An EU Directive amending the Bank Recovery and Resolution Directive has been published in the Official Journal of the European Union. The amending Directive amends the ranking of unsecured debt instruments in the insolvency hierarchy for the purpose of bank resolution and insolvency proceedings by introducing non-preferred senior debt instruments as a separate category of senior debt. These new instruments will rank junior to all other senior liabilities but will be senior to subordinated debt. The debt instruments must have an original contractual maturity of at least one year, must not contain embedded derivatives or be derivatives themselves and the contractual documentation, including the prospectus where applicable, relating to their issuance must explicitly refer to their lower ranking under normal insolvency proceedings.

Member states are required to transpose the amending Directive into national law by December 29, 2018 and must apply the laws from the date of transposition. The new provisions will apply to unsecured claims resulting from debt instruments issued on or after the date of application of the amending Directive. The insolvency ranking of all outstanding unsecured claims resulting from instruments issued before that date will be governed by the relevant national law as adopted at December 31, 2016, unless the national law permitted firms to issue subordinated liabilities in which case the instrument will be ranked as non-preferred senior debt instruments issued under the amending Directive.

View the BRRD Insolvency Hierarchy Directive.

The Single Resolution Board has published its second policy statement on the minimum requirement for own funds and eligible liabilities (MREL). MREL is the EU equivalent of the minimum amount of loss-absorbing capacity that is also covered by the international standard of total loss absorbing capacity (TLAC) developed by the Financial Stability Board. MREL was introduced in May 2014 by the Bank Recovery and Resolution Directive for all EU banks, including those banks within the SRB's remit. The SRB is the resolution authority for all banking groups and entities as well as cross-border groups that are subject to direct prudential supervision by the European Central Bank (i.e., for banks within the Banking Union).

The SRB's MREL policy for 2017 provides for a multi-year timeframe, with transition periods which will allow individual banks to implement the requirement by progressively building up their MREL capacity. This replaces the preliminary MREL approach used in 2016. The SRB will set bank-specific binding consolidated MREL targets for the majority of the largest and most complex Eurozone banks, including all global systemically important institutions (G-SIIs) and banks with resolution colleges under its remit.

In 2018, the SRB will focus on: (i) enhancing the MREL targets based on the outcome of the SRB’s resolvability assessment; (ii) refining its location policy within groups and developing a framework for individual and internal MREL; and (iii) developing a policy for transfer strategies.

View the SRB Policy for 2017.

The US Board of Governors of the Federal Reserve System and the US Federal Deposit Insurance Corporation announced that none of the most recent resolution plans for the eight largest and most complex domestic banking organizations had deficiencies that were so severe as to require resubmission. The agencies did, however, note that half of the resolution plans that were submitted had “shortcomings” that must be addressed in the institutions’ next submissions due July 1, 2019. The Federal Reserve Board and the FDIC also stated that while this round of resolution plans demonstrates that significant progress that has been made in the area of resolution planning, more work needs to be done, especially in the areas of resolvability, internal loss-absorbing capacity, derivatives and payment, clearing and settlement activities. The agencies also noted that institutions should be cognizant of changes to their risk profiles that will need to be accounted for in future resolution plans.  The Federal Reserve Board and the FDIC noted that they continue to explore ways to improve the resolution planning process and are considering extending the cycle for resolution plan submissions from annual to once every two years, to reflect the time needed to prepare and review the plans.

View joint agency press release.

Commission Delegated Regulation (EU) 2017/2361 on the final system of contributions to the administrative expenditures of the Single Resolution Board has been published in the Official Journal of the European Union. The SRB is the resolution authority for all banking groups and entities as well as cross-border groups that are subject to direct prudential supervision by the European Central Bank (i.e., for banks within the Banking Union).

The Delegated Regulation sets out a final system for the determination and raising of the contributions to administrative expenditures of the SRB, which will replace the provisional system introduced in 2014. While the provisional system covered only a limited subset of entities, namely entities which are considered significant by the European Central Bank, the final system will apply for all entities that are subject to the Single Resolution Mechanism.

The Delegated Regulation will take effect from January 8, 2018.

View the Delegated Regulation.

The European Banking Authority has published a Final Report and final draft Regulatory Technical Standards for the criteria to be used to determine whether institutions should be subject to simplified obligations for recovery and resolution planning under the Bank Recovery & Resolution Directive.

Under the BRRD, national regulators and resolution authorities may apply simplified obligations for institutions if the failure of such institutions would not be likely to have a significant negative effect on financial markets, on other institutions, on funding conditions or on the wider economy. National regulators and resolution authorities must make an assessment of an institution's eligibility for simplified obligations by reference to: the nature of the institution’s business; its shareholding structure; its legal form; its risk profile; its size; its legal status; its interconnectedness to other institutions or to the financial system in general; the scope and the complexity of its activities; its membership of an institutional protection scheme or other cooperative mutual solidarity system; and any exercise of investment services or activities.

Read more.

The EU Single Resolution Board and the US Federal Deposit Insurance Corporation announced that they had signed a cooperation agreement which would provide for information sharing and cooperation in policymaking and resolution planning for cross-border financial institutions. The preamble of the agreement notes that given the interconnectedness of the global financial system, such cooperation is necessary to promote financial stability in the event of an institution’s failure. While not legally binding, the agreement sets forth the general framework of the relationship and the principals designed to advance the resolution goals of each agency.  The agreement also sets forth the policies and procedures that govern the relationship between the SRB and FDIC, including the scope of the agreement, permissible uses of information shared between the agencies and the mechanisms that each agency can use to effectuate consultation, cooperation and information sharing.

View the cooperation agreement between SRB and FDIC.

Following its consultation earlier this year on its expectations on recovery planning, the Prudential Regulation Authority has published a Policy Statement which sets out the PRA's final revised expectations on the content of recovery plans and the approach to recovery planning for groups which include a ring-fenced body. Alongside the Policy Statement, the PRA has published a new Supervisory Statement on recovery planning and an updated Supervisory Statement on RFBs. The PRA decided to publish the new Supervisory Statement because its experience in assessing firm's plans showed that there was a need to improve the quality of recovery plans and to increase the prospect of plans being credible. The new Supervisory Statement on recovery planning therefore supersedes the previous one, SS-18/13.

Read more.

​The Prudential Regulation Authority has published an updated Supervisory Statement, “The minimum requirement for own funds and eligible liabilities (MREL) - buffers and Threshold Conditions”. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.

The updated Supervisory Statement set out the PRA’s expectations on the relationship between the minimum requirement for MREL and both capital and leverage ratio buffers. It follows the PRA’s consultation earlier this year clarifying that it did not intend to create a different buffer requirement from that which is usable in the going-concern regime. The Supervisory Statement also discusses the implications that a breach of MREL would have for the PRA’s consideration of whether a firm is failing, or likely to fail, to satisfy the Threshold Conditions. The PRA has confirmed that it expects firms not to count Common Equity Tier 1 (CET1) capital towards both MREL and the capital buffer requirements.
 
The Supervisory Statement applies to PRA-regulated banks, building societies and PRA-designated investment firms. 

View the updated Supervisory Statement. 

The European Commission has published a Communication on further steps towards completing Europe's Economic and Monetary Union. The Commission is proposing several initiatives. First, the Commission is proposing a regulation to establish a European Monetary Fund. The EMF would replace the existing European Stability Mechanism and would act as a backstop to the Single Resolution Fund. Any support that the EMF provided to the SRF would need to be fully repaid by the Single Resolution Board from its own resources, including contributions from the industry. There are also proposals on new budgetary instruments for a stable euro area within the EU framework, changes to the Common Provisions Regulation, proposals to strengthen the Structural Reform Support Programme and a proposal to establish a European Minister of Economy and Finance. The Communication is supplemented by a proposed roadmap for implementing these steps over the next 18 months. The proposed roadmap indicates the dates by which certain of the Commission's proposed financial services legislation would be finalized. The risk-reduction package (amendments to the Capital Requirements framework and the Bank Recovery and Resolution Directive) would be finalized by mid-2018 and the Capital Markets Union legislative initiatives, including the review of the European Supervisory Authorities and the European Market Infrastructure Regulation, would be finalized by mid-2019.

View the Commission's Communication.

The Financial Stability Board has launched a consultation on proposed guidance on two aspects of recovery and resolution of global systemically important banks. The first consultation proposes guidance on the principles of bail-in execution, and the second on the funding strategy elements of an implementable resolution plan. Both of these proposals relate to the implementation of the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions, published in 2011.

The first consultation on bail-in execution proposes a set of principles to assist resolution authorities developing bail-in resolution strategies and making resolution plans for G-SIBs operational. The FSB's Key Attributes provide for the bail-in powers that resolution authorities should have to carry out bail-in within a resolution and the Total Loss-absorbing Capacity standard sets the minimum requirements for the instruments and liabilities that should be available for bail-in. The FSB is proposing the new guidance because these omit operational aspects of executing bail-in and they consider that guidance is needed to address the challenges that have emerged in operationalizing bail-in.

Read more. 

The OCC published a final rule requiring all covered qualified financial contracts of covered banks to contain a contractual stay-and-transfer provision. This provision is similar to the stay-and-transfer provision that is statutorily required under Title II of the Dodd-Frank Act and the Federal Deposit Insurance Act. The OCC final rule also limits the exercise of default rights in the event of the insolvency of a covered bank’s affiliate. In connection with these provisions, the final rule makes conforming changes to the OCC’s capital adequacy standards and liquidity risk measurement standards. The Federal Register notice notes that the final rule is substantively identical to the provision adopted by the Federal Reserve Board and by the FDIC. The OCC final rule will take effect January 1, 2018.

View the final rule.

The European Banking Authority has published an own-initiative Recommendation on the coverage of entities in banking group recovery plans, with the aim of defining common criteria to identify entities that need to be covered in group recovery plans, as well as the extent of such coverage.

The EBA recommends that entities are covered in a group recovery plan in proportion to their relevance. It recommends that entities be categorized for recovery purposes as; (i) relevant for the group; (ii) relevant for the economy or financial system of a relevant member state; or (iii) not relevant for either of the two. For each category, different levels of information are identified. The Recommendation also provides for an adjustment phase to ensure the smooth migration of recovery planning information currently available at the local level to the group level.

View EBA Final Report.

View EBA Press Release.

The European Banking Authority has published a final Report and final Guidelines on the supervision of significant branches. The Capital Requirements Directive and the Bank Recovery and Resolution Directive provide the EU legal framework for the prudential supervision of branches. The Guidelines set out how the consolidating supervisor, the home supervisor and the host supervisor should cooperate to supervise prudentially and assess recovery planning and coordinate monitoring of significant branches requiring intensified supervision. The Guidelines apply to 'significant-plus' branches of EU firms established in another EU member state, not to branches of third-country firms.

Read more. 

The European Banking Authority has launched a consultation on proposals to amend the Implementing Technical Standards on the forms and templates to be used by institutions when providing information to resolution authorities for the purpose of drawing up and implementing resolution plans. The EBA proposes to amend the ITS to account for evolution in the policy and practices applied by authorities in the development of plans for financial institutions since the issue of the ITS in 2015. The amendments include content changes to many of the templates and deletion of some others. A new template has been added, which will collect information on deposit guarantee scheme arrangements. The consultation also sets out proposals to clarify the scope of the reporting framework in line with the EU Bank Recovery and Resolution Directive and to specify minimum procedural and technical reporting requirements. There are also proposals for the application of simplified reporting obligations for small institutions.

Comments on the proposals are invited by December 11, 2017 and must be made using an online submission form.

View EBA consultation paper.

View the annexes, response form and other related information.

The Bank of England has published a consultation paper setting out proposed changes to the Statement of Policy it issued in November 2016 on its approach to setting a minimum requirement for own funds and eligible liabilities (MREL). MREL is the requirement for firms to maintain a minimum amount of loss-absorbing resources to ensure that, should the firm fail, the resolution authority can use the firm's own financial resources to absorb losses and recapitalize the business so it can continue to provide critical functions without the need to rely upon public funds. The MREL requirement is the EU implementation, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board.

The BoE's 2016 Statement of Policy focused on "external" MREL, i.e. the calibration of the MREL of UK resolution entities. This consultation sets out the BoE's proposals on "internal" MREL, i.e. instruments that are issued to the resolution entity from other legal entities in a group. The consultation paper sets out the scope of internal MREL, how it should be calibrated, which instruments are eligible and the proposed transitional period for the application of the requirements. Internal MREL is intended to cover UK-headquartered banking groups as well as UK subsidiaries of overseas banking groups.

Read more. 

The Bank of England has published an update to its 2014 approach to resolution. The BoE is the resolution authority responsible for the resolution of financial institutions in the UK. The document describes the key features of the UK resolution regime, how the BoE would be likely to implement a resolution and the BoE's overall responsibilities as the UK's resolution authority. The annexes to the document set out how the BoE is addressing certain barriers to resolvability, such as Loss-absorbing capacity (TLAC and MREL), valuation and the bail-in process and ensuring the continuity of contracts through resolution. The BoE intends to improve transparency on the steps being taken by firms to remove barriers to resolvability by publishing, from 2019, summaries of firms’ resolution plans and its summary assessments of their effectiveness. This approach mirrors the approach taken by the US regulators.

View the BoE's approach to resolution.

The International Swaps and Derivatives Association has published a paper outlining recommendations for a CCP Recovery and Resolution Framework.
 

The ISDA's paper focuses on CCPs that clear derivatives, although many of its recommendations will be relevant to clearing houses that clear other instruments. It is intended to build on the guidance from CPMI-IOSCO and the FSB. The paper sets out certain key points for CCPs, their supervisors, resolution authorities and other policy makers to consider when implementing CCP recovery and resolution mechanisms.
 

In brief, the ISDA's recommendations cover: (i) the level of transparency that should be afforded to clearing participants about the expected recovery and resolution strategies for a CCP, so that participants can manage and control their potential exposure; (ii) the timing of the resolution regime and the necessary flexibility that should be incorporated into the regime to allow for further recovery measures; (iii) the allocation of losses after a clearing member default, including by making cash calls and the application of variation margin gains haircutting (initial margin haircutting is not supported by the paper however); (iv) tools to rebalance a CCP's book, including the use of partial tear-ups as a last resort, but excluding forced allocation of positions to non-defaulting clearing members; (v) claims for clearing participants that suffer losses beyond a certain point in CCP recovery or resolution; (vi) the allocation of non-default losses; and (vii) ensuring adequate liquidity from central banks on standard market terms.
 

View the Paper.

The European Banking Authority has published final draft Implementing Technical Standards setting out the common templates to be used and the procedures to be followed by resolution authorities when reporting to the EBA the minimum requirement for own funds and eligible liabilities (MREL) that has been set for each financial institution in their jurisdiction. The MREL requirement is the EU equivalent, in the Bank Recovery and Resolution Directive, of the standard for total loss-absorbing capacity (TLAC) set by the Financial Stability Board. The TLAC standard is the minimum amount of loss-absorbing capital an institution needs to hold so that bail-in tools can be deployed successfully on a resolution.

Read more.

The Bank of England has published a consultation setting out policy proposals on the minimum standard of valuation capabilities that firms should have in place to ensure that their valuations are sufficiently timely and robust to support the effective resolution of the firm. In the BoE's view, limitations to a firm's valuation capabilities may constitute an impediment to resolvability where those limitations would not reliably enable valuations that support the firm's intended resolution strategy.

The consultation paper sets out the BoE's thinking around how minimum requirements for valuation capabilities would be applied and outlines the rationale behind its "timeliness" and "robustness" policy objectives. The consultation paper provides detail on proposed principles that firms would be expected to meet and summarises the rationale underlying each principle. The principles cover: (i) data and information; (ii) valuation models; (iii) valuation methodologies; (iv) valuation assumptions; (v) governance; (vi) transparency; and (vii) assurance.

Read more.

The Financial Conduct Authority has published a Policy Statement and final rules following its January 2017 consultation on proposed changes to the client money distribution rules (CASS 7A) affecting the return of client assets following a firm's failure or other pooling events. The rule changes, which come into effect on July 26, 2017, are designed to speed up the distribution of client assets, improve consumer outcomes and reduce the market impact of an investment firm failure. Following consultation feedback, the FCA is introducing the majority of the proposed changes in the form consulted on. However, minor changes have been made to the proposals on post-transfer client notifications (a 14-day deadline will be introduced rather than the 7-day deadline originally proposed) and on the proposed guidance on reconciliations that follow a primary pooling event. The FCA also provided new guidance concerning the need for firms to designate as client transaction accounts those accounts which the CCP makes available as customer accounts for such purposes. The FCA will not be proceeding with its original proposal to require firms to provide annotated samples of their client statements.

View the FCA Policy Statement (PS 17/18).

The Prudential Regulation Authority has launched a consultation on an update to its November 2016 Supervisory Statement, "The minimum requirement for own funds and eligible liabilities (MREL) - buffers and Threshold Conditions". The Supervisory Statement (SS 16/16) set out the PRA';s expectations on the relationship between the minimum requirement for own funds and eligible liabilities (MREL) and both capital and leverage ratio buffers, as well as the implications that a breach of MREL would have for the PRA's consideration of whether a firm is failing, or likely to fail, to satisfy the Threshold Conditions. The Supervisory Statement states that the PRA expects firms not to count Common Equity Tier 1 (CET1) capital towards both MREL and the buffer requirements.

Since its publication of the Supervisory Statement in November 2016, the PRA has been asked about the approach to be taken in the situation where MREL is calibrated on the basis of one capital regime (e.g. leverage, in circumstances where the leverage requirement is larger than the risk-weighted requirement), but the largest requirement for buffers derives from the other regime (e.g. risk-weighted capital). The PRA is consulting on revisions to SS 16/16 to clarify that the expectations set in SS16/16 are not intended to create a different buffer requirement from that which is usable in the going-concern regime.

The PRA invites responses to the consultation by September 29, 2017. The PRA aims to publish a revised supervisory statement by the end of 2017.

View the PRA's consultation paper.

The G20 Leaders met in Hamburg, Germany on July 7-8, 2017 and have published a Leaders' Declaration and an Action Plan setting out the G20's strategy for achieving strong, sustainable, balanced and inclusive growth. The Action Plan includes ongoing and planned work on financial sector regulation and development.

Read more.

The European Banking Authority has launched a public consultation on draft Regulatory Technical Standards, further specifying the eligibility criteria to determine whether firms should be subject to simplified obligations when drafting their recovery and resolution plans. The Bank Recovery and Resolution Directive permits national regulators to apply simplified recovery obligations, including simpler requirements as to the contents and details of resolution plans, and less frequency in their updates. Simplified obligations may be applied by authorities based on their assessment of a firm based on the size of the firm, interconnectedness, scope and complexity of its activities, risk profile, legal status, nature of business and shareholding structure.

The draft RTS set out the quantitative and qualitative factors to be considered depending on the type of firm (credit institution, investment firm, firms that are part of a group, promotional banks and credit institutions subject to an orderly winding up process). According to the draft RTS, the authorities should approach the criteria in two stages: (i) they should select firms which could potentially benefit from simplified obligations based on quantitative criteria; and (ii) if the first stage is satisfied, they should verify whether firms meet the qualitative criteria. The consultation will close on August 8, 2017.

View the Consultation Paper.

A Commission Delegated Regulation on the contributions to the Single Resolution Fund has been published in the Official Journal of the European Union. The Single Resolution Mechanism and the SRF provide for the resolution of credit institutions and certain investment firms established in Member States within the Eurozone or in Member States that participate in the Banking Union. The SRF will support resolution measures for those banks and investment firms and will be financed by bank levies raised at national level. Ex ante contributions by those firms must be made to ensure that the SRF reaches a level of one percent of the protected deposits of all banks within the Banking Union within eight years. The Delegated Regulation sets out the criteria for the calculation of ex ante contributions and the circumstances and conditions under which the payment of extraordinary ex post contributions may be partially or entirely deferred. The Delegated Regulation enters into force on May 19, 2017.

View the Delegated Regulation.

The European Banking Authority has published final Guidelines on the interrelationship between the provisions of the Bank Recovery and Resolution Directive setting out the sequence of write down and conversion and the provisions of the Capital Requirements Regulation and the Capital Requirements Directive. The BRRD establishes the sequence for a resolution authority to apply bail-in to an entity under resolution. That sequence is: Common Equity Tier 1, Additional Tier 1 instruments, Tier 2 instruments, other subordinated debt in accordance with the normal insolvency hierarchy and other eligible liabilities in accordance with the normal insolvency hierarchy.

Read more. 

The European Banking Authority has published final Guidelines on the treatment of shareholders in bail-in under the Bank Recovery and Resolution Directive. The Guidelines are addressed to national resolution authorities and aim to clarify how valuation information should inform the determination of the terms of bail-in.

The Guidelines set out the circumstances in which it would be appropriate for a resolution authority, when implementing a bail-in or write down of capital instruments, to either: (i) cancel existing shares or other instruments of ownership or transfer of them to bailed-in creditors, and/or (ii) dilute existing shareholders and holders of other instruments of ownership as a result of the conversion of relevant capital instruments or eligible liabilities to equity.

Read more. 

The European Banking Authority has published final Guidelines on the setting of rates of conversion of debt to equity in bail-in under the Bank Recovery and Resolution Directive. The Guidelines are addressed to national resolution authorities with the objective of clarifying how valuation information should inform the determination of the terms of bail-in.

The BRRD provides that resolution authorities, when applying the bail-in tool, may apply a different rate of conversion to different classes of capital instruments and liabilities.

Read more. 

The European Securities and Markets Authority has issued an Opinion on the European Commission's proposed EU Regulation on CCP Recovery and Resolution. The proposal gives CCPs' national regulators under the European Market Infrastructure regulation powers of supervision and early intervention with regards to CCP recovery. It further asks Member States to designate National Resolution Authorities to develop CCP resolution plans and ensure the resolvability of CCPs established in their Member State and for the establishment of a resolution college. ESMA is tasked with taking on a mediator role. In its Opinion, ESMA states that it broadly supports the regulatory approach taken by the Commission. However, ESMA considers that the EU legislators should consider the budgetary implications of the role assigned to ESMA and include a provision in the final CCP Recovery and Resolution Regulation for ESMA to draft a report on the issue, as was the case for EMIR. While it supports the introduction of binding mediation, ESMA raises some concerns over the proposed mediation mechanism. ESMA also states that further detailed requirements on the content of recovery plans, such as what recovery tools could be used to allocate default losses or to cover non-default losses, would be useful.

View the ESMA Opinion.

HM Treasury has published a revised"Banking Act 2009 Special Resolution Regime Code of Practice". The Code aims to encourage financial stability by resolving institutions such as banks, building societies and certain investment firms that are failing, and protecting depositors, taxpayers and the wider economy from the consequences of such failure. The Code was first published in November 2010 and was last updated in March 2015. The Code has been amended to take into account the Bank Recovery and Resolution Order 2016 which came into force on December 16, 2016. The Order amends the Banking Act 2009, the Financial Services and Markets Act 2000 and certain related secondary legislation in order, among other things, to ensure that the Bank of England (as the UK's resolution authority) and the Prudential Regulation Authority and Financial Conduct Authority (as the regulators) have powers to manage the failure of a bank or investment firm and their group companies and to ensure that critical functions continue to be performed. The Order also provides specific powers to the PRA and FCA to replace directors and senior managers and appoint temporary managers, amends provisions relating to triggers of contractual termination rights and adds new provisions relating to the resolution of UK branches of third-country firms. The Code has been updated to reflect the relevant changes, in particular those relating to contractual termination rights and the resolution of UK branches of third-country firms.

View the revised SRR Code of Practice.

The US FDIC and the Federal Reserve Board completed their evaluation of the 2015 resolution plans of 16 domestic banks and separately issued guidance to four foreign banks.

Read more.

The Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 have been published. The Amending Regulations aim to improve the return of client money when an investment firm fails. The changes are in line with the Bloxham Report's recommendations on minimizing the market impact of a failed firm's entry into special administration. The Amending Regulations amend the scope of the SAR regime to include firms that manage an alternative investment fund or Undertakings for the Collective Investment of Transferable Securities or who act as a trustee or depositary for such an AIF or UCITS. The Amending Regulations will make easier the transfer of client assets from a failing firm, as it removes restrictions on transfers, limitations on what may be assigned and requirements to obtain client consent. The Amending Regulations also strengthen the bar date mechanism (which requires a reasonable time to pass before the calculation/submission of claims to the administrator) and provide continuity of safe custody services. The Amending Regulations come into force on April 6, 2017.

View the Amending Regulations.

View the Bloxham Report.

The US Federal Reserve Board announced that it will not object to a resubmitted capital plan from Morgan Stanley given the progress made by the firm in addressing deficiencies identified by the Federal Reserve Board in last year's Comprehensive Capital Analysis and Review (CCAR).

Following its review of Morgan Stanley's plan last June, the Federal Reserve Board required the firm to resubmit its capital plan to address certain qualitative deficiencies in its capital planning processes, such as weaknesses in the way the firm identifies and incorporates its material risks into its capital planning scenarios, key modeling practices and governance and controls related to both of those areas. The Federal Reserve Board will continue to evaluate the firm's progress in addressing those deficiencies in its assessment of this year's CCAR submission.

View Morgan Stanley’s resubmission.

The European Banking Authority has launched a consultation on proposed recommendations on the coverage of legal entities in a group recovery plan. The Bank Recovery and Resolution Directive requires a Union parent undertaking to prepare a recovery plan that covers the parent as a whole and identifies measures that are needed at the level of the parent and each individual subsidiary. The EBA has identified that several group recovery plans are predominantly drafted from the parent undertaking's perspective and have little information relating to the other entities in the group. Such plans, in its view, do not comply with applicable legal requirements and are of limited credibility and effectiveness. In addition, the EBA has found that because some national regulators have historically asked for plans from entities established in their jurisdiction, there are information asymmetries between the overall group plan and the plan for a given subsidiary. These asymmetries are impeding the making of joint decisions for group recovery plans by home and host regulators. The EBA is therefore consulting on proposed recommendations which specify how legal entities and branches should be covered in a group recovery plan, including a transitional regime so that recovery planning information available at local level can be migrated to the group level by 2019. Responses to the consultation are due by June 2, 2017. The EBA is proposing that the recommendations would apply from July 1, 2017.

View the consultation paper.

The European Banking Authority published a comparative report on recovery planning by EU banks, focusing on recovery options. The Bank Recovery and Resolution Directive requires a bank to prepare recovery plans which set out the measures it could take to restore its financial position if it came under stress. The BRRD and secondary measures provide for the relevant information and detail that recovery plans should cover. The EBA compared the recovery plans of 23 European cross-border banking groups with parent institutions located across 12 different EU countries. The EBA's comparative analysis is intended to assist national regulators and banks in effectively preparing recovery plans. The EBA found that all the recovery plans in the sample provided a good overview of recovery options, and that where plans had previously been submitted, there had been improvements on financial impact analysis, possible interaction with the scenarios and assessment of credibility. However, the analysis also revealed areas where more work is needed. These included linking recovery options to governance by setting out detailed governance, decision-making and implementation for each option; and better coverage and integration of material legal entities. The report also recommends improvements as regards the information backing impact assessments, particularly the detail on which the calculations are based, operational impact and continuity, and whether operational continuity is warranted under each recovery option. The report also recommends including detailed information on the estimated timelines for implementation of each option so that an assessment could be made of whether the timelines are realistic.

View the report.

The Financial Stability Board published proposed Guidance on central counterparty resolution and resolution planning. The aim of the proposed Guidance is to assist national authorities and FSB member jurisdictions in implementing effective resolution regimes, credit resolution strategies and plans for CCPs that are consistent with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions and the financial market infrastructure guidance annexed to the Key Attributes. The FSB published a Discussion Note on August 16, 2016 which sought feedback on aspects of CCP resolution that are key to the design of effective resolution strategies. The FSB's proposed Guidance is based on responses to that Discussion Note as well as further consultations with FSB member authorities. The FSB is seeking feedback on, amongst other things, the powers that resolution authorities should have to maintain the continuity of critical CCP functions, return the CCP to a matched book and address default and non-default losses, the treatment of equity of existing CCP owners in a CCP resolution and cross-border enforcement of resolution actions. Among others, it is proposed that resolution authorities should have power to write down initial margin as well as variation margin.  The assessment for the "no creditor worse off" test is proposed to be based upon what would happen following exercise of all CCP post-default powers. Responses to the consultation are requested by March 13, 2017.

View the consultation paper. 

View the FSB's summary of responses to the discussion paper. 

View the discussion paper.

The European Securities and Markets Authority announced details of the 2017 EU-wide CCP stress test exercise. The European Market Infrastructure Regulation requires ESMA to conduct the exercise at least once per year to assess the resilience and safety of the EU’s CCPs from a systemic risk viewpoint. The exercise covers 17 EU CCPs and includes all products currently cleared by the CCPs. ESMA may issue recommendations to address any issues that are highlighted by the exercise. The results of the exercise are expected to be published in Q4 2017.

View ESMA's announcement and framework methodology. 

The FCA published a consultation paper on proposed changes to the client money distribution rules in the Client Assets Sourcebook of the FCA Handbook - CASS 7A - as a result of the special administration regime review. The client money rules govern how client assets are to be distributed by an insolvency practitioner managing a failed investment firm. The proposals focus on rule changes following the introduction in early January 2017 by the Government of draft regulations to improve the regime in line with the Bloxham Report's recommendations, i.e. The Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017, the Amending SAR Regulations.

Read more. 

The Prudential Regulation Authority and the Financial Conduct Authority published a joint consultation paper on the management expenses levy limit for the Financial Services Compensation Scheme in 2017/2018. The MELL proposed for 2017/18 is £74.54 million. The FSCS is a last resort compensation fund for consumers of failed authorized financial services firms that fall under the regulatory remit of the FCA and PRA. The MELL is the maximum amount which the FSCS may levy in a year without further consultation. The proposed MELL of £74.54 million consists of £69.24 million for FSCS management of expenses and £5.3 million as an unlevied contingency reserve. The consultation also contains the proposed rules for the PRA and FCA to set the MELL in 2017/18. Responses to the MELL for 2017/18 as outlined in the consultation are due by February 13, 2017. The PRA and FCA aim to finalize and publish the rules in a policy statement to be published in March 2017 and final rules are expected to take effect from April 1, 2017 with invoices to be sent out to firms from July 2017.

View the consultation paper.

The UK Government published draft legislation to amend the Special Administration Regulations, i.e. The Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017, the Amending SAR Regulations. The purpose of the draft legislation is to improve the return of client money when an investment firm fails. The changes are in line with the Bloxham Report's recommendations which aim to minimize the market impact of a failed firm's entry into special administration. The draft Amending SAR Regulations amend the scope of the SAR Regulations to include firms that manage an alternative investment fund or Undertakings for the Collective Investment of Transferable Securities or who act as a trustee or depositary for an AIF or UCITS. The Amending SAR Regulations will make the transfer of client assets from a failing firm to another financial institution easier because restrictions on transfers will be removed, including removing any restriction affecting what can or cannot be assigned as well as any requirement to obtain client consent. The draft Amending SAR Regulations also improve the bar date mechanism and provide for continuity of services for the safe custody of client assets. The draft Amending SAR Regulations are subject to Parliamentary scrutiny. They are expected to come into force in February 2017.

View the Amending SAR Regulations.

View the Bloxham report.

The Financial Stability Board published a consultative paper containing draft Guiding Principles on the internal total loss-absorbing capacity or Internal TLAC of global systemically important banks. The FSB is proposing the Guiding Principles to support the implementation of the TLAC Standard. The TLAC Standard is designed to ensure that failing G-SIBs will have sufficient loss-absorbing and recapitalization capacity available in resolution. The FSB committed to develop implementation guidance on the TLAC Standard, in particular for internal TLAC. Internal TLAC is the loss-absorbing resources that a resolution entity commits to its material subsidiaries. The proposed Guiding Principles cover, among other things: (i) the process for identifying material sub-groups, the composition of sub-groups, the distribution of internal TLAC between the entities within material sub-groups and the treatment of unregulated or non-bank entities; (ii) the role of home and host authorities and the factors to be considered when determining the size of the internal TLAC requirement; (iii) practical considerations relating to the issuance and composition of internal TLAC; (iv) the trigger mechanism for internal TLAC; and (v) cooperation and coordination between home and host authorities in triggering the write-down and/or conversion into equity of internal TLAC. Responses to the consultation are due by February 10, 2017. The FSB intends to review the technical implementation of the TLAC Standard by the end of 2019.

View the consultative paper.

The UK Bank Recovery and Resolution Order 2016 came into force. The Order implements in part the Bank Recovery and Resolution Directive which sets out the framework for the recovery and resolution of banks and investment firms. The Order amends the Banking Act 2009, the Financial Services and Markets Act 2000 and certain related secondary legislation to, amongst other things, ensure that the Bank of England as the UK's resolution authority and the Prudential Regulation Authority and Financial Conduct Authority as the regulators have powers to manage the failure of a bank or investment firm and their group companies to ensure that critical functions continued to be performed. The Order also provides specific powers to the PRA and FCA to replace directors and senior managers and appoint temporary managers in accordance with the BRRD, amends provisions relating to triggers of contractual termination rights and adds new provisions relating to the resolution of UK branches of third-country institutions.

View the Order.

The Financial Stability Board launched a consultation on proposed Guidance on continuity of access to financial market infrastructures for a firm in resolution. The FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions provides that resolution authorities should develop resolution strategies and plans for firms that are systemically important. One objective of those plans is to ensure that a firm can maintain its critical functions during resolution. In particular, access to the services that support those functions, including access to services provided by FMIs such as clearing, payment, settlement and custody shared services, should be maintained.

The proposed Guidance is intended to assist national supervisors and resolution authorities to evaluate whether a firm has appropriate arrangements to support continuity of access to critical FMI services in all circumstances. The proposed Guidance covers the arrangements needed to support access to FMIs at the level of providers of critical FMI services, arrangements at the level of the firm and/or FMI participants and the role of FMI supervisors in facilitating continuity of access to critical FMI services. Responses to the consultation are requested by February 10, 2017.

View the consultation paper.

The European Banking Authority published its final Report on the design and implementation of the minimum requirement for own funds and eligible liabilities framework. MREL is the EU equivalent of the US Total Loss Absorbing Capacity (known as TLAC) rule. The Report is addressed to the European Commission following publication of its proposed banking reform package on November 23, 2016 which included proposals to amend the Bank Recovery and Resolution Directive and the Capital Requirements Regulation to integrate the TLAC standard into the EU's MREL framework. The EBA does not currently consider that any changes to the key principles underlining the Regulatory Technical Standards (adopted by the Commission in May 2016) on the criteria for setting MREL are needed. The Report does, however, identify changes with a view to improving the technical soundness of the MREL framework and implementing the TLAC standard as a key component of that framework. The EBA has made recommendations on twelve topics.

Read more.

The US Federal Reserve Board and the FDIC announced that Bank of America, Bank of New York Mellon, JP Morgan Chase and State Street had adequately remedied all deficiencies in their 2015 resolution plans that caused the plans to be deemed “not credible” by the regulators. The Federal Reserve Board and the FDIC announced that Wells Fargo has not adequately remedied two of the firm’s three deficiencies and it is expected to file a revised submission addressing the deficiencies by March 31, 2017. Wells Fargo is subject to restrictions on activities until the deficiencies are remedied.

View press release.

The FDIC released a notice of proposed rulemaking that proposed amendments to its rule regarding recordkeeping requirements for qualified financial contracts (QFCs) (12 CFR Part 371). The rule currently requires an insured depository institution in troubled condition to maintain detailed recordkeeping requirements about its QFCs which would ultimately make it easier for the FDIC to transfer, disaffirm or repudiate such QFCs in the event of an FDIC receivership. The proposed rule would align Part 371 more closely with the QFC recordkeeping requirements adopted by the Secretary of the Treasury in connection with the Orderly Liquidation Authority under Title II of Dodd-Frank. The proposed rule would expand the scope of records required to be maintained under Part 371 and update the recordkeeping requirements accordingly.

View notice of proposed rulemaking.

The European Commission published a legislative proposal for a Regulation on the recovery and resolution of CCPs. The aim of the proposed Regulation is to set up a framework for the orderly recovery of a CCP through implementation of recovery plans. Under the proposal, a CCP's recovery plan will need to be agreed between the CCP and its clearing members. If the recovery measures do not restore the CCP’s viability, the CCP's resolution authority will have the power to take action to ensure the continuity of the CCP's critical functions and, if needed, resolve the CCP.  This includes setting up bridge CCPs. In the event of losses arising under a resolution, these will be borne by a CCP's owners, creditors and counterparties in line with the hierarchy of claims in insolvency.  Managers of a CCP will be capable of being replaced and held accountable for wrongdoing under the applicable national laws. The CCP recovery and resolution framework would apply to all CCPs established in the EU. It is not proposed that the recovery and resolution framework would apply to the wider group of a CCP, but a resolution authority would be able to decide on a case-by-case basis whether a recovery plan should include a parent company.

Read more.

The European Commission published a package of proposed legislative amendments in relation to the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation, the Capital Requirements Regulation and the Capital Requirements Directive. The amendments aim in part to introduce some of the revised global prudential standards from latest FSB/Basel developments, to apply a more proportionate approach to regulating banks and investment firms depending on their size and complexity and to remove some of the options and discretions that are currently available to EU Member States.

The changes to CRR and CRD IV include a new requirement on non-EU G-SIBs (or non-EU banking groups that have EU firms with total assets of at least EUR 30 billion) that have two or more EU firms to establish an EU intermediate holding company.  This controversial proposal does not square well with US or other third country bank structural laws nor will it be reflected in banks' existing resolution and recovery plans, and so will doubtless be a contentious issue as it is developed further.

Read more.

The Prudential Regulation Authority published a consultation paper on proposals to reset the deposit protection limit at £85,000. The purpose of the update is to provide depositors with PRA-authorized firms commensurate protection to that of depositors with firms authorized by regulators in other EU Member States. The Deposit Guarantee Schemes Directive requires non-Euro Member States to adjust their deposit protection limits every five years to ensure they are equivalent to the euro limit of EUR100,000. The DGSD also requires that such countries, including the UK, must adjust their deposit protection limit to take into account currency fluctuations. Following the Brexit referendum on June 23, 2016, the PRA considers that a structural shift in the exchange rates has occurred and to comply with the DGSD, the PRA is proposing that the depositors’ protection level be raised to £85,000 from January 30, 2017. This will require an increase of £10,000 pounds from the limit that was set in 2015. The PRA is also proposing a five month transitional period until June 30, 2017 for firms to implement changes to their disclosure materials, advertising materials and Single Customer View (SCV) and Continuity of Access (CoA) systems to accurately reflect the new deposit protection limit. Prior to June 30, 2017, firms will be required to notify the PRA if they are ready to implement the rule changes and will become subject to the new rules from the next business day following notification.  Separate notifications are available for: (i) SCV and CoA systems; and (ii) disclosure and advertising materials. The PRA notes that it will seek to maintain a stable deposit protection limit through uncertainty in foreign exchange markets resulting from the referendum, but will seek to avoid making further adjustments to the limit. Responses to the proposals are due by December 16, 2016.

View the Consultation Paper. 

HM Treasury published a consultation paper on rules for a financial market infrastructure special administration regime. A form of special administration for certain financial market infrastructure companies, excluding central counterparties, was introduced by The Financial Services (Banking Reform) Act 2013, known as FMI administration. CCPs are already subject to the special resolution regime in the Banking Act 2009. The entities covered by the FMI administration regime are non-CCP operators of payment systems and central securities depositories. HM Treasury is seeking views on new rules, and modifications to existing general insolvency rules, required to facilitate the effective functioning of an FMI administration. The proposed rules outline the application procedure for an FMI administration order and specify the application of the Insolvency (England and Wales) Rules 2016 with modifications.

Read more.

The Prudential Regulation Authority published its final Supervisory Statement on the relationship between a firm's Minimum Requirement for own funds and Eligible Liabilities (MREL) and capital and leverage buffers as well as the relationship between MREL and the PRA's Threshold Conditions which are a set of minimum requirements that authorized firms must meet in order to continue carrying out their regulated activities. The PRA also provided feedback on the responses to its consultation on its proposed approach. The PRA is maintaining its proposed approach without any substantive changes but has amended the Supervisory Statement to provide clarity to firms. The PRA's approach is to prohibit firms from being able to double-count common equity Tier 1 capital towards MREL and to risk-weighted capital and leverage buffers. Some guidance has been given on enforcement: when a firm is in breach of its MREL requirements, the PRA may investigate whether that firm is failing or likely to fail to meet the Threshold Conditions, although investigation will not be automatic. The PRA's Supervisory Statement should be read in conjunction with the Bank of England's policy documents on setting MREL. The PRA will apply the MREL buffer and Threshold Conditions policies in line with the interim and end-state MREL dates set by the BoE. A firm that cannot meet its MREL requirement should notify the PRA promptly.

View the PRA's Policy Statement on buffers and capital requirements for MREL.

View the PRA's Supervisory Statement on buffers and capital requirements for MREL.