Guidance on Resolution Plans of U.S. and Foreign Banking Organizations

The following post comes to us from Arthur S. Long, partner and member of the financial institutions and securities regulation practice groups at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Mr. Long, Alexander G. Acree, Kimble C. Cannon, Cantwell F. Muckenfuss III, and Colin C. Richard.

On April 15, 2013, the Board of Governors of the Federal Reserve System (Federal Reserve) and the Federal Deposit Insurance Corporation (FDIC) issued additional guidance (Guidance) with respect to the 2013 resolution plan submissions of the U.S. and foreign banking organizations that filed their initial resolution plans on July 1, 2012 (First-Round Filers).

The Guidance shows that the Federal Reserve and FDIC are intensifying their credibility review of resolution plans, requiring analysis of the most challenging issues raised by a Covered Company’s failure. Responding to the Guidance will require First-Round Filers to address head-on difficult questions raised by their original submissions. In recognition of the amount of new information required to be supplied, the Guidance extends the 2013 submission date for First-Round Filers to October 1, 2013.

Although by its terms the Guidance is limited to the plans of the First-Round Filers, it suggests that banking organizations in the second and third filing rounds may be required to undertake more searching analysis in their submissions next year.

In this post, we discuss the most significant aspects of the Guidance:

  • Expanded required analysis of the Covered Company’s resolution strategy, in particular how it would address weaknesses in the original resolution plan
  • Multiple acceptable failure assumptions
  • New and updated required information, including a project plan or plans for remediating weaknesses
  • Required responses to very detailed questions relating to five obstacles to resolution identified by the Federal Reserve and the FDIC after their review of the 2012 submissions
  • Required reassessment of Material Entity definitions, with emphasis on non-U.S. offices
  • An expanded required description of the bankruptcy process, including a limitation of a pre-bankruptcy “runway” period to not more than 30 days
  • Required consideration of adverse and severely adverse economic scenarios

Expanded Analysis of Resolution Strategy

The Guidance calls for an expanded analysis of a Covered Company’s resolution strategy. In what appears to suggest that the substantial amounts of information required to be included in the 2012 filings may have obscured the forest for the trees, the Guidance requires that this strategic analysis “should take the form of a concise narrative that enhances the readability and understanding of the Covered Company’s discussion of its strategy for Rapid and Orderly Resolution.” Also to facilitate readability, the Guidance requires that the detail and analysis supporting the strategic analysis should be included in Appendices “distinct from and clearly referenced” in the Narrative.

The required Narrative should include “a discussion of how the significant material weaknesses and impediments” to resolution would be addressed by the Covered Company’s strategic approach, as well as an update on the Covered Company’s efforts to remediate weaknesses identified in its 2012 filing. For emphasis, the Guidance requires that the discussion of weaknesses and impediments also be included in the plan’s Executive Summary.

Multiple Acceptable Failure Assumptions

The Guidance expands the list of possible assumptions regarding failure, including, in addition to the bankruptcy or failure of all Material Entities:

  • The bankruptcy of the parent holding company or U.S. parent, as applicable, and a limited number of Material Entities, if any; or
  • The bankruptcy of one or more Material Entities within the Covered Company, with the Covered Company being sufficiently compartmentalized that the risk is mitigated that the bankruptcy would result in other Material Entities entering resolution

The Guidance permits a First-Round Filer’s 2013 submission to contain a modified version of the 2012 plan using a new assumption.

New and Updated Information

The Guidance requires three forms of new and updated information to be included in the Narrative: (i) a discussion of newly identified Material Entities; (ii) a discussion of any material, structural, organizational, or business practice changes since the first filing and how these changes affect the resolution strategy; and (iii) a discussion of any new or newly identified weaknesses in, or impediments, to resolution.

In addition, in what suggests that the Federal Reserve and the FDIC expect more efforts in a second-round filing than an original one, the Guidance states that the 2013 plan should “provide an update on the Covered Company’s efforts to remediate or otherwise mitigate weaknesses in or impediments to” orderly resolution identified in the 2012 Plan. Put differently, although the identification of weaknesses and impediments and some analysis of remediation may suffice in an initial filing, the agencies will require expanded consideration of mitigants the second time around.

Indeed, the Guidance emphasizes the significance of appropriately updating remedial actions by requiring, in the Narrative, a description of such actions in a project plan or plans. Although a project plan was not required in the 2012 submission, the 2013 filing must include specific information about:

  • The project plan budget and approval process
  • Project plan coordination and staffing
  • Major milestones and expected completion dates
  • The impact that successful completion of the project plan is expected to have on remediating the identified weaknesses

Agency-Identified Obstacles

Based on their review of the 2012 submissions, the Federal Reserve and FDIC identified five, non-exhaustive, significant Obstacles to orderly resolution. The Guidance requires the First-Round Filers to include a highly detailed discussion of the Obstacles in their Narratives and Appendices.

The five Obstacles identified by the agencies are the following:

  • Multiple Competing Insolvencies – competing insolvency proceedings taking place under different legal frameworks and/or multiple jurisdictions heighten the risk of discontinuity of Critical Operations, systemic consequences and uncertainty of outcome
  • Lack of Global Cooperation – the risk of ring-fencing of assets and other similar actions by home and host supervisors and resolution authorities could increase financial instability and loss of franchise value
  • Operations and Interconnectedness – the Federal Reserve and FDIC identified risks arising from: the failures of affiliates and third-parties to provide services; the loss of access to financial market utilities (FMUs) and payment and clearing capabilities; the interruption or loss of data and IT services; the liquidation of a counterparty negatively affecting operations; and the exercise of cross-defaults, contractual termination and contractual excuse provisions
  • Counterparty Actions – counterparty actions such as derivatives and repo unwinds taking place on a large scale could lead to operational challenges and market disruption
  • Funding and Liquidity – insufficient liquidity at one or more Material Entities, or in one or more jurisdictions, could result in a failure to maintain Critical Operations, including increased margin requirements, acceleration, termination, inability to roll over short term borrowings, default interest rate obligations, loss of access to alternative sources of credit, or additional restructuring expenses

In their Narratives, each First-Round Filer is required to describe the relationship of each of these Obstacles to its resolution strategy and to discuss the actions or steps it has taken or proposes to take to remediate or mitigate each Obstacle, including a timeline for actions.

In addition, each First-Round Filer is required to answer, in the Appendices, a long list of detailed questions relating to the Obstacles. For example, the Guidance requires a discussion, on a jurisdiction-by-jurisdiction basis for each jurisdiction hosting a Material Entity, including a branch, of:

  • the actions the Covered Company would need to take, the specific mandatory and discretionary actions or forebearances that regulatory and resolution authorities would need to take, and any legal rights and obligations that those authorities would need to delay or forego exercising, for the Covered Company’s resolution strategies to be effective;
  • the actions the Covered Company and the authorities would each need to take or forbear from taking to avoid adverse consequences from ring-fencing;
  • the consequences for the Covered Company’s resolution strategy if ring-fencing were not avoided; and
  • how the Covered Company would ensure continuity of Critical Operations if ring-fencing were not avoided.

There are similarly lengthy analyses required with respect to operations and interconnectedness, including strategies for meeting payment, clearing and settlement obligations in the event access to critical FMUs and other agents became restricted or unavailable; counterparty actions, including how the Covered Company’s global booking and collateral management practices (including for inter-affiliate derivatives, counterparty facing derivatives and cleared derivatives) could expose the Covered Company to vulnerabilities; and funding and liquidity, including a description of the effects on the funding of Material Entities and Critical Operations if portions of the Covered Company’s liquidity became trapped in particular jurisdictions.

The Guidance also requires each Covered Company to include in its resolution strategy a liquidity needs schedule for resolution, specifying the Covered Company’s assumptions regarding counterparty and customer responses to resolution; the effect of contractual provisions, like qualified financial contracts, triggered by resolution; and the identification of the sources of funding for all liquidity needs, including dealing with potential liquidity traps. The funding requirements in resolution for each Critical Operation must be specified as well.

Reassessment of Material Entity Definitions

The Guidance requires institutions to reassess their Material Entity definitions. “Material Entities” are described as entities – including branch offices – that are significant to the activities of a Critical Operation or Core Business Line.

Significantly for non-U.S. Covered Companies, their branch offices outside the United States may be Material Entities, if:

  • The non-U.S. office is significant to the activities of a Critical Operation
  • The non-U.S. office provides or supports global treasury operations, funding, or liquidity activities – including intercompany transactions – in a manner significant to the activities of a Critical Operation
  • The non-U.S. office provides material operational support in resolution (key personnel, information technology, data centers, real estate or other shared services) to the activities of a Critical Operation
  • The non-U.S. office is engaged in derivatives booking activities that are significant to the activities of a Critical Operation, including both internal hedging and client-facing activities
  • The non-U.S. office is engaged in asset custody or asset management in a manner significant to a Critical Operation
  • The non-U.S. office holds licenses or memberships in clearinghouses, exchanges, or other FMUs that are significant to the activities of a Critical Operation

In particular, the requirements to consider global treasury, funding and derivatives booking activities engaged in outside the U.S. will likely increase the number of non-U.S. offices of non-U.S. Covered Companies that are Material Entities. [1]

Expanded Description of the Bankruptcy Process

The Guidance requires an expanded, and highly detailed, description of the process that a Covered Company would use to determine that recovery is not feasible, and, significantly, requires an institution to assume a “runway” of not more than 30 days prior to bankruptcy. The 30-day runway limitation is an important development because this relatively short period of time limits the amount of business that a Covered Company can assume to run off prior to bankruptcy. This in turn means that more business will remain – and will be required to be funded – as the Covered Company and its Material Entities are wound down or sold off. The expanded required discussion of the bankruptcy process and limited runway period indicates that the Federal Reserve and FDIC are intensifying their credibility review and, as a general matter, expect much more granular analysis in a Covered Company’s second submission.

Additional Stress Scenarios

The 2012 plans considered that an institution would undergo failure under a baseline economic scenario, but the 2013 submissions require consideration of adverse and severely adverse economic scenarios as well. In the Narrative, Covered Companies must describe – in addition to whether their proposed resolution strategies, identified impediments to resolution and proposed mitigants described in the 2012 plan are reflective of the firm’s failure under the fourth quarter 2012 baseline scenario provided by the regulators – but also how these elements would change under the fourth quarter 2012 adverse and severely adverse scenarios, without assuming a one-time trading portfolio shock. If an idiosyncratic event or action triggering failure is continued in the adverse and severely adverse scenarios, continued use of the assumption must be justified, consistent with the conditions of the economic scenario.


For First-Round Filers, their 2013 submissions will be anything but a simple update; rather, the hard questions raised by a systemic firm’s resolution will need to be addressed, and in very significant detail. For Covered Companies that are filing their first submissions in 2013, including those entities that are permitted to file tailored resolution plans, the Guidance should nonetheless be closely considered, as it is certainly possible that aspects of it will be applied to those companies’ subsequent submissions.

In particular, the five Obstacles to resolution identified by the Federal Reserve and the FDIC should be a subject of focus, especially for foreign Covered Companies and any U.S. Covered Companies with Material Entities or Critical Operations in foreign jurisdictions, given the complexities raised by multiple insolvency regimes and cross-border insolvency issues. For although the Federal Reserve and the FDIC have said that they view resolution planning as an iterative process, the Guidance makes clear that they expect plans to evolve in detail and sophistication at a rapid pace.


[1] The Guidance has a similarly expansive view of the potential for non-U.S. offices and non-U.S. subsidiaries of U.S. Covered Companies to be Material Entities.
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