should include detailed descriptions of
the framework and each of its material components. In particular, a
firm's resolution plan should include descriptions of documented
booking models covering its U.S. derivatives and trading
activities.\31\ These descriptions should provide clarity with respect
to the underlying booking flows (e.g., the mapping of trade flows based
on multiple trade characteristics as decision points that determine on
which entity a trade is directly booked and the applicability of any
risk transfer arrangements). Furthermore, a firm's resolution plan
should describe its end-to-end booking and reporting processes,
including a description of the current scope of automation (e.g.,
automated trade flows, detective monitoring) of the systems controls
applied to the firm's documented booking models. The plan should also
discuss why the firm believes its current (or planned) scope of
automation is sufficient for managing its U.S. derivatives and trading
activities during the execution of its U.S. resolution strategy.\32\
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\31\ The booking models should represent the vast majority
(e.g., 95 percent) of a firm's U.S. derivatives and trading
activities, measured by, for example, trade notional and gross
market value (for derivatives) and client positions and balances
(for prime brokerage client accounts).
\32\ Effective preventative (up-front) and detective (post-
booking) controls embedded in a firm's booking processes can help
avoid and/or timely remediate trades that do not align with a
documented booking model or related risk limit. Firms typically use
a combination of manual and automated control functions. Although
automation may not be best suited for all control functions, as
compared to manual methods, it can improve consistency and
traceability with respect to booking practices. However, non-
automated methods also can be effective when supported by other
internal controls (e.g., robust detective monitoring, escalation
protocols).
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Derivatives and trading entity analysis and reporting. A firm
should have the ability to identify, assess, and report on each U.S.
entity that originates or otherwise conducts (in whole or in material
part) any significant aspect of the firm's U.S. derivatives and trading
activities (a derivatives or trading entity). First, the firm's
resolution plan should describe its method (which may include both
qualitative and quantitative criteria) for evaluating the significance
of each derivatives or trading entity both with respect to the firm's
current U.S. derivatives and trading activities and its U.S. resolution
strategy.\33\ Second, a firm's resolution plan should demonstrate
(including through use of illustrative samples) the firm's ability to
readily generate current derivatives or trading entity profiles that
(i) cover all derivatives or trading entities, (ii) are reportable in a
consistent manner, and (iii) include information regarding current
legal ownership structure, business activities and volume, and risk
profile of the entity (including relevant risk transfer arrangements).
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\33\ The firm should leverage any existing methods and criteria
it uses for other entity assessments (e.g., legal entity
rationalization or the prepositioning of internal loss-absorbing
resources). The firm's method for determining the significance of
derivatives or trading entities may diverge from the parameters for
material entity designation under the Rule (i.e., entities
significant to the activities of an identified critical operation or
core business line); however, any differences should be adequately
supported and explained.
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U.S. Activities Monitoring
A firm should be able to assess how the management of U.S.
derivatives and trading activities could be affected in the period
leading up to and during the execution of its U.S. resolution strategy,
including disruptions that could affect materially the funding or
operations of the U.S. entities that conduct the U.S. derivatives and
trading activities or their clients and counterparties. Therefore, a
firm should have capabilities to provide timely transparency into the
management of its U.S. derivatives and trading activities, in the
period leading up to and during the execution of its U.S. resolution
strategy by maintaining a monitoring framework for U.S. derivatives and
trading activities, which consists of at least the following two
components:
1. A method for identifying U.S. derivatives and trading
activities, and measuring, monitoring, and reporting on those
activities on a business line and legal entity basis; and
2. A method for identifying, assessing, and reporting the potential
impact on (i) clients and counterparties of U.S. entities that conduct
the U.S. derivatives and trading activities and (ii) any related risk
transfer arrangements \34\ among and between U.S. entities and their
non-U.S. affiliates.
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\34\ For example, risk transfer arrangements might include
transfer pricing, profit sharing, loss limiting, or intragroup
hedging arrangements.
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Prime Brokerage Customer Account Transfers
A firm should have the operational capacity to facilitate the
orderly transfer of U.S. prime brokerage accounts,\35\ to peer prime
brokers in periods of material financial distress and during the
execution of its U.S. resolution strategy. The firm's plan should
include an assessment of how it would transfer such accounts. This
assessment should be informed by clients' relationships with other
prime brokers, the use of automated and manual transaction processes,
clients' overall long and short positions as facilitated by the firm,
and the liquidity of clients' portfolios. The assessment should also
analyze the risks and loss mitigants of customer-to-customer
internalization (e.g., the inability to fund customer longs with
customer shorts) and operational challenges (including insufficient
staffing) that the firm may experience in effecting the scale and speed
of prime brokerage account transfers envisioned under the firm's U.S.
resolution strategy.
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\35\ ``U.S. prime brokerage account'' or ``U.S. prime brokerage
account balances'' should include the account positions and balances
of a client of the firm's U.S. prime brokerage business who signs a
prime brokerage agreement with a U.S. material entity.
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In addition, a firm should describe and demonstrate its ability to
segment and analyze the quality and composition of U.S. prime brokerage
account balances based on a set of well-defined and consistently
applied segmentation criteria (e.g., size, single-prime, platform, use
of leverage, non-rehypothecatable securities, liquidity of underlying
assets). The capabilities should cover U.S. prime brokerage account
balances and the resulting segments should represent a range in
[[Page 83577]]
potential transfer speed (e.g., from fastest to longest to transfer,
from most liquid to least liquid). The selected segmentation criteria
should reflect characteristics \36\ that the firm believes could affect
the speed at which the U.S. prime brokerage account would be
transferred to an alternate prime broker.
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\36\ For example, relevant characteristics might include
product, size, clearability, currency, maturity, level of
collateralization, and other risk characteristics.
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Portfolio Segmentation
A firm should have the capabilities to produce analysis that
reflects derivatives portfolio \37\ segmentation and differentiation of
assumptions, taking into account trade-level characteristics. More
specifically, a firm should have systems capabilities that would allow
it to produce a spectrum of derivatives portfolio segmentation analysis
using multiple segmentation dimensions for each U.S. entity with a
derivatives portfolio--namely, (1) trading desk or product, (2) cleared
vs. clearable vs. non-clearable trades, (3) counterparty type, (4)
currency, (5) maturity, (6) level of collateralization, and (7) netting
set.\38\ A firm should also have the capabilities to segment and
analyze the full contractual maturity (run-off) profile of the
derivatives portfolios in its U.S. entities. The firm's resolution plan
should describe and demonstrate the firm's ability to segment and
analyze the derivatives portfolios booked into its U.S. entities using
the relevant segmentation dimensions and to report the results of such
segmentation and analysis.
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\37\ A firm's derivatives portfolios include its derivatives
positions and linked non-derivatives trading positions.
\38\ The enumerated segmentation dimensions are not intended as
an exhaustive list of relevant dimensions. With respect to any
product or asset class, a firm may have reasons for not capturing
data on (or not using) one or more of the enumerated segmentation
dimensions. In that case, however, the firm should explain those
reasons.
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Derivatives Stabilization and De-Risking Strategy
To the extent the U.S. resolution strategy assumes the continuation
of a U.S. IHC subsidiary with a derivatives portfolio after the entry
of the U.S. IHC into a U.S. bankruptcy proceeding (surviving
derivatives subsidiary), the firm's plan should provide a detailed
analysis of the strategy to stabilize and de-risk any derivatives
portfolio of the surviving derivatives subsidiary (U.S. derivatives
strategy) that has been incorporated into its U.S. resolution
strategy.\39\ In developing its U.S. derivatives strategy, a firm
should apply the following assumption constraints:
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\39\ Subject to the relevant constraints, a firm's U.S.
derivatives strategy may take the form of a going-concern strategy,
an accelerated de-risking strategy (e.g., active wind-down) or an
alternative, third strategy so long as the firm's resolution plan
adequately supports the execution of the chosen strategy. For
example, a firm may choose a going-concern scenario (e.g., surviving
derivatives subsidiary reestablishes investment grade status and
does not enter any wind-down) as its derivatives strategy. Likewise,
a firm may choose to adopt a combination of going-concern and
accelerated de-risking scenarios as its U.S. derivatives strategy.
For example, the U.S. derivatives strategy could be a stabilization
scenario for the U.S. bank entity and an accelerated de-risking
scenario for U.S. broker-dealer entities.
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OTC derivatives market access: At or before the start of
the resolution period, each surviving derivatives subsidiary should be
assumed to lack an investment grade credit rating (e.g., unrated or
downgraded below investment grade). Each surviving derivatives
subsidiary also should be assumed to have failed to establish or
reestablish investment grade status for the duration of the resolution
period, unless the plan provides well-supported analysis to the
contrary. As the subsidiary is not investment grade, it further should
be assumed that each surviving derivatives subsidiary has no access to
bilateral OTC derivatives markets and must use exchange-traded or
centrally cleared instruments for any new hedging needs that arise
during the resolution period. Nevertheless, a firm may assume the
ability to engage in certain risk-reducing derivatives trades with
bilateral OTC derivatives counterparties during the resolution period
to facilitate novations with third parties and to close out inter-
affiliate trades.\40\
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\40\ A firm may engage in bilateral OTC derivatives trades with,
for example, (i) external counterparties, to effect the novation of
the firm's side of a derivatives contract to a new, acquiring
counterparty; and (ii) inter-affiliate counterparties, where the
trades with inter-affiliate counterparties do not materially
increase either the credit exposure of any participating
counterparty or the market risk of any such counterparty on a
standalone basis, after taking into account any hedging with
exchange-traded and centrally-cleared instruments. The firm should
provide analysis to support the risk of the trade on the basis of
information that would be known to the firm at the time of the
transaction.
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Early exits (break clauses): A firm should assume that
counterparties (both external and affiliates) will exercise any
contractual termination or other right, including any rights stayed by
contract (including amendments) or in compliance with the rules
establishing restrictions on qualified financial contracts of the
Board, the FDIC, or the Office of the Comptroller of the Currency \41\
or any other regulatory requirements, (i) that is available to the
counterparty at or following the start of the resolution period; and
(ii) if exercising such right would economically benefit the
counterparty (counterparty-initiated termination).
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\41\ See 12 CFR part 47 (OCC); part 252, subpart I (Board); part
382 (FDIC).
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Time horizon: The duration of the resolution period should
be between 12 and 24 months. The resolution period begins immediately
after the U.S. IHC bankruptcy filing and extends through the completion
of the U.S. resolution strategy.\42\
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\42\ The firm may consider a resolution period of less than 12
months as long as the length of the resolution period is adequately
supported by the firm's analysis of the size, composition,
complexity, and maturity profile of the derivatives portfolios in
its U.S. IHC subsidiaries.
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A firm's analysis of its U.S. derivatives strategy should take into
account (i) the starting profile of any derivatives portfolio of each
surviving derivatives subsidiary (e.g., nature, concentration,
maturity, clearability, liquidity of positions); (ii) the profile and
function of any surviving derivatives subsidiary during the resolution
period; (iii) the means, challenges, and capacity of the surviving
derivatives subsidiary to manage and de-risk its derivatives portfolios
(e.g., method for timely segmenting, packaging, and selling the
derivatives positions; challenges with novating less liquid positions;
re-hedging strategy); (iv) the financial and operational resources
required to effect the derivatives strategy; and (v) any potential
residual portfolio (further discussed below). In addition, the firm's
resolution plan should address the following areas in the analysis of
its derivatives strategy:
Forecasts of resource needs. The forecasts of capital and liquidity
resource needs of U.S. IHC subsidiaries required to support adequately
the firm's U.S. derivatives strategy should be incorporated into the
firm's RCEN and RLEN estimates for its overall U.S. resolution
strategy. These include, for example, the costs and liquidity flows
resulting from (i) the close-out of OTC derivatives, (ii) the hedging
of derivatives portfolios, (iii) the quantified losses that could be
incurred due to basis and other risks that would result from hedging
with only exchange-traded and centrally cleared instruments in a
severely adverse stress environment, and (iv) operational costs.\43\
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\43\ A firm may choose not to isolate and separately model the
operational costs solely related to executing its derivatives
strategy. However, the firm should provide transparency around
operational cost estimation at a more granular level than material
entity (e.g., business line level within a material entity, subject
to wind-down).
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Sensitivity analysis. A firm should have a method to apply
sensitivity
[[Page 83578]]
analyses to the key drivers of the derivatives-related costs and
liquidity flows under its U.S. resolution strategy. A firm's resolution
plan should describe its method for (i) evaluating the materiality of
assumptions and (ii) identifying those assumptions (or combinations of
assumptions) that constitute the key drivers for its forecasts of
derivatives-related operational and financial resource needs under the
U.S. resolution strategy. In addition, using its U.S. resolution
strategy as a baseline, the firm's resolution plan should describe and
demonstrate its approach to testing the sensitivities of the identified
key drivers and the potential impact on its forecasts of resource
needs.\44\
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\44\ For example, key drivers of derivatives-related costs and
liquidity flows might include the timing of derivatives unwind, cost
of capital-related assumptions (e.g., target return on equity,
discount rate, weighted average life, capital constraints, tax
rate), operational cost reduction rate, and operational capacity for
novations. Other examples of key drivers likely also include central
counterparty margin flow assumptions and risk-weighted asset
forecast assumptions.
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Potential residual derivatives portfolio. A firm's resolution plan
should include a method for estimating the composition of any potential
residual derivatives portfolio transactions booked in a U.S. IHC
subsidiary remaining at the end of the resolution period under its U.S.
resolution strategy. The firm's plan also should provide detailed
descriptions of the trade characteristics used to identify such
potential residual portfolio and of the resulting trades (or categories
of trades).\45\ A firm should assess the risk profile of such potential
residual portfolio (including its anticipated size, composition,
complexity, and counterparties), and the potential counterparty and
market impacts of non-performance by the firm on the stability of U.S.
financial markets (e.g., on funding markets, on underlying asset
markets, on clients and counterparties).
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\45\ If, under the firm's U.S. resolution strategy, any
derivatives portfolios are transferred during the resolution period
by way of a line of business sale (or similar transaction), then
those portfolios nonetheless should be included within the firm's
potential residual portfolio analysis.
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Non-surviving entity analysis. To the extent the U.S. resolution
strategy assumes a U.S. IHC subsidiary with a derivatives portfolio
enters its own resolution proceeding after the entry of the U.S. IHC
into a U.S. bankruptcy proceeding (a non-surviving derivatives
subsidiary), the firm should provide a detailed analysis of how the
non-surviving derivatives subsidiary's resolution can be accomplished
within a reasonable period of time and in a manner that substantially
mitigates the risk of serious adverse effects on U.S. financial
stability and on the orderly execution of the firm's U.S. resolution
strategy. In particular, the firm should provide an analysis of the
potential impacts on funding markets, on underlying asset markets, on
clients and counterparties (including affiliates), and on the firm's
U.S. resolution strategy.
IX. Format and Structure of Plans
Format of Plan
Executive Summary. The Plan should contain an executive summary
consistent with the Rule, which must include, among other things, a
concise description of the key elements of the firm's U.S. strategy for
an orderly resolution. In addition, the executive summary should
include a discussion of the firm's assessment of any impediments to the
firm's U.S. resolution strategy and its execution, as well as the steps
it has taken to address any identified impediments.
Narrative. The Plan should include a strategic analysis consistent
with the Rule. This analysis should take the form of a concise
narrative that enhances the readability and understanding of the firm's
discussion of its U.S. strategy for orderly resolution in bankruptcy or
other applicable insolvency regimes (Narrative). The Narrative also
should include a high-level discussion of how the firm is addressing
key vulnerabilities jointly identified by the Agencies. This is not an
exhaustive list and does not preclude identification of further
vulnerabilities or impediments.
Appendices. The Plan should contain a sufficient level of detail
and analysis to substantiate and support the strategy described in the
Narrative. Such detail and analysis should be included in appendices
that are distinct from and clearly referenced in the related parts of
the Narrative (Appendices).
Public Section. The Plan must be divided into a public section and
a confidential section consistent with the requirements of the Rule.
Other Informational Requirements. The Plan must comply with all
other informational requirements of the Rule. The firm may incorporate
by reference previously submitted information as provided in the Rule.
Guidance Regarding Assumptions
1. The Plan should be based on the current state of the applicable
legal and policy frameworks. Pending legislation or regulatory actions
may be discussed as additional considerations.
2. The firm must submit a plan that does not rely on the provision
of extraordinary support by the United States or any other government
to the firm or its subsidiaries to prevent the failure of the firm.
3. The firm should not assume that it will be able to sell
identified critical operations or core business lines, or that
unsecured funding will be available immediately prior to filing for
bankruptcy.
4. The Plan should assume the Dodd-Frank Act Stress Test (DFAST)
severely adverse scenario for the first quarter of the calendar year in
which the Plan is submitted is the domestic and international economic
environment at the time of the firm's failure and throughout the
resolution process.
5. The resolution strategy may be based on an idiosyncratic event
or action. The firm should justify use of that assumption, consistent
with the conditions of the economic scenario.
6. Within the context of the applicable idiosyncratic scenario,
markets are functioning and competitors are in a position to take on
business. If a firm's Plan assumes the sale of assets, the firm should
take into account all issues surrounding its ability to sell in market
conditions present in the applicable economic condition at the time of
sale (i.e., the firm should take into consideration the size and scale
of its operations as well as issues of separation and transfer.)
7. The firm should not assume any waivers of section 23A or 23B of
the Federal Reserve Act in connection with the actions proposed to be
taken prior to or in resolution.
8. The firm may assume that its depository institutions will have
access to the Discount Window only for a few days after the point of
failure to facilitate orderly resolution. However, the firm should not
assume its subsidiary depository institutions will have access to the
Discount Window while critically undercapitalized, in FDIC
receivership, or operating as a bridge bank, nor should it assume any
lending from a Federal Reserve credit facility to a non-bank affiliate.
Financial Statements and Projections
The Plan should include the actual balance sheet for each material
entity and the consolidating balance sheet adjustments between material
entities as well as pro forma balance sheets for each material entity
at the point of failure and at key junctures in the execution of the
resolution strategy. It should also include projected statements of
sources and uses of funds for the interim periods. The pro forma
financial statements and accompanying notes in the Plan must clearly
evidence the failure trigger event; the Plan's
[[Page 83579]]
assumptions; and any transactions that are critical to the execution of
the Plan's preferred strategy, such as recapitalizations, the creation
of new legal entities, transfers of assets, and asset sales and
unwinds.
Material Entities
Material entities should encompass those entities, including
subsidiaries, branches and agencies (collectively, Offices), which are
significant to the activities of an identified critical operation or
core business line. If the abrupt disruption or cessation of a core
business line might have systemic consequences to U.S. financial
stability, the entities essential to the continuation of such core
business line should be considered for material entity designation.
Material entities should include the following types of entities:
a. Any Office, wherever located, that is significant to the
activities of an identified critical operation.
b. Any Office, wherever located, whose provision or support of
global treasury operations, funding, or liquidity activities (inclusive
of intercompany transactions) is significant to the activities of an
identified critical operation.
c. Any Office, wherever located, that would provide material
operational support in resolution (key personnel, information
technology, data centers, real estate or other shared services) to the
activities of an identified critical operation.
d. Any Office, wherever located, that is engaged in derivatives
booking activity that is significant to the activities of an identified
critical operation, including those that conduct either the internal
hedge side or the client-facing side of a transaction.
e. Any Office, wherever located, engaged in asset custody or asset
management that are significant to the activities of an identified
critical operation.
f. Any Office, wherever located, holding licenses or memberships in
clearinghouses, exchanges, or other FMUs that are significant to the
activities of an identified critical operation.
For each material entity (including a branch), the Plan should
enumerate, on a jurisdiction-by-jurisdiction basis, the specific
mandatory and discretionary actions or forbearances that regulatory and
resolution authorities would take during resolution, including any
regulatory filings and notifications that would be required as part of
the U.S. resolution strategy, and explain how the Plan addresses the
actions and forbearances. The Plan should describe the consequences for
the firm's U.S. resolution strategy if specific actions in each
jurisdiction were not taken, delayed, or forgone, as relevant.
X. Public Section
The purpose of the public section is to inform the public's
understanding of the firm's resolution strategy and how it works.
The public section should discuss the steps that the firm is taking
to improve resolvability under the U.S. Bankruptcy Code. The public
section should provide background information on each material entity
and should be enhanced by including the firm's rationale for
designating material entities. The public section should also discuss,
at a high level, the firm's intra-group financial and operational
interconnectedness (including the types of guarantees or support
obligations in place that could impact the execution of the firm's
strategy). There should also be a high-level discussion of the
liquidity resources and loss-absorbing capacity of the U.S. IHC.
The discussion of strategy in the public section should broadly
explain how the firm has addressed any deficiencies, shortcomings, and
other key vulnerabilities that the Agencies have identified in prior
Plan submissions. For each material entity, it should be clear how the
strategy provides for continuity, transfer, or orderly wind-down of the
entity and its operations. There should also be a description of the
resulting organization upon completion of the resolution process.
The public section may note that the resolution plan is not binding
on a bankruptcy court or other resolution authority and that the
proposed failure scenario and associated assumptions are hypothetical
and do not necessarily reflect an event or events to which the firm is
or may become subject.
Appendix: Frequently Asked Questions
In March 2017, the Agencies issued guidance for use in developing
the 2018 resolution plan submissions by certain foreign banking
organizations.
In response to frequently asked questions regarding that guidance
from the recipients of that guidance, Board and FDIC staff jointly
developed answers and provided those answers to the guidance recipients
in 2017 so that they could take this information into account in
developing their next resolution plan submissions.\46\
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\46\ The FAQs represent the views of staff of the Board of
Governors of the Federal Reserve System and the Federal Deposit
Insurance Corporation and do not bind the Board or the FDIC.
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The questions in this Appendix:
Comprise common questions asked by different covered
companies. Not every question is applicable to every firm; not every
aspect of the guidance applies to each firm's preferred strategy/
structure; and
Reflect updated references to correspond to this final
guidance for the Specified FBOs (Final Guidance).
As indicated below, those questions and answers that are deemed to
be no longer meaningful or relevant have not been consolidated in this
Appendix and are superseded.
Capital
CAP 1. Not consolidated
CAP 2. Definition of ``Well-Capitalized'' Status
Q. How should firms apply the term ``well-capitalized''?
A. U.S. non-branch material entities must comply with the capital
requirements and expectations of their primary regulator. U.S. non-
branch material entities should be recapitalized to meet jurisdictional
requirements and to maintain market confidence as required under the
U.S. resolution strategy.
CAP 3. RCEN Relationship to DFAST Severely Adverse Scenario
Q. How should the firm's RCEN and RLEN estimates relate to the
DFAST Severely Adverse scenario? Can those estimates be recalibrated in
actual stress conditions?
A. For resolution plan submission purposes, the estimation of RLEN
and RCEN should assume macroeconomic conditions consistent with the
DFAST Severely Adverse scenario. However, the RLEN and RCEN
methodologies should have the flexibility to incorporate macroeconomic
conditions that may deviate from the DFAST Severely Adverse scenario in
order to facilitate execution of the U.S. resolution strategy.
CAP 4. Not Consolidated
Liquidity
LIQ 1. Inter-Company ``Frictions''
Q. Can the Agencies clarify what kinds of frictions might occur
between affiliates beyond regulatory ring-fencing?
A. Frictions are any impediments to the free flow of funds,
collateral and other transactions between material entities. Examples
include regulatory, legal, financial (i.e., tax consequences), market,
or operational constraints or requirements.
LIQ 2. Distinction between Liquidity Forecasting Periods
[[Page 83580]]
Q1. How long is the stabilization period?
A1. The stabilization period begins immediately after the U.S. IHC
bankruptcy filing and extends until each material entity reestablishes
market confidence. The stabilization period may not be less than 30
days. The reestablishment of market confidence may be reflected by the
maintaining, reestablishing, or establishing of investment grade
ratings or the equivalent financial condition for each entity. The
stabilization period may vary by material entity, given differences in
regulatory, counterparty, and other stakeholder interests in each
entity.
Q2. Not Consolidated.
Q3. What is the resolution period?
A3. The resolution period begins immediately after the U.S. IHC's
bankruptcy filing and extends through the completion of the U.S.
strategy. After the stabilization period (see ``LIQ 2. Distinction
between Liquidity Forecasting Periods,'' Question 1, regarding
``stabilization period''), financial statements and projections may be
provided at quarterly intervals through the remainder of the resolution
period.
LIQ 3. Inter-Affiliate Transaction Assumptions
Q. Does inter-affiliate funding refer to all kinds of intercompany
transactions, including both unsecured and secured?
A. Yes.
LIQ 4. RLEN and Minimum Operating Liquidity (MOL)
Q1. How should firms distinguish between the minimum operating
liquidity (MOL) and peak funding needs during the RLEN period?
A1. The peak funding needs represent the peak cumulative net out-
flows during the stabilization period. The components of peak funding
needs, including the monetization of assets and other management
actions, should be transparent in the RLEN projections. The peak
funding needs should be supported by projections of daily sources and
uses of cash for each U.S. IHC subsidiary, incorporating inter-
affiliate and third-party exposures. In mathematical terms, RLEN = MOL
+ peak funding needs during the stabilization period. RLEN should also
incorporate liquidity execution needs of the U.S. resolution strategy
for derivatives (see Derivatives and Trading Activities section).
Q2. Should the MOL per entity make explicit the allocation for
intraday liquidity requirements, inter-affiliate and other funding
frictions, operating expenses, and working capital needs?
A2. Yes, the components of the MOL estimates for each surviving
U.S. IHC subsidiary should be transparent and supported.
Q3. Can MOLs decrease as surviving U.S. IHC subsidiaries wind down?
A3. MOL estimates can decline as long as they are sufficiently
supported by the firm's methodology and assumptions.
LIQ 5. Not Consolidated
LIQ 6. Inter-Affiliate Transactions with Optionality
Q. How should firms treat an inter-affiliate transaction with an
embedded option that may affect the contractual maturity date?
A. For the purpose of calculating a firm's net liquidity position
at a material entity, the RLEN model should assume that these
transactions mature at the earliest possible exercise date; this
adjusted maturity should be applied symmetrically to both material
entities involved in the transaction.
LIQ 7. Stabilization and Regulatory Liquidity Requirements
Q. As it relates to the RLEN model and actions necessary to re-
establish market confidence, what assumptions should firms make
regarding compliance with regulatory liquidity requirements?
A. Firms should consider the applicable regulatory expectations for
each U.S. IHC subsidiary to achieve the stabilization needed to execute
the U.S. resolution strategy. Firms' assumptions in the RLEN model
regarding the actions necessary to reestablish market confidence during
the stabilization period may vary by U.S. IHC subsidiary, for example,
based on differences in regulatory, counterparty, other stakeholder
interests, and based on the U.S. resolution strategy for each U.S. IHC
subsidiary. See also ``LIQ 2. Distinction between Liquidity Forecasting
Periods.''
LIQ 8. HQLA and Assets Not Eligible as HQLA in the RLEN Model
Q. The Final Guidance states the RLEN estimate should be based on
the minimum amount of HQLA required to facilitate the execution of the
firm's U.S. resolution strategy. How should firms incorporate any
expected liquidity value of assets that are not eligible as HQLA (non-
HQLA) into the RLEN model?
A. For a firm's RLEN model, firms may incorporate conservative
estimates of potential liquidity that may be generated through the
monetization of non-HQLA. The estimated liquidity value of non-HQLA
should be supported by thorough analysis of the potential market
constraints and asset value haircuts that may be required. Assumptions
for the monetization of non-HQLA should be consistent with the U.S.
resolution strategy for each U.S. IHC subsidiary.
LIQ 9. Components of Minimum Operating Liquidity
Q. Do the agencies have particular definitions of the ``intraday
liquidity requirements,'' ``operating expenses,'' and ``working capital
needs'' components of minimum operating liquidity (MOL) estimates?
A. No. A firm may use its internal definitions of the components of
MOL estimates. The components of MOL estimates should be well-supported
by a firm's internal methodologies and calibrated to the specifics of
each U.S. IHC subsidiary.
LIQ 10. RLEN Model and Net Revenue Recognition
Q. Can firms assume in the RLEN model that cash-based net revenue
generated by U.S. IHC subsidiaries after the U.S. IHC's bankruptcy
filing is available to offset estimated liquidity needs?
A. Yes. Firms may incorporate cash revenue generated by U.S. IHC
subsidiaries in the RLEN model. Cash revenue projections should be
conservatively estimated and consistent with the operating environment
and the U.S. strategy for each U.S. IHC subsidiary.
LIQ 11. RLEN Model and Inter-Affiliate Frictions
Q. Can a firm modify its assumptions regarding one or more inter-
affiliate frictions during the stabilization or post-stabilization
period in the RLEN model?
A. Once a U.S. IHC subsidiary has achieved market confidence
necessary for stabilization consistent with the U.S. resolution
strategy, a firm may modify one or more inter-affiliate frictions,
provided the firm provides sufficient analysis to support this
assumption.
LIQ 12. RLEN Relationship to DFAST Severely Adverse scenario
(See ``CAP 3. RCEN Relationship to DFAST Severely Adverse
Scenario'' in the Capital section.)
LIQ 13. Liquidity Positioning and Foreign Parent Support
Q1. May firms consider available liquidity at the foreign parent
for meeting RLEN estimates for U.S. non-branch material entities?
A1. To meet the liquidity needs informed by the RLEN methodology,
firms may either fully pre-position liquidity in the U.S. non-branch
material entities or develop a mechanism for planned foreign parent
support of any amount not pre-
[[Page 83581]]
positioned for the successful execution of the U.S. strategy.
Mechanisms to support readily available liquidity may include a term
liquidity facility between the U.S. IHC and the foreign parent that can
be drawn as needed. If a firm's plan relies on foreign parent support,
the plan should include analysis of how the U.S. IHC/foreign parent
facility is funded or buffered for by the foreign parent.
LIQ 14. Not consolidated
LIQ 15. Not consolidated
LIQ 16. Not consolidated
Operational: Shared Services
OPS SS 1. Not Consolidated
OPS SS 2. Working Capital
Q1. Must working capital be maintained for third party and internal
shared service costs?
A1. Where a firm maintains shared service companies to provide
services to affiliates, working capital should be maintained in those
entities sufficient to permit those entities to continue to provide
services for six months or through the period of stabilization as
required in the firm's U.S. resolution strategy.
Costs related to third-party vendors and inter-affiliate services
should be captured through the working capital element of the MOL
estimate (RLEN).
Q2. When does the six month working capital requirement period
begin?
A2. The measurement of the six month working capital expectation
begins upon the bankruptcy filing of the U.S. IHC. The expectation for
maintaining the working capital is effective upon the July 2018
submission.
OPS SS 3. Not Consolidated
OPS SS 4. Not Consolidated
Operations: Payments, Clearing and Settlement
To the extent relevant, the PCS FAQs have been consolidated into
the updated section of the Final Guidance.
Legal Entity Rationalization
LER 1. Not consolidated
LER 2. Legal Entity Rationalization Criteria
Q. Is it acceptable to take into account business-related criteria,
in addition to the resolution requirements, so that the LER Criteria
can be used for both resolution planning and business operations
purposes?
A. Yes, LER criteria may incorporate both business and resolution
considerations. In determining the best alignment of legal entities and
business lines to improve the firm's resolvability under different
market conditions, business considerations should not be prioritized
over resolution needs.
LER 3. Creation of Additional Legal Entities
Q. Is the addition of legal entities acceptable, so long as it is
consistent with the LER criteria?
A. Yes.
LER 4. Clean Funding Pathways
Q1. Can you provide additional context around what is meant by
clean lines of ownership and clean funding pathways in the legal entity
rationalization criteria? Additionally, what types of funding are
covered by the requirements?
A1. The funding pathways between the foreign parent, U.S. IHC, and
U.S. IHC subsidiaries should minimize uncertainty in the provision of
funds and facilitate recapitalization. Also, the complexity of
ownership should not impede the flow of funding to a U.S. non-branch
material entity under the firm's U.S. resolution strategy. Potential
sources of additional complexity could include, for example, multiple
intermediate holding companies, tenor mismatches, or complicated
ownership structures (including those involving multiple jurisdictions
or fractional ownerships). Ownership should be as clean and simple as
practicable, supporting the U.S. strategy and actionable sales,
transfers, or wind-downs under varying market conditions. The clean
funding pathways expectation applies to all funding provided to a U.S.
non-branch material entity regardless of type and should not be viewed
solely to apply to internal TLAC.
Q2. The Final Guidance regarding legal entity rationalization
criteria discusses ``clean lines of ownership'' and ``clean funding
pathways.'' Does this statement mean that firms' legal entity
rationalization criteria should require funding pathways and
recapitalization to always follow lines of ownership?
A2. No. However, the firm should identify and address or mitigate
any legal, regulatory, financial, operational, and other factors that
could complicate the recapitalization and/or liquidity support of U.S.
non-branch material entities.
LER 5. Not consolidated
LER 6. Not consolidated
LER 7. Application of Legal Entity Rationalization Criteria
Q1. Which legal entities should be covered under the LER framework?
A1. The scope of a firm's LER criteria should apply to the entire
U.S. operations.
Q2. To the extent a firm has a large number of similar U.S. non-
material entities (such as single-purpose entities formed for Community
Reinvestment Act purposes), may a firm apply its legal entity
rationalization criteria to these entities as a group, rather than at
the individual entity level?
A2. Yes.
LER 8. Application of LER Criteria.
Q. Under the Final Guidance, is there an expectation that the LER
criteria be applied to the legal structure outside of the U.S.
operations (e.g., outside of the U.S. IHC or U.S. branch)?
A. The LER criteria serve to govern the corporate structure and
arrangements between U.S. subsidiaries and U.S. branches in a manner
that facilitates the resolvability of U.S. operations. The Final
Guidance is not intended to govern the corporate structure in
jurisdictions outside the U.S. The application of the LER criteria
should, among other things, ensure that the allocation of activities
across the firm's U.S. branches and U.S. non-branch material entities
support the firm's US resolution strategy and minimize risk to US
financial stability in the event of resolution.
Moreover, LER works with other components to improve resolvability.
For example, with regard to shared services the firm should identify
all shared services that support identified critical operations,
maintain a mapping of how/where these services support core business
lines and identified critical operations, and include this mapping into
the legal rationalization criteria and implementation efforts.
Derivatives and Trading Activities
To the extent relevant, the derivatives and trading FAQs have been
consolidated into the updated section of the Final Guidance.
Legal
LEG 1. Not consolidated.
LEG 2. Contractually Binding Mechanisms
The Final Guidance does not specifically reference consideration of
a contractually binding mechanism. However, the following questions and
answers may be useful to a firm that chooses to consider a
contractually binding mechanism as a mitigant to the potential
challenges to the planned Support.
Q1. Do the Agencies have any preference as to whether capital is
down-streamed to key subsidiaries (including an IDI subsidiary) in the
form of capital contributions vs. forgiveness of debt?
A1. No. The Agencies do not have a preference as to the form of
capital contribution or liquidity support.
[[Page 83582]]
Q2. Should a contractually binding mechanism relate to the
provision of capital or liquidity? What classes of assets would be
deemed to provide capital vs. liquidity?
A2. Contractually binding mechanism is a generic term and includes
the down-streaming of capital and/or liquidity as contemplated by the
U.S. resolution strategy. Furthermore, it is up to the firm, as
informed by any relevant guidance of the Agencies, to identify what
assets would satisfy a U.S. affiliate's need for capital and/or
liquidity.
Q3. Is there a minimum acceptable duration for a contractually
binding mechanism? Would an ``evergreen'' arrangement, renewable on a
periodic basis (and with notice to the Agencies), be acceptable?
A3. To the extent a firm utilizes a contractually binding
mechanism, such mechanism, including its duration, should be
appropriate for the firm's U.S. resolution strategy, including
adequately addressing relevant financial, operational, and legal
requirements and challenges.
Q4. Not consolidated.
Q5. Not consolidated.
Q6. The firm may need to amend its contractually binding mechanism
from time to time resulting potentially from changes in relevant law,
new or different regulatory expectations, etc. Is a firm able to do
this as long as there is no undue risk to the enforceability (e.g., no
signs of financial stress sufficient to unduly threaten the agreement's
enforceability as a result of fraudulent transfer)?
A6. Yes, however the Agencies should be informed of the proposed
duration of the agreement, as well as any terms and conditions on
renewal and/or amendment. Any amendments should be identified and
discussed as part of the firm's next U.S. resolution plan submission.
Q7. Not consolidated.
Q8. Should firms include a formal regulatory trigger by which the
Agencies can directly trigger a contractually binding mechanism?
A8. No
General
None of the general FAQs were consolidated.
By order of the Board of Governors of the Federal Reserve
System.
Ann Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on or about December 7, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-28155 Filed 12-21-20; 8:45 am]
BILLING CODE 6210-01- 6714-01-P