A Commission Delegated Regulation on the valuation of derivatives for the purpose of bailing-in derivative liabilities in the form of Regulatory Technical Standards was published in the Official Journal of the European Union. The final RTS do not differ substantively from the RTS adopted by the European Commission on May 23, 2016. The Bank Recovery and Resolution Directive provides that a resolution authority may bail-in relevant derivative liabilities provided that the authority complies with certain conditions, including exercising the bail-in power only upon or after closing out the derivatives and ensuring that derivatives subject to a netting agreement are bailed-in on a net basis following the terms of the netting agreement. Before exercising the bail-in power, a resolution authority is required to ensure that an independent valuation of the assets and liabilities of a firm is carried out. For derivative liabilities, the valuation will determine the value of those derivative liabilities at the moment of exercise of the resolution power. The RTS provide a methodology for resolution authorities to follow when comparing the destruction in value that would arise from the close-out with the losses that those derivatives would incur in a bail-in, principles for determining the point in time at which the value of a derivative should be established and measures for establishing the value of classes of derivatives. The RTS entered into force on September 12, 2016.
 
View the RTS on the Valuation of Derivatives for Bail-in. 

A Commission Delegated Regulation outlining the Regulatory Technical Standards on the elements of a business reorganization plan and the minimum contents for reporting progress in the implementation of the plan was published in the Official Journal of the European Union. The final RTS do not differ substantively from the RTS adopted by the European Commission on May 10, 2016. The final RTS supplement the requirements set out in the Bank Recovery and Resolution Directive which require a firm that has been bailed in to submit a plan to the resolution authority on how the firm, or parts of it, might be restored to long-term viability within a reasonable timescale.

Read more.

 

The OCC issued a notice of proposed rulemaking that would require OCC-supervised subsidiaries, branches and agencies of US and foreign global systemically important banking organizations to amend certain qualified financial contracts to prohibit the immediate termination of such contracts and the exercise of certain other default rights by counterparties if the firm enters bankruptcy or a special resolution proceeding. Covered QFCs are defined to include swaps, derivatives, repurchase, reverse repurchase and securities lending and borrowing transactions. Under the proposed rule, any covered QFC would be required to include a contractual stay-and-transfer provision analogous to the stay-and-transfer provision provided for in Title II of the Dodd-Frank Act that supports the orderly resolution of financial firms in their contracts. Moreover, the proposed rule would also limit the default rights of a counterparty in the event of the insolvency of the G-SIB or its affiliates. Comments must be submitted to the OCC by October 18, 2016.

The proposed rule is largely analogous to a proposed rule issued by the Federal Reserve Board on May 3, 2016 and provides a substantively parallel rule for OCC-regulated institutions within a G-SIB group.

View the notice of proposed rulemaking.

The US Federal Reserve Board and the FDIC announced that for 38 firms, the deadlines to submit resolution plans will be extended from December 31, 2016 to December 31, 2017. The firms include 36 domestic bank holding companies and foreign banking organizations, as well as two nonbank financial companies designated by the Financial Stability Oversight Council. The agencies expect to provide feedback on the firms’ December 2015 plans for use in their December 2017 submissions. This extension will allow the firms additional time to incorporate feedback and guidance into their next plan submissions.

View the list of firms subject to the extension.

The European Banking Authority launched a consultation on the appropriate reference point for setting the target level of resolution financing arrangements required by the Bank Recovery and Resolution Directive. The BRRD provides that when a bank fails, shareholders and creditors of the bank must be the first to bear losses. To ensure the effective implementation of the other resolution tools available, member states are required to have pre-funded resolution financing arrangements, contributions of which are made by the banks in each member state. The BRRD currently provides for contributions of at least 1% of the amount of covered deposits of all the banks in a given Member State by December 31, 2024. The BRRD requires the EBA to make recommendations to the Commission on whether the basis for those arrangements should be changed. The EBA is seeking feedback on its proposal to recommend to the Commission that the basis should be changed to one of: (i) total liabilities (excluding own funds) less covered deposits; (ii) total liabilities (excluding own funds); or (iii) total liabilities (including own funds).

Read more.

The Prudential Regulation Authority published a Policy Statement on operational continuity in resolution. The Appendices to the Policy Statement set out a final Supervisory Statement and the PRA Rulebook: CRR Firms: Operational Continuity Instrument 2016. 

The Policy Statement provides feedback to responses to the PRA consultation on this topic in December 2015. Based on responses received, the PRA concluded that no significant changes were required to its proposals. The Supervisory Statement sets out its expectations of firms to ensure operational continuity of critical services to facilitate recovery actions, orderly resolution and post-resolution restructuring. Compared to the draft Supervisory Statement, the PRA has amended the financial resilience expectations by removing the capital expectation and stating that the Bank of England will consider whether a loss absorbing capacity should be allocated within groups to ensure operational continuity as part of the minimum requirement for own funds and eligible liabilities (MREL) regime. 

The Operational Continuity Instrument 2016 sets out the final text of the new Operational Continuity Part of the PRA Rulebook and will come into effect on January 1, 2019.

View the Policy Statement.

View the Supervisory Statement.

View the Operational Continuity Instrument 2016. 

A Commission Implementing Regulation setting out the Implementing Technical Standards on the provision of information to national resolution authorities for the purpose of developing resolution plans was published in the Official Journal of the European Union. The Bank Recovery and Resolution Directive provides that resolution authorities must prepare a resolution plan for each bank and empowers resolution authorities to require firms to provide information for that purpose. The ITS set out the procedure for the provision of that information, as well as the templates to be used which will capture the minimum set of information required, including, for example, organizational structure, critical counterparties and pledged collateral. 

The ITS entered into force on July 26, 2016.

View the ITS on provision of information for resolution plans.

The European Banking Authority published a comparative report on recovery plan governance and indicators. Banks and certain large investment firms are required by the Bank Recovery and Resolution Directive to prepare recovery plans and to submit them to their national regulator. The national regulator must assess the credibility of the recovery plans. The BRRD requires firms to include appropriate conditions and procedures for the timely implementation of any recovery actions and a framework of indicators that identify the points at which certain recovery actions may be taken. The EBA compared the recovery plans of 26 European cross-border banking groups with parent firms located across 12 EU countries. The aim of the analysis is to assess how firms are implementing the requirements of the BRRD as well as draft technical standards on the content of recovery plans and EBA Guidelines on recovery indicators and to consider the credibility and effectiveness of governance arrangements across the sample banks. The EBA hopes that the analysis will assist regulators in their assessments of recovery plans, in particular, in identifying crucial elements to be considered by institutions when designing credible governance arrangements and effective indicator frameworks. 

Read more.

The Prudential Regulation Authority published final amendments to its rules on the contractual recognition of bail-in. The Bank Recovery and Resolution Directive requires EU banks and certain investment firms to include clauses in certain contracts governed by non-EU law by which the creditor agrees to recognise that the liability may be bailed in by the national resolution authority. In November 2015, the PRA issued a Modification by Consent which disapplied the requirement for unsecured liabilities that are not debt securities (known as "phase 2 liabilities") where compliance would be impracticable until June 30, 2016. The PRA published its final rules and extended the Modification by Consent until July 31, 2016. The amended rules applied from August 1, 2016. The PRA also published a Supervisory Statement which provides guidance on the meaning of the term "impracticable" by providing a list of non-exhaustive examples of impracticability such as it is illegal in the third country to include contractual recognition language in agreements or instruments creating liabilities governed by the laws of that third country and the creation of liabilities is governed by international protocols which the firm has no power to amend. The onus will be on firms to demonstrate that compliance with the contractual recognition requirement would be impracticable.

View the amended rules, final Policy Statement and Supervisory Statement.

As part of his remarks at the Riksbank Macroprudential Conference in Stockholm, US Federal Reserve Board Vice Chairman Stanley Fischer responded to criticisms of the Dodd-Frank Act’s orderly liquidation authority and the Federal Reserve Board’s proposed total loss-absorbing capacity, or TLAC, requirement.

The proposed TLAC requirement mandates that systemically important firms maintain a minimum level of long-term, outstanding debt that could be used to absorb losses and recapitalize the firm in an orderly resolution under either the Bankruptcy Code or the orderly liquidation authority.

In his remarks, Fischer addressed the three most common criticisms of the TLAC proposal, starting with whether TLAC is a redundant backup OLA because the Bankruptcy Code provides an adequate framework for the resolution of any financial company. He also assessed whether OLA provides for a taxpayer bailout of systemically important funds through the orderly liquidation fund, concluding that it does not since OLA allows for liquidity support, and that any losses incurred by the fund would be covered by assessments imposed on large financial firms. Finally, he set forth reasons why TLAC requirements should not lead to GSIBs increasing their leverage and thereby their probability of failure.

View Vice Chairman Fischer’s speech.
 

US Senators Elizabeth Warren (D-Mass.) and Joe Donnelly (D-Ind.) sent a letter to the Federal Reserve Board and the FDIC encouraging the agencies to use “all statutory tools at their disposal” if banks’ resolution plans, also known as living wills, are found not credible. The Senators expressed concern that, eight years after the financial crisis, and “after a multi-year review process, the living wills of five large banks reveal that the banks are still too vulnerable to weather a major economic storm without threatening the economy.” The Senators further noted that Section 165 of the Dodd-Frank Act provides the Federal Reserve Board and the FDIC “the authority to impose more stringent prudential requirements on, or even ultimately restructure, large financial institutions unable to craft credible resolution plans on their own.”

Earlier this year, the Federal Reserve Board and the FDIC jointly determined that five large financial institutions had submitted living wills that were not credible. The agencies have required those five firms to address the deficiencies and submit revised plans by October 1 of this year.

View the text of the letter.

A Commission Implementing Regulation laying Implementing Technical Standards under the Bank Recovery and Resolution Directive was published in the Official Journal of the European Union. The ITS outlines the uniform forms, templates and definitions for the identification and transmission of information by regulators and resolution authorities to the European Banking Authority. The BRRD outlines obligations for regulators and resolution authorities on the application of simplified obligations in relation to the contents and details of recovery plans, the date by which the first recovery plans are to be drawn up and the frequency for updating the recovery plans.

Read more.

The Federal Reserve Board and the FDIC announced that they are permitting certain foreign banking organizations with limited US operations to file “reduced content” resolution plans for their next three resolution plans.  All of the 84 firms that are permitted to file the reduced content plans have less than $50 billion in total US assets and have submitted prior plans that provide the agencies with an understanding of their US operations.  The agencies noted that the decision is intended to create more certainty around future filling requirements. The ability for these firms to file such plans over the next three years is contingent on their maintaining less than $50 billion in US assets, and not experiencing any material events. The agencies said the reduced content plans should focus on changes the firms have made to their prior resolution plans, actions taken to improve the effectiveness of those plans and actions to ensure any subsidiary insured depository institution is adequately protected from the risks of nonbank subsidiaries of the institution, where applicable. The first round of reduced content plan submissions is due by December 31, 2016. 

View the press release.

A Commission Implementing Regulation laying down Implementing Technical Standards on the form and content of the description of group financial support agreements in accordance with the Bank Recovery and Resolution Directive was published in the Official Journal of the European Union. The BRRD sets rules for agreements under which financial support is provided among an EU parent firm and its subsidiaries in other Member States or third countries that are firms covered by the consolidated supervision of the parent undertaking. The entity receiving the support must meet certain conditions for early intervention. Under the implementing technical standards, firms party to the group financial support agreement are required to disclose certain terms on their website in a form that ensures accessibility to the public, in the same form as established for non-quantitative information included in the firm's financial statements. Minimum terms to be disclosed include the form the support may take, the principles for calculation of the consideration for the provision of the support, a general description of the seniority, maturity profile and the maximum term of loans provided as support. 

The implementing regulation will enter into force June 30, 2016.

View the implementing Regulation.

The Federal Reserve Board and the FDIC announced that they are giving four foreign banking organizations a one-year extension for the submission of their next US resolution plans. Barclays PLC, Credit Suisse Group, Deutsche Bank AG, and UBS AG will be required to submit their next plan on July 1, 2017, with the 2016 annual resolution filing requirement being satisfied by submission of the 2017 plans. The agencies’ press release indicates that the extension was granted in light of the fact that these firms are undergoing significant restructuring to come into compliance with the intermediate holding company requirement by July 1, 2016. The agencies also stated that they expect to provide feedback to the four foreign banking organizations in respect of their 2015 plans, as well as provide additional guidance to the firms for their 2017 plans.

View the press release.

The European Commission adopted Regulatory Technical Standards on criteria relating to the methodology for setting the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). MREL is the European equivalent of US TLAC. There are some differences between the adopted RTS and the final draft RTS submitted by the European Banking Authority with its Opinion published in February 2016 which expressed disagreement with certain of the European Commission's proposed amendments to the final draft RTS submitted in July 2015.

The European Commission adopted Regulatory Technical Standards on the valuation of derivatives for the purpose of bailing-in derivative liabilities. The Bank Recovery and Resolution Directive provides that a resolution authority may bail-in relevant derivative liabilities provided that the authority complies with certain conditions, including exercising the bail-in power only upon or after closing out the derivatives and ensuring that derivatives subject to a netting agreement are bailed-in on a net basis following the terms of the netting agreement. Before exercising the bail-in power, a resolution authority is required to ensure that an independent valuation of the assets and liabilities of a firm is carried out. For derivative liabilities, the valuation will determine the value of those derivative liabilities at the moment of exercise of the resolution power. The adopted RTS provide a methodology for resolution authorities to follow when comparing the destruction in value that would arise from the close-out with the losses that those derivatives would incur in a bail-in, principles for determining the point in time at which the value of a derivative should be established and measures for establishing the value of classes of derivatives.  The Commission has adopted the final draft RTS submitted by the European Banking Authority without any substantive amendments. The adopted RTS will now be considered by the European Parliament and Council of the European Union. 

View the adopted RTS.

The European Banking Authority published translations of its Guidelines on business reorganization plans following a bail-in. The Bank Recovery and Resolution Directive requires a firm that has been recapitalized through a bail-in to produce a reorganization plan that sets out how the firm will be restored to long-term viability and to submit progress reports twice annually throughout the reorganization period. The EBA's Guidelines provide the minimum criteria that the business reorganization plan must fulfil for approval by a resolution authority and set out how national regulators and resolution authorities should assess whether the business reorganization plan is credible, realistic and consistent with other business plans prepared by the firm in parallel. The Guidelines will apply to resolution authorities and national regulators from August 20, 2016.

View the Guidelines. 

Commission Delegated Regulation on deferral of extraordinary ex post contributions to a resolution financing arrangement and the criteria for determining critical functions was published in the Official Journal of the European Union. The Regulation sets out the assessment that a resolution authority should undertake of a firm's application for deferral from the obligation to contribute to extraordinary ex post contributions to a resolution financing arrangement, including an assessment of the impact on the firm's financial position. The Regulation also provides the criteria for determining whether a function is a critical function. The BRRD requires firms to identify all of the critical functions within the firm or its group in the firm's recovery plan to aid the assessment of how a critical function could be continued when the firm is under financial stress. The Regulation applies from June 9, 2016. 

View the Regulation.

The Financial Conduct Authority published initial feedback on the recovery plans submitted by investment firms regulated by it. Recovery plans are required to be submitted by banks and certain investment firms to national regulators under the EU Bank Recovery and Resolution Directive. The FCA regulates those investment firms in the UK that are not designated by the Prudential Regulation Authority. The FCA identifies key areas for improvement in recovery plans, including identifying and analyzing internal and external interconnectedness, identifying and calibrating recovery plan indicators, demonstrating that recovery plan options are comprehensive and credible, capturing the minimum range of scenarios or properly explaining why certain scenarios are not applicable, correctly defining core business lines and critical functions and designing appropriate communication strategies for crisis management. 

Read more.

The Bank of England published a Financial Stability Paper on legal certainty for central counterparty default management processes. In the context of legal certainty, the paper focuses on the ability of CCPs effectively to manage a large member default. The paper provides analysis of the three key stages in the process of managing a default at a clearing house: (i) declaration of default; (ii) returning to a matched book; and (iii) managing collateral to absorb the losses caused by the default.

The paper examines the rules governing CCP default management and the extent to which they provide legal certainty. The current legal framework provides certainty around many aspects of financial markets which has been created through the interaction of contract and legislation at both UK and EU levels. Legislation such as the UK Companies Act 1989, European Market Infrastructure Regulation, Settlement Finality Regulation and the Financial Collateral Arrangements (No. 2) Regulation all provide protections but apply in different situations resulting in a patchwork of partial safe harbors. The Bank of England highlights various steps that could be taken to make this legislative framework more robust and coherent.

View the Financial Stability Paper.

The European Commission adopted a Delegated Regulation outlining the regulatory technical standards on the elements of a business reorganization plan and the minimum contents for reporting progress in the implementation of the plan. The adopted Delegated Regulation will supplement the requirements set out in the Bank Recovery and Resolution Directive which requires a firm that has been bailed in to submit a plan to the resolution authority on how the firm, or parts of it, might be restored to long-term viability within a reasonable timescale.

The adopted RTS require a business reorganization plan to set out the firm's strategy for restoring viability, the projected financial performance of the firm and how it meet its prudential regulatory requirements on a going-forward basis and quarterly implementation milestones and performance indicators. The business reorganization plan must be also include information that will allow the national regulator and resolution authority to conduct a viability assessment of the proposed strategy for restoration.

Read more. 

The International Swaps and Derivatives Association launched the Resolution Stay Jurisdictional Modular Protocol and the UK (PRA Rule) Jurisdictional Module. Certain jurisdictions require banks and investment firms to include clauses in certain contracts with non-EU counterparties by which the counterparty agrees to recognize the powers of the firm’s national regulator to impose a temporary stay on the exercise of early termination rights. The new protocol seeks to help banks comply with new requirements. Many jurisdictions have implemented national regimes on the recovery and resolution of banks and investment firms.  However, whether the actions of a national regulator in relation to a failing or failed firm would be recognized by regulators, authorities and courts in other jurisdictions is uncertain and may require contractual support in some countries. Without a global statutory framework in place, the Financial Stability Board recommends jurisdictions to implement laws to ensure that their powers will be recognized on a contractual basis. The UK (PRA Rule) Jurisdictional Module is intended to assist compliance with the UK’s requirements on recognition of temporary stays. 

View the Resolution Stay Jurisdictional Modular Protocol and the UK (PRA Rule) Jurisdictional Module.

View ISDA’s press announcement. 

Executive Vice President and Head of the Wholesale Product Office at the US Federal Reserve Bank of New York, Richard Dzina, discussed the importance of improving the cyber resiliency of financial market infrastructures (FMIs) in light of escalating cyber threats with systemic consequences. Dzina cited the recent consultative report by the Committee on Payment and Market Infrastructures and the Board of the International Organization of Securities Commissions which provides guidance on cyber resilience for FMIs, including the expectation that their critical operations resume within a two-hour period following disruption. Heralding joint industry efforts as well as those taken by individual institutions, Dzina highlighted backup site (so-called "third site") capacity as a lynchpin to improving the resiliency of FMIs. Specifically, he recommended that FMIs invest in technologically diverse off-network third site solutions as a backstop to the measures they have in place to prevent against cyber-attacks. He stressed the importance of FMIs, particularly those at the epicenter of the financial system, continuously investing in improvements to resiliency and cybersecurity.

View Dzina’s speech.

The US Federal Reserve Board proposed a rule to support US financial stability by enhancing the resolvability of large, complex financial firms. The proposed rule would require US global systemically important banking institutions and the US operations of foreign GSIBs to amend certain bilateral, uncleared qualified financial contracts, including derivatives, repurchase agreements, reverse repurchase agreements and securities lending and borrowing agreements, to prohibit the immediate cancellation of such contracts and the exercise of certain other default rights by counterparties if the firm enters bankruptcy or a resolution proceeding. Under the proposal, GSIBs may comply by using QFCs that are modified by the International Swaps and Derivatives Association 2015 Resolution Stay Protocol.
 

FDIC Chairman Martin Gruenberg discussed improvements in cross-border cooperation with respect to the resolution of systemically important financial institutions. He highlighted ongoing conversations among leading financial jurisdictions at an FDIC-hosted high-level meeting of the heads of the finance ministries, central banks and leading financial regulatory bodies in the United States and the UK. Gruenberg also discussed the close working relationship between the FDIC and the EU’s Single Resolution Board as well as the regular meetings of the joint working group maintained by the FDIC and EC focused on resolution and deposit insurance issues. In addition to meetings with other regulatory authorities, he cited the importance of the cross-border crisis management groups for each of the global systemically important financial institutions. Significantly, he noted that in his opinion, should a systemically important financial institution in the United States experience severe financial distress today, it would be able to be resolved in an orderly manner under either the Orderly Liquidation Authority under Dodd-Frank Act, or under traditional bankruptcy law. Gruenberg concluded by noting the value of having a single agency, the FDIC, be responsible for both deposit insurance and resolution authority in the United States.

View Chairman Gruenberg’s speech.

The European Banking Authority published a report, including final Guidelines, on how confidential information collected under the EU Bank Recovery and Resolution Directive should be disclosed. The BRRD restricts the disclosure of confidential information by recipients of such information in the course of their professional activities unless certain conditions are met. One of these conditions is that the information is in summary or collective form such that the relevant entity cannot be identified. The EBA's Guidelines stipulate that confidential information should be provided either in a brief statement or on an aggregate basis, in anonymized form, taking into account the number of institutions, specific patterns and the context of the disclosure. Regulators of EU member states have six months from when the translated versions are published by the EBA to implement the Guidelines.
 
View the report and Guidelines.

The US Federal Reserve Board and Federal Deposit Insurance Corporation jointly determined that the 2015 resolution plans of the following five US domestic global systemically important banking organizations are not credible: Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street and Wells Fargo. The agencies also jointly identified weaknesses in the resolution plans of Goldman Sachs and Morgan Stanley, but did not make joint determinations as to the plans and their deficiencies. Neither agency found that Citigroup’s resolution plan was not credible, although the agencies did identify certain shortcomings that Citigroup must address.

Under Section 165(d) of the Dodd-Frank Act, bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the FSOC for supervision by the Federal Reserve Board must periodically submit resolution plans to the Federal Reserve Board and the FDIC. The five firms receiving a joint notice of deficiencies must remediate those deficiencies by October 1, 2016, to avoid imposition of more stringent prudential requirements on the firm until it remediates the deficiencies. Such prudential requirements could include more stringent capital, leverage or liquidity requirements, as well as restrictions on growth, activities or operations of the firm, or its subsidiaries.

The Federal Reserve Board is releasing the feedback letters issued to each firm. The agencies are also issuing “Resolution Plan Assessment Framework and Firm Determinations (2016),” which provides further information on the determinations and the agencies’ processes for reviewing the plans. Additionally, the agencies are releasing new guidance for the July 2017 submissions for all covered companies. The deadline for the next full plan submission for the eight US GSIBs is July 1, 2017. 

View the Federal Reserve Board press release.

A Commission Delegated Regulation, in the form of Regulatory Technical Standards, was published specifying procedural and content related requirements for the recovery and resolution of banks and certain investment firms under the EU Bank Recovery and Resolution Directive. In particular, the RTS set out the requirements for: the content of recovery plans, the criteria for the assessment of recovery plans, content of resolution plans and assessment criteria for resolvability, conditions for group financial support and the circumstances in which a person is independent from both the resolution authority and the institution or entity in recovery or resolution. The RTS also provides for: recognition of write-down and conversion powers, procedure and content of notifications to a regulator when a firm is assessed as failing or likely to fail and rules specifying the operational functioning of resolution colleges. The RTS must still be approved by the European Parliament and the Council of the European Union and be published in the Official Journal before they can enter into force. 

View the Delegated Regulation.

The European Commission adopted a Delegated Regulation on the classes of arrangements to be protected in a partial property transfer or where a contract is forcibly modified by a resolution authority. The EU Bank Recovery and Resolution Directive provides for certain types of arrangements to be protected during the partial transfer of assets, rights and liabilities of a bank under resolution as well as when a resolution authority requires a contract to which the bank is a party to be modified. The objective is to prevent assets, rights and liabilities that are linked to each other from being split. The Delegated Regulation sets out in detail the conditions that security, set-off, netting and structured finance arrangements (including securitizations and investments used for hedging) must meet to benefit from the protection.The Delegated Regulation reminds creditors that they will need to review and modify the terms of their credit exposures to EU banks and investment firms so as to ensure that they maximize their rights to determine a net exposure to that entity and avoid their credit exposure increasing if assets and liabilities are not transferred together. The Delegated Regulation must still be approved by the European Parliament and the Council of the European Union. When it enters into force, it will apply directly in all member states across the EU.

View the Delegated Regulation.

The Financial Stability Board published its second Thematic Review on Resolution Regimes. The report considers the range and nature of resolution powers in FSB member jurisdiction for resolution authorities in the banking sector. The FSB has found that: (i) not all jurisdictions have implemented a bank resolution regime with a comprehensive set of powers which aligns with the FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions and that those jurisdictions that do are primarily the home jurisdictions of global systemically important banks; (ii) the powers that are most often not included in regimes are those relating to bail-in, the imposition of temporary stays on the exercise of early termination rights and the power to ensure continuity of essential services during a bank resolution; and (iii) more progress has been made in implementing processes for recovery planning than for resolution planning and resolvability assessments. The FSB is recommending that the identified gaps in powers are addressed. FSB member countries must report to the FSB by December 2016 on the actions that they have taken or intend to take to address the issues for their bank resolution regime. 

View the FSB's report.

The Prudential Regulation Authority published proposals to amend its rules on contractual recognition of bail-in. Under the EU Bank Recovery and Resolution Directive, EU banks and large investment firms are required to include clauses in certain contracts with non-EU counterparties by which the creditor agrees to recognise that the liability may be bailed in by the national resolution authority. In November 2015, the PRA issued a Modification by Consent which disapplies the requirement for unsecured liabilities that are not debt securities (known as "phase 2 liabilities") where compliance would be impracticable. The Modification by Consent expires on June 30, 2016. The aim of the PRA's amendment is to make permanent the Modification by Consent.

Read more.

US Federal Deposit Insurance Corporation Chairman Martin Gruenberg discussed the improved financial condition of US banks, supervisory challenges that the FDIC is focused on, and developments in cross-border cooperation with respect to the resolution of systemically important financial institutions. Chairman Gruenberg noted the overall increase in FDIC-insured institutions’ earnings in 2015 and that 2015 saw the fewest bank failures since before the financial crisis. Supervisory challenges that the FDIC and other banking supervisors are focused on for 2016 include interest rate risk, credit risk, including lending in higher risk categories and exposure to energy producers, and cybersecurity. With respect to resolution plans, Chairman Gruenberg noted that the 2015 plans submitted by the wave 1 filers in July 2015 are currently under review by the FDIC and the Board of Governors of the Federal Reserve System. Moreover, he noted that the FDIC has worked closely with other major financial jurisdictions including the UK, EU, Switzerland and Japan, to understand how cross-border resolution of a large systemically important financial institution would unfold. Specifically, the FDIC is working with the new Single Resolution Board and is part of a joint working group with the European Commission that works bilaterally to focus on resolution and deposit insurance issues. Additionally, cross-border crisis management groups have been formed for each of the global systemically important financial institutions. Finally, Chairman Gruenberg noted the revised ISDA resolution stay protocol and the total loss absorbing capacity standards issued by the Financial Stability Board and proposed by the Federal Reserve as examples of how cross-border cooperation is improving resolution capabilities.

View speech.

The Prudential Regulation Authority published a consultation paper proposing amendments to the Depositor Protection Part of the PRA Rulebook and a new Statement of Policy in relation to the Financial Services Compensation Scheme and the calculation of firm contributions to the Scheme. The consultation is relevant to UK banks, building societies, credit unions, overseas firms with PRA deposit-taking permission, and the FSCS (UK's administrator of its Deposit Guarantee Scheme). Current PRA rules require the FSCS to calculate firm levies on the basis of covered deposits. The recast Deposit Guarantee Schemes Directive provides that contributions to a deposit guarantee scheme should also be adjusted relative to the risk incurred by each member of the scheme. The European Banking Authority issued Guidelines detailing methods for calculating contributions to schemes. In response to the EBA Guidelines the PRA has set out, in appendices to the consultation paper, the methodology for calculating risk-based levies and their application to the repayment of current and future compensations costs incurred by the FSCS. The methodology uses different calculations depending on the category of firm: Capital Requirements Regulated firm, Credit Unions and Non-European Economic Area branches. The consultation closes on June 3, 2016.
 
View the consultation paper.
 
View the EBA Guidelines.

The European Banking Authority published its report on the functioning of supervisory colleges in 2015. The report sets out the EBA's annual assessment of how well the supervisory colleges have met the action plan for 2015. The EU supervisory colleges make joint decisions on capital, liquidity and recovery plans for EU cross-border banking groups. The EBA considers that, generally, there were significant improvements, particularly when it came to the reorganization of supervisory colleges following the introduction of the Single Supervisory Mechanism in 2014, the frequency of interaction and the quality of supervisory colleges. However, the EBA notes that some areas still require work, such as the joint decision processes, quality of joint decision documents and requests for individual recovery plans outside the joint decision process. The report also includes the EBA's action plan for supervisory colleges in 2016. The plan sets out the focus areas for supervisory colleges which are: on going balance sheet cleaning, reduction of non-performing loans for legacy portfolios, the sustainability of banks' business models, conduct risk and IT risk.
 
View the EBA's Report.

The Single Resolution Board announced that it had started to collect data for the purposes of resolution planning and the determination of the Minimum Requirement for Own Funds and Eligible Liabilities (known as MREL) for banking groups within its 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 Single Resolution Mechanism Regulation requires the SRB to set the MREL during 2016. The SRB published a Liability Data Template for firms to provide it with the required information, prioritizing the minimum data required by EU legislation and requesting that other data be provided on a priority or best efforts basis in 2016.

View the SRB announcement.

The European Banking Authority published its final Guidelines relating to cooperation agreements between Deposit Guarantee Schemes in accordance with the EU Deposit Schemes Directive. The Guidelines provide the minimum content for cooperation agreements between DGSs. The EBA has also provided a multilateral framework cooperation agreement in an attempt to minimize the need for numerous detailed bilateral agreements to be executed between multiple DGSs. The framework offers scope for DGSs to enter multilateral and bilateral agreements with more detailed terms than those provided for in the Guidelines, if necessary. The Guidelines stipulate minimum specifications to be included in cooperation agreements, including the means for: (i) repayment of depositors by the host DGS at branches of banks established in other Member States; (ii) the transfer of contributions from one DGS to another where a bank ceases to be a member of a DGS and joins another DGS; and (iii) mutual lending between DGSs. The EBA has attempted to cater for depositors in EU branches of firms headquartered in other Member States, so that they are treated in a similar fashion to depositors in home Member States by providing direction on the sequence and timing of events when the host DGS pays out depositors on behalf of the home DGS. The Guidelines will come into effect six months after their publication in all official EU languages.

View the Guidelines.

The European Banking Authority published its Opinion expressing its disagreement with certain of the European Commission's proposed amendments to the final draft Regulatory Technical Standards on the criteria for setting the Minimum Requirement for Own Funds and Eligible Liabilities (MREL). MREL is the European equivalent of US TLAC. The EBA submitted the draft RTS to the Commission in July 2015. The Commission proposed a number of amendments in December 2015. The EBA disagrees on, amongst other things: (i) the removal of the reference to a minimum contribution to loss absorption and recapitalization of 8% of total liabilities and own funds; (ii) the removal of the test for downward adjustments to the recapitalization amount and peer group reference for systemic institutions; and (iii) the removal of the upper limit (48 months) on the transitional compliance period, instead making reference to a transitional period that is "as short as possible". The EBA has resubmitted a further revision of the draft RTS to the Commission as an Annex to the Opinion.
 
View the Opinion.

 
The European Banking Authority published a letter dated December 18, 2015 addressed to the European Commission in which the EBA requests delays to the dates by which the EBA is required to prepare technical standards and reports under the Capital Requirements Directive, the Capital Requirements Regulation, the EU Bank Recovery and Resolution Directive, the European Market Infrastructure Regulation and the Credit Rating Agencies Regulation. The EBA states that for the most part it has not been able to deliver its mandates according to deadlines due to a persistent shortage in resources and the need to prioritize other workstreams. The EBA invites the Commission to request the EBA to fulfil its mandates  within new time limits.
 
View the EBA's letter.

The International Organization of Securities Commissions published a report on the mechanisms for trading venues to effectively manage electronic trading risks and plans for business continuity. The report focuses on how trading venues manage technology, in particular, the potential risks that technological innovations pose to the markets. It stems from an IOSCO investigation into causes of the recent market disruptions which sought to identify steps taken by market participants and regulators to address the causes and probe whether the IOSCO High-Level Principles for Business Continuity issued in 2006 should be updated. In addition, IOSCO surveyed trading venues across more than 30 jurisdictions. The report discusses IOSCO's findings based on responses to the survey, makes recommendations to regulators and proposes sound practices for trading venues. IOSCO recommends that regulators should require trading venues to put mechanisms in place to help ensure the resiliency, reliability and integrity of critical systems and should require trading venues to establish, maintain and implement an appropriate business continuity plan.

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The International Organization for Securities Commissions published a report on market intermediary business continuity and recovery planning. The report sets two standards for regulators of market intermediaries and recommends sound practices for regulators to consider in their supervision of market intermediaries. The IOSCO standards state that regulators should require market intermediaries to create and maintain written business continuity plans and to update the plans in the event of any material change to the intermediaries' operations, structure, business or location and to conduct an annual review of the plan. The IOSCO recommendations on sound practices for regulators of intermediaries cover setting the components of a market intermediary's business continuity plan and addressing the need for data protection and client privacy, in particular, against cyber-attacks. IOSCO recognizes that the sound practices are flexible and may be tailored to the size and needs of a market intermediary.

View the report.

The UK Government launched a consultation on further proposals for implementing the Bank Recovery and Resolution Directive into UK law following the identification of a few changes that the Government believes will clarify and strengthen the UK's transposition of the BRRD. The proposals would amend the Banking Act 2009, the Financial Services and Markets Act 2000 and certain secondary legislation and a draft Order was published with the consultation paper.

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The European Banking Authority published final draft Regulatory Technical Standards on the valuation of derivatives for the purpose of bailing in derivative liabilities. Under the Bank Recovery and Resolution Directive, a resolution authority may bail-in relevant derivative liabilities provided that the authority complies with certain conditions including exercising the bail-in power only upon or after closing out the derivatives and ensuring that derivatives subject to a netting agreement are bailed-in on a net basis following the terms of the netting agreement. Before exercising the bail-in power, a resolution authority is required to ensure that an independent valuation of the assets and liabilities of a firm is carried out. For derivative liabilities, the valuation will determine a value of those derivative liabilities at the moment of exercise of the resolution power. The EBA's final draft RTS provide a methodology for resolution authorities to follow when comparing the destruction in value that would arise from the close-out with the losses that those derivatives would incur in a bail-in, principles for determining the point in time at which the value of a derivative should be established and measures for establishing the value of classes of derivatives. The EBA has submitted the final draft RTS to the European Commission for endorsement. Member states are required to implement the bail-in tool by January 1, 2016.

View the final draft RTS.

The European Banking Authority published final draft Regulatory Technical Standards and final guidelines on the business reorganization plans that a firm that has been recapitalized using the bail-in tool is required to produce. Under the Bank Recovery and Resolution Directive, a firm that has been recapitalized through a bail-in must: (i) produce a reorganization plan that sets out how the firm will be restored to long-term viability; (ii) submit progress reports twice annually throughout the reorganization period. The BRRD requires the EBA to develop RTS on the minimum content of the business reorganization plans and progress reports and to issue guidelines for national regulators and resolution authorities to assess the reorganization plan. The final draft RTS require a business plan to identify and address the cause of the firm's failure, demonstrate that the firm can operate viably in the long-term, address shortcomings in the firm's business model (even if not related to the firm's failure), include financial performance projections with relevant milestones and indicators. The progress report should report on implementation of the reorganization plan and include proposed amendments to the plan, if necessary. The EBA's guidelines provide national regulators and resolution authorities with the means to assess whether the business reorganization plan is credible and realistic and consistent with other business plans prepared by the firm in parallel. Verification by independent entities, such as auditors, should be possible, where necessary.

View the final draft RTS and guidelines.

The European Banking Authority published final draft Regulatory Technical Standards specifying the information on financial contracts that a firm may be required to maintain. The Bank Recovery and Resolution Directive gives resolution authorities the power temporarily to suspend the termination rights of any counterparty to a contract with a firm that is under resolution. Both national regulators and resolution authorities may require a firm to maintain detailed records of financial contracts (generally, these are securities contracts, commodities contracts, futures and forwards contracts, swap agreements, inter-bank borrowing agreements) on whether or not they include suspensory provisions. The EBA's final draft RTS set out the minimum set of information on financial contracts that should be included in the detailed records held by a firm which includes information such as whether a contract includes contractual recognition of resolution powers, information on value and valuation, collateral, termination rights, maturity and netting arrangements. The RTS also prescribe the circumstances in which the requirement to hold such records should be imposed and take a wide approach by including all firms or entities that might be subject to resolution actions. The EBA considers that firms that would be placed into an insolvency procedure need not be included but the European authority does not prohibit national regulators or resolution authorities from imposing similar requirements on such firms, or any other firms.

View the final draft RTS.

The Bank of England published proposals on its approach to setting a Minimum Requirement for own funds and Eligible Liabilities (known as MREL).  This is the equivalent of the US Total Loss Absorbing Capacity (known as TLAC) rule. Under the Bank Recovery and Resolution Directive and related UK legislation, the BoE is responsible for directing relevant firms to maintain MREL.  MREL is a minimum requirement for firms to maintain equity and eligible debt liabilities that can bear losses before and in resolution and results in a top up to standard regulatory capital requirements, similar in concept to the old Tier 3 requirements under Basel II. 

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The Prudential Regulation Authority published its proposed approach setting regulatory buffers in light of a firm's Minimum Requirement for own funds and Eligible Liabilities (MREL) requirement 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. MREL is the equivalent of the US Total Loss Absorbing Capacity (known as TLAC) rule. The proposals are relevant to PRA-regulated banks, building societies and PRA-designated investment firms. The PRA-proposed 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 approach is in line with the Financial Stability Board's TLAC standards. The proposals should be read in conjunction with the Bank of England's consultation on setting MREL. Responses to the PRA's consultation are due by March 11, 2016.
 
View the PRA's consultation paper.
 
View the BoE's consultation paper.
 
View the FSB's TLAC term sheet. 

The Bank of England published its Statement of Policy and feedback to its consultation on its proposed approach to exercising its power to direct firms to address impediments to resolvability. As the UK resolution authority, the BoE must, in preparing the resolution plan for a firm, assess the resolvability of a firm. If any substantive impediments are identified during that assessment or otherwise, the BoE has the power to require the firm to remove any such obstacle, including requiring the amendment of a group financial support agreement, the disposal of certain assets or a change to its legal or operational structure. The BoE's power of direction applies to UK incorporated and authorized banks, building societies and PRA-designated investment firms, any UK incorporated parents of those firms that are financial holding companies and to UK incorporated and authorized subsidiaries of such firms. The final Statement of Policy sets out the BoE's approach to and process for using the power of direction and includes illustrative examples of scenarios in which the BoE may consider exercising its power of direction.
 
View the Statement of Policy and responses to the consultation.

The Prudential Regulation Authority published an addendum to its October 2015 consultation paper proposing the creation of a new framework that would require firms to ensure operational continuity of shared services that are considered critical to the economy in the event of failure of a firm, recovery action, resolution or post-resolution restructuring. The PRA released its initial proposals in October 2015, stating that the exact scope of firms that would be subject to the proposed rules would be set once the Bank of England had completed its calibration work for setting a Minimum Requirement for own funds and Eligible Liabilities (known as MREL, which is the European equivalent of Total Loss Absorbing Capacity or TLAC). The BoE published its MREL proposals on December 11, 2015. The PRA proposes that banks, investment firms and building societies meeting the following criteria on January 1 of any year, would be subject to the new rules on operational continuity if: (i) the firm's total assets averaged over the previous 36 months exceeds £10 billion; (ii) the total value of safe custody assets the firm holds averaged over the previous 36 months exceeds £10 billion; or (iii) the total value of sight deposits (i.e. able to be withdrawn immediately, without notice) the firm holds averaged over the previous 36 months exceeds £350 million. The consultation closes on March 11, 2016. The PRA intends to publish its Policy Statement, final rules and supervisory rules in mid-2016. The new rules would apply from January 1, 2019.
 
View the October consultation and Addendum consultation papers. 

The European Commission announced that it had formally requested 10 EU countries to fully implement the EU Deposit Guarantee Schemes Directive which was due to be implemented into national law by July 3, 2015. The countries - Belgium, Cyprus, Estonia, Greece, Italy, Luxembourg, Poland, Romania, Slovenia and Sweden - must implement the DGSD within two months. If any of these countries fails to do so, the Commission may refer them to the Court of Justice of the EU. In October, the European Commission referred the Czech Republic, Luxembourg, the Netherlands, Poland, Romania and Sweden to the Court of Justice of the EU for failing to transpose the Bank Recovery and Resolution Directive into national legislation in time.

View the press release.