Living Wills – SIFIs and Resolution After the Cannes Summit

At the G20 Summit in Cannes in early November, a raft of critical papers from the Financial Stability Board (FSB) were endorsed, setting out not only the policy for addressing the “too-big-to-fail” issues posed by Systemically Important Financial Institutions (SIFIs), but also naming the first 29 groups of Global SIFIs (“G-SIFIs“). In this article, Rosali Pretorius and Emma Radmore of SNR Denton look at the G20 conclusions and the current thinking of the UK and US authorities.
The Cannes Summit and the FSB Recommendations

The FSB package of policy measures will include:

• An international standard to be a point of reference for national resolution regimes: setting out responsibilities, instruments and powers that all national resolution regimes should have;
• Requirements for resolvability assessments, recovery and resolution plans (RRPs) and cross-border cooperation agreements specific to individual G-SIFIs: this should prepare home and host authorities better for dealing with crises and cooperating during them;
• Requirements that all global systemically important banks (G-SIBs) hold loss-absorption capacity above Basel III standards: this will rise from 1 to 2.5% risk-weighted assets; and
• More intensive and effective supervision.

FSB intends to use the Basel Committee on Banking Supervision (Basel) methodology to review and update a list of G-SIFIs each November. FSB and Basel will work to extend the framework to all SIFIs, and the International Association of Insurance Supervisors should complete its methodology for identifying globally systemic insurers by the June 2012 G20 Summit. The 29 groups named now must meet the requirements on resolution by the end of 2012. Banks that are identified as G-SIFIs in 2014 will have to meet the new loss absorbency requirements and supervisory expectations by 2016. FSB also intends to put in place a peer assessment programme to ensure proper implementation. The initial list of G-SIFIs includes entities headquartered in several jurisdictions, including the US, UK, rest of Europe and Asia Pacific.

Before FSB finalised its plans, however, the UK and the US had already both moved quickly to require recovery and resolution plans to resolve UK SIFIs and US SIFIs. In the UK and in the US, these plans are often referred to as “Living Wills”. This article looks at the UK proposals, distinguishing key differences between the planned UK and US regimes.

Living Wills in the UK

The Banking Act 2009 created a Special Resolution Regime (“SRR”) giving the Financial Services Authority (the “FSA”), the Bank of England and the UK Treasury various tools for resolving failed deposit-taking financial institutions.  However, the UK authorities require detailed knowledge and understanding of a financial institution’s business to exercise the SRR tools and enable the orderly resolution of a failed financial institution without relying on taxpayer support.  In February 2011, a special administration regime was introduced for investment firms.  This was initiated for the first time when MF Global UK entered the process. Using powers under the Financial Services Act 2010, FSA published proposals for certain financial services firms to prepare and maintain RRPs and, in addition, for firms holding client money and assets to develop client asset resolution plans (“CASS RP”) to promote swift return of clients’ money and custody assets (“CMA”) should they fail.  Some firms will have to prepare RRPs and CASS RRPs; smaller firms with CMA only CASS RRPs.

In the US, the Dodd Frank Act created the framework for Resolution Plans for SIFIs, and this is bolstered by rules of the Federal Deposit Insurance Corporation.

Who is covered?

The RRP requirements will apply to:
 

• All FSA-authorised banks and building societies regardless of size, including UK incorporated subsidiaries of overseas banks.
• Significant investment firms authorised by FSA, specifically full scope BIPRU 730k investment firms (firms with authority to deal on own account) with assets exceeding £15 billion.

The CASS RP requirement will apply to all firms subject to the FSA’s client asset custody rules and investment business client money rules.  So some banks and significant investment firms may not need to also prepare a CASS RP. The FSA is not calling for RRPs from UK branches of overseas entities, partly because the SRR tools are unavailable to resolve branches of overseas banks.

In contrast, under the US plans, US SIFIs subject to resolution planning requirements will include:
 

• US bank holding companies with at least USD50 billion in consolidated assets;
• US branches and agencies of international banks, where the consolidated worldwide assets of the international bank is at least USD50 billion; and
• Any nonbank financial company designated as a SIFI by the FSOC
• US insured depository institutions with at least US$50 billion in assets must also file Living Wills

 
What should the RRP include?

Recovery Plans

The purpose of a Recovery Plan is to enable firms to plan how they would try to recover from severely adverse conditions that could cause their failure.  Firms are responsible for preparing their Recovery Plans which are subject to FSA review and require updating yearly.  A key aspect is deciding when the firm will carry out its Recovery Plan.  Firms will be required to develop their own unambiguous triggers.

Resolution Planning

The purpose of Resolution Planning is to provide a strategy to resolve a failed firm or group in a manner that minimises the impact on financial stability without needing to resort to taxpayer support.  The UK authorities are responsible for preparing a Resolution Plan, which must allow decisions and actions to be taken and performed in a short space of time (for example, over a ‘resolution weekend’).  However, firms must provide a Resolution Pack to FSA, which is regularly updated to reflect any material developments in a firm’s business.  The Resolution Pack must include:
 

• Details of significant entities in the group and the key structural and operational issues relevant to separating significant legal entities. 
• Critical Function Contingency Analysis (“CFCA”) covering separation and / or ‘controlled wind-down’ for each critical role of the firm. 
• Plans to overcome any barriers to resolution which the UK authorities consider unacceptable.  

CASS Resolution Pack

This aims to reduce the wider economic cost of an in-scope firm failure.   It ensures that information and records that would help an insolvency practitioner or resolution authority return client money and custody assets to clients more quickly, will be accessible to the insolvency practitioner or resolution authority after the firm’s failure.  

While the content of US Living Wills is to be very detailed, they are resolution plans, and do not also include recovery plans.

Where next for the RRP?

The consultation period has just closed. FSA will publish final rules in the first quarter of 2012.  Certain rules will come into effect during the first quarter of 2012, but FSA will also provide transitional rules so firms will have until June 2012 to prepare their first RRPs. Large banks, though, have taken part in FSA’s pilot exercise already. FSA should take account of the developments at the Cannes Summit when finalising its rules, but as with other reforms agreed at G20 level, the UK and US are pressing ahead of the game.

Rosali Pretorius is a Partner and Emma Radmore is a Senior Associate at SNR Denton UK LLP

© 2011 SNR Denton. SNR Denton is the collective trade name for an international legal practice.  SNR Denton UK LLP is a limited liability partnership registered in England and Wales under no. OC322045. Regulated by the Solicitors Regulation Authority. A list of its members is open for inspection at its registered office: One Fleet Place, London EC4M 7WS.
Any reference to a “partner” means a partner, member, consultant or employee with equivalent standing and qualifications in one of SNR Denton’s affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Attorney Advertising. Please see snrdenton.com for Legal Notices. Rosali Pretorius (Partner) and Emma Radmore (Senior Associate and Professional Support Lawyer) are members of SNR Denton’s London Financial Markets and Regulation practice.  Contact them on +44 (0)20 7246 7000 (rosali.pretorius@snrdenton.com or emma.radmore@snrdenton.com).  

At the G20 Summit in Cannes in early November, a raft of critical papers from the Financial Stability Board (FSB) were endorsed, setting out not only the policy for addressing the “too-big-to-fail” issues posed by Systemically Important Financial Institutions (SIFIs), but also naming the first 29 groups of Global SIFIs (“G-SIFIs“). In this article, Rosali Pretorius and Emma Radmore of SNR Denton look at the G20 conclusions and the current thinking of the UK and US authorities.
The Cannes Summit and the FSB Recommendations

The FSB package of policy measures will include:

• An international standard to be a point of reference for national resolution regimes: setting out responsibilities, instruments and powers that all national resolution regimes should have;
• Requirements for resolvability assessments, recovery and resolution plans (RRPs) and cross-border cooperation agreements specific to individual G-SIFIs: this should prepare home and host authorities better for dealing with crises and cooperating during them;
• Requirements that all global systemically important banks (G-SIBs) hold loss-absorption capacity above Basel III standards: this will rise from 1 to 2.5% risk-weighted assets; and
• More intensive and effective supervision.

FSB intends to use the Basel Committee on Banking Supervision (Basel) methodology to review and update a list of G-SIFIs each November. FSB and Basel will work to extend the framework to all SIFIs, and the International Association of Insurance Supervisors should complete its methodology for identifying globally systemic insurers by the June 2012 G20 Summit. The 29 groups named now must meet the requirements on resolution by the end of 2012. Banks that are identified as G-SIFIs in 2014 will have to meet the new loss absorbency requirements and supervisory expectations by 2016. FSB also intends to put in place a peer assessment programme to ensure proper implementation. The initial list of G-SIFIs includes entities headquartered in several jurisdictions, including the US, UK, rest of Europe and Asia Pacific.

Before FSB finalised its plans, however, the UK and the US had already both moved quickly to require recovery and resolution plans to resolve UK SIFIs and US SIFIs. In the UK and in the US, these plans are often referred to as “Living Wills”. This article looks at the UK proposals, distinguishing key differences between the planned UK and US regimes.

Living Wills in the UK

The Banking Act 2009 created a Special Resolution Regime (“SRR”) giving the Financial Services Authority (the “FSA”), the Bank of England and the UK Treasury various tools for resolving failed deposit-taking financial institutions.  However, the UK authorities require detailed knowledge and understanding of a financial institution’s business to exercise the SRR tools and enable the orderly resolution of a failed financial institution without relying on taxpayer support.  In February 2011, a special administration regime was introduced for investment firms.  This was initiated for the first time when MF Global UK entered the process. Using powers under the Financial Services Act 2010, FSA published proposals for certain financial services firms to prepare and maintain RRPs and, in addition, for firms holding client money and assets to develop client asset resolution plans (“CASS RP”) to promote swift return of clients’ money and custody assets (“CMA”) should they fail.  Some firms will have to prepare RRPs and CASS RRPs; smaller firms with CMA only CASS RRPs.

In the US, the Dodd Frank Act created the framework for Resolution Plans for SIFIs, and this is bolstered by rules of the Federal Deposit Insurance Corporation.

Who is covered?

The RRP requirements will apply to:
 

• All FSA-authorised banks and building societies regardless of size, including UK incorporated subsidiaries of overseas banks.
• Significant investment firms authorised by FSA, specifically full scope BIPRU 730k investment firms (firms with authority to deal on own account) with assets exceeding £15 billion.

The CASS RP requirement will apply to all firms subject to the FSA’s client asset custody rules and investment business client money rules.  So some banks and significant investment firms may not need to also prepare a CASS RP. The FSA is not calling for RRPs from UK branches of overseas entities, partly because the SRR tools are unavailable to resolve branches of overseas banks.

In contrast, under the US plans, US SIFIs subject to resolution planning requirements will include:
 

• US bank holding companies with at least USD50 billion in consolidated assets;
• US branches and agencies of international banks, where the consolidated worldwide assets of the international bank is at least USD50 billion; and
• Any nonbank financial company designated as a SIFI by the FSOC
• US insured depository institutions with at least US$50 billion in assets must also file Living Wills

 
What should the RRP include?

Recovery Plans

The purpose of a Recovery Plan is to enable firms to plan how they would try to recover from severely adverse conditions that could cause their failure.  Firms are responsible for preparing their Recovery Plans which are subject to FSA review and require updating yearly.  A key aspect is deciding when the firm will carry out its Recovery Plan.  Firms will be required to develop their own unambiguous triggers.

Resolution Planning

The purpose of Resolution Planning is to provide a strategy to resolve a failed firm or group in a manner that minimises the impact on financial stability without needing to resort to taxpayer support.  The UK authorities are responsible for preparing a Resolution Plan, which must allow decisions and actions to be taken and performed in a short space of time (for example, over a ‘resolution weekend’).  However, firms must provide a Resolution Pack to FSA, which is regularly updated to reflect any material developments in a firm’s business.  The Resolution Pack must include:
 

• Details of significant entities in the group and the key structural and operational issues relevant to separating significant legal entities. 
• Critical Function Contingency Analysis (“CFCA”) covering separation and / or ‘controlled wind-down’ for each critical role of the firm. 
• Plans to overcome any barriers to resolution which the UK authorities consider unacceptable.  

CASS Resolution Pack

This aims to reduce the wider economic cost of an in-scope firm failure.   It ensures that information and records that would help an insolvency practitioner or resolution authority return client money and custody assets to clients more quickly, will be accessible to the insolvency practitioner or resolution authority after the firm’s failure.  

While the content of US Living Wills is to be very detailed, they are resolution plans, and do not also include recovery plans.

Where next for the RRP?

The consultation period has just closed. FSA will publish final rules in the first quarter of 2012.  Certain rules will come into effect during the first quarter of 2012, but FSA will also provide transitional rules so firms will have until June 2012 to prepare their first RRPs. Large banks, though, have taken part in FSA’s pilot exercise already. FSA should take account of the developments at the Cannes Summit when finalising its rules, but as with other reforms agreed at G20 level, the UK and US are pressing ahead of the game.

Rosali Pretorius is a Partner and Emma Radmore is a Senior Associate at SNR Denton UK LLP

© 2011 SNR Denton. SNR Denton is the collective trade name for an international legal practice.  SNR Denton UK LLP is a limited liability partnership registered in England and Wales under no. OC322045. Regulated by the Solicitors Regulation Authority. A list of its members is open for inspection at its registered office: One Fleet Place, London EC4M 7WS.
Any reference to a “partner” means a partner, member, consultant or employee with equivalent standing and qualifications in one of SNR Denton’s affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Attorney Advertising. Please see snrdenton.com for Legal Notices. Rosali Pretorius (Partner) and Emma Radmore (Senior Associate and Professional Support Lawyer) are members of SNR Denton’s London Financial Markets and Regulation practice.  Contact them on +44 (0)20 7246 7000 (rosali.pretorius@snrdenton.com or emma.radmore@snrdenton.com).