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From Banking and Finance Law Daily, November 3, 2015

FSB further refines G-SIFI resolution procedures

By John M. Pachkowski, J.D.

The Financial Stability Board has released a series of documents as part of its policy agenda to end “too-big-to-fail” and promote the resolvability of global systemically important financial institutions (G-SIFIs).

Key Attributes. The five documents are comprised of two guidance papers and three consultative documents and are intended to further implement the FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions.” The Key Attributes are the international standard for resolution regimes for financial institutions. They are a key component of the FSB’s policy framework to address the moral hazard and systemic risks associated with institutions that are “too-big-to-fail.” They were released by the FSB in November 2011 following their endorsement by G20 Leaders at the Cannes Summit.

Cross-border resolutions. In its “Principles for Cross-border Effectiveness of Resolution Actions,” the FSB set out statutory and contractual mechanisms that jurisdictions should consider including in their legal frameworks to give cross-border effect to resolution actions in accordance with the Key Attributes.

The Principles grew out of a commitment made by the FSB at the St. Petersburg G20 Summit in 2013 to “develop policy proposals on how legal certainty in cross-border resolution can be further enhanced.” The FSB issued a consultative document in September 2014 that presented a set of policy measures (see Banking and Finance Law Daily, Sept. 29, 2014).

The Principles provide:

  • elements that jurisdictions should consider including in their statutory cross-border recognition frameworks to facilitate effective cross-border resolution as required by the FSB Key Attributes of Effective Resolution Regimes for financial institutions;
  • contractual approaches to cross-border recognition that focus on temporary restrictions or stays on early termination and cross-default rights in financial contracts; and
  • the “bail-in” of debt instruments that are governed by the laws of a jurisdiction other than that of the issuing entity.

In developing the Principles, the FSB noted that they are not intended to be comprehensive, and each jurisdiction will need to consider what is required in the context of its own legal environment for such a legal framework to be effective. The FSB also noted that, although the guidance was developed with a focus on the resolution of banks, many of the legal issues and principles that are discussed below may be relevant to other types of financial institutions as well as to financial market infrastructures.

Information sharing. The second guidance document—“Guidance on Cooperation and Information Sharing with Host Authorities of Jurisdictions where a G-SIFI has a Systemic Presence that are Not Represented on its CMG”—seeks to promote cooperation and information sharing between crisis management groups (CMGs) for G-SIFIs and authorities from jurisdictions not represented on the CMG where the firm is systemic for their market.

Under the Key Attributes, home and key host authorities of FSB-designated global systemically important financial institutions (G-SIFIs) are encouraged to establish CMGs and to develop effective cross-border resolution plans. However, the Key Attributes generally limits CMG membership to key authorities from jurisdictions that are home or host to entities that are material to an effective resolution of the group.

The information sharing guidance covers:

  • processes for identifying jurisdictions where operations of a G-SIFI are locally systemic;
  • criteria for assessing a systemic G-SIFI presence in a non-CMG host jurisdiction;
  • possible cooperation and information sharing arrangements with a non-CMG host jurisdiction; and
  • classes of information that should be shared.

The FSB proposed the guidance in October 2014 in order to fulfill an action item that it cited in its September 2013 report to the G-20 on Progress and Next Steps Towards Ending “Too-Big-To-Fail.” In the report, the FSB agreed “to develop recommendations for cooperation and sharing information with host authorities in jurisdictions where a G-SIFI has a systemic presence but that are not participating in the CMG of that G-SIFI” (see Banking and Finance Law Daily, Oct. 17, 2014).

The three consultative documents address various issues regarding the resolution of global systemically important banks (G-SIBs) and global systemically important insurers (G-SIIs). Public comments are due by Jan. 4, 2016.

Funding and liquidity. The first consultative document—“Guiding principles on the temporary funding needed to support the orderly resolution of a global systemically important bank (“G-SIB”)—would address the risk of banks having insufficient liquidity to maintain critical operations during a resolution. The Guiding Principles are intended to ensure that temporary funding is available to enable the effective resolution of G-SIBs without bail-out by the public sector and in a way that reduces moral hazard. The proposed guidance would have a preference towards the private sector providing liquidity.

The FSB issued this consultative document based on its November 2014 report to the G20, “Progress in reform of resolution regimes and resolution planning for global systemically important financial institutions (G-SIFIs),” in which the FSB identified the provision of temporary funding in resolution as an outstanding issue that needs to be addressed to complete the FSB’s systemically important financial institution (SIFI) reform agenda (see Banking and Finance Law Daily, Nov. 12, 2014).

Besides preferring private sector providing liquidity during a G-SIB’s resolution, the Guiding Principles would also:

  • endorse an effective public sector backstop funding mechanism to promote market confidence and to encourage private sector counterparties to provide or to continue to provide funding to the material operating entities of a G-SIB in resolution.
  • establish a mechanism to recover any losses when temporary public sector funding is provided for a G-SIB resolution;
  • establish criteria to ensure that resolution plans are sound and feasible; and
  • call for effective cross-border cooperation.

Operational continuity. The second consultative document—“Guidance on Arrangements to Support Operational Continuity in Resolution”—would establish proposed guidance setting forth arrangements to ensure continuity of critical shared services, such as information technology infrastructure and software-related services.

For purposes of the consultative document, “operational continuity” refers to the means of ensuring continuity of critical shared services that are necessary to maintain a firm’s critical functions in resolution. The FSB noted that operational continuity is a key aspect of resolution planning for individual firms; and a lack of adequate arrangements for operational continuity is likely to impair firms’ resolvability.

The proposed guidance identifies a number of arrangements that could support operational continuity in resolution and help address obstacles to resolvability that arise from uncertainties about continuity of critical shared services. It discusses those arrangements in the context of three prevailing industry models: service provision within a regulated entity, service provision by an intra-group service company, and service provision by a third-party service provider.

G-SII resolutions. The final consultative document—“Developing Effective Resolution Strategies and Plans for Systemically Important Insurers”—would assist authorities in developing effective resolution strategies and plans for systemic insurers and also assist CMGs of G-SIIs in their resolution planning work.

The consultative document was developed in consultation with the International Association of Insurance Supervisors and builds on the implementation guidance published by the FSB in October 2014 on how provisions of the Key Attributes, including resolution powers and the details of recovery and resolution planning, should be interpreted for different types of financial institution, including insurers.

The consultative document also incorporates guidance on the identification of critical insurance functions, which was the subject of a separate consultative document that the FSB released in October 2014. Elements from that October 2014 consultative document have been included in the current consultative document due to the close connection between critical functions, the institution-specific resolution objectives, and the development of resolution strategies.

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