Notice2024-18191
Guidance for Resolution Plan Submissions of Domestic Triennial Full Filers
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Published
August 15, 2024
Issuing agencies
Federal Reserve SystemFederal Deposit Insurance Corporation
Abstract
The Board and the FDIC (together, the agencies) are adopting this final guidance for the 2025 and subsequent resolution plan submissions by certain domestic banking organizations. The final guidance is meant to assist these firms in developing their resolution plans, which are required to be submitted under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended (the Dodd-Frank Act), and the jointly issued implementing regulation (the Rule). The scope of application of the final guidance is domestic triennial full filers (specified firms or firms), which are domestic Category II and III banking organizations. The final guidance describes the agencies' expectations, depending on the resolution strategy chosen by the firm, regarding a number of key vulnerabilities in plans for an orderly resolution under the U.S. Bankruptcy Code (i.e., capital; liquidity; governance mechanisms; operational; legal entity rationalization; and insured depository institution (IDI) resolution, if applicable). The final guidance modifies and clarifies certain aspects of the proposed guidance based on the agencies' consideration of comments to the proposal, additional analysis, and further assessment of the business and risk profiles of the firms.
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[Federal Register Volume 89, Number 158 (Thursday, August 15, 2024)]
[Notices]
[Pages 66388-66412]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-18191]
[[Page 66388]]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1816]
FEDERAL DEPOSIT INSURANCE CORPORATION
RIN 3064-ZA37
Guidance for Resolution Plan Submissions of Domestic Triennial
Full Filers
AGENCY: Board of Governors of the Federal Reserve System (Board) and
Federal Deposit Insurance Corporation (FDIC).
ACTION: Final guidance.
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SUMMARY: The Board and the FDIC (together, the agencies) are adopting
this final guidance for the 2025 and subsequent resolution plan
submissions by certain domestic banking organizations. The final
guidance is meant to assist these firms in developing their resolution
plans, which are required to be submitted under the Dodd-Frank Wall
Street Reform and Consumer Protection Act, as amended (the Dodd-Frank
Act), and the jointly issued implementing regulation (the Rule). The
scope of application of the final guidance is domestic triennial full
filers (specified firms or firms), which are domestic Category II and
III banking organizations. The final guidance describes the agencies'
expectations, depending on the resolution strategy chosen by the firm,
regarding a number of key vulnerabilities in plans for an orderly
resolution under the U.S. Bankruptcy Code (i.e., capital; liquidity;
governance mechanisms; operational; legal entity rationalization; and
insured depository institution (IDI) resolution, if applicable). The
final guidance modifies and clarifies certain aspects of the proposed
guidance based on the agencies' consideration of comments to the
proposal, additional analysis, and further assessment of the business
and risk profiles of the firms.
DATES: The final guidance is available on August 15, 2024.
FOR FURTHER INFORMATION CONTACT:
Board: Catherine Tilford, Deputy Associate Director, (202) 452-
5240, Elizabeth MacDonald, Assistant Director, (202) 475-6316, Tudor
Rus, Manager, (202) 475-6359, Mason Laird, Senior Financial Institution
Policy Analyst II, (202) 912-7907, Caroline Elkin, Senior Financial
Institution Policy Analyst, (202) 263-4888, Division of Supervision and
Regulation; or Jay Schwarz, Deputy Associate General Counsel, (202)
452-2970; Andrew Hartlage, Special Counsel, (202) 452-6483; Brian
Kesten, Counsel, (202) 843-4079; or Sarah Podrygula, Senior Attorney,
(202) 912-4658, Legal Division, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue NW, Washington, DC
20551. For users of TTY-TRS, please call 711 from any telephone,
anywhere in the United States.
FDIC: Robert C. Connors, Senior Advisor, (202) 898-3834; Mark E.
Haley, Chief, (917) 320-2911, Patrick R. Bittner, Senior Policy
Specialist, (202) 898-6571, Division of Complex Financial Institution
Supervision and Resolution; Celia Van Gorder, Assistant General Counsel
(Acting), (202) 898-6749; Dena S. Kessler, Counsel, (202) 898-3833;
Gregory J. Wach, Counsel, (202) 898-6972, Legal Division.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Connection to Other Rulemakings
C. Proposed Guidance
II. Overview of Comments
III. Final Guidance
A. Scope of Application
B. Transition Period
C. Capital
D. Liquidity
E. Governance Mechanisms
F. Operational
G. Legal Entity Rationalization and Separability
H. Insured Depository Institution Resolution
I. Derivatives and Trading Activities
J. Format and Structure of Plans; Assumptions
K. Additional Comments
IV. Paperwork Reduction Act
V. Text of the Final Guidance
I. Introduction
A. Background
Section 165(d) of the Dodd-Frank Act \1\ and the Rule \2\ require
certain financial institutions to report periodically to the Board and
the FDIC their plans for rapid and orderly resolution under the U.S.
Bankruptcy Code (the Bankruptcy Code) in the event of material
financial distress or failure. The Rule divides covered companies into
three groups of filers: (a) biennial filers, (b) triennial full filers,
and (c) triennial reduced filers.\3\ The terms ``covered company'' and
``triennial full filer'' have the meanings given in the Rule, as do
other, similar terms used throughout this final guidance document.
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\1\ 12 U.S.C. 5365(d).
\2\ 12 CFR parts 243 and 381.
\3\ 12 CFR 243.4 and 381.4.
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Triennial full filers under the Rule are required to file a
resolution plan every three years, alternating between full and
targeted resolution plans.\4\ The Rule requires each covered company's
full resolution plan to include, among other things, a strategic
analysis of the plan's components, a description of the range of
specific actions the covered company proposes to take in resolution,
and a description of the covered company's organizational structure,
material entities, and interconnections and interdependencies.\5\
Targeted resolution plans are required to include a subset of
information contained in a full plan.\6\ In addition, the Rule requires
that all resolution plans consist of two parts: a confidential section
that contains any confidential supervisory and proprietary information
submitted to the agencies, and a section that the agencies make
available to the public.\7\ Public sections of resolution plans can be
found on the agencies' websites.\8\
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\4\ 12 CFR 243.4(b) and 381.4(b).
\5\ 12 CFR 243.5 and 381.5.
\6\ 12 CFR 243.6(b) and 381.6(b).
\7\ 12 CFR 243.11(c) and 381.11(c).
\8\ The public sections of resolution plans submitted to the
agencies are available at <a href="http://www.federalreserve.gov/supervisionreg/resolution-plans.htm">www.federalreserve.gov/supervisionreg/resolution-plans.htm</a> and <a href="http://www.fdic.gov/regulations/reform/resplans/">www.fdic.gov/regulations/reform/resplans/</a>.
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Recent Developments
Implementation of the Rule has been an iterative process aimed at
strengthening the resolution planning capabilities of financial
institutions subject to the Rule. To assist the development of covered
companies' resolution planning capabilities and plan submissions, the
agencies have provided feedback on individual plan submissions, issued
guidance to certain groups of covered companies, and issued answers to
frequently asked questions. The agencies believe that guidance can help
focus the efforts of similarly situated covered companies to improve
their resolution capabilities and clarify the agencies' expectations
for those filers' future progress in their resolution plans. To date,
the agencies have issued guidance to (a) U.S. global systemically
important banks (GSIBs),\9\
[[Page 66389]]
which constitute the biennial filer group; and (b) certain large
foreign banking organizations (FBOs) that are triennial full
filers.\10\ The agencies have not, however, thus far issued guidance to
domestic triennial full filers and the additional FBOs that make up the
remainder of the triennial full filers.
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\9\ Guidance for section 165(d) Resolution Plan Submissions by
Domestic Covered Companies applicable to the Eight Largest, Complex
U.S. Banking Organizations, 84 FR 1438 (Feb. 4, 2019) (2019 U.S.
GSIB Guidance).
\10\ Guidance for Resolution Plan Submissions of Certain
Foreign-Based Covered Companies, 85 FR 83557 (Dec. 22, 2020) (2020
FBO Guidance).
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Several developments inform the final guidance:
<bullet> The agencies' consideration of comments to the proposed
guidance (as defined below);
<bullet> The agencies' review of domestic triennial full filers'
2021 resolution plans and the issuance of individual letters
communicating the agencies' feedback on those submitted plans;
<bullet> The agencies' recent experience with the resolutions of
Silicon Valley Bank, Signature Bank, and First Republic Bank, and
related stress experienced by a range of other financial institutions;
and
<bullet> The agencies' analysis of the current risk profiles of the
domestic triennial full filers.
The preamble to the 2019 revisions to the Rule indicated that the
agencies would make any future resolution guidance available for
comment,\11\ and on August 29, 2023, the agencies invited comments on
proposed guidance for the 2024 and subsequent resolution plan
submissions by domestic triennial full fillers (proposed guidance or
proposal).\12\
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\11\ Resolution Plans Required, 84 FR 59194, 59204 (Nov. 1,
2019) (2019 Federal Register Rule Publication).
\12\ <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230829b.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230829b.htm</a>; <a href="https://www.fdic.gov/news/press-releases/2023/pr23067.html">https://www.fdic.gov/news/press-releases/2023/pr23067.html</a>. See also Guidance for Resolution Plan Submissions of
Domestic Triennial Full Filers, 88 FR 64626 (Sept. 19, 2023).
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The Rule requires triennial full filers to submit their resolution
plans on or before July 1 of each year in which a resolution plan is
due.\13\ At the time the agencies issued the proposed guidance,
triennial full filers were required to submit their next resolution
plans on or before July 1, 2024. In the proposal, the agencies
requested comment about whether the agencies should provide more than
six months for firms to take into consideration the expectations in the
finalized guidance. Several comments discussed the timing of the next
resolution plan submission and its relationship to the final guidance
as well as other regulatory requirements. Most requested extensions,
with several requesting at least a year and one stating six months
would be adequate. Two commenters stated a maximum of six months from
publication of the final guidance to the first submission would be
adequate.
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\13\ 12 CFR 243.4(b)(3) and 381.4(b)(3).
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On January 17, 2024, the agencies announced an extension of the
resolution plan submission deadline for the triennial full filers from
July 1, 2024, to March 31, 2025.\14\ At this time, the agencies are
further extending the 2025 resolution plan submission deadline for all
triennial full filers to October 1, 2025, to provide the firms with
sufficient time to develop their full resolution plans in light of the
final guidance. The agencies are also clarifying that all triennial
full filers' subsequent resolution plan submission, a targeted
resolution plan, is due on or before July 1, 2028, and that future
resolution plan submissions will be due every three years after that,
alternating between full and targeted resolution plans, pursuant to the
Rule,\15\ unless the agencies exercise their authority under the Rule
to alter the submission date for future resolution plan
submissions.\16\
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\14\ <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20240117a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20240117a.htm</a>; <a href="https://www.fdic.gov/news/press-releases/2024/pr24002.html">https://www.fdic.gov/news/press-releases/2024/pr24002.html</a>.
\15\ 12 CFR 243.4(b) and 381.4(b).
\16\ 12 CFR 243.4(d)(2) and 381.4(d)(2).
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Resolution Plan Strategy
U.S.-based covered companies subject to the Rule have adopted one
of two resolution strategies: (1) a single point of entry (SPOE)
strategy where only the top tier bank holding company enters resolution
through a bankruptcy proceeding; or (2) a multiple point of entry
(MPOE) strategy where the top tier bank holding company files for
bankruptcy, the FDIC-insured bank subsidiary enters resolution pursuant
to the Federal Deposit Insurance Act of 1950, as amended (the FDI Act),
and where other entities enter the appropriate resolution regimes. The
SPOE and MPOE resolution strategies that firms have chosen present
different risks and entail different types of planning and development
of capabilities; accordingly, the proposal contained content applicable
to SPOE resolution strategies and separate content applicable to MPOE
resolution strategies.
Commenters supported inclusion of expectations for both MPOE and
SPOE resolution strategies, and supported firms' ability to choose
either strategy. However, some commenters questioned whether the
agencies were expecting or encouraging firms to adopt an SPOE
resolution strategy and recommended that the agencies disclose publicly
whether they prefer a particular resolution strategy, and engage in
notice and comment rulemaking if they do. For firms that change
resolution strategies, some commenters requested that the agencies
provide a transition period and made statements about the preferred
length of such a transition period, and one requested that the agencies
not issue any findings regarding a firm's first resolution plan that
adopts a different resolution strategy.
The agencies do not prescribe a specific resolution strategy for
any firm. This guidance, similarly, does not suggest that any firm
should change its resolution strategy, nor are the agencies identifying
a preferred strategy for a specific firm or set of firms. The selection
of a preferred strategy, including MPOE or SPOE as a preferred
resolution strategy, should reflect the characteristics of the firm and
its business operations and support the goal of the resolution plan to
substantially mitigate serious adverse effects of the firm's failure on
financial stability in the United States. Each firm remains free to
choose the resolution strategy it believes would most effectively
facilitate a rapid and orderly resolution.
The agencies are providing separate guidance for an SPOE resolution
strategy and an MPOE resolution strategy in acknowledgment that firms
are free to adopt the resolution strategy that best suits their
operations and organizations. Further, the agencies note there may be
resolution strategies other than SPOE and MPOE that could facilitate a
rapid and orderly resolution. The specified firms should continue to
submit resolution plans using the resolution strategies they believe
would be most effective in achieving an orderly resolution of their
firms. Regardless of strategy, a resolution plan should address the key
vulnerabilities, support the underlying assumptions required to
successfully execute the chosen resolution strategy, and demonstrate
the adequacy of the capabilities necessary to execute the selected
strategy.
Moreover, because the agencies do not prescribe resolution
strategies, firms may voluntarily change their preferred strategy in
the future. However, reflecting the voluntary nature of resolution
strategy changes, the agencies do not anticipate providing a transition
period during which a firm would be free from potential findings under
the Rule while it effectuates a change in resolution strategy, whether
from MPOE to SPOE, or to any other resolution strategy. A firm controls
the timing of when it submits its first plan with a different strategy;
accordingly, it can take the time it needs to put in place the
[[Page 66390]]
resources and capabilities needed to submit a plan that satisfies the
standard in section 165(d) of the Dodd-Frank Act and the Rule. The
standard of review for a resolution plan submission of a firm that
transitions to a new strategy is therefore the same as for any firm
subject to the Rule.\17\
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\17\ See 12 CFR 243.8 and 381.8.
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B. Connection to Other Rulemakings
Long-Term Debt Proposal
The agencies, as well as the Office of the Comptroller of the
Currency (together with the agencies, the Federal banking agencies),
issued in August 2023 a proposed rule for comment that would require
certain large holding companies, U.S. intermediate holding companies of
FBOs, and certain IDIs, to issue and maintain outstanding a minimum
amount of long-term debt (LTD), among other proposed requirements.\18\
The agencies have received comments on the LTD proposal, and will
consider all comments received in context of the LTD rulemaking. The
agencies requested comments on the proposed guidance that take the LTD
proposal into consideration.
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\18\ <a href="https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230829a.htm">https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230829a.htm</a>; <a href="https://www.fdic.gov/news/press-releases/2023/pr23065.html">https://www.fdic.gov/news/press-releases/2023/pr23065.html</a>. See also Long-Term Debt Requirements for Large Bank
Holding Companies, Certain Intermediate Holding Companies of Foreign
Banking Organizations, and Large Insured Depository Institutions, 88
FR 64524 (Sept. 19, 2023) (LTD proposal).
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One commenter recommended that, for purposes of their resolution
plans, firms should only assume their existing outstanding LTD and not
the projected LTD that would be in place once the firm has achieved
full compliance with the LTD proposal. Another commenter argued that
the agencies should consider the interaction between the proposed
guidance and LTD proposal, with a goal of having them work together to
improve the resolvability of applicable banking organizations and avoid
duplicative or contradictory requirements. The commenter also asserted
that calibration of an IDI's internal LTD requirement could lead
banking organizations using an MPOE resolution strategy to adopt an
SPOE resolution strategy because of the costs of compliance with such
internal LTD issuance. One commenter discussed whether the agencies
should align the objectives of the LTD proposal and the resolution
planning under the Rule.
The Federal banking agencies have not finalized the LTD rulemaking
as of the issuance of this final guidance. The agencies recognize that
LTD issued and maintained by a specified firm could affect the firm's
strategic analysis of the funding, liquidity, and capital needs of, and
resources available to, the covered company and its material
entities.\19\ However, the agencies believe that the finalization of a
requirement to maintain a specified amount of LTD would not affect this
guidance in any material way. Any final LTD rule will address the
manner in which its requirements will be implemented. This final
guidance is intended to convey the agencies' expectations regarding the
content of resolution plan submissions, and not to contradict, modify,
or accelerate a company's obligations under other laws or regulations.
As provided in the final guidance, firms should develop their
resolution plans in accordance with the current state of the applicable
legal and policy frameworks. The agencies also recognize, however, that
there may be phase-in periods during which rules become effective.
Should the LTD rule be finalized in advance of October 1, 2025, the
agencies will not expect firms to incorporate the requirements of the
rule into their 2025 resolution plan submissions. This should provide
firms covered by the LTD rule with reasonable time to consider any
final LTD rule in a future resolution plan submission.
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\19\ See 12 CFR 243.5(c)(1)(iii) and 381.5(c)(1)(iii).
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Further, and as noted above, the agencies are not recommending that
any specified firm adopt any particular strategy in response to this
guidance or the LTD proposal.
FDIC IDI Resolution Plan Proposal
The agencies received three comments on the connection between the
proposal and the IDI Rule.\20\ The FDIC published proposed revisions to
the IDI Rule on September 19, 2023,\21\ and published final revisions
on July 9, 2024.\22\ Those commenters recommended coordinating aspects
of the proposed guidance and the Proposed IDI Rule, including having
consistent terms and concepts. One commenter requested that cross-
referencing to section 165(d) resolution plans be permitted under the
Proposed IDI Rule. Another comment questioned whether a more holistic
approach would be possible to synchronize the requirements of section
165(d) planning and IDI Rule resolution planning. One commenter
asserted that the MPOE guidance could cause confusion on the part of
firms by conflating resolution strategies and the underlying purpose of
the Rule and the IDI Rule.
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\20\ 12 CFR 360.10 (IDI Rule).
\21\ Resolution Plans Required for Insured Depository
Institutions With $100 Billion or More in Total Assets;
Informational Filings Required for Insured Depository Institutions
With at Least $50 Billion But Less Than $100 Billion in Total
Assets, 88 FR 64579 (Sept. 19, 2023) (Proposed IDI Rule).
\22\ Resolutions Plans Required for Insured Depository
Institutions with $100 Billion or More in Total Assets;
Informational Filings Required for Insured Depository Institutions
With at Least $50 Billion but Less Than $100 Billion in Total
Assets, 89 FR 56620 (July 9, 2024).
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The Rule requires a covered company to submit a resolution plan
that would allow for the rapid and orderly resolution of the firm under
the Bankruptcy Code in the event of material financial distress or
failure. The final guidance clarifies the agencies' expectations
regarding certain topics and provides direction as to how a covered
company may demonstrate its compliance with its statutory obligation
under section 165(d) of the Dodd-Frank Act to develop a resolution plan
allowing for its rapid and orderly resolution. The IDI Rule serves a
different purpose: the IDI Rule assists the FDIC in preparing to manage
the resolution of a covered insured depository institution. While these
two rules may be complementary, they are not the same. Additionally,
whether to align the IDI Rule with the Rule or permit cross-referencing
to section 165(d) resolution plans under the IDI Rule is outside the
scope of this guidance.
C. Proposed Guidance
On August 29, 2023, the agencies invited public comment on proposed
guidance for how domestic triennial full filers' resolution plans could
address key challenges in resolution, which was proposed to apply
beginning with the specified firms' 2024 resolution plan
submissions.\23\ The proposal identified the banking organizations to
which the guidance would apply and articulated several areas of
guidance: capital; liquidity; governance mechanisms; operational; legal
entity rationalization and separability; and IDI resolution, if
applicable. The proposed guidance described the agencies' proposed
expectations for each of these areas. Most substantive topics were
bifurcated, with separate guidance for an SPOE resolution strategy and
an MPOE resolution strategy. The proposed guidance concluded with
information about the format and structure of a plan that applied
equally to plans contemplating either an SPOE resolution strategy or an
MPOE resolution strategy.
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\23\ Supra note 12.
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The proposed guidance for firms that adopt an SPOE resolution
strategy was generally based on the 2019 U.S. GSIB Guidance, with
certain modifications
[[Page 66391]]
that reflected the specific characteristics of and potential risks
posed by the failure of the specified firms. The proposed guidance for
firms that adopt an MPOE resolution strategy incorporated certain
aspects of the 2019 U.S. GSIB Guidance that the agencies believed are
applicable to large banking organizations, with modifications
appropriate to this strategy and institutions with the characteristics
displayed by the specified firms. For MPOE firms, the proposed guidance
also omitted aspects of the 2019 U.S. GSIB Guidance that would not be
pertinent to MPOE resolution strategies. The agencies also proposed to
clarify their expectations for specified firms that adopt an MPOE
resolution strategy that includes the resolution of a material entity
that is a U.S. IDI.
The agencies invited comments on all aspects of the proposed
guidance. The agencies also specifically requested comments on a number
of issues, including the interaction of resolution guidance with a
final long-term debt rule, the amount of time between the publication
of the final guidance and the firms' next resolution plans, the
appropriateness of guidance on IDI resolution, and whether to issue
derivatives and trading expectations.
II. Overview of Comments
The agencies received and reviewed eight comment letters on the
proposed guidance. Commenters included various financial services trade
associations, a law firm, two public interest groups, and certain
individuals. In addition, the agencies met with representatives of a
banking organization that would be a specified firm and a trade
association that represents banking organizations that would be
specified firms at their request to discuss issues relating to the
proposed guidance.\24\ This section provides an overview of the general
themes raised by commenters. The comments received on the proposed
guidance are further discussed below in the sections describing the
final guidance (and, in some cases, previously in section I), including
any changes that the agencies have made to the proposed guidance in
response to comments.
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\24\ Summaries of those meetings and copies of the comments can
be found on each agency's website. <a href="https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=OP-1816&doc_ver=1">https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=OP-1816&doc_ver=1</a>; <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/2023/2023-guidance-resolution-plan-submissions-domestic-triennial-3064-za37.html">https://www.fdic.gov/resources/regulations/federal-register-publications/2023/2023-guidance-resolution-plan-submissions-domestic-triennial-3064-za37.html</a>.
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Differentiating Expectations Based on Size, Complexity, and Risk
One commenter contended that the proposed guidance did not
sufficiently differentiate expectations among firms subject to
resolution planning guidance. The commenter argued that section 165 of
the Dodd-Frank Act requires the agencies to tailor application of
prudential standards issued pursuant to that section, such as
resolution planning guidance; contended that the proposal was too
similar to the 2019 U.S. GSIB Guidance; and encouraged expectations in
the final guidance to be further differentiated based on size, risk,
and other factors.
Resolution Strategy and Transition Period
Several commenters supported the proposal's inclusion of
expectations for both MPOE and SPOE resolution strategies and the
agencies' statement that firms have ability to choose their preferred
strategy. However, as noted above, some commenters questioned whether
the agencies were expecting or encouraging firms to adopt an SPOE
resolution strategy and recommended that the agencies disclose publicly
whether they prefer a particular resolution strategy. For firms that
change resolution strategies, some commenters requested that the
agencies provide a transition period during which the agencies would
not make credibility findings in connection with a plan review.
Capital and Liquidity
The agencies received a number of comments on the capital and
liquidity sections of the proposed guidance. Regarding the capital
section of the proposed guidance, one commenter asserted that including
expectations regarding the positioning of capital for firms with an
SPOE resolution strategy is premature given that finalization of a
proposal to modify the capital requirements for large banking
organizations \25\ and the LTD proposal may impact firms' capital
planning, contended that the proposal included expectations that are
duplicative of existing capital requirements, and suggested removing
the guidance on Resolution Capital Adequacy and Positioning (RCAP) from
the final guidance. Regarding expectations for firms using an MPOE
resolution strategy, one commenter agreed that additional expectations
are not warranted, while another commenter argued for capital plans for
each material entity and asked the agencies to align expectations for
the MPOE capital guidance with SPOE capital guidance.
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\25\ Regulatory Capital Rule: Large Banking Organizations and
Banking Organizations With Significant Trading Activity, 88 FR 64028
(Sept. 18, 2023) (Capital proposal).
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Regarding the liquidity section of the proposed guidance, one
commenter argued that Resolution Liquidity Adequacy and Positioning
(RLAP) expectations are not appropriate due to the comparatively simple
legal entity structures and reduced risk profiles of these firms and
claimed that RLAP is redundant with certain regulatory requirements. In
addition, one commenter requested that the final guidance strengthen
expectations for liquidity in resolution by including a procedure or
protocol for liquidity related decisions, irrespective of resolution
strategy.
IDI Resolution Analysis
The agencies received a number of comments on the proposed guidance
related to the resolution of a subsidiary material entity U.S. IDI.
Multiple commenters requested clarity on how the firm's plan should
address the expectations regarding the FDIC's statutory least-cost
requirement and questioned whether there is sufficient information
available for firms to effectively evaluate whether a proposed
resolution plan would satisfy the least-cost analysis expectations.
These commenters also questioned whether the least-cost analysis would
be of value to FDIC in an actual resolution and argued that the
guidance should be aligned with the requirements of the IDI Rule. One
stated sufficient time should be given for firms to conduct new
analyses and seek additional guidance from the agencies and that
aspects of this section of the proposal should not be finalized.
Another commenter argued that firms should not be expected to
demonstrate that their preferred strategy would be consistent with the
FDIC's statutory least-cost requirement. One commenter further
suggested that the Proposed IDI Rule is a better forum to address how
IDI subsidiaries can be resolved under the FDI Act.
Another commenter suggested that the agencies should require firms
to develop resolution strategies involving bridge depository
institutions (BDIs) and recommended that the guidance address the value
of assets transferred to such a BDI, how the resolution plan would
address the IDI's franchise value, and how the preferred resolution
strategy would result in a least-costly resolution.
[[Page 66392]]
Derivatives and Trading
Some commenters supported including expectations for derivatives
and trading activity in the final guidance, contending that derivatives
activity for domestic triennial full filers may increase in the future
and proposed applying such guidance to firms with net derivatives
exceeding a given threshold. However, one commenter supported not
including such expectations, stating it was appropriate to exclude such
guidance because the specified firms have limited derivatives and
trading portfolios, particularly relative to the U.S. G-SIB banking
organizations covered by such guidance.
Connection to Other Rules
The agencies received a number of comments about the interaction of
the proposed guidance with several other rulemaking initiatives by the
Federal banking agencies. For example, some commenters recommended
coordinating the FDIC's Proposed IDI Rule revisions with the resolution
plan rule and final guidance for the specified firms. Two commenters
suggested that the agencies consider the interaction between the
proposed guidance and the LTD proposal to ensure the two proposals work
together to improve the resolvability of applicable banking
organizations and avoid duplicative or contradictory requirements. One
commenter also expressed concern including certain expectations in the
final guidance, such as those relating to capital, would be premature
before finalizing the Capital proposal and LTD proposal, which impact
firms' capital planning.
Timing of Next Resolution Plan
Several comments discussed the timing of the next resolution plan
submission and its relationship to this final guidance. Some commenters
recommended providing at least one year between issuing final guidance
and the deadline for domestic triennial full filers' next resolution
plan submissions. However, other commenters suggested that six months
from publication of the final guidance to the first resolution plan
submission would be adequate for firms to take into account the
guidance.
III. Final Guidance
After considering the comments, conducting additional analysis, and
further assessing the business and risk profiles of domestic triennial
full filers, the agencies are issuing final guidance that includes
certain modifications and clarifications from the proposal. In
particular, the capital, liquidity, governance mechanisms, operational,
IDI resolution, separability, and assumptions sections of the final
guidance reflect changes from the proposed guidance. In addition, as
was noted in the proposal,\26\ the final guidance consolidates all
prior resolution planning guidance for the firms in one document.
Further, as was noted in the proposal,\27\ the final guidance is not
intended to override the obligation of an individual firm to respond in
its next resolution plan submission to pending items of individual
feedback or any shortcomings or deficiencies jointly identified or
determined by the agencies in that firm's prior resolution plan
submissions. The guidance is drafted to reflect the current conditions
in the industry and institutions as they exist today.
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\26\ See proposed guidance at 88 FR 64628.
\27\ See id.
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As discussed below,\28\ several commenters asserted that the
proposal did not adequately differentiate among covered companies based
on their size, complexity, and risk to financial stability. The
guidance, however, takes into account the size and complexity of firms,
their resolution strategy, and whether they are based in the United
States or in a foreign jurisdiction. In addition, the final guidance is
not meant to limit firms' consideration of additional vulnerabilities
or obstacles that might arise based on a firm's particular structure,
operations, or resolution strategy.
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\28\ See infra section III.K of this document.
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The agencies also note that commenters described certain
expectations that are set forth in the guidance as ``requirements.'' As
the agencies indicated in the proposed guidance and are now
reaffirming, the final guidance does not have the force and effect of
law. Rather, the final guidance outlines the agencies' supervisory
expectations regarding each subject area covered by the final
guidance.\29\ The final guidance includes language reflecting this
position.\30\
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\29\ See 12 CFR 262.7 and appendix A to 12 CFR part 262; 12 CFR
part 302.
\30\ See infra section V.I of this document.
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Finally, the agencies made several minor, non-substantive changes
from the proposal, including to align the wording of guidance directed
at firms that adopt an SPOE resolution strategy and firms that adopt an
MPOE resolution strategy.
A. Scope of Application
The agencies proposed applying the guidance to all domestic
triennial full filers and invited comment on all aspects of the
proposed scope of the guidance. The agencies received no comments
concerning the scope of the guidance's application and are finalizing
this section of the guidance as proposed.
B. Transition Period
The proposed guidance did not describe how the guidance would be
applied to domestic banking organizations that become covered by its
scope, but it did request comment on all aspects of the proposed scope
of application. To provide certainty to domestic banking organizations,
the final guidance states that when a domestic banking organization
becomes a specified firm, the final guidance will apply to the firm's
next resolution plan submission with a submission date that is at least
12 months after the time the firm becomes a specified firm.\31\ If a
specified firm ceases to be a domestic triennial full filer, it will no
longer be considered a specified firm, and the guidance will no longer
be applicable to that firm as of the date the firm ceases to be a
domestic triennial full filer.
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\31\ The plan type for that next submission remains as specified
by the Rule, i.e., a full or targeted resolution plan. See 12 CFR
243.4 and 381.4.
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C. Capital
For specified firms with an SPOE resolution strategy, the agencies
proposed capital expectations substantially similar to those in the
2019 U.S. GSIB Guidance. The ability to provide sufficient capital to
material entities without disruption from creditors is essential to an
SPOE resolution strategy's objective of ensuring that material entities
can continue to operate as the firm is resolved. The proposal described
expectations concerning the appropriate positioning of capital and
other loss-absorbing instruments (e.g., debt that a parent holding
company may choose to forgive or convert to equity) among the material
entities within the firm (RCAP). The proposal also described
expectations regarding a methodology for periodically estimating the
amount of capital that may be needed to support each material entity
after the bankruptcy filing (resolution capital execution need, or
RCEN).
The agencies received several comments on the capital section of
the proposed guidance. One commenter asserted that including
expectations in this guidance regarding the positioning of capital is
premature given that finalization of the Capital proposal and the LTD
proposal may impact firms' capital planning. The commenter argued
[[Page 66393]]
that existing capital requirements are sufficient for the size and
complexity of the firms subject to this guidance without RCAP
expectations, which, the commenter asserted, would add more complexity
to the resolution planning process.
After reviewing these comments, the agencies are finalizing this
section of the guidance generally as proposed, but with one
clarification. Proposed guidance related to the methodology for
periodically estimating the amount of capital that may be needed to
support material entities in bankruptcy (RCEN) could have been
construed as establishing a mandatory minimum capital requirement. As
the agencies have discussed elsewhere, resolution plan guidance is not
binding and does not establish legal requirements.\32\ The final
guidance clarifies the kind of information the agencies expect a firm
to provide if that firm's resolution strategy includes recapitalizing
material entities but does not establish requirements for firms.
---------------------------------------------------------------------------
\32\ See supra section III of this document.
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RCAP expectations are important for firms to ensure the appropriate
positioning of capital and other loss-absorbing instruments among the
material entities within the firm and to effectively execute a SPOE
resolution strategy. Finalizing RCAP expectations is not premature in
light of outstanding proposals such as the LTD rulemaking and other
pending rules because the RCAP expectations can be achieved with or
without the LTD contemplated in the LTD proposal. The Federal banking
agencies have not finalized the LTD proposal as of the issuance of this
final guidance, and comments on that proposed rule are currently under
consideration. Specifically, the final guidance does not rely on or
presume the finalization of pending rules and instead states,
consistent with the proposal, that a resolution plan should be based on
the current state of the applicable legal and policy frameworks.\33\
The guidance is intended to assist firms in developing their resolution
plans, which are required to be submitted pursuant to the Dodd-Frank
Act and the Rule. While other capital and resolution-related rules may
establish minimum standards applicable to firms submitting resolution
plans, this guidance is designed to facilitate a firm's own analysis of
its expected needs in resolution across that firm's material entities.
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\33\ See infra section V.VIII of this document.
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Additionally, the stress experienced by and the failure of several
large banking organizations in March 2023 highlighted the fast-moving
nature of stress events, as several banking organizations entered
resolution proceedings rapidly. These events also highlighted the
potential for the failure of a large regional banking organization to
affect financial stability. Successful execution of an SPOE resolution
strategy--including the need to ensure that individual material
entities have adequate capital to maintain operations as the firm is
resolved--is unlikely to be successful under a short time frame without
advance planning. Appropriate positioning of capital and other loss-
absorbing instruments among the firm's material entities is an
important element of this advanced planning to reduce uncertainty and
enable timely recapitalization consistent with an SPOE resolution
strategy. Accordingly, the agencies are finalizing guidance that
includes RCAP expectations for firms that adopt an SPOE strategy.
For firms that adopt an MPOE resolution strategy, the agencies did
not propose further expectations concerning capital and asked a
question about whether capital-related expectations should be applied.
In response, one commenter agreed with the proposal that additional
expectations are not warranted for firms using an MPOE resolution
strategy, arguing that such expectations would serve no purpose.
However, another commenter contended that it is not prudent to assume
that material entities within a holding company structure can be wound
down in an orderly manner and that, at a minimum, capital plans are
needed for each material entity to preserve its value during the
transition period between a firm's failure and when it can be sold or
closed in an orderly way. The commenter asked the agencies to
reconsider expectations for firms that adopt an MPOE resolution
strategy and align them with expectations for firms that adopt an SPOE
resolution strategy.
The agencies have determined that additional capital expectations
for firms selecting an MPOE resolution strategy are not necessary at
this time. Under an MPOE resolution strategy, most material entities do
not continue as going concerns upon the firm's entry into resolution
proceedings and are likely to have already depleted existing capital.
Accordingly, the agencies are finalizing this section as proposed.
D. Liquidity
For firms that adopt an SPOE resolution strategy, the agencies
proposed liquidity expectations substantially similar to those in the
2019 U.S. GSIB Guidance. A firm's ability to reliably estimate and meet
its liquidity needs prior to, and in, resolution is important to the
execution of a firm's resolution strategy because it enables the firm
to respond quickly to demands from stakeholders and counterparties,
including regulatory authorities in other jurisdictions and financial
market utilities. Maintaining sufficient and appropriately positioned
liquidity also allows subsidiaries to continue to operate while the
firm is being resolved in accordance with the firm's preferred
resolution strategy. For firms that adopt an MPOE resolution strategy,
the agencies proposed that a firm should have the liquidity
capabilities necessary to execute its preferred resolution strategy,
and its plan should include analysis and projections of a range of
liquidity needs during resolution.
The agencies received several comments on the liquidity section of
the proposed guidance. One commenter supported including RLAP
expectations in the final guidance for firms that adopt an SPOE
resolution strategy, while another commenter requested that the
agencies remove RLAP from the final guidance. The second commenter
argued that RLAP expectations are not appropriate due to the
comparatively simple legal entity structures and reduced risk profiles
of the firms subject to the proposed guidance. The commenter also
claimed that RLAP would be redundant to certain regulatory
requirements, such as the Liquidity Coverage Ratio (LCR) and Internal
Liquidity Stress Testing (ILST).
Another commenter requested that, irrespective of resolution
strategy, the guidance strengthen expectations for liquidity in
resolution by including a procedure or protocol for liquidity related
decisions. The commenter argued that the guidance should affirm the
importance of overcoming barriers to moving liquidity across material
legal entities and clarify which types of transfers of liquidity are
permissible for material entities in resolution.
After reviewing these comments, the agencies are finalizing this
section of the guidance largely as proposed, with one clarifying edit
concerning forecasting maximum operating liquidity and peak funding
needs. The final guidance clarifies that these forecasts should ensure
that material entities can operate through resolution, as compared to
the proposed guidance that provided that the forecasts should ensure
that material entities can operate after the firm files for bankruptcy.
RLAP expectations are not addressed by ILST and other regulatory
requirements. Maintaining sufficient
[[Page 66394]]
and appropriately positioned liquidity is critical to executing an SPOE
resolution strategy, regardless of the size and complexity of the
banking organization. The LCR and ILST requirements that commenters
referenced serve a different purpose--to promote resilience of firms'
funding profiles--and are not focused on resolution planning.
Finally, the agencies are not establishing expectations regarding
procedures or protocols for liquidity-related decisions and the types
of transfers of liquidity that are permissible for material entities in
resolution for firms that adopt a MPOE resolution strategy. The Rule
already includes requirements for firms to include detailed
descriptions of funding and liquidity needs and resources of material
entities, and to identify interconnections and interdependencies
related to liquidity arrangements.\34\ Beyond the assumptions specified
in the final guidance related to liquidity, additional details of how
each firm provisions liquidity in the lead up to and during resolution
are not needed at this time. Furthermore, firms should follow
procedures and protocols that are aligned with their larger liquidity
management frameworks to facilitate their preferred resolution
strategies.
---------------------------------------------------------------------------
\34\ 12 CFR 243.5(c)(1)(iii) and (g) and 381.5(c)(1)(iii) and
(g).
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E. Governance Mechanisms
The agencies proposed governance mechanisms expectations for
domestic firms that use an SPOE resolution strategy. These firms would
have been expected to develop an adequate governance structure with
triggers that identify the onset, continuation, and increase of
financial stress to ensure that there is sufficient time to prepare for
resolution-related actions. The agencies did not propose governance
mechanisms expectations for domestic firms contemplating an MPOE
resolution strategy, as entry of certain types of material entities
into resolution would be determined by criteria prescribed in statute
or dependent to some extent on actions taken by regulatory authorities
in implementing a statute. The agencies requested comment on whether to
apply additional governance mechanisms expectations to domestic firms
contemplating an MPOE resolution strategy. Some commenters called for
the agencies to apply similar governance mechanisms expectations
regardless of a firm's preferred resolution strategy, arguing that many
aspects of resolution planning are the same or similar for MPOE and
SPOE resolution strategies.
One commenter also encouraged the agencies to adopt expectations
that firms articulate their internal legal strategy, processes for
making key decisions, and roles and responsibilities leading up to and
after a material entity of a firm using an MPOE resolution strategy
enters bankruptcy. Another commenter claimed that governance mechanisms
are needed for domestic MPOE filers to preserve the value of each
material entity during the transition period between failure and
orderly resolution. However, another commenter argued that final
guidance should not include governance mechanisms expectations for
domestic MPOE filers as such expectations would not meaningfully
improve resolvability.
After review and consideration of these comments, the agencies are
finalizing this section of the guidance largely as proposed, with one
clarification applicable only to firms that adopt an SPOE strategy. The
proposed guidance provided that a firm can reproduce a legal analysis
that was submitted in a prior plan submission, and that the firm should
build upon the analysis. The final guidance clarifies that the agencies
expect that a firm that relies upon a previously submitted analysis
ensure it remains accurate and up to date. While there is a general
obligation for firms to submit plans that contain accurate information,
the agencies are providing this clarification due to the agencies'
experience that certain legal matters in some resolution plan
submissions have been outdated.
Regarding firms that adopt an MPOE strategy, the agencies are
finalizing this section of the guidance as proposed. Under an MPOE
resolution strategy, certain material entities' entry into resolution
is typically determined by or dependent on the actions of supervisory
and resolution authorities. Adopting expectations for triggers,
playbooks, pre-bankruptcy support, internal legal strategy, processes
for making key decisions, and roles and responsibilities for domestic
triennial full filers adopting an MPOE resolution strategy, with their
present operations, activities, and structures, would not meaningfully
improve the resolvability of the specified firms. Accordingly, the
final guidance does not contain governance mechanisms expectations for
those firms.
F. Operational
For firms that adopt an SPOE resolution strategy, the agencies
proposed aspects of the operational expectations of the 2019 U.S. GSIB
Guidance and SR letter 14-1,\35\ with modifications based on the
specific characteristics and complexities of the specified firms. Like
the 2019 U.S. GSIB Guidance, the proposal contained expectations on
managing, identifying, and valuing collateral; management information
systems (MIS); and shared and outsourced services. For firms that adopt
an MPOE resolution strategy, the agencies proposed operational
expectations based on SR letter 14-1 and the 2019 U.S. GSIB Guidance
that are limited to those most relevant to an MPOE resolution strategy.
As noted in the proposal, development and maintenance of operational
capabilities is important to support and enable execution of a firm's
preferred resolution strategy, including providing for the continuation
of identified critical operations and preventing or mitigating adverse
effects on U.S. financial stability.
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\35\ SR letter 14-1, ``Principles and Practices for Recovery and
Resolution Preparedness'' (Jan. 24, 2014), available at: <a href="https://www.federalreserve.gov/supervisionreg/srletters/sr1401.htm">https://www.federalreserve.gov/supervisionreg/srletters/sr1401.htm</a>.
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The agencies received two comments on the proposed guidance. One
comment argued that the proposed guidance's expectation that MPOE firms
remediate vendor arrangements to support continuity of shared and
outsourced services is overbroad. The commenter asserted that this
expectation is inappropriate for MPOE firms that mostly receive
external services through their IDIs because termination of such vendor
contracts due to ipso facto clauses would be stayed by the FDI Act,\36\
and as many firms include resolution-resilient terms in vendor
contracts when those contracts undergo periodic review and renewal. The
commenter recommended that the Agencies specify that this expectation
would apply only to contracts not covered by the FDI Act stay. Another
commenter contended that firms with limited payment, clearing, and
settlement (PCS) activities, such as firms without identified critical
operations related to those activities, should not have to develop the
same capabilities as firms with more complex PCS activities.
---------------------------------------------------------------------------
\36\ See 12 U.S.C. 1821(e)(13).
---------------------------------------------------------------------------
After review and consideration of these comments, the agencies are
finalizing this area of the guidance with three clarifications
applicable only to firms that adopt an SPOE strategy, and one
modification applicable to firms with either preferred resolution
strategy. First, the proposed guidance for firms that adopt an SPOE
strategy stated that a firm should maintain a fully
[[Page 66395]]
actionable implementation plan to ensure the continuity of shared
services that support identified critical operations or core business
lines. Implied in the concept of supporting identified critical
operations or core business lines is the notion that a firm would need
to be able to execute its resolution strategy. Accordingly, the final
guidance for firms that adopt an SPOE strategy explicitly states that a
firm's implementation plan to ensure continuity of shared services
should include those services that are material to the execution of the
firm's resolution strategy.
Second, the proposed guidance for firms that adopt an SPOE strategy
stated that a firm should demonstrate capabilities for continued access
to PCS services essential to an orderly resolution through a framework
to support such access and the provided elements of such a framework.
The agencies note that prior instances of resolution plan guidance
contained certain limitations on similar PCS framework
expectations,\37\ and the final guidance adopts that language to
clarify the scope of said expectations.
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\37\ 2020 FBO Guidance at 85 FR 83572-73.
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Third, the proposed PCS guidance for firms that adopt an SPOE
strategy contained several references to ``various currencies.'' The
agencies note that in the finalization of the 2020 FBO Guidance, the
agencies revised similar language in response to a comment requesting
that certain aspects of that guidance be made consistent with
international expectations.\38\ The final guidance is adopting the
language from the 2020 FBO Guidance for that same reason.
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\38\ See 2020 FBO Guidance at 85 FR 83566.
---------------------------------------------------------------------------
Additionally, the agencies recognize that firms anticipate relying
on external parties for the execution of some aspects of the resolution
strategy, and the proposal included and the final guidance maintains
the expectation that a firm identify and support the continuity of
outsourced services that support critical operations or are material to
the execution of the preferred resolution strategy. Such outsourced
services that firms may rely on could be employing outside bankruptcy
counsel and consultants to help prepare documents needed to file for
bankruptcy, and to represent the firm during the course of the
bankruptcy proceedings. The agencies expect that covered companies
engage in advance planning to help facilitate their ability to complete
all filings, motions, supporting declarations and other documents to
prepare for and file an orderly resolution in bankruptcy. In
recognition of this expectation, the final guidance states that--
regardless of strategy--those professionals' services could be material
to the execution of a firm's preferred resolution strategy and, if so,
should be accounted for in the firm's resolution plan. Accordingly, the
agencies expect that firms should prepare during business-as-usual to
ensure they can complete and file all documents needed to initiate
their preferred resolution strategy.
The other aspects of this section of the guidance are being
finalized as proposed. The comment addressing contract remediation
correctly observes that the FDI Act permits the FDIC as receiver of a
failed IDI to enforce contracts with that IDI notwithstanding any
provisions in the contract permitting termination due to insolvency or
appointment of the receiver. However, it is advantageous for contracts
that support identified critical operations or that are material to the
execution of the resolution strategy to not purport to permit
termination. Counterparties may not be aware of the receiver's
authority under the FDI Act to enforce such agreements, potentially
requiring the receiver to seek authority from a court to compel the
counterparty's performance, which could lead to interruption of
identified critical operations and capabilities needed to execute the
resolution strategy. Further, counterparties located overseas may not
recognize the authority afforded the receiver to compel the performance
of contracts. The agencies recognize that contract remediation is an
ongoing process and encourage firms to make such changes proactively.
Regarding PCS activities, as discussed elsewhere,\39\ the Agencies
note that the level of detail provided in a firm's plan should be both
consistent and commensurate with the firm's risk and activities.
---------------------------------------------------------------------------
\39\ See infra section III.K of this document.
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G. Legal Entity Rationalization and Separability
For domestic banking organizations that adopt an SPOE resolution
strategy, the agencies proposed adopting legal entity rationalization
(LER) and separability expectations from the 2019 U.S. GSIB Guidance.
The LER expectations explained that a firm's legal structure should
support the firm's preferred resolution strategy, including by:
facilitating the recapitalization and liquidity support of material
entities; facilitating the sale, transfer, or wind-down of certain
discrete operations; adequately protecting the subsidiary IDIs from
risks arising from the activities of any nonbank subsidiaries of the
firm; and minimizing complexity that could impede an orderly
resolution. The separability expectations outlined that a firm should
identify discrete operations that could be sold or transferred in
resolution, with the objective of providing optionality in resolution,
including via a detailed separability analysis that addresses
divestiture options, execution plans, and impact assessments.
For domestic banking organizations using an MPOE resolution
strategy, the agencies proposed LER and separability expectations that
are reduced as compared to those contained in the 2019 U.S. GSIB
Guidance. The LER expectations clarified that the firm should consider
various factors and describe in its plan how the legal entity structure
aligns core business lines and any identified critical operations with
the firm's material entities, as well as any cases where a material
entity IDI relies on an affiliate that is not the IDI's subsidiary
during resolution. The separability expectations explained that a firm
should include options for the sale, transfer, or disposal of
significant assets, portfolios, legal entities, or business lines in
resolution and provide supporting analysis, including an execution
plan, identification of any impediments and mitigants, a financial
impact assessment, and an identified critical operation impact
assessment.
The agencies received one comment on the LER and separability
guidance for domestic banking organizations. The commenter contended
that separability analysis is inappropriate for businesses and legal
entities that would be wound down in resolution, as it may not be
feasible to sell or otherwise transfer such businesses, and that
separability analysis would not enhance resolvability. The commenter
further claimed that many elements of the separability analysis may not
be appropriate for firms that are not active in the investment banking
space or lack large mergers and acquisitions teams.
After consideration of the comment received, the agencies are
issuing legal entity rationalization guidance for both SPOE and MPOE
firms. LER criteria enhance an orderly resolution by promoting in
business-as-usual a corporate structure that supports a firm's
preferred resolution strategy. The agencies are retaining these
expectations, in part, to encourage firms to consider resolution
implications of changes to corporate structure, including from future
growth or mergers and acquisitions. For firms with SPOE
[[Page 66396]]
resolution strategies, the agencies continue to encourage the firms to
develop and apply LER criteria to facilitate the sale, transfer, or
wind-down of certain discrete operations within a timeframe that would
meaningfully increase the likelihood of orderly resolution. The
agencies continue to encourage firms using MPOE resolution strategies
to consider potential sales, transfers, and wind-downs during
resolution as they maintain their legal entity structures.
However, the separability section of guidance is not needed at this
time for the specified firms due to their current corporate structures
and other separability-related expectations. Most of the specified
firms have three or fewer material entities, with the overwhelming
majority of their assets concentrated in their IDIs. In addition, the
Rule requires firms to address the feasibility and impact of sales or
divestitures and the final LER guidance contains separability-related
expectations. The agencies may consider the need for firm-specific
separability expectations in the future for specified firms that
substantially increase their non-bank activities or change in a way
such that separability becomes critical to their resolvability.
Finally, the agencies moved the description of their expectation on
governance processes from the proposed separability section to the LER
section of the final guidance text.
H. Insured Depository Institution Resolution
Background
In the proposal, the agencies provided clarifying expectations as
to how a firm adopting an MPOE resolution strategy with a material
entity IDI should explain how the IDI can be resolved under the FDI Act
in a manner that is consistent with the overall objectives of the
resolution plan. In particular, the proposed expectations for IDI
resolution were designed to support the resolution plans' effectiveness
in substantially mitigating the risk that the failure of the specified
firm would have serious adverse effects on financial stability in the
United States, while also adhering to the legal requirements of the FDI
Act without relying on the assumption that the systemic risk exception
will be invoked in connection with the resolution of the firm. For
example, the agencies proposed clarifying that if a firm adopting an
MPOE resolution strategy selects an IDI resolution strategy other than
a payout liquidation, the firm's plan should provide information
supporting the feasibility of the firm's selected strategy, although
such a feasibility analysis need not consist of a full FDI Act least-
cost requirement analysis. The agencies proposed that a firm could
instead provide a more limited analysis. The proposal noted that the
same expectations would not be applicable to firms adopting an SPOE
resolution strategy because the U.S. IDI subsidiaries of such firms
would not be expected to enter resolution.
The agencies received a number of comments on the proposed guidance
related to the resolution of a subsidiary material entity U.S. IDI.
Some commenters requested additional clarity on how the firm's plan
should address the expectation that the plan include an analysis of how
the resolution strategy could potentially meet the FDIC's statutory
least-cost requirement. One commenter suggested that the agencies
should require firms to develop resolution strategies involving BDIs.
This commenter recommended that the guidance address how firms could
describe and quantify the value of the firm's assets transferred to
such a BDI, and that the agencies should provide guidance so that firms
would address how the resolution plan would incorporate the value of
the IDI's assets and liabilities, including its franchise value, and
how the preferred resolution strategy would result in a least-costly
resolution. The commenter also recommended that firms and regulators
reach agreement on certain assumptions regarding valuations.
Another commenter argued that firms adopting an MPOE strategy
should not be expected to demonstrate that their preferred strategy
would be consistent with the FDIC's statutory least-cost requirement.
This commenter stated that efforts to conduct a hypothetical least-cost
requirement analysis, or a proxy for that analysis, would be of no or
minimal value to the FDIC in an actual resolution event. The commenter
claimed that it would not be possible to conduct a least-cost test
requirement analysis in a resolution plan submission in the absence of
actual bids from actual buyers. Instead, the commenter recommended that
the guidance provide expectations for how firms selecting an MPOE
strategy could demonstrate their valuation capabilities. The commenter
also suggested that because a least-cost requirement analysis is not a
component of the Proposed IDI Rule, it also should not be a component
of the guidance. This commenter requested sufficient time to address
any finalized guidance that provides expectations for including least-
cost requirement analysis.
Several commenters suggested that the Proposed IDI Rule is a better
forum to address how the IDI subsidiary of a specified firm selecting
an MPOE strategy can be resolved under the FDI Act in a manner that is
consistent with the FDI Act. A commenter also suggested that the
agencies' expectations for resolution plan submissions under the Rule
should align with the requirements of the FDIC's IDI Rule plan
submissions.
When an IDI fails and the FDIC is appointed receiver, the FDIC
generally must use the resolution option for the failed IDI that is
least costly to the DIF of all possible methods (the least-cost
requirement).\40\ A resolution plan that contemplates the separate
resolution of a U.S. IDI that is a material entity and the appointment
of the FDIC as receiver for that IDI should explain how the resolution
could be achieved in a manner that adheres to applicable law, including
the FDI Act, and that would achieve the overall objectives of the
resolution plan. Prior resolution plans that have addressed the
resolution of the IDIs in MPOE strategies have sometimes included
resolution mechanics that are not consistent with the FDI Act,
including inappropriate assumptions that uninsured deposits could
automatically be transferred to a BDI.
---------------------------------------------------------------------------
\40\ See 12 U.S.C. 1823(c)(4)(A). A deposit payout and
liquidation of the failed IDI's assets (payout liquidation) is the
general baseline the FDIC uses in a least-cost requirement
determination. See 12 U.S.C. 1823(c)(4)(D). An exception to this
requirement exists when a determination is made by the Secretary of
the Treasury, in consultation with the President and after a written
recommendation from two-thirds of the FDIC's Board of Directors and
two-thirds of the Board, that complying with the least-cost
requirement would have serious adverse effects on economic
conditions or financial stability and implementing another
resolution option would avoid or mitigate such adverse effects. See
12 U.S.C. 1823(c)(4)(G). A specified firm should not assume the use
of this systemic risk exception to the least-cost requirement in its
resolution plan.
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Separate and distinct from the Rule, the FDIC has a regulation, the
IDI Rule, requiring certain IDIs (covered IDIs or CIDIs) to submit to
the FDIC resolution plans providing information about how the CIDI can
be resolved under the FDI Act. Contemporaneous with publication of the
proposed guidance, the FDIC published in the Federal Register the
Proposed IDI Rule, a proposed rulemaking to amend and restate the IDI
Rule, which has since been finalized and was published in the Federal
Register on July 9, 2024.
The IDI Rule and the Rule each have different goals, and,
accordingly, the expected content of the respective resolution plans is
different. The purpose of the IDI Rule is to ensure that
[[Page 66397]]
the FDIC has access to the information it needs to resolve a CIDI
efficiently in the event of its failure, including an understanding of
the CIDI's ability to produce the information the FDIC would need to
conduct a least-cost determination under a wide range of circumstances.
The Rule serves a different purpose. The Rule requires a covered
company to submit a resolution plan that would allow rapid and orderly
resolution of the firm under the Bankruptcy Code in the event of
material financial distress or failure. The regional bank failures in
March 2023 demonstrated that banking organizations of size and
complexity similar to that of the specified firms--or even smaller and
less complex banking organizations--can be disruptive to U.S. financial
stability. In the case of Silicon Valley Bank and Signature Bank,
uninsured depositors would have faced the potential for significant
losses had the least costly approach to resolution, a payout
liquidation, been adopted. The potential for contagion from the deposit
runs at the firms that failed, as well as related potential for risks
to the economy and financial stability, led the Secretary of the
Treasury, in consultation with the President and after a written
recommendation from the FDIC's Board of Directors and the Board, to
invoke the systemic risk exception to enable the FDIC to resolve these
institutions in a way that would avoid or mitigate serious adverse
effects on economic conditions or financial stability. Though a
specified firm would be conducting its analysis without input in the
form of actual bids from potential buyers, the agencies expect firms to
use available information to estimate the value of its franchise for
purposes of conducting the limited least-cost analysis articulated in
the guidance.
If a firm's resolution plan under the Rule that includes an MPOE
strategy calls for resolving an IDI using a strategy other than payout
liquidation, the plan should explain how the requirements of the FDI
Act could be met without depending upon extraordinary government
support. Even though this analysis is not binding in an actual
resolution scenario, an analysis showing that the firm's preferred
resolution strategy could satisfy requirements of the FDI Act could
help the firm demonstrate that the resolution plan's preferred strategy
could be executed in a manner consistent with applicable law. If a
resolution plan does not provide such an explanation, it may be
appropriate to conclude that the strategy would not satisfy the FDI
Act's relevant provisions, such as the least-cost requirement, which
could represent a weakness in the plan. As a general matter, the
agencies followed this practice in reviewing previous full resolution
plan submissions.
Guidance. In response to commenters, the agencies are providing
additional detail to help address commenters' questions related to the
FDI Act's least-cost requirement and how it relates to the expectations
in this final guidance. The final guidance does not express a change in
the agencies' expectations. Instead, the final guidance provides more
detail on approaches a firm can use to explain how the resolution of
its IDI subsidiary can be achieved in a manner that substantially
mitigates the risk that the firm's failure would have serious adverse
effects on U.S. financial stability while also complying with the
statutory and regulatory requirements governing IDI resolution. The
final guidance lists a number of different common strategies for
resolving an IDI and describes the kind of information that a firm
could provide to explain how a resolution using one of the example
strategies could be consistent with the least-cost requirement. The
final guidance also provides information about calculating the value of
an IDI's assets and its franchise value. Finally, the final guidance
explicitly notes that the agencies are not expecting a firm to provide
a complete least-cost analysis.
Strategies for Resolving an IDI
Purchase and Assumption Transaction. The FDIC typically seeks to
resolve a failed IDI by identifying, before the IDI's failure, one or
more potential acquirers so that as many of the IDI's assets and
deposit liabilities as possible can be sold to and assumed by the
acquirer(s) instead of remaining in the receivership created on the
failure date.\41\ This transaction form, termed a purchase and
assumption or P&A transaction, has often been the resolution approach
that is least costly to the DIF, and is usually considered the easiest
for the FDIC to execute and the least disruptive to the depositors of
the failed IDI--particularly in the case of transactions involving the
assumption of all the failed IDI's deposits by the assuming institution
(an all-deposit transaction).
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\41\ See generally <a href="https://www.fdic.gov/resources/resolutions/bank-failures/">https://www.fdic.gov/resources/resolutions/bank-failures/</a> for background about the resolution of IDIs by the
FDIC.
---------------------------------------------------------------------------
The limited size and operational complexity present in most small-
bank failures have been significant factors in allowing the FDIC to
execute P&A transactions with a single acquirer on numerous occasions.
Resolving an IDI via a P&A transaction over the closing weekend,
however, has not always been available to the FDIC, particularly in
failures involving large IDIs. P&A transactions require lead time to
identify potential buyers and allow due diligence on, and an auction
of, the failing IDI's assets and banking business, also termed its
franchise. The acquiring banks must also have sufficient excess capital
to absorb the failed IDI's assets and deposit franchise, sufficient
expertise to manage business integration, and the ability to comply
with several legal requirements. Larger failed banks can pose
significant, and potentially systemic, challenges in resolutions that
make a P&A transaction less viable. These challenges include: a more
limited pool of potential acquirers as a failed IDI increases in size;
operational complexities that require lengthy advance planning on the
part of the IDI and the FDIC; the development of certain expertise;
potential market concentration and antitrust considerations; and
potentially the need to maintain the continuity of activities conducted
in whole or in part in the IDI that are critical to U.S. financial
stability.
Alternative Resolution Strategies. If no P&A transaction that meets
the least-cost requirement can be accomplished at the time an IDI
fails, the FDIC must pursue an alternative resolution strategy. The
primary alternative resolution strategies for a failed IDI are (1) a
payout liquidation, or (2) utilization of a BDI.
Payout Liquidation. The FDIC conducts payout liquidations by paying
insured deposits in cash or transferring the insured deposits to an
existing institution or a new institution organized by the FDIC to
assume the insured deposits (generally, a Deposit Insurance National
Bank or DINB). In payout liquidations, the FDIC as receiver retains
substantially all of the failed IDI's assets for later sale, and the
franchise value of the failed IDI is lost. A payout liquidation is
often the most costly and disruptive resolution strategy because of
this destruction of franchise value and the FDIC's direct payment of
insured deposits.
Bridge Depository Institution. If the FDIC determines that
temporarily continuing the operations of the failed IDI is less costly
than a payout liquidation, the FDIC may organize a BDI to purchase
certain assets and assume certain liabilities of the failed IDI.\42\
Generally, a BDI would continue
[[Page 66398]]
the failed bank's operations according to business plans and budgets
approved by the FDIC and carried out by FDIC-selected BDI leadership.
In addition to providing depositors continued access to deposits and
banking services, the BDI would conduct any necessary restructuring
required to rationalize the failed IDI's operations and maximize value
to be achieved in an eventual sale. Subject to the least-cost
requirement, the initial structure of the BDI may be based upon an all-
deposit transaction, a transaction in which the BDI assumes only the
insured deposits, or a transaction in which the BDI assumes all insured
deposits and a portion of the uninsured deposits. Once a BDI is
established, the FDIC seeks to stabilize the institution while
simultaneously planning for the eventual exit and termination of the
BDI. In exiting and terminating a BDI, the FDIC may merge or
consolidate the BDI with another depository institution, issue and sell
a majority of the capital stock in the BDI, or effect the assumption of
the deposits or acquisition of the assets of the BDI.\43\ While
utilizing a BDI can avoid the negative effects of a payout liquidation,
such as destruction of franchise value, many of the same factors that
challenge the feasibility of a traditional P&A transaction also
complicate planning for the termination of a BDI through a sale of the
whole entity or its constituent parts.
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\42\ Before a BDI may be chartered, the chartering conditions
set forth in 12 U.S.C. 1821(n)(2) must also be satisfied. For
purposes of this guidance, if the Plan provides appropriate analysis
concerning the feasibility of the BDI strategy, there is no
expectation that the resolution plan also demonstrate separately
that the conditions for chartering the BDI have been satisfied.
\43\ 12 U.S.C. 1821(n)(10).
---------------------------------------------------------------------------
Though one commenter suggested that the guidance should require
firms to develop resolution strategies involving BDIs, the agencies do
not maintain an expectation that firms will develop resolution
strategies involving BDIs. The expectations provided in this guidance
are also intended to be helpful to firms that have chosen to involve a
BDI in their resolution strategy.
Least-Cost Analysis for Resolution Plans. The final guidance does
not include an expectation that firms provide in their resolution plans
a complete least-cost analysis. Such an analysis would, for example,
include a comparison of the preferred strategy for resolving an IDI
that is a material entity against every other possible resolution
method. While a firm may choose to provide a complete least-cost
analysis, this guidance discusses expectations regarding a limited
least-cost analysis that would explain how the firm's preferred
strategy is not more costly than a payout liquidation and, if
applicable, an insured-only BDI.
One commenter suggested that the agencies should provide guidance
for how firms should address the valuation of an IDI's assets and
liabilities, including its franchise value. In this final guidance, the
agencies are providing additional explanation for how firms can develop
and support the valuation of the IDI's assets and liabilities in an IDI
resolution. This guidance includes a description of how firms can
assess the franchise value of a firm's business.
Example. The following example should be read in conjunction with
section VIII of the guidance text, Insured Depository Institution
Resolution. This example is only intended to provide firms with an
illustration of the types of considerations and calculations that could
be included in a firm's analysis explaining how its preferred strategy
would be less costly than a payout liquidation and, if applicable, an
insured-only BDI. This example is not intended to serve as a template
for firms or to provide guidelines for reasonable valuations of a
firm's assets or liabilities. The valuations described in this example
are intended to be illustrative and are not guidance about the likely
values of a firm's assets and liabilities in an individual resolution
plan or in resolution.
Bank A has $500 billion in total assets, consisting of $250 billion
loans; $75 billion cash and equivalents; $125 billion in investment
securities; and other assets totaling $50 billion. The bank's initial
funding structure consists of $400 billion in deposits; $25 billion in
various unsecured payables and debt; $25 billion in secured funding;
and $50 billion in capital instruments. For this example, the bank
assumes it would encounter idiosyncratic events at a time when severely
adverse economic conditions are present, and this combination of events
would cause the bank to be closed by the chartering authority and the
FDIC appointed as receiver. The illustrative tables below reflect
values as of the appointment of the FDIC as receiver.
The initial events combine to cause immediate losses of $25 billion
recognized as direct operating charges and $15 billion through write-
downs/provision expense for the loan portfolio, and $60 billion of
deposit runoff occurs.
<bullet> For purposes of conducting the analysis, the firm's
management assumes that additional value diminution is present in the
loan portfolio. Accordingly, after thoroughly analyzing the quality of
its loan portfolio and determining the potential for additional credit
losses, as well as considering the market value of the loan portfolio
based upon the type of loans it holds in comparison with comparable
sales transactions, and after further considering sensitivity testing,
management supports an estimate near $175 billion for the loan
portfolio.
<bullet> In developing its Resolution Plan, the firm's management
further supports that $40 billion of additional deposit runoff would
occur in addition to the initial $60 billion. At the time of failure,
Bank A's remaining $300 billion of deposits are 60 percent insured and
40 percent uninsured. The ratio of insured deposits to uninsured
deposits is used to calculate the pro rata recovery of depositors and
the losses imposed on the DIF as a result.\44\
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\44\ See infra note 45.
---------------------------------------------------------------------------
<bullet> The deposit runoff is assumed to be met by using $50
billion of cash and selling $50 billion of investment securities. The
remaining $75 billion investment portfolio is entirely invested in
short-term U.S. Treasury securities with an estimated value of $70
billion.
<bullet> The other assets are implicated in the initial
idiosyncratic loss. These other assets include fixed assets, foreclosed
property, intellectual property, and miscellaneous items with a market
value of $25 billion.
<bullet> As shown in table 1, the Plan provides an analysis of the
payout liquidation strategy. This strategy includes an expected loss to
the DIF of $18 billion.
[[Page 66399]]
Table 1--Illustration of Bank A Payout Liquidation--Cost Estimate
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Liquidation market value Payout liquidation liability claim and amount recovered
----------------------------------------------------------------------------------------------------------------
Category Value Category Claim Recovery/(loss)
----------------------------------------------------------------------------------------------------------------
Loans............................ $175 Secured Claims..... $25 $25/($0).
Securities....................... $70 Deposits Insured... $180 $162/($18).
--------------------------------------------------------------
Cash............................. $25 FDIC incurs the loss for the insured deposits so that all
Other............................ $25 insured deposits are fully repaid.
--------------------------------------------------------------
Total........................ $295 Deposits Uninsured. $120 $108/($12).
Unsecured Claims/ $25 $0/($25).
Debt.
Equity Holders..... .............. No recovery.
----------------------------------------------------------------------------------------------------------------
Loss to Deposit Insurance Fund (to make whole insured depositors) = $18 billion.\45\
Losses to uninsured depositors = $12 billion.
<bullet> However, the Plan also asserts and supports that the
payout liquidation approach fails to reflect the franchise value of the
combined deposit and loan relationships stemming from considerations
such as the low administrative costs associated with servicing large
deposits, the elimination of significant customer acquisition costs,
the stable fee income stream associated with the accounts due to
barriers to entry for certain products, and the importance and value of
integrating the loan and deposit products.
---------------------------------------------------------------------------
\45\ Calculation: (1) $295 billion asset value less secured
claim of $25 billion = $270 billion available to depositors and
junior claims; (2) $270 billion available spread pro-rata across
$300 billion depositor class; 60 percent insured deposits and 40
percent uninsured deposits; (3) $270 billion x .6 = $162 billion
paid to insured depositors; $270 billion x .4 = $108 billion paid to
uninsured depositors.
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<bullet> The Plan calculates, and provides the analysis supporting
the calculation, that the economic benefit of packaging these benefits
together in an all-deposit BDI is $20 billion, which is reflected as a
bid premium to liquidation pricing in table 2.
<bullet> The result is that the all-deposit BDI is less costly to
the DIF than liquidation because of the inclusion of the bid premium.
Table 2--Illustration of Bank A Preferred Strategy--Cost Estimate
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
All deposit bridge market value All deposit bridge bank liability claim and amount recovered
----------------------------------------------------------------------------------------------------------------
Category Value Category Claim Recovery/(loss)
----------------------------------------------------------------------------------------------------------------
Loans............................ $175 Secured Claims..... $25 $25/($0).
Securities....................... $70 Deposits Insured... $180 $174/($6).
--------------------------------------------------------------
Cash............................. $25 FDIC incurs the loss for the insured deposits so that all
Other............................ $25 insured deposits are fully repaid.
--------------------------------------------------------------
Sub Total........................ $295 Deposits Uninsured. $120 $116/($4).*
Bid Premium...................... $20 Unsecured Claims/ $25 $0/($25).
Debt.
Total........................ $315 Equity Holders..... .............. No recovery.
----------------------------------------------------------------------------------------------------------------
Loss to Deposit Insurance Fund (to make whole insured and uninsured depositors) = $10 billion, which is less
than the payout liquidation loss.\46\
* Losses to uninsured depositors total $4 billion and are absorbed by the DIF.
I. Derivatives and Trading Activities
The agencies requested comment on whether to provide derivatives
and trading activities guidance for specified firms that adopt an SPOE
or MPOE resolution strategy. Some commenters argued that no derivatives
and trading guidance is needed for domestic triennial full filers
because they have limited derivatives and trading portfolios,
particularly relative to the U.S. GSIB banking organizations covered by
such guidance. These commenters also noted that not all of these
biennial filers, which are Category I firms, are subject to this type
of guidance. Other commenters supported providing such guidance to
domestic triennial full filers, despite observing that these firms
engage in less activity than the biennial filers. One commenter
cautioned that derivatives activities for domestic triennial full
filers may increase in the future and proposed the inclusion of an
orderly-wind-down analysis for firms with net derivatives exceeding a
given threshold. Another commenter recommended that the guidance
include expectations for: roles and responsibilities in derivatives
unwind, plan reporting regarding derivatives exposures, plan risk
assessments in cross-border activity, barriers to swift unwind of
derivatives activities booked outside the United States, and
capabilities to generate detailed derivative reports. This commenter
also argued that firms should specify plans to wind-down between
affiliates and external
[[Page 66400]]
counterparties, as well as describe potential sale of some trading
positions.
---------------------------------------------------------------------------
\46\ Calculation: (1) $315 billion asset value less secured
claim of $25 billion = $290 billion available to depositors and
junior claims; (2) $290 billion available spread pro-rata across
$300 billion depositor class; 60 percent insured deposits and 40
percent uninsured deposits; (3) $290 billion x .6 = $174 billion
paid to insured depositors; $290 billion x .4 = $116 billion paid to
uninsured depositors.
---------------------------------------------------------------------------
After reviewing the comments and considering the scope of
derivatives and trading activities of domestic Category I, II, and III
banking organizations,\47\ the agencies determined that the banking
organizations that would be specified firms have limited derivatives
and trading operations compared to the subset of biennial filers that
are the subject of derivatives and trading guidance. The agencies also
note that the Rule includes certain requirements regarding derivatives
and trading activities with which all covered companies--including
domestic triennial full filers--must comply, as well as the overall
requirement to provide a strategic analysis describing the covered
company's plan for orderly resolution.\48\ The agencies believe that
for this set of covered companies, given their current activities, the
topic of derivatives and trading activities is sufficiently addressed
by the Rule. The agencies are therefore finalizing the guidance without
including expectations on derivatives and trading activity for the
specified firms.
---------------------------------------------------------------------------
\47\ See FR Y-15 Systemic Risk Report, 2nd quarter 2023 data.
Publicly available at the National Information Center, <a href="https://www.ffiec.gov/NPW">https://www.ffiec.gov/NPW</a>. See also Quarterly Report on Bank Trading and
Derivatives Activities--Third Quarter 2023. Publicly available at
<a href="https://www.occ.gov/publications-and-resources/publications/quarterly-report-on-bank-trading-and-derivatives-activities/index-quarterly-report-on-bank-trading-and-derivatives-activities.html">https://www.occ.gov/publications-and-resources/publications/quarterly-report-on-bank-trading-and-derivatives-activities/index-quarterly-report-on-bank-trading-and-derivatives-activities.html</a>.
\48\ See 12 CFR 243.2 and 381.2; 12 CFR 243.5(c) and (e)(6)-(7),
and 381.5(c) and (e)(6)-(7).
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The agencies also recognize that derivatives activity or risk for
domestic triennial full filers may change in the future. The agencies
may consider the need for firm-specific derivatives and trading
expectations in the future for specified firms that substantially
increase their derivatives and trading activities or change in a way
such that having a strategy to wind-down their derivatives portfolios
is critical to their resolvability.
J. Format and Structure of Plans; Assumptions
This section of the proposal described the agencies' preferred
presentation regarding the format, assumptions, and structure of
resolution plans. Under the proposal, plans would have been expected to
contain an executive summary, a narrative of the firm's resolution
strategy, relevant technical appendices, and a public section as
detailed in the Rule. The proposed format, structure, and assumptions
were generally similar to those in the 2019 U.S. GSIB Guidance, except
that the proposed guidance reflected the expectations that (a) a firm
should support any assumptions that it will have access to the Discount
Window and/or other borrowings during the period immediately prior to
entering bankruptcy and clarified expectations around such assumptions,
and (b) a firm should not assume the use of the systemic risk exception
to the least-cost test in the event of a failure of an IDI requiring
resolution under the FDI Act. In addition, for firms that adopt an MPOE
resolution strategy, the proposal included the expectation that a plan
should demonstrate and describe how the failure event(s) results in
material financial distress, including consideration of the likelihood
of the diminution the firm's liquidity and capital levels prior to
bankruptcy. The proposal also included several questions about
assumptions and whether to include answers to frequently asked
questions.
The agencies received one comment in response to a question posed
regarding assumptions related to lending facilities, including the
Discount Window. The commenter supported the proposed assumptions
guidance regarding these facilities and recommended that the agencies
consider providing additional guidance on assumptions related to the
amount, timing, and limitations of liquidity that might become
available from these sources. However, the additional guidance
requested by the commenter is unnecessary, and the agencies are
finalizing this section of the guidance as proposed with one
clarification. Specifically, the proposed guidance regarding the
relevant assumptions already includes references to timing and
limitations of liquidity commensurate with the activities of firms
subject to the guidance.
As a clarification, the agencies have added a reference to Federal
Home Loan Banks (FHLBs) as a type of borrowing for which firms should
provide support in their resolution plans if they assume access during
the period immediately prior to entering bankruptcy. The agencies'
experiences in 2023 showed that many IDIs depend heavily on FHLB
funding in times of stress and, accordingly, the agencies expect firms
to be prepared to support any assumptions around such reliance for
resolution planning purposes.
The final guidance also includes an expectation contained in the
2019 U.S. GSIB Guidance and the 2020 FBO Guidance regarding the
parameters of economic forecasting in a resolution plan submission.
Those guidance documents stated that a resolution plan should assume
the Dodd-Frank Act Stress Test (DFAST) severely adverse scenario for
the first quarter of the calendar year in which a resolution plan is
submitted is the domestic and international economic environment at the
time of the firm's failure and throughout the resolution process.\49\
While this assumption is similar to a provision in the Rule,\50\ the
agencies believe it is important to provide guidance to firms about the
timing of the required assumption in the Rule. The Board provides DFAST
scenario information to the specified firms through the Board's public
website.\51\
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\49\ 2019 U.S. GSIB Guidance at 84 FR 1459; 2020 FBO Guidance at
85 FR 83578.
\50\ 12 CFR 243.4(h)(1) and 381.4(h)(1).
\51\ <a href="https://www.federalreserve.gov/publications/dodd-frank-act-stress-test-publications.htm">https://www.federalreserve.gov/publications/dodd-frank-act-stress-test-publications.htm</a>.
---------------------------------------------------------------------------
The agencies also received a comment recommending that more of
firms' resolution plans be disclosed publicly to promote market
discipline and specifically asking that the public portion of
resolution plans describe potential acquirers of operations in the
event of resolution. The Rule establishes at a high-level the required
content of the public section of a resolution plan,\52\ and this final
guidance clarifies the agencies' expectations with respect to that
section. The agencies are mindful that the public disclosure of
resolution plans, which may contain private commercial information, has
both benefits and drawbacks, and the agencies believe that, at the
moment, the Rule--revisions to which are outside the scope of this
guidance--and the final guidance appropriately balance transparency
with confidentiality.
---------------------------------------------------------------------------
\52\ 12 CFR 243.11(c) and 381.11(c).
---------------------------------------------------------------------------
The agencies are otherwise finalizing this section of the guidance
as proposed.\53\ The agencies did not receive any comments in response
to the proposal's request for comments about answers to frequently
asked questions, and the agencies have not included those prior answers
to frequently asked questions because these prior answers were
requested by and prepared for a different set of firms.
---------------------------------------------------------------------------
\53\ The agencies also are clarifying one expectation in the
Financial Statements and Projections subsection of the Format and
Structure of Plans; Assumptions section of the guidance that could
be construed to impose a requirement on the specified firms.
---------------------------------------------------------------------------
K. Additional Comments
Differentiating Resolution Plan Guidance
The agencies received several general comments about whether the
expectations in the proposal were suitably modified from expectations
[[Page 66401]]
included in past resolution plan guidance and whether the proposal
appropriately distinguished between different types of triennial full
filers. Several commenters contended that the proposed guidance did not
sufficiently differentiate expectations among firms subject to
resolution planning guidance. One commenter argued that section 165 of
the Dodd-Frank Act requires the agencies to differentiate the content
of the resolution planning guidance; the proposal was too similar to
the 2019 U.S. GSIB Guidance; and expectations for the specified firms
should be further differentiated based on size, risk, and other
factors. Another commenter argued that the proposed guidance favors the
MPOE resolution strategy by including fewer expectations for firms that
adopt that strategy and recommended that final guidance for firms
adopting an MPOE resolution strategy should be more aligned with
guidance for resolution plan filers with an SPOE resolution strategy.
While the differentiation requirement in section 165 of the Dodd-
Frank Act does not apply to this non-binding resolution plan guidance,
the guidance differentiates among covered companies, taking into
consideration their size, complexity, and other risk-related factors;
their resolution strategy, whether SPOE or MPOE; and whether they are
domestic or foreign-based.
The thresholds and risk-based indicators that form the basis of the
risk-based category framework used by the Rule are designed to take
into account an individual firm's particular activities and
organizational footprint that may present significant challenges to an
orderly resolution.\54\ The Rule, using those categories, defines
triennial full filers as one cohort because the failure of a Category
II or III banking organization could pose a threat to U.S. financial
stability. Banking organizations in these two categories often have
similar characteristics, such as organizational structures, and similar
resolution strategies that benefit from similar resolution guidance.
Accordingly, the agencies believe the guidance is equally appropriate
for domestic Category II and III banking organizations. In addition, as
discussed above, the regional bank failures in March 2023 demonstrated
that the failure of banking organizations with $100 billion to $250
billion in total consolidated assets can be disruptive to U.S.
financial stability. For these reasons, providing the guidance to
domestic triennial full filers in that asset range is appropriate to
prevent or mitigate risks to the financial stability of the United
States.
---------------------------------------------------------------------------
\54\ See 2019 Federal Register Rule Publication at 84 FR 59197-
201.
---------------------------------------------------------------------------
Guidance for specified firms that adopt an SPOE resolution strategy
is differentiated relative to guidance for Category I banking
organizations (i.e., the 2019 U.S. GSIB Guidance), notably with the
absence of derivatives and trading expectations, which are applicable
to most of the U.S. GSIBs, and other operational guidance as well as
reduced separability expectations. Other aspects of the SPOE guidance
are appropriately similar to the 2019 U.S. GSIB Guidance because the
successful execution of an SPOE resolution strategy benefits from the
capabilities discussed in the guidance. The guidance for firms that
adopt an MPOE resolution strategy includes substantially simpler
expectations, relative to SPOE guidance and the 2019 U.S. GSIB
Guidance, in the areas of capital, liquidity, governance mechanisms,
operational, legal entity rationalization and separability, derivatives
and trading expectations, and PCS. Having simpler expectations relative
to SPOE guidance does not necessarily mean a firm adopting an MPOE
strategy will encounter fewer challenges developing its resolution
plan; regardless of the strategy chosen, the firm is responsible for
providing adequate information and analysis to demonstrate its plan
will facilitate an orderly resolution. Each firm remains free to choose
the resolution strategy it believes would most effectively facilitate
an orderly resolution, and the agencies are not suggesting that any
firm change its resolution strategy, nor do the agencies identify a
preferred strategy for a specific firm or set of firms.\55\
---------------------------------------------------------------------------
\55\ See infra section I.A, Resolution Plan Strategy, of this
document for further discussion about why the agencies are
differentiating expectations depending on whether a firm adopts an
SPOE or MPOE resolution strategy.
---------------------------------------------------------------------------
Finally, resolution plan guidance for Category II and III banking
organizations is adapted to whether a covered company is based in the
United States or in a foreign jurisdiction, with dedicated guidance
documents for each type of firm. The Rule differentiates between
banking organizations based on home jurisdiction,\56\ and whether a
banking organization is based in the United States can significantly
impact its resolution strategy, resolution capabilities, and resolution
planning. Accordingly, expectations for domestic and foreign-based
triennial full filers are differentiated in the areas of capital,
liquidity, governance mechanisms, shared services, separability,
branches, and group-wide resolution plans.
---------------------------------------------------------------------------
\56\ See 12 CFR 243.5(a) and 381.5(a).
---------------------------------------------------------------------------
Comments About Resolution Planning and the Proposal
The agencies received several general comments about resolution
planning guidance. The agencies have considered these commenters' input
but have made no modifications to the final guidance.
One commenter expressed support for the proposed guidance, in part,
because it reaffirms that bankruptcy is the preferred resolution
strategy and would improve the quality of resolution plan submissions
through enhanced information and assumptions, better enabling the
resolution of a specified firm in an orderly manner. Another commenter
praised the agencies' proposal for providing needed clarity and
transparency on expectations for specified firms' resolution plans, and
for making several improvements that will improve specified firms'
resolution plans.
Another commenter recommended that the agencies adopt the content
of the guidance in the form of a legally binding and enforceable rule,
in part due to the size and scope of specified firms, the importance of
resolution planning, and the financial stability implications involved.
This commenter also suggested that the large bank failures in 2023
demonstrated the need for improvement in banking organizations'
resolution planning and the agencies' process for assessing these
plans.
Resolution planning is important to U.S. financial stability;
however, the agencies have not made changes to the guidance in response
to these comments. The Rule, which is legally enforceable, identifies
the specific topics that must be addressed in resolution plans. In
contrast, resolution plan guidance outlines the agencies' supervisory
expectations and priorities and articulates the agencies' general views
regarding appropriate resolution planning practices for the specified
firms. The final guidance provides examples of resolution plan content
and capabilities that the agencies generally consider consistent with
effective resolution planning. This approach is consistent with
resolution planning guidance provided to other covered companies in the
past, including guidance for Category I banking organizations and
certain foreign Category II banking organizations.
A commenter argued that the agencies should allow for an iterative
process for domestic triennial full filers to develop their strategies
and capabilities, similar to the gradual maturation of Category I
[[Page 66402]]
banking organizations' resolution plans. This commenter also argued the
agencies should provide more than one year for firms to incorporate the
final guidance into their next resolution plan submissions and that the
guidance should not be the basis for a deficiency.
By statute and under the Rule, each resolution plan filer must
submit a plan for orderly resolution under the Bankruptcy Code, and the
agencies must assess the credibility of each plan. Each firm remains
free to choose the resolution strategy it believes would most
effectively facilitate an orderly resolution and the agencies are not
suggesting that any firm change its resolution strategy, nor do the
agencies identify a preferred strategy for a specific firm or set of
firms. The standard of review for a resolution plan submission of a
firm that transitions to a new strategy is the same as for any firm
subject to the Rule. The agencies stated in the preamble to the 2019
revisions to the Rule that they would endeavor to finalize guidance a
year in advance of the next applicable resolution plan submission date,
and the agencies are extending the next resolution plan submission
deadline for these firms to provide at least one year advanced notice
of general guidance.\57\ The agencies also reaffirm that the guidance
does not have the force and effect of law, and the agencies do not take
enforcement actions or issue findings based on resolution planning
guidance.
---------------------------------------------------------------------------
\57\ See 2019 Federal Register Publication at 84 FR 59204.
---------------------------------------------------------------------------
Comments Outside the Scope of Proposal
The agencies received several comments outside the scope of the
proposed guidance. One commenter urged the agencies to shorten the
length between resolution plan submissions under the Rule, from three
to two years, and evaluate key aspects of plans annually. This
commenter also recommended the agencies create an independent committee
to advise the agencies on resolution planning matters as well as
require large banking organizations to hold more capital generally.
Another commenter argued that any LTD requirements should reflect a
banking organization's preferred resolution strategy and not push a
banking organization to adopt a particular strategy while another
commenter recommended finalizing the LTD proposal as proposed. A
commenter also encouraged the FDIC to provide banking organizations at
least one year to comply with any final IDI Rule. Another commenter
also recommended that the agencies promote resolvability by requiring
large corporations to hold term deposits at the specified firms. In
addition, another commenter suggested including in the final guidance
expectations related to green financing. The agencies have not made any
changes to the guidance to address these comments.
IV. Paperwork Reduction Act
Certain provisions of the final guidance contain ``collections of
information'' within the meaning of the Paperwork Reduction Act (PRA)
of 1995 (44 U.S.C. 3501-3521). In accordance with the requirements of
the PRA, the agencies may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently valid Office of Management and Budget (OMB)
control number. The agencies have requested and OMB has assigned to the
agencies the respective control numbers shown. The information
collections contained in the final guidance have been submitted to OMB
for review and approval by the FDIC under section 3507(d) of the PRA
(44 U.S.C. 3507(d)) and section 1320.11 of OMB's implementing
regulations (5 CFR part 1320). The Board reviewed the final guidance
under the authority delegated to the Board by OMB and has approved
these collections of information.
The agencies did not receive any comments related to the PRA.
The agencies have a continuing interest in the public's opinions of
information collections. At any time, commenters may submit comments
regarding the burden estimate, or any other aspect of this collection
of information, including suggestions for reducing the burden, to the
addresses listed in the ADDRESSES caption in the proposed guidance
notice. All comments will become a matter of public record. Written
comments and recommendations for these information collections also
should be sent within 30 days of publication of this document to
<a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>. Find this particular information
collection by selecting ``Currently under 30-day Review--Open for
Public Comments'' or by using the search function.
Collection title: Board: Reporting Requirements Associated with
Regulation QQ.
FDIC: Reporting Requirements Associated with Resolution Planning.
OMB control number: Board 7100-0346; FDIC 3064-0210.
Frequency: Triennial, Biennial, and on occasion.
Respondents: Bank holding companies (including any foreign bank or
company that is, or is treated as, a bank holding company under section
8(a) of the International Banking Act of 1978 and meets the relevant
total consolidated assets threshold) with total consolidated assets of
$250 billion or more, a bank holding companies with $100 billion or
more in total consolidated assets with certain characteristics, and
nonbank financial firms designated by the Financial Stability Oversight
Council for supervision by the Board.
Current actions: The final guidance modifies certain provisions of
the proposed guidance. For domestic firms, the final guidance
eliminates expectations related to separability, reducing the average
burden hours per response by 3,000 for domestic firms using an SPOE
strategy and 975 for domestic firms using an MPOE strategy. The final
guidance also clarifies expectations around operational shared services
for firms using an SPOE resolution strategy and around the IDI
Resolution Plan/Least Cost Test for all firms. Regarding operational
shared services, the guidance clarifies that a firm's implementation
plan to ensure continuity of shared services should include those that
are material to the execution of the resolution strategy, such as
reliance on outside bankruptcy counsel and consultants. Regarding the
FDI Act's least-cost requirement and how it relates to expectations
around IDI resolution, the agencies provided additional detail on how
firms can develop and support the valuation of an IDI's assets and
liabilities in an IDI resolution. The agencies do not anticipate these
clarifications impacting the burden estimates.
Historically, the Board and the FDIC have split the respondents for
purposes of PRA clearances. As such, the agencies will split the change
in burden as well. As a result of this split and the final revisions,
there is a proposed net increase in the overall estimated burden hours
of 14,922 hours for the Board and 14,304 hours for the FDIC. Therefore,
the total Board estimated burden for its entire information collection
would be 216,129 hours and the total FDIC estimated burden would be
210,844 hours.
The following table presents only the change in the estimated
burden hours, as amended by the final guidance, broken out by agency.
The table does not include a discussion of the remaining estimated
burden hours,
[[Page 66403]]
which remain unchanged.\58\ As shown in the table, the triennial full
filers' resolution plan submissions would be estimated more granularly
according to SPOE and MPOE resolution strategies.
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\58\ In addition to the revisions to the estimations for
triennial full filers, the agencies have revised the estimation for
biennial filers from 40,115 hours per response to 39,550 hours per
response to align with burden estimation methodology with what was
used for triennial full filers under the final guidance.
Specifically, the agencies removed a component for a biennial
filer's analysis of its critical operations as part of its
submission of targeted and full resolution plans, because this
critical operations analysis is integrated in the preparation of
such plans.
----------------------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated
FR QQ number of annual average hours annual burden
respondents frequency per response hours
----------------------------------------------------------------------------------------------------------------
Board Burdens
----------------------------------------------------------------------------------------------------------------
Current
Triennial Full:
Complex Foreign......................... 1 1 9,777 9,777
Foreign and Domestic.................... 7 1 4,667 32,669
---------------------------------------------------------------
Current Total....................... .............. .............. .............. 42,446
Final
Triennial Full:
FBO SPOE *.............................. 2 1 11,848 23,696
FBO MPOE................................ 3 1 5,939 17,817
Domestic MPOE........................... 3 1 5,285 15,855
---------------------------------------------------------------
Final Total......................... .............. .............. .............. 57,368
----------------------------------------------------------------------------------------------------------------
FDIC Burdens
----------------------------------------------------------------------------------------------------------------
Current
Triennial Full:
Complex Foreign......................... 1 1 9,777 9,777
Foreign and Domestic.................... 6 1 4,667 28,002
---------------------------------------------------------------
Current Total....................... .............. .............. .............. 37,779
Final
Triennial Full:
FBO SPOE................................ 2 1 11,848 23,696
FBO MPOE................................ 3 1 5,939 17,817
Domestic MPOE........................... 2 1 5,285 10,570
---------------------------------------------------------------
Final Total......................... .............. .............. .............. 52,083
----------------------------------------------------------------------------------------------------------------
* There are currently no domestic triennial full filers utilizing an SPOE strategy. Estimated hours per response
for a domestic SPOE triennial full filer would be 10,535 hours.
V. Text of the Final Guidance
Guidance for Resolution Plan Submissions of Domestic Triennial Full
Filers
I. Introduction
Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5365(d)) requires certain financial companies
to report periodically to the Board of Governors of the Federal Reserve
System (the Board) and the Federal Deposit Insurance Corporation (the
FDIC) (together, the agencies) their plans for rapid and orderly
resolution in the event of material financial distress or failure. On
November 1, 2011, the agencies promulgated a joint rule implementing
the provisions of Section 165(d).\1\ Subsequently, in November 2019,
the agencies finalized amendments to the joint rule addressing
amendments to the Dodd-Frank Act made by the Economic Growth,
Regulatory Relief, and Consumer Protection Act and improving certain
aspects of the joint rule based on the agencies' experience
implementing the joint rule since its adoption.\2\ Financial companies
meeting criteria set out in the Rule must file a resolution plan (Plan)
according to the schedule specified in the Rule.
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\1\ Resolution Plans Required, 76 FR 67323 (Nov. 1, 2011).
\2\ Resolution Plans Required, 84 FR 59194 (Nov. 1, 2019). The
amendments became effective December 31, 2019. The ``Rule'' means
the joint rule as amended in 2019. Terms not defined herein have the
meanings set forth in the Rule.
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This document is intended to provide guidance to certain domestic
financial companies required to submit Plans to assist their further
development of a Plan for their 2025 and subsequent Plan submissions.
Specifically, the guidance applies to any domestic covered company that
is a triennial full filer under the Rule \3\ because it is subject to
Category II or III standards in accordance with the Board's tailoring
rule (specified firms or firms).\4\ The Plan for a specified firm would
address the subsidiaries and operations that are domiciled in the
United States as well as the foreign subsidiaries, offices, and
operations of the covered company.
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\3\ See 12 CFR 243.4(b)(1) and 381.4(b)(1).
\4\ Prudential Standards for Large Bank Holding Companies,
Savings and Loan Holding Companies, and Foreign Banking
Organizations, 84 FR 59032 (Nov. 1, 2019).
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The document does not have the force and effect of law.\5\ Rather,
it describes the agencies' expectations and priorities regarding the
specified firms' Plans and the agencies' general views regarding
specific areas where additional detail should be provided and where
certain capabilities or optionality should be
[[Page 66404]]
developed and maintained to demonstrate that each firm has considered
fully, and is able to mitigate, obstacles to the successful
implementation of their resolution strategy.
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\5\ See 12 CFR 262.7 and appendix A to 12 CFR part 262; 12 CFR
part 302.
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When a domestic banking organization first becomes a specified
firm,\6\ this document will apply to the firm's next resolution plan
submission that is due at least 12 months after the date the firm
becomes a specified firm. If a specified firm ceases to be subject to
Category II or III standards, it will no longer be a specified firm,
and this document would no longer apply to that firm.
---------------------------------------------------------------------------
\6\ See 12 CFR 252.5(c)-(d).
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In general, this document is organized around a number of key
challenges in resolution (capital; liquidity; governance mechanisms;
operational; legal entity rationalization; and insured depository
institution resolution (IDI), if applicable) that apply across
resolution plans, depending on their strategy. Additional challenges or
obstacles may arise based on a firm's particular structure, operations,
or resolution strategy. Each firm is expected to satisfactorily address
these vulnerabilities in its Plan. In addition, each topic of this
guidance is separated into expectations for a specified firm that
adopts a single point of entry (SPOE) resolution strategy for its Plan
and expectations for a specified firm that adopts a multiple point of
entry (MPOE) resolution strategy for its Plan.
Under the Rule, the agencies will review a Plan to determine if it
satisfactorily addresses key potential challenges, including those
specified below. If the agencies jointly decide that an aspect of a
Plan presents a weakness that individually or in conjunction with other
aspects could undermine the feasibility of the Plan, the agencies may
determine jointly that the Plan is not credible or would not facilitate
an orderly resolution under the U.S. Bankruptcy Code. The agencies may
not take enforcement actions or issue findings based on this guidance.
II. Capital
SPOE
The firm should have the capital capabilities necessary to execute
its resolution strategy, including the modeling and estimation process
described below.
Resolution Capital Adequacy and Positioning (RCAP). In order to
help ensure that a firm's material entities \7\ could operate while the
parent company is in bankruptcy, the firm should have an adequate
amount of loss-absorbing capacity to recapitalize those material
entities. Thus, a firm should have outstanding a minimum amount of
loss-absorbing capacity, including long-term debt, to help ensure that
the firm has adequate capacity to meet that need at a consolidated
level (external LAC). \8\
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\7\ The terms ``material entities,'' ``identified critical
operations,'' and ``core business lines'' have the same meaning as
in the Rule.
\8\ Total Loss-Absorbing Capacity, Long-Term Debt, and Clean
Holding Company Requirements for Systemically Important U.S. Bank
Holding Companies and Intermediate Holding Companies of Systemically
Important Foreign Banking Organizations, 82 FR 8266 (Jan. 24, 2017);
Long-Term Debt Requirements for Large Bank Holding Companies,
Certain Intermediate Holding Companies of Foreign Banking
Organizations, and Large Insured Depository Institutions, 88 FR
64524 (Sept. 19, 2023).
---------------------------------------------------------------------------
A firm's external LAC should be complemented by appropriate
positioning of loss-absorbing capacity within the firm (i.e., internal
LAC), consistent with any applicable rules requiring prepositioned
resources at IDIs in the form of long-term debt. After adhering to any
requirements related to prepositioning long-term debt at IDIs, the
positioning of a firm's remaining resources should balance the
certainty associated with pre-positioning resources directly at
material entities with the flexibility provided by holding
recapitalization resources at the parent (contributable resources) to
meet unanticipated losses at material entities. That balance should
take account of both pre-positioning at material entities and holding
resources at the parent, and the obstacles associated with each. With
respect to material entities that are not U.S. IDIs subject to pre-
positioned long-term debt requirements, the firm should not rely
exclusively on either full pre-positioning or parent contributable
resources to recapitalize such entities. The Plan should describe the
positioning of resources within the firm, along with analysis
supporting such positioning.
Finally, to the extent that pre-positioned resources at a material
entity are in the form of intercompany debt and there are one or more
entities between that material entity and the parent, the firm should
structure the instruments so as to ensure that the material entity can
be recapitalized.
Resolution Capital Execution Need (RCEN). To the extent
necessitated by the firm's resolution strategy, material entities need
to be recapitalized to a level that allows them to operate or be wound
down in an orderly manner following the parent company's bankruptcy
filing. The firm should have a methodology for periodically estimating
the amount of capital that may be needed to support each material
entity after the bankruptcy filing (RCEN). The firm's positioning of
resources should be able to support the RCEN estimates. In addition,
the RCEN estimates should be incorporated into the firm's governance
framework to ensure that the parent company files for bankruptcy at a
time that enables execution of the preferred strategy.
The firm's RCEN methodology should use conservative forecasts for
losses and risk-weighted assets and incorporate estimates of potential
additional capital needs through the resolution period,\9\ consistent
with the firm's resolution strategy. The RCEN methodology should be
calibrated such that recapitalized material entities will have
sufficient capital to maintain market confidence as required under the
preferred resolution strategy. Capital levels should meet or exceed all
applicable regulatory capital requirements for ``well-capitalized''
status and meet estimated additional capital needs throughout
resolution. Material entities that are not subject to capital
requirements may be considered sufficiently recapitalized when they
have achieved capital levels typically required to obtain an
investment-grade credit rating or, if the entity is not rated, an
equivalent level of financial soundness. Finally, the methodology
should be independently reviewed, consistent with the firm's corporate
governance processes and controls for the use of models and
methodologies.
---------------------------------------------------------------------------
\9\ The resolution period begins immediately after the parent
company bankruptcy filing and extends through the completion of the
preferred resolution strategy.
---------------------------------------------------------------------------
MPOE
N/A.
III. Liquidity
SPOE
The firm should have the liquidity capabilities necessary to
execute its preferred resolution strategy. For resolution purposes,
these capabilities should include having an appropriate model and
process for estimating and maintaining sufficient liquidity at or
readily available to material entities and a methodology for estimating
the liquidity needed to successfully execute the resolution strategy,
as described below.
Resolution Liquidity Adequacy and Positioning (RLAP). With respect
to RLAP, the firm should be able to measure the stand-alone liquidity
position of each material entity (including material entities that are
non-U.S. branches)--i.e., the high-quality liquid assets (HQLA) at the
material
[[Page 66405]]
entity less net outflows to third parties and affiliates--and ensure
that liquidity is readily available to meet any deficits. The RLAP
model should cover a period of at least 30 days and reflect the
idiosyncratic liquidity profile and risk of the firm. The model should
balance the reduction in frictions associated with holding liquidity
directly at material entities with the flexibility provided by holding
HQLA at the parent available to meet unanticipated outflows at material
entities. Thus, the firm should not rely exclusively on either full
pre-positioning or an expected contribution of liquid resources from
the parent. The model \10\ should ensure that the parent holding
company holds sufficient HQLA (inclusive of its deposits at the U.S.
branch of the lead bank subsidiary) to cover the sum of all stand-alone
material entity net liquidity deficits. The stand-alone net liquidity
position of each material entity (HQLA less net outflows) should be
measured using the firm's internal liquidity stress test assumptions
and should treat inter-affiliate exposures in the same manner as third-
party exposures. For example, an overnight unsecured exposure to an
affiliate should be assumed to mature. Finally, the firm should not
assume that a net liquidity surplus at one material entity could be
moved to meet net liquidity deficits at other material entities or to
augment parent resources.
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\10\ ``Model'' refers to the set of calculations estimating the
net liquidity surplus/deficit at each legal entity and for the firm
in aggregate based on assumptions regarding available liquidity,
e.g., HQLA and third-party and interaffiliate net outflows.
---------------------------------------------------------------------------
Additionally, the RLAP methodology should take into account: (A)
the daily contractual mismatches between inflows and outflows; (B) the
daily flows from movement of cash and collateral for all inter-
affiliate transactions; and (C) the daily stressed liquidity flows and
trapped liquidity as a result of actions taken by clients,
counterparties, key financial market utilities (FMUs), and foreign
supervisors, among others.
Resolution Liquidity Execution Need (RLEN). The firm should have a
methodology for estimating the liquidity needed after the parent's
bankruptcy filing to stabilize the surviving material entities and to
allow those entities to operate post-filing. The RLEN estimate should
be incorporated into the firm's governance framework to ensure that the
firm files for bankruptcy in a timely way, i.e., prior to the firm's
HQLA falling below the RLEN estimate.
The firm's RLEN methodology should:
(A) Estimate the minimum operating liquidity (MOL) needed at each
material entity to ensure those entities could continue to operate
post-parent's bankruptcy filing and/or to support a wind-down strategy;
(B) Provide daily cash flow forecasts by material entity to support
estimation of peak funding needs to stabilize each entity under
resolution;
(C) Provide a comprehensive breakout of all inter-affiliate
transactions and arrangements that could impact the MOL or peak funding
needs estimates; and
(D) Estimate the minimum amount of liquidity required at each
material entity to meet the MOL and peak needs noted above, which would
inform the firm's board(s) of directors of when they need to take
resolution-related actions.
The MOL estimates should capture material entities' intraday
liquidity requirements, operating expenses, working capital needs, and
inter-affiliate funding frictions to ensure that material entities
could operate without disruption during the resolution. The peak
funding needs estimates should be projected for each material entity
and cover the length of time the firm expects it would take to
stabilize that material entity. Inter-affiliate funding frictions
should be taken into account in the estimation process.
The firm's forecasts of MOL and peak funding needs should ensure
that material entities could operate through resolution consistent with
regulatory requirements, market expectations, and the firm's post-
failure strategy. These forecasts should inform the RLEN estimate,
i.e., the minimum amount of HQLA required to facilitate the execution
of the firm's strategy. The RLEN estimate should be tied to the firm's
governance mechanisms and be incorporated into the playbooks as
discussed below to assist the board of directors in taking timely
resolution-related actions.
MPOE
The firm should have the liquidity capabilities necessary to
execute its preferred resolution strategy. A Plan with an MPOE
resolution strategy should include analysis and projections of a range
of liquidity needs during resolution, including intraday; reflect
likely failure and resolution scenarios; and consider the guidance on
assumptions provided in Section VIII, Format and Structure of Plans;
Assumptions.
IV. Governance Mechanisms
SPOE
Playbooks and Triggers. A firm should identify the governance
mechanisms that would ensure execution of required board actions at the
appropriate time (as anticipated under the firm's preferred strategy)
and include pre-action triggers and existing agreements for such
actions. Governance playbooks should detail the board and senior
management actions necessary to facilitate the firm's preferred
strategy and to mitigate vulnerabilities, and should incorporate the
triggers identified below. The governance playbooks should also include
a discussion of:
(A) The firm's proposed communications strategy, both internal and
external; \11\
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\11\ External communications include those with U.S. and foreign
authorities and other external stakeholders, such as large
depositors and shareholders.
---------------------------------------------------------------------------
(B) The boards of directors' fiduciary responsibilities and how
planned actions would be consistent with such responsibilities
applicable at the time actions are expected to be taken;
(C) Potential conflicts of interest, including interlocking boards
of directors; and
(D) Any employee retention policy. All responsible parties and
timeframes for action should be identified. Governance playbooks should
be updated periodically for all entities whose boards of directors
would need to act in advance of the commencement of resolution
proceedings under the firm's preferred strategy.
The firm should demonstrate that key actions will be taken at the
appropriate time in order to mitigate financial, operational, legal,
and regulatory vulnerabilities. To ensure that these actions will
occur, the firm should establish clearly identified triggers linked to
specific actions for:
(A) The escalation of information to senior management and the
board(s) to potentially take the corresponding actions at each stage of
distress leading eventually to the decision to file for bankruptcy;
(B) Successful recapitalization of subsidiaries prior to the
parent's filing for bankruptcy and funding of such entities during the
parent company's bankruptcy to the extent the preferred strategy relies
on such actions or support; and
[[Page 66406]]
(C) The timely execution of a bankruptcy filing and related pre-
filing actions.\12\
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\12\ Key pre-filing actions include the preparation of any
emergency motion required to be decided on the first day of the
firm's bankruptcy.
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These triggers should be based, at a minimum, on capital,
liquidity, and market metrics, and should incorporate the firm's
methodologies for forecasting the liquidity and capital needed to
operate as required by the preferred strategy following a parent
company's bankruptcy filing. Additionally, the triggers and related
actions should be specific.
Triggers linked to firm actions as contemplated by the firm's
preferred strategy should identify when and under what conditions the
firm, including the parent company and its material entities, would
transition from business-as-usual (BAU) conditions to a stress period
and from a stress period to the recapitalization/resolution periods.
Corresponding escalation procedures, actions, and timeframes should be
constructed so that breach of the triggers will allow prerequisite
actions to be completed. For example, breach of the triggers needs to
occur early enough to ensure that resources are available and can be
downstreamed, if anticipated by the firm's strategy, and with adequate
time for the preparation of the bankruptcy petition and first-day
motions, necessary stakeholder communications, and requisite board
actions. Triggers identifying the onset of stress and recapitalization/
resolution periods, and the associated escalation procedures and
actions, should be discussed directly in the governance playbooks.
Pre-Bankruptcy Parent Support. The Plan should include a detailed
legal analysis of the potential state law and bankruptcy law challenges
and mitigants to planned provision of capital and liquidity to the
subsidiaries prior to the parent's bankruptcy filing (Support).
Specifically, the analysis should identify potential legal obstacles
and explain how the firm would seek to ensure that Support would be
provided as planned. Legal obstacles include claims of fraudulent
transfer, preference, breach of fiduciary duty, and any other
applicable legal theory identified by the firm. The analysis also
should include related claims that may prevent or delay an effective
recapitalization, such as equitable claims to enjoin the transfer
(e.g., imposition of a constructive trust by the court). The analysis
should apply the actions contemplated in the Plan regarding each
element of the claim, the anticipated timing for commencement and
resolution of the claims, and the extent to which adjudication of such
claim could affect execution of the firm's preferred resolution
strategy.
The analysis should include mitigants to the potential challenges
to the planned Support. The Plan should identify the mitigant(s) to
such challenges that the firm considers most effective. In identifying
appropriate mitigants, the firm should consider the effectiveness of a
contractually binding mechanism (CBM), pre-positioning of financial
resources in material entities, and the creation of an intermediate
holding company. Moreover, if the Plan includes a CBM, the firm should
consider whether it is appropriate that the CBM should have the
following:
(A) Clearly defined triggers;
(B) Triggers that are synchronized to the firm's liquidity and
capital methodologies;
(C) Perfected security interests in specified collateral sufficient
to fully secure all Support obligations on a continuous basis
(including mechanisms for adjusting the amount of collateral as the
value of obligations under the agreement or collateral assets
fluctuates); and
(D) Liquidated damages provisions or other features designed to
make the CBM more enforceable.
The firm also should consider related actions or agreements that
may enhance the effectiveness of a CBM. A copy of any agreement and
documents referenced therein (e.g., evidence of security interest
perfection) should be included in the Plan.
The governance playbooks included in the Plan should incorporate
any developments from the firm's analysis of potential legal challenges
regarding the Support, including any Support approach(es) the firm has
implemented. If the firm analyzed and addressed an issue noted in this
section in a prior plan submission, the Plan may reproduce that
analysis and arguments and should build upon it to at least the extent
described above, including ensuring that, as with all other aspects of
the Plan, it remains accurate and up to date. In preparing the analysis
of these issues, firms may consult with law firms and other experts on
these matters. The agencies do not object to appropriate collaboration
between firms, including through trade organizations and with the
academic community, to develop analysis of common legal challenges and
available mitigants.
MPOE
N/A.
V. Operational
SPOE
Payment, Clearing, and Settlement Activities Framework. Maintaining
continuity of payment, clearing, and settlement (PCS) services is
critical for the orderly resolution of firms that are either users or
providers,\13\ or both, of PCS services. A firm should demonstrate
capabilities for continued access to PCS services essential to an
orderly resolution through a framework to support such access by:
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\13\ A firm is a user of PCS services if it accesses PCS
services through an agent bank or it uses the services of a
financial market utility (FMU) through its membership in that FMU or
through an agent bank. A firm is a provider of PCS services if it
provides PCS services to clients as an agent bank or it provides
clients with access to an FMU or agent bank through the firm's
membership in or relationship with that service provider. A firm is
also a provider if it provides clients with PCS services through the
firm's own operations (e.g., payment services or custody services).
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<bullet> Identifying clients,\14\ FMUs, and agent banks as key from
the firm's perspective for the firm's material entities, identified
critical operations, and core business lines, using both quantitative
(volume and value) \15\ and qualitative criteria;
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\14\ For purposes of this section, a client is an individual or
entity, including affiliates of the firm, to whom the firm provides
PCS services and any related credit or liquidity offered in
connection with those services.
\15\ In identifying entities as key, examples of quantitative
criteria may include: for a client, transaction volume/value, market
value of exposures, assets under custody, usage of PCS services, and
any extension of related intraday credit or liquidity; for an FMU,
the aggregate volumes and values of all transactions processed
through such FMU; and for an agent bank, assets under custody, the
value of cash and securities settled, and extensions of intraday
credit.
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<bullet> Mapping material entities, identified critical operations,
core business lines, and key clients to both key FMUs and key agent
banks; and
<bullet> Developing a playbook for each key FMU and key agent bank
essential to an orderly resolution under its preferred resolution
strategy that reflects the firm's role(s) as a user and/or provider of
PCS services.
The framework should address direct relationships (e.g., a firm's
direct membership in an FMU, a firm's provision of clients with PCS
services through its own operations, or a firm's contractual
relationship with an agent bank) and indirect relationships (e.g., a
firm's provision of clients with access to the relevant FMU or agent
bank through the firm's membership in or relationship with that FMU or
agent bank).
Playbooks for Continued Access to PCS Services. The firm is
expected to provide a playbook for each key FMU and key agent bank that
addresses
[[Page 66407]]
considerations that would assist the firm and its key clients in
maintaining continued access to PCS services in the period leading up
to and including the firm's resolution. Each playbook should provide
analysis of the financial and operational impact to the firm's material
entities and key clients due to adverse actions that may be taken by a
key FMU or a key agent bank and contingency actions that may be taken
by the firm. Each playbook also should discuss any possible alternative
arrangements that would allow continued access to PCS services for the
firm's material entities, identified critical operations and core
business lines, and key clients, while the firm is in resolution. The
firm is not expected to incorporate a scenario in which it loses key
FMU or key agent bank access into its preferred resolution strategy or
its RLEN and RCEN estimates. The firm should continue to engage with
key FMUs, key agent banks, and key clients, and playbooks should
reflect any feedback received during such ongoing outreach.
Content Related to Users of PCS Services. Individual key FMU and
key agent bank playbooks should include:
<bullet> Description of the firm's relationship as a user with the
key FMU or key agent bank and the identification and mapping of PCS
services to material entities, identified critical operations, and core
business lines that use those PCS services;
<bullet> Discussion of the potential range of adverse actions that
may be taken by that key FMU or key agent bank when the firm is in
resolution,\16\ the operational and financial impact of such actions on
each material entity, and contingency arrangements that may be
initiated by the firm in response to potential adverse actions by the
key FMU or key agent bank; and
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\16\ Examples of potential adverse actions may include increased
collateral and margin requirements and enhanced reporting and
monitoring.
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<bullet> Discussion of PCS-related liquidity sources and uses in
BAU, in stress, and in the resolution period, presented by currency
type (with U.S. dollar equivalent) and by material entity.
[cir] PCS Liquidity Sources: These may include the amounts of
intraday extensions of credit, liquidity buffer, inflows from FMU
participants, and key client prefunded amounts in BAU, in stress, and
in the resolution period. The playbook also should describe intraday
credit arrangements (e.g., facilities of the key FMU, key agent bank,
or a central bank) and any similar custodial arrangements that allow
ready access to a firm's funds for PCS-related key FMU and key agent
bank obligations (including margin requirements) in all currencies
relevant to the firm's participation, including placements of firm
liquidity at central banks, key FMUs, and key agent banks.
[cir] PCS Liquidity Uses: These may include firm and key client
margin and prefunding and intraday extensions of credit, including
incremental amounts required during resolution.
[cir] Intraday Liquidity Inflows and Outflows: The playbook should
describe the firm's ability to control intraday liquidity inflows and
outflows and to identify and prioritize time-specific payments. The
playbook also should describe any account features that might restrict
the firm's ready access to its liquidity sources.
Content Related to Providers of PCS Services.\17\ Individual key
FMU and key agent bank playbooks should include:
---------------------------------------------------------------------------
\17\ Where a firm is a provider of PCS services through the
firm's own operations, the firm is expected to produce a playbook
for the material entities that provide those services, addressing
each of the items described under ``Content Related to Providers of
PCS Services,'' which include contingency arrangements to permit the
firm's key clients to maintain continued access to PCS services.
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<bullet> Identification and mapping of PCS services to the material
entities, identified critical operations, and core business lines that
provide those PCS services, and a description of the scale and the way
in which each provides PCS services;
<bullet> Identification and mapping of PCS services to key clients
to whom the firm provides such PCS services and any related credit or
liquidity offered in connection with such services;
<bullet> Discussion of the potential range of firm contingency
arrangements available to minimize disruption to the provision of PCS
services to its key clients, including the viability of transferring
key client activity and any related assets, as well as any alternative
arrangements that would allow the firm's key clients continued access
to PCS services if the firm could no longer provide such access (e.g.,
due to the firm's loss of key FMU or key agent bank access), and the
financial and operational impacts of such arrangements from the firm's
perspective;
<bullet> Descriptions of the range of contingency actions that the
firm may take concerning its provision of intraday credit to key
clients, including analysis quantifying the potential liquidity the
firm could generate by taking such actions in stress and in the
resolution period, such as: (i) requiring key clients to designate or
appropriately pre-position liquidity, including through prefunding of
settlement activity, for PCS-related key FMU and key agent bank
obligations at specific material entities of the firm (e.g., direct
members of key FMUs) or any similar custodial arrangements that allow
ready access to key clients' funds for such obligations in all relevant
currencies of key clients of the firm's operations; (ii) delaying or
restricting key client PCS activity; and (iii) restricting, imposing
conditions upon (e.g., requiring collateral), or eliminating the
provision of intraday credit or liquidity to key clients; and
<bullet> Descriptions of how the firm will communicate to its key
clients the potential impacts of implementation of any identified
contingency arrangements or alternatives, including a description of
the firm's methodology for determining whether any additional
communication should be provided to some or all key clients (e.g., due
to the key client's BAU usage of that access and/or related intraday
credit or liquidity), and the expected timing and form of such
communication.
Capabilities. The firm is expected to have and describe
capabilities to understand, for each material entity, the obligations
and exposures associated with PCS activities, including contractual
obligations and commitments. The firm should be able to:
<bullet> Track the following items by: (i) material entity; and
(ii) with respect to customers, counterparties, and agents and service
providers, location and jurisdiction:
[cir] PCS activities, with each activity mapped to the relevant
material entities, identified critical operations, and core business
lines; \18\
---------------------------------------------------------------------------
\18\ 12 CFR 243.5(e)(12) and 381.5(e)(12).
---------------------------------------------------------------------------
[cir] Customers and counterparties for PCS activities, including
values and volumes of various transaction types, as well as used and
unused capacity for all lines of credit; \19\
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
[cir] Exposures to and volumes transacted with FMUs, nostro agents,
and custodians; and \20\
---------------------------------------------------------------------------
\20\ 12 CFR 252.34(h).
---------------------------------------------------------------------------
[cir] Services provided and service level agreements, as
applicable, for other current agents and service providers (internal
and external).\21\
---------------------------------------------------------------------------
\21\ 12 CFR 243.5(f)(l)(i) and 381.5(f)(1)(i).
---------------------------------------------------------------------------
<bullet> Assess the potential effects of adverse actions by FMUs,
nostro agents, custodians, and other agents and service providers,
including suspension or termination of membership or services, on the
firm's operations and customers
[[Page 66408]]
and counterparties of those operations; \22\
---------------------------------------------------------------------------
\22\ 12 CFR 252.34(f).
---------------------------------------------------------------------------
<bullet> Develop contingency arrangements in the event of such
adverse actions; \23\ and
---------------------------------------------------------------------------
\23\ Id.
---------------------------------------------------------------------------
<bullet> Quantify the liquidity needs and operational capacity
required to meet all PCS obligations, including any change in demand
for and sources of liquidity needed to meet such obligations.
Managing, Identifying, and Valuing Collateral. The firm is expected
to have and describe its capabilities to manage, identify, and value
the collateral that it receives from and posts to external parties and
affiliates. Specifically, the firm should:
<bullet> Be able to query and provide aggregate statistics for all
qualified financial contracts concerning cross-default clauses,
downgrade triggers, and other key collateral-related contract terms--
not just those terms that may be impacted in an adverse economic
environment--across contract types, business lines, legal entities, and
jurisdictions;
<bullet> Be able to track both collateral sources (i.e.,
counterparties that have pledged collateral) and uses (i.e.,
counterparties to whom collateral has been pledged) at the CUSIP level
on at least a t+1 basis;
<bullet> Have robust risk measurements for cross-entity and cross-
contract netting, including consideration of where collateral is held
and pledged;
<bullet> Be able to identify CUSIP and asset class level
information on collateral pledged to specific central counterparties by
legal entity on at least a t+1 basis;
<bullet> Be able to track and report on inter-branch collateral
pledged and received on at least a t+1 basis and have clear policies
explaining the rationale for such inter-branch pledges, including any
regulatory considerations; and
<bullet> Have a comprehensive collateral management policy that
outlines how the firm as a whole approaches collateral and serves as a
single source for governance.\24\
---------------------------------------------------------------------------
\24\ The policy may reference subsidiary or related policies
already in place, as implementation may differ based on business
line or other factors.
---------------------------------------------------------------------------
Management Information Systems. The firm should have the management
information systems (MIS) capabilities to readily produce data on a
legal entity basis and have controls to ensure data integrity and
reliability. The firm also should perform a detailed analysis of the
specific types of financial and risk data that would be required to
execute the preferred resolution strategy and how frequently the firm
would need to produce the information, with the appropriate level of
granularity. The firm should have the capabilities to produce the
following types of information, as applicable, in a timely manner and
describe these capabilities in the Plan:
<bullet> Financial statements for each material entity (at least
monthly);
<bullet> External and inter-affiliate credit exposures, both on-
and off-balance sheet, by type of exposure, counterparty, maturity, and
gross payable and receivable;
<bullet> Gross and net risk positions with internal and external
counterparties;
<bullet> Guarantees, cross holdings, financial commitments and
other transactions between material entities;
<bullet> Data to facilitate third-party valuation of assets and
businesses, including risk metrics;
<bullet> Key third-party contracts, including the provider,
provider's location, service(s) provided, legal entities that are a
party to or a beneficiary of the contract, and key contractual rights
(for example, termination and change in control clauses);
<bullet> Legal agreement information, including parties to the
agreement and key terms and interdependencies (for example, change in
control, collateralization, governing law, termination events,
guarantees, and cross-default provisions);
<bullet> Service level agreements between affiliates, including the
service(s) provided, the legal entity providing the service, legal
entities receiving the service, and any termination/transferability
provisions;
<bullet> Licenses and memberships to all exchanges and value
transfer networks, including FMUs;
<bullet> Key management and support personnel, including dual-
hatted employees, and any associated retention agreements;
<bullet> Agreements and other legal documents related to property,
including facilities, technology systems, software, and intellectual
property rights. The information should include ownership, physical
location, where the property is managed and names of legal entities and
lines of business that the property supports; and
<bullet> Updated legal records for domestic and foreign entities,
including entity type and purpose (for example, holding company, bank,
broker dealer, and service entity), jurisdiction(s), ownership, and
regulator(s).
Shared and Outsourced Services. The firm should maintain a fully
actionable implementation plan to ensure the continuity of shared
services that support identified critical operations or core business
lines, or are material to the execution of the resolution strategy, and
robust arrangements to support the continuity of shared and outsourced
services, including, without limitation, appropriate plans to retain
key personnel relevant to the execution of the firm's strategy. For
example, specified firms should evaluate internal and external
dependencies and develop documented strategies and contingency
arrangements for the continuity or replacement of the shared and
outsourced services that are necessary to maintain identified critical
operations or core business lines, or are material to the execution of
the resolution strategy. Examples may include personnel, facilities,
systems, data warehouses, intellectual property, and counsel and
consultants involved in the preparation for and filing of bankruptcy.
Specified firms also should maintain current cost estimates for
implementing such strategies and contingency arrangements.
The firm should (A) maintain an identification of all shared
services that support identified critical operations or core business
lines, or are material to the execution of the resolution strategy;
\25\ (B) maintain a mapping of how/where these services support its
core business lines and identified critical operations; (C) incorporate
such mapping into legal entity rationalization criteria and
implementation efforts; and (D) mitigate identified continuity risks
through establishment of service-level agreements (SLAs) for all shared
services that support identified critical operations or core business
lines, or are material to the execution of the resolution strategy.
---------------------------------------------------------------------------
\25\ This should be interpreted to include data access and
intellectual property rights.
---------------------------------------------------------------------------
SLAs should fully describe the services provided, reflect pricing
considerations on an arm's-length basis where appropriate, and
incorporate appropriate terms and conditions to (A) prevent automatic
termination upon certain resolution-related events and (B) achieve
continued provision of such services during resolution. The firm should
also store SLAs in a central repository or repositories in a searchable
format, develop and document contingency strategies and arrangements
for replacement of critical shared services, and complete re-alignment
or restructuring of activities within its corporate structure. In
addition, the firm should ensure the financial resilience of internal
shared service providers by maintaining working capital for six months
(or through the period of
[[Page 66409]]
stabilization as required in the firm's preferred strategy) in such
entities sufficient to cover contract costs, consistent with the
preferred resolution strategy.
The firm should identify all critical service providers and
outsourced services that support identified critical operations or core
business lines, or are material to the execution of the resolution
strategy, and identify any that could not be promptly substituted. The
firm should (A) evaluate the agreements governing these services to
determine whether there are any that could be terminated upon
commencement of any resolution despite continued performance, and (B)
update contracts to incorporate appropriate terms and conditions to
prevent automatic termination upon commencement of any resolution
proceeding and facilitate continued provision of such services. Relying
on entities projected to survive during resolution to avoid contract
termination is insufficient to ensure continuity. In the Plan, the firm
should document the amendment of any such agreements governing these
services.
Qualified Financial Contracts. The Plan should reflect how the
early termination of qualified financial contracts triggered by the
parent company's bankruptcy filing could impact the resolution of the
firm's operations, including potential termination of any contracts
that are not subject to statutory, contractual or regulatory stays of
direct default or cross-default rights. A Plan should explain and
support the firm's strategy for addressing the potential disruptive
effects in resolution of early termination provisions and cross-default
rights in existing qualified financial contracts at both the parent
company and material entity subsidiaries. This discussion should
address, to the extent relevant for the firm, qualified financial
contracts that include limitations of standard contractual direct
default and cross default rights by agreement of the parties.
MPOE
Payment, Clearing, and Settlement Activities Capabilities. The firm
is expected to have and describe capabilities to understand, for each
material entity, the obligations and exposures associated with PCS
activities, including contractual obligations and commitments. For
example, firms should be able to:
<bullet> As users of PCS services:
[cir] Track the following items by: (i) material entity; and (ii)
with respect to customers, counterparties, and agents and service
providers, location and jurisdiction:
[ssquf] PCS activities, with each activity mapped to the relevant
material entities, identified critical operations, and core business
lines;
[ssquf] Customers and counterparties for PCS activities, including
values and volumes of various transaction types, as well as used and
unused capacity for all lines of credit;
[ssquf] Exposures to and volumes transacted with FMUs, nostro
agents, and custodians; and
[ssquf] Services provided and service level agreements, as
applicable, for other current agents and service providers (internal
and external).
[cir] Assess the potential effects of adverse actions by FMUs,
nostro agents, custodians, and other agents and service providers,
including suspension or termination of membership or services, on the
firm's operations and customers and counterparties of those operations;
[cir] Develop contingency arrangements in the event of such adverse
actions; and
[cir] Quantify the liquidity needs and operational capacity
required to meet all PCS obligations, including intraday requirements.
<bullet> As providers of PCS services:
[cir] Identify their PCS clients and the services they provide to
these clients, including volumes and values of transactions;
[cir] Quantify and explain time-sensitive payments; and
[cir] Quantify and explain intraday credit provided.
Managing, Identifying and Valuing Collateral. The firm is expected
to have and describe its capabilities to manage, identify and value the
collateral that it receives from and posts to external parties and
affiliates, including tracking collateral received, pledged, and
available at the CUSIP level and measuring exposures.
Management Information Systems. The firm should have the management
information systems (MIS) capabilities to readily produce data on a
legal entity basis and have controls to ensure data integrity and
reliability. The firm also should perform a detailed analysis of the
specific types of financial and risk data that would be required to
execute the preferred resolution strategy. The firm should have the
capabilities to produce the following types of information, as
applicable, in a timely manner and describe these capabilities in the
Plan:
<bullet> Financial statements for each material entity (at least
monthly);
<bullet> External and inter-affiliate credit exposures, both on-
and off-balance sheet, by type of exposure, counterparty, maturity, and
gross payable and receivable;
<bullet> Gross and net risk positions with internal and external
counterparties;
<bullet> Guarantees, cross holdings, financial commitments and
other transactions between material entities;
<bullet> Data to facilitate third-party valuation of assets and
businesses, including risk metrics;
<bullet> Key third-party contracts, including the provider,
provider's location, service(s) provided, legal entities that are a
party to or a beneficiary of the contract, and key contractual rights
(for example, termination and change in control clauses);
<bullet> Legal agreement information, including parties to the
agreement and key terms and interdependencies (for example, change in
control, collateralization, governing law, termination events,
guarantees, and cross-default provisions);
<bullet> Service level agreements between affiliates, including the
service(s) provided, the legal entity providing the service, legal
entities receiving the service, and any termination/transferability
provisions;
<bullet> Licenses and memberships to all exchanges and value
transfer networks, including FMUs;
<bullet> Key management and support personnel, including dual-
hatted employees, and any associated retention agreements;
<bullet> Agreements and other legal documents related to property,
including facilities, technology systems, software, and intellectual
property rights. The information should include ownership, physical
location, where the property is managed and names of legal entities and
lines of business that the property supports; and
<bullet> Updated legal records for domestic and foreign entities,
including entity type and purpose (for example, holding company, bank,
broker dealer, and service entity), jurisdiction(s), ownership, and
regulator(s).
Shared and Outsourced Services. The firm should maintain robust
arrangements to support the continuity of shared and outsourced
services that support any identified critical operations or are
material to the execution of the resolution strategy, including
appropriate plans to retain key personnel relevant to the execution of
the firm's strategy. For example, specified firms should evaluate
internal and external dependencies and develop documented strategies
and contingency arrangements for the continuity or replacement of the
shared and outsourced services that are necessary to maintain
identified critical operations
[[Page 66410]]
or are material to the execution of the resolution strategy. Examples
may include personnel, facilities, systems, data warehouses,
intellectual property, and counsel and consultants involved in the
preparation for and filing of bankruptcy. Specified firms also should
maintain current cost estimates for implementing such strategies and
contingency arrangements.
The firm should: (A) maintain an identification of all shared
services that support identified critical operations or are material to
the execution of the resolution strategy; and (B) mitigate identified
continuity risks through establishment of SLAs for all shared services
supporting identified critical operations or are material to the
execution of the resolution strategy. SLAs should fully describe the
services provided and incorporate appropriate terms and conditions to:
(A) prevent automatic termination upon certain resolution-related
events; and (B) achieve continued provision of such services during
resolution.
The firm should identify all critical service providers and
outsourced services that support identified critical operations or are
material to the execution of the resolution strategy. Any of these
services that cannot be promptly substituted should be identified in a
firm's Plan. The firm should: (A) evaluate the agreements governing
these services to determine whether there are any that could be
terminated upon commencement of any resolution despite continued
performance; and (B) update contracts to incorporate appropriate terms
and conditions to prevent automatic termination upon commencement of
any resolution proceeding and facilitate continued provision of such
services. Relying on entities projected to survive during resolution to
avoid contract termination is insufficient to ensure continuity. In the
Plan, the firm should document the amendment of any such agreements
governing these services.
VI. Legal Entity Rationalization
SPOE
Legal Entity Rationalization Criteria (LER Criteria). A firm should
develop and implement legal entity rationalization criteria that
support the firm's preferred resolution strategy and minimize risk to
U.S. financial stability in the event of the firm's resolution. LER
Criteria should consider the best alignment of legal entities and
business lines to improve the firm's resolvability under different
market conditions. LER Criteria should govern the firm's corporate
structure and arrangements between legal entities in a way that
facilitates the firm's resolvability as its activities, technology,
business models, or geographic footprint change over time.
Specifically, application of the criteria should:
(A) Facilitate the recapitalization and liquidity support of
material entities, as required by the firm's resolution strategy. Such
criteria should include clean lines of ownership, minimal use of
multiple intermediate holding companies, and clean funding pathways
between the parent and material operating entities;
(B) Facilitate the sale, transfer, or wind-down of certain discrete
operations within a timeframe that would meaningfully increase the
likelihood of an orderly resolution of the firm, including provisions
for the continuity of associated services and mitigation of financial,
operational, and legal challenges to separation and disposition;
(C) Adequately protect the subsidiary IDIs from risks arising from
the activities of any nonbank subsidiaries of the firm (other than
those that are subsidiaries of an IDI); and
(D) Minimize complexity that could impede an orderly resolution and
minimize redundant and dormant entities.
These criteria should be built into the firm's ongoing process for
creating, maintaining, and optimizing its structure and operations on a
continuous basis.
Finally, the Plan should include a description of the firm's legal
entity rationalization governance process.
MPOE
Legal Entity Structure. A firm should maintain a legal entity
structure that supports the firm's preferred resolution strategy and
minimizes risk to U.S. financial stability in the event of the firm's
failure. The firm should consider factors such as business activities;
banking group structures and booking models and practices; and
potential sales, transfers, or wind-downs during resolution. The Plan
should describe how the firm's legal entity structure aligns core
business lines and any identified critical operations with the firm's
material entities to support the firm's resolution strategy. To the
extent a material entity IDI relies upon an affiliate that is not the
IDI's subsidiary during resolution, including for the provision of
shared services, the firm should discuss its rationale for the legal
entity structure and associated resolution risks and potential
mitigants.
The firm's corporate structure and arrangements among legal
entities should be considered and maintained in a way that facilitates
the firm's resolvability as its activities, technology, business
models, or geographic footprint change over time.
VII. Insured Depository Institution Resolution
MPOE
Least-cost requirement analysis. If the Plan includes a strategy
that contemplates the separate resolution of a U.S. IDI that is a
material entity, the Plan should explain how the resolution could be
achieved in a manner that is consistent with the overall objective of
the Plan to substantially mitigate the risk that the failure of the
specified firm would have serious adverse effects on financial
stability in the United States while also complying with the statutory
and regulatory requirements governing IDI resolution.
This explanation does not include an expectation that firms provide
a complete least-cost analysis. A complete least-cost analysis would,
for example, include a comparison of the preferred strategy for
resolving an IDI that is a material entity against every other possible
resolution method available for that IDI.
To explain how a firm's preferred strategy could potentially enable
the FDIC to resolve the failed bank in a manner consistent with the
FDIC's statutory least-cost requirement, the firm could instead compare
the estimated costs to the DIF of the firm's preferred resolution
strategy to a payout liquidation and, for strategies involving a BDI,
explain how the inclusion or exclusion of uninsured deposits within the
BDI would impact the estimated overall costs to the DIF.
Firms should address the following matters as applicable to their
strategy:
<bullet> Payout Liquidation: If the Plan envisions a payout
liquidation for the IDI, with or without use of a Deposit Insurance
National Bank or a paying agent, the Plan should explain how the
deposit payout and asset liquidation process would be executed in a
manner that substantially mitigates the risk of serious adverse effects
on U.S. financial stability.
<bullet> P&A Transaction: If the Plan assumes a weekend P&A
strategy, the plan should first demonstrate the ready availability of
this option under severely adverse economic scenario, assuming that
markets are functioning and competitors are in a position to take on
business. The Plan may demonstrate a weekend P&A strategy is available
by discussing evidence of several potential buyers supported by
information
[[Page 66411]]
indicating that these potential buyers could reasonably be expected to
have sufficient financial resources to complete the transaction in a
severely adverse scenario and the expertise to incorporate the business
of the failed bank. The plan should also address how such a merger can
be completed with these potential acquirers considering any applicable
approvals that would be required for the proposed transaction.
Additionally, a P&A strategy should explain how it either (1) results
in no loss to the DIF or (2) despite its resulting in a loss to the
DIF, the loss is less than would be incurred through a payout
liquidation.
<bullet> All-Deposit BDI: If the Plan contemplates a strategy
involving an all-deposit BDI, the Plan should include an analysis that
shows that the incremental estimated cost to the DIF of transferring
all uninsured deposits to the BDI is offset by the preservation of
franchise value and other benefits connected to the uninsured deposits
(such as the franchise value derived from retaining full banking
relationships).
<bullet> BDI with Partial Uninsured Deposit Transfers: A Plan may
demonstrate the feasibility of a strategy involving a BDI that assumes
(1) all insured deposits or (2) only a portion of uninsured deposits
(e.g. an advance dividend to uninsured depositors for a portion of
their deposit claim) by showing that the incremental estimated cost to
the DIF of transferring the portion of uninsured deposits to the BDI is
offset by the preservation of franchise value connected to those
uninsured deposits (such as the franchise value derived from retaining
full banking relationships).
In all cases, the Plan should discuss how the implementation of the
Plan's resolution strategy, including the impact on any depositors
whose accounts are not transferred in whole or in part to a BDI, would
not be likely to create the risk of serious adverse effects on U.S.
financial stability.
Valuation. Regardless of the strategy chosen, the Plan should
demonstrate reasonable and well-supported assumptions that support the
valuation of the failed IDI's assets and business franchise under the
firm's preferred strategy that are drawn from comparable transactions
or other inputs observable in the marketplace. A firm's franchise value
is generally understood to be the value of the bank as an operating
company relative to the value of the firm's individual assets minus its
liabilities. In assessing the franchise value of the firm's business,
the Plan could provide support through relevant inputs such as the
revenue generated by the account relationships; the efficiencies in
administrative costs associated with servicing large deposits/large
relationships; the elimination of barriers to entry or the reduction in
customer acquisition costs; growth history and prospects for the
products or business activity; market trading or sales multiples; or
any other factors the firm believes appropriate. Asset values should be
representative of the bank's asset mix under the appropriate economic
conditions and of sufficient distress as to result in failure.
Exit from BDI. A Plan should include a discussion of the eventual
exit from the BDI. A Plan could support the feasibility of an exit
strategy by, for example, describing an actionable process, based on
historical precedent or otherwise supportable projections, that winds
down certain businesses, includes the sale of assets and the transfer
of deposits to one or multiple acquirers, or culminates in a capital
markets transaction, such as an initial public offering or a private
placement of securities.
VIII. Format and Structure of Plans; Assumptions
SPOE & MPOE
Format of Plan
Executive Summary. The Plan should contain an executive summary
consistent with the Rule, which must include, among other things, a
concise description of the key elements of the firm's strategy for an
orderly resolution. In addition, the executive summary should include a
discussion of the firm's assessment of any impediments to the firm's
resolution strategy and its execution, as well as the steps it has
taken to address any identified impediments.
Narrative. The Plan should include a strategic analysis consistent
with the Rule. This analysis should take the form of a concise
narrative that enhances the readability and understanding of the firm's
discussion of its strategy for an orderly resolution in bankruptcy or
other applicable insolvency regimes (Narrative).
Appendices. The Plan should contain a sufficient level of detail
and analysis to substantiate and support the strategy described in the
Narrative. Such detail and analysis should be included in appendices
that are distinct from and clearly referenced in the related parts of
the Narrative (Appendices).
Public Section. The Plan must be divided into a public section and
a confidential section consistent with the requirements of the Rule.
Other Informational Requirements. The Plan must comply with all
other informational requirements of the Rule. The firm may incorporate
by reference previously submitted information as provided in the Rule.
Guidance Regarding Assumptions
1. The Plan should be based on the current state of the applicable
legal and policy frameworks. Pending legislation or regulatory actions
may be discussed as additional considerations.
2. The firm must submit a Plan that does not rely on the provision
of extraordinary support by the United States or any other government
to the firm or its subsidiaries to prevent the failure of the firm.\26\
The firm should not submit a Plan that assumes the use of the systemic
risk exception to the least-cost test in the event of a failure of an
IDI requiring resolution under the FDI Act.
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\26\ 12 CFR 243.4(h)(2) and 381.4(h)(2).
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3. The firm should not assume that it will be able to sell
identified critical operations or core business lines, or that
unsecured funding will be available immediately prior to filing for
bankruptcy.
4. The Plan should assume the Dodd-Frank Act Stress Test (DFAST)
severely adverse scenario for the first quarter of the calendar year in
which the Plan is submitted is the domestic and international economic
environment at the time of the firm's failure and throughout the
resolution process.
5. The resolution strategy may be based on an idiosyncratic event
or action, including a series of compounding events. The firm should
justify use of that assumption, consistent with the conditions of the
economic scenario.
6. Within the context of the applicable idiosyncratic scenario,
markets are functioning and competitors are in a position to take on
business. If a firm's Plan assumes the sale of assets, the firm should
take into account all issues surrounding its ability to sell in market
conditions present in the applicable economic condition at the time of
sale (i.e., the firm should take into consideration the size and scale
of its operations as well as issues of separation and transfer.).
7. For a firm that adopts an MPOE resolution strategy, the Plan
should demonstrate and describe how the failure event(s) results in
material financial distress.\27\ In particular, the Plan should
consider the likelihood that there would be a diminution of the firm's
liquidity buffer in the stress
[[Page 66412]]
period prior to filing for bankruptcy from high unexpected outflows of
deposits and increased liquidity requirements from counterparties.
Though the immediate failure event may be liquidity-related and
associated with a lack of market confidence in the financial condition
of the covered company or its material legal entity subsidiaries prior
to the final recognition of losses, the demonstration and description
of material financial distress may also include depletion of capital.
Therefore, the Plan should also consider the likelihood of the
depletion of capital.
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\27\ See Section 11(c)(5) of the FDI Act, codified at 11 U.S.C.
1821(c)(5), which details grounds for appointing the FDIC as
conservator or receiver of an IDI.
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8. The firm should not assume any waivers of section 23A or 23B of
the Federal Reserve Act in connection with the actions proposed to be
taken prior to or in resolution.
9. The Plan should support any assumptions that the firm will have
access to the Discount Window and/or other borrowings during the period
immediately prior to entering bankruptcy. To the extent the firm
assumes use of the Discount Window, Federal Home Loan Banks, and/or
other borrowings, the Plan should support that assumption with a
discussion of the operational testing conducted to facilitate access in
a stress environment, placement of collateral, and the amount of
funding accessible to the firm. The firm may assume that its depository
institutions will have access to the Discount Window only for a few
days after the point of failure to facilitate orderly resolution.
However, the firm should not assume its subsidiary depository
institutions will have access to the Discount Window while critically
undercapitalized, in FDIC receivership, or operating as a bridge bank,
nor should it assume any lending from a Federal Reserve credit facility
to a non-bank affiliate.
Financial Statements and Projections. The Plan should include the
actual balance sheet for each material entity and the consolidating
balance sheet adjustments between material entities as well as pro
forma balance sheets for each material entity at the point of failure
and at key junctures in the execution of the resolution strategy. It
should also include statements of projected sources and uses of funds
for the interim periods. The pro forma financial statements and
accompanying notes in the Plan should clearly evidence the failure
trigger event; the Plan's assumptions; and any transactions that are
critical to the execution of the Plan's preferred strategy, such as
recapitalizations, the creation of new legal entities, transfers of
assets, and asset sales and unwinds.
Material Entities. Material entities should encompass those
entities, including foreign offices and branches, which are significant
to the maintenance of an identified critical operation or core business
line. If the abrupt disruption or cessation of a core business line
might have systemic consequences to U.S. financial stability, the
entities essential to the continuation of such core business line
should be considered for material entity designation. Material entities
should include the following types of entities:
1. Any U.S.-based or non-U.S. affiliates, including any branches,
that are significant to the activities of an identified critical
operation.
2. Subsidiaries or foreign offices whose provision or support of
global treasury operations, funding, or liquidity activities (inclusive
of intercompany transactions) is significant to the activities of an
identified critical operation.
3. Subsidiaries or foreign offices that provide material
operational support in resolution (key personnel, information
technology, data centers, real estate or other shared services) to the
activities of an identified critical operation.
4. Subsidiaries or foreign offices that are engaged in derivatives
booking activity that is significant to the activities of an identified
critical operation, including those that conduct either the internal
hedge side or the client-facing side of a transaction.
5. Subsidiaries or foreign offices engaged in asset custody or
asset management that are significant to the activities of an
identified critical operation.
6. Subsidiaries or foreign offices holding licenses or memberships
in clearinghouses, exchanges, or other FMUs that are significant to the
activities of an identified critical operation.
For each material entity (including a branch), the Plan should
enumerate, on a jurisdiction-by-jurisdiction basis, the specific
mandatory and discretionary actions or forbearances that regulatory and
resolution authorities would take during resolution, including any
regulatory filings and notifications that would be required as part of
the preferred strategy, and explain how the Plan addresses the actions
and forbearances. The Plan should describe the consequences for the
covered company's resolution strategy if specific actions in a non-U.S.
jurisdiction were not taken, delayed, or forgone, as relevant.
IX. Public Section
SPOE & MPOE
The purpose of the public section is to inform the public's
understanding of the firm's resolution strategy and how it works.
The public section should discuss the steps that the firm is taking
to improve resolvability under the U.S. Bankruptcy Code. The public
section should provide background information on each material entity
and should be enhanced by including the firm's rationale for
designating material entities. The public section should also discuss,
at a high level, the firm's intra-group financial and operational
interconnectedness (including the types of guarantees or support
obligations in place that could impact the execution of the firm's
strategy).
The discussion of strategy in the public section should broadly
explain how the firm has addressed any deficiencies, shortcomings, and
other key vulnerabilities that the agencies have identified in prior
plan submissions. For each material entity, it should be clear how the
strategy provides for continuity, transfer, or orderly wind-down of the
entity and its operations. There should also be a description of the
resulting organization upon completion of the resolution process.
The public section may note that the Plan is not binding on a
bankruptcy court or other resolution authority and that the proposed
failure scenario and associated assumptions are hypothetical and do not
necessarily reflect an event or events to which the firm is or may
become subject.
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on August 9, 2024.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2024-18191 Filed 8-14-24; 8:45 am]
BILLING CODE 6210-01-P; 6714-01-P
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</html>Indexed from Federal Register on August 15, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.