Skip to main content
  1. Home
  2. Holding and Nonbank Financial Companies
  3. Regulation QQ
  4. Guidance on Section 165(d) Resolution Plan Submissions by Domestic Covered Companies

Guidance on Section 165(d) Resolution Plan Submissions by Domestic Covered Companies

Issued February 4, 2019
Issued February 4, 2019

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 (Covered Companies) to report periodically to the Board of Governors of the Federal Reserve System (the Federal Reserve or Board) and the Federal Deposit Insurance Corporation (the FDIC) (together “the agencies”) the companies’1 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 (the rule) implementing the provisions of section 165(d), 12 CFR parts 243 and 381.2 Certain Covered Companies meeting criteria set out in the rule must file a resolution plan (Plan) annually or at a different time period specified by the agencies.
This document is intended to assist the eight current U.S. global systemically important banks (G-SIBs or firms)3 in further developing their preferred resolution strategies. The document does not have the force and effect of law. Rather, it describes the agencies’ supervisory expectations regarding these firms’ resolution plans and the agencies’ general views regarding specific areas where additional detail should be provided and where certain capabilities or optionality should be developed and maintained to demonstrate that each firm has considered fully, and is able to itigate, obstacles to the successful implementation of the preferred strategy.4
This document is organized around a number of key vulnerabilities in resolution (i.e., capital; liquidity; governance mechanisms; operational; legal entity rationalization and separability; and derivatives and trading activities) that apply across resolution plans. Additional vulnerabilities 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—e.g., by developing sensitivity analysis for certain underlying assumptions, enhancing capabilities, providing detailed analysis, or increasing optionality development, as indicated below.
The agencies will review the Plan to determine if it satisfactorily addresses key potential vulnerabilities, including those detailed below. If the agencies jointly decide that these matters are not satisfactorily addressed in 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.
1
Capitalized terms not defined herein have the meaning set forth in the rule.
2
76 Fed. Reg. 67323 (November 1, 2011).
3
Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corporation, and Wells Fargo & Company.
4
This guidance consolidates the Guidance for 2013 Section 165(d) Annual Resolution Plan Submissions by Domestic Covered Companies that Submitted Initial Resolution Plans in 2012; firm-specific feedback letters issued in August 2014 and April 2016; the February 2015 staff communication; and Guidance for 2017 Section 165(d) Annual Resolution Plan Submissions by Domestic Covered Companies that Submitted Resolution Plans in July 2015, including the frequently asked questions that were published in response to the Guidance for the 2017 Plan Submissions (taken together, prior guidance). To the extent not incorporated in or appended to this guidance, prior guidance is superseded.

II. CAPITAL

A. Resolution Capital Adequacy and Positioning (RCAP)
To help ensure that a firm’s material entities5 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 total loss-absorbing capital, as well as a minimum amount of long-term debt, to help ensure that the firm has adequate capacity to meet that need at a consolidated level (external TLAC).6
A firm’s external TLAC should be complemented by appropriate positioning of additional loss-absorbing capacity within the firm (internal TLAC). The positioning of a firm’s internal TLAC should balance the certainty associated with prepositioning internal TLAC 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. Accordingly, the firm should not rely exclusively on either full pre-positioning or parent contributable resources to recapitalize any material entity. The plan should describe the positioning of internal TLAC within the firm, along with analysis supporting such positioning.
Finally, to the extent that prepositioned internal TLAC at a material entity is 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.
B. Resolution Capital Execution Need (RCEN)
To support the execution of 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 internal TLAC 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,7 consistent with the firm’s resolution strategy. However, the methodology is not required to produce aggregate losses that are greater than the amount of external TLAC that would be required for the firm under the Board’s rule.8 The RCEN methodology should be calibrated such that recapitalized material entities 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.
5
The terms “material entities,” “critical operations,” and “core business lines” have the same meaning as in the agencies’ rule.
6
82 Fed. Reg. 8266 (January 24, 2017).
7
The resolution period begins immediately after the parent company bankruptcy filing and extends through the completion of the preferred resolution strategy.
8
See 12 CFR 252.60-.65; 82 Fed. Reg. 8266 (January 24, 2017).

III. LIQUIDITY

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.
A. 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 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 the parent. The model9 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 interaffiliate 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.
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 interaffiliate transactions; and (C) the daily stressed liquidity flows and trapped liquidity as a result of actions taken by clients, counterparties, key FMUs, and foreign supervisors, among others.
B. 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 interaffiliate 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 interaffiliate 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. Interaffiliate 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 postfiling 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.
9
“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.

IV. GOVERNANCE MECHANISMS

A. 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;10 (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 post-recovery 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
(C) The timely execution of a bankruptcy filing and related pre-filing actions.
11
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 conditions to a stress period and from a stress period to the runway and 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 the runway and recapitalization/resolution periods, and the associated escalation procedures and actions, should be discussed directly in the governance playbooks.
B. Pre-Bankruptcy Parent Support
The resolution 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.
As noted, the analysis should include mitigants to the potential challenges to the planned Support. The plan should include 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 resolution plan.
The governance playbooks included in the resolution 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. 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.
10
External communications include those with U.S. and foreign authorities and other external stakeholders.
11
Key pre-filing actions include the preparation of any emergency motion required to be decided on the first day of the firm’s bankruptcy. See section “V. OPERATIONAL, E. Legal Obstacles Associated with Emergency Motions,” below.

V. OPERATIONAL

A. 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,12 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:
  • Identifying clients,13 FMUs, and agent banks as key from the firm’s perspective, using both quantitative (volume and value)14 and qualitative criteria;
  • Mapping material entities, critical operations, core business lines, and key clients to both key FMUs and key agent banks; and
  • Developing a playbook for each key FMU and key agent bank reflecting the firm’s role(s) as a user and/or provider of PCS services.
The framework should address both 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 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 the firm and its key clients continued access to PCS services 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/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:
  • 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, critical operations, and core business lines that use those PCS services;
  • 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,15 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
  • Discussion of PCS-related liquidity sources and uses in business-as-usual (BAU), in stress, and in the resolution period, presented by currency type (with U.S. dollar equivalent) and by material entity.
    •  o  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 various currencies, including placements of firm liquidity at central banks, key FMUs, and key agent banks.
    •  o  PCS liquidity uses: These may include firm and key client margin and prefunding and intraday extensions of credit, including incremental amounts required during resolution.
    •  o  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.16 Individual key FMU and key agent bank playbooks should include:
  • Identification and mapping of PCS services to the material entities, 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;
  • 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;
  • 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;
  • Description 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 preposition 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 various currencies; (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
  • Description 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.
B. Managing, Identifying, and Valuing Collateral
The firm should have capabilities related to managing, identifying, and valuing the collateral that it receives from and posts to external parties and its affiliates. Specifically, the firm should:
  • 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;
  • Be able to track both firm 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;
  • Have robust risk measurements for cross-entity and cross-contract netting, including consideration of where collateral is held and pledged;
  • 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;
  • 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
  • Have a comprehensive collateral management policy that outlines how the firm as a whole approaches collateral and serves as a single source for governance. 17
C. 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.
D. Shared and Outsourced Services
The firm should maintain a fully actionable implementation plan to ensure the continuity of shared services that support critical operations 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. The firm should (A) maintain an identification of all shared services that support critical operations (critical services);18 (B) maintain a mapping of how/where these services support its core business lines and 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 critical shared services. These 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 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 outsourced services that support critical operations and 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 despite continued performance upon the parent’s bankruptcy filing, and (B) update contracts to incorporate appropriate terms and conditions to prevent automatic termination and facilitate continued provision of such services during resolution. 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.
E. Legal Obstacles Associated with Emergency Motions
The Plan should address legal issues associated with the implementation of the stay on cross-default rights described in section 2 of the International Swaps and Derivatives Association 2015 Universal Resolution Stay Protocol (Protocol), similar provisions of any U.S. protocol,19 or other contractual provisions that comply with the agencies’ rules regarding stays from the exercise of cross-default rights in qualified financial contracts, to the extent relevant.20 Generally, the Protocol provides two primary methods of satisfying the stay conditions for covered agreements for which the affiliate in Chapter 11 proceedings has provided a credit enhancement: (A) transferring all such credit enhancements to a Bankruptcy Bridge Company (as defined in the Protocol) (bridge transfer); or (B) having such affiliate remain obligated with respect to such credit enhancements in the Chapter 11 proceeding (elevation).21 A firm must file a motion for emergency relief (emergency motion) seeking approval of an order to effect either of these alternatives on the first day of its bankruptcy case.
First-day issues. For each alternative the firm selects, the resolution plan should present the firm’s analysis of issues that are likely to be raised at the hearing on the emergency motion and its best arguments in support of the emergency motion. A firm should include supporting legal precedent and describe the evidentiary support that the firm would anticipate presenting to the bankruptcy court—e.g., declarations or other expert testimony evidencing the solvency of transferred subsidiaries and that recapitalized entities have sufficient liquidity to perform their ongoing obligations.
For either alternative, the firm should address all potential significant legal obstacles identified by the firm. For example, the firm should address due process arguments likely to be made by creditors asserting that they have not had sufficient opportunity to respond to the emergency motion given the likelihood that a creditors’ committee will not yet have been appointed. The firm also should consider, and discuss in its plan, whether it would enhance the successful implementation of its preferred strategy to conduct outreach to interested parties, such as potential creditors of the holding company and the bankruptcy bar, regarding the strategy.
If the firm chooses the bridge transfer alternative, its analysis and arguments should address at a minimum the following potential issues: (A) the legal basis for transferring the parent holding company’s equity interests in certain subsidiaries (transferred subsidiaries) to a Bankruptcy Bridge Company, including the basis upon which the Bankruptcy Bridge Company would remain obligated for credit enhancements; (B) the ability of the bankruptcy court to retain jurisdiction, issue injunctions, or take other actions to prevent third parties from interfering with, or making collateral attacks on (i) a Bankruptcy Bridge Company, (ii) its transferred subsidiaries, or (iii) a trust or other legal entity designed to hold all ownership interests in a Bankruptcy Bridge Company (new ownership entity); and (C) the role of the bankruptcy court in granting the emergency motion due to public policy concerns—e.g., to preserve financial stability. The firm should also provide a draft agreement (e.g., trust agreement) detailing the preferred post-transfer governance relationships between the bankruptcy estate, the new ownership entity, and the Bankruptcy Bridge Company, including the proposed role and powers of the bankruptcy court and creditors’ committee. Alternative approaches to these proposed post-transfer governance relationships should also be described, particularly given the strong interest that parties will have in the ongoing operations of the Bankruptcy Bridge Company and the likely absence of an appointed creditors’ committee at the time of the hearing.
If the firm chooses the elevation alternative, the analysis and arguments should address at a minimum the following potential issues: (A) the legal basis upon which the parent company would seek to remain obligated for credit enhancements; (B) the ability of the bankruptcy court to retain jurisdiction, issue injunctions, or take other actions to prevent third parties from interfering with, or making collateral attacks on, the parent in bankruptcy or its subsidiaries; and (C) the role of the bankruptcy court in granting the emergency motion due to public policy concerns—e.g., to preserve financial stability.
Regulatory implications. The plan should include a detailed explanation of the steps the firm would take to ensure that key domestic and foreign authorities would support, or not object to, the emergency motion (including specifying the expected approvals or forbearances and the requisite format—i.e., formal, affirmative statements of support or, alternatively, “non-objections”). The potential impact on the firm’s preferred resolution strategy if a specific approval or forbearance cannot be timely obtained should also be detailed.
Contingencies if preferred structure fails. The plan should consider contingency arrangements in the event the bankruptcy court does not grant the emergency motion—e.g., whether alternative relief could satisfy the Transfer Conditions and/or U.S. Parent debtor-in-possession (DIP) Conditions of the Protocol;22 the extent to which action upon certain aspects of the emergency motion may be deferred by the bankruptcy court without interfering with the resolution; and whether, if the credit-enhancement-related protections are not satisfied, there are alternative strategies to prevent the closeout of qualified financial contracts with credit enhancements (or reduce such counterparties’ incentives to closeout) and the feasibility of the alternative(s).
Format. If the firm analyzed and addressed an issue noted in this section in a prior plan submission, the plan may incorporate this analysis and arguments and should build upon it to at least the extent required above. A bankruptcy playbook, which includes a sample emergency motion and draft documents setting forth the post-transfer governance terms substantially in the form they would be presented to the bankruptcy court, is an appropriate vehicle for detailing the issues outlined in this section. In preparing analysis of these issues, the firm may consult with law firms and other experts on these matters. The agencies do not object to appropriate collaboration among firms, including through trade organizations and with the academic community and bankruptcy bar, to develop analysis of common legal challenges and available mitigants.
12
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).
13
For purposes of this section V, 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.
14
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.
15
Examples of potential adverse actions may include increased collateral and margin requirements and enhanced reporting and monitoring.
16
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.
17
The policy may reference subsidiary or related policies already in place, as implementation may differ based on business line or other factors.
18
This should be interpreted to include data access and intellectual property rights.
19
U.S. protocol has the same meaning as it does at 12 CFR 252.85(a). See also 12 CFR 382.5(a) (including a substantively identical definition).
20
See 12 CFR part 47, 252.81-.88, and part 382 (together, the QFC stay rules). Plans submitted prior to the final initial applicability date of the QFC stay rules should reflect how the early termination of qualified financial contracts could impact the firm’s resolution in light of the current state of its qualified financial contracts’ compliance with the requirements of the QFC stay rules. The firm may also separately discuss the firm’s resolution assuming that the final initial applicability date has been reached and all covered qualified financial contracts have been conformed to comply with the QFC stay rules. If the firm complies with the QFC stay rules other than through adherence to the Protocol, the plan also should explain how the alternative compliance method differs from Protocol, how those differences affect the analysis and other expectations of this “E. Legal Obstacles Associated with Emergency Motions” section, and how the firm plans to satisfy any different conditions or requirements of the alternative compliance method.
21
Under its terms, the Protocol also provides for the transfer of credit enhancements to transferees other than a Bankruptcy Bridge Company.
22
See Protocol sections 2(b)(ii) and (iii) and related definitions.

VI. LEGAL ENTITY RATIONALIZATION AND SEPARABILITY

A. 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 failure. 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 insured depository institutions from risks arising from the activities of any nonbank subsidiaries of the firm (other than those that are subsidiaries of an insured depository institution); 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.
B. Separability
The firm should identify discrete operations that could be sold or transferred in resolution, which individually or in the aggregate would provide meaningful optionality in resolution under different market conditions.
A firm’s separability options should be actionable, and impediments to their execution and projected mitigation strategies should be identified in advance. Relevant impediments could include, for example, legal and regulatory preconditions, interconnectivity among the firm’s operations, tax consequences, market conditions, and other considerations. To be actionable, divestiture options should be executable within a reasonable period of time.
In developing their options, firms should also consider potential consequences for U.S. financial stability of executing each option, taking into consideration impacts on counterparties, creditors, clients, depositors, and markets for specific assets.
Firms should have a comprehensive understanding of the entire organization and certain baseline capabilities. That understanding should include the operational and financial linkages among a firm’s business lines, material entities, and critical operations. Additionally, information systems should be robust enough to produce the required data and information needed to execute separability options.
The level of detail and analysis should vary based on the firm’s risk profile and scope of operations. A separability analysis should address the following elements:
  • Divestiture options: the options in the plan should be actionable and comprehensive, and should include:
    •  o  Options contemplating the sale, transfer, or disposal of significant assets, portfolios, legal entities or business lines.
    •  o  Options that may permanently change the firm’s structure or business strategy.
  • Execution plan: for each divestiture option listed, the separability analysis should describe the steps necessary to execute the option. Among other considerations, the description should include:
    •  o  The identity and position of the senior management officials of the company who are primarily responsible for overseeing execution of the separability option.
    •  o  An estimated time frame for implementation.
    •  o  A description of any impediments to execution of the option and mitigation strategies to address those impediments.
    •  o  A description of the assumptions underpinning the option.
    •  o  A plan describing the methods and forms of communication with internal, external, and regulatory stakeholders.
  • Impact assessment: the separability analysis should holistically consider and describe the expected impact of individual divestiture options. This should include the following for each divestiture option:
    •  o  A financial impact assessment that describes the impact of executing the option on the firm’s capital, liquidity, and balance sheet.
    •  o  A business impact assessment that describes the effect of executing the option on business lines and material entities, including reputational impact.
    •  o  A critical operation impact assessment that describes how execution of the option may affect the provision of any critical operation.
    •  o  An operational impact assessment and contingency plan that explains how operations can be maintained if the option is implemented; such an analysis should address internal operations (for example, shared services, IT requirements, and human resources) and access to market infrastructure (for example, clearing and settlement facilities and payment systems).
Further, the firm should have, and be able to demonstrate, the capability to populate in a timely manner a data room with information pertinent to a potential divestiture of the business (including, but not limited to, carve-out financial statements, valuation analysis, and a legal risk assessment).
Within the plan, the firm should demonstrate how the firm’s LER Criteria and implementation efforts meet the guidance above. The plan should also provide the separability analysis noted above. Finally, the plan should include a description of the firm’s legal entity rationalization governance process.

VII. DERIVATIVES AND TRADING ACTIVITIES

Applicability. This section of the proposed guidance applies to Bank of America Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan Chase & Co., Morgan Stanley, and Wells Fargo & Company (each, a dealer firm).
A. Booking Practices
A dealer firm should have booking practices commensurate with the size, scope, and complexity of a firm’s derivatives portfolios,23 including systems capabilities to track and monitor market, credit, and liquidity risk transfers between entities. The following booking practices-related capabilities should be addressed in a dealer firm’s resolution plan:
Derivatives booking framework. A dealer firm should have a comprehensive booking model framework that articulates the principles, rationales, and approach to implementing its booking practices. The framework and its underlying components should be documented and adequately supported by internal controls (e.g., procedures, systems, and processes). Taken together, the derivatives booking framework and its components should provide transparency with respect to (i) what is being booked (e.g., product/counterparty), (ii) where it is being booked (e.g., legal entity/geography), (iii) by whom it is booked (e.g., business/trading desk), (iv) why it is booked that way (e.g., drivers/rationales), and (v) what controls are in place to monitor and manage those practices (e.g., governance/information systems).24 The dealer firm’s resolution plan should include detailed descriptions of the framework and each of its material components. In particular, a dealer firm’s resolution plan should include descriptions of the documented booking models covering its firm-wide derivatives portfolio.25 The descriptions should provide clarity with respect to the underlying trade flows (e.g., the mapping of trade flows based on multiple trade characteristics as decision points that determine on which entity a trade is booked, if risk is transferred, and at which entity that risk is subsequently managed). For example, a firm may choose to incorporate decision trees that depict the multiple trade flows within each documented booking model.26 Furthermore, a dealer firm’s resolution plan should describe its end-to-end trade booking and reporting processes, including a description of the current scope of automation (e.g., automated trade flows and detective monitoring) for the systems controls applied to its documented booking models. The plan should also discuss why the firm believes its current (or planned) scope of automation is sufficient for managing its derivatives activities and executing its preferred resolution strategy.27
Derivatives entity analysis and reporting. A dealer firm should have the ability to identify, assess, and report on each of its entities (material and nonmaterial) with derivatives portfolios (a derivatives entity). First, the firm’s resolution plan should describe its method (that may include both qualitative and quantitative criteria) for evaluating the significance of each derivatives entity both with respect to the firm’s current activities and to its preferred resolution strategy.28 Second, a dealer firm’s resolution plan should demonstrate (including through illustrative samples) its ability to readily generate current derivatives entity profiles that (i) cover all derivatives entities, (ii) are reportable in a consistent manner, and (iii) include information regarding current legal ownership structure, business activities/volume, and risk profile (including applicable risk limits).
B. Interaffiliate Risk Monitoring and Controls
A dealer firm should be able to assess how the management of interaffiliate risks can be affected in resolution, including the potential disruption in the risk transfers of trades between affiliate entities. Therefore, a dealer firm should have capabilities to provide timely transparency into the management of risk transfers between affiliates by maintaining an interaffiliate market risk framework, consisting of at least the following two components:29
1. A method for measuring, monitoring, and reporting the market risk exposures for a given material derivatives entity30 resulting from the termination of a specific counterparty or a set of counterparties (e.g., all trades with a specific affiliate or with all affiliates in a specific jurisdiction)31 and
2. A method for identifying, estimating associated costs of, and evaluating the effectiveness of, a re-hedge strategy in resolution put on by the same material derivatives entity.32
In determining the re-hedge strategy, the firm should consider whether the instruments used (and the risk factors and risk sensitives controlled for) are sufficiently tied to the material derivatives entity’s trading and risk-management practices to demonstrate its ability to execute the strategy in resolution using existing resources (e.g., existing traders and systems).
A dealer firm’s resolution plan should describe and demonstrate its interaffiliate market risk framework (discussed above). In addition, the firm’s plan should provide detailed descriptions of its compression strategies used for executing its preferred strategy and how those strategies would differ from those used currently to manage its interaffiliate derivatives activities. To the extent a dealer firm relies on compression strategies for executing its preferred strategy, the plan should include detailed descriptions of its compression capabilities, the associated risks, and obstacles in resolution.
C. Portfolio Segmentation and Forecasting
A dealer firm should have the capabilities to produce analysis that reflects derivatives portfolio segmentation and differentiation of assumptions taking into account trade-level characteristics. More specifically, a dealer firm should have the systems capabilities that would allow it to produce a spectrum of derivatives portfolio segmentation analysis using multiple segmentation dimensions, including (1) legal entity (and material entities that are branches), (2) trading desk and/or product, (3) cleared vs. clearable vs. non-clearable trades, (4) counterparty type, (5) currency, (6) maturity, (7) level of collateralization, and (8) netting set.33 A dealer firm should also have the capabilities to segment and analyze the full contractual maturity (run-off) profile of its external and interaffiliate derivatives portfolios. The dealer firm’s resolution plan should describe and demonstrate the firm’s ability to segment and analyze its firm-wide derivatives portfolio using the relevant segmentation dimensions and to report the results of such segmentation and analysis. In addition, the dealer firm’s resolution plan should address the following segmentation and forecasting related capabilities:
“Ease of exit” position analysis. A dealer firm should have, and its resolution plan should describe and demonstrate, a method and supporting systems capabilities for categorizing and ranking the ease of exit for its derivatives positions based on a set of well-defined and consistently applied segmentation criteria. These capabilities should cover the firm-wide derivatives portfolio and the resulting categories should represent a range in degree of difficulty (e.g., from easiest to most difficult to exit). The segmentation criteria should, at a minimum, reflect characteristics34 that the firm believes could affect the level of financial incentive and operational effort required to facilitate the exit of derivatives portfolios (e.g., to motivate a potential step-in party to agree to the novation or an existing counterparty to bilaterally agree to a termination). Dealer firms should consider this methodology when separately identifying and analyzing the population of derivatives positions that it will include in the potential residual portfolio under the firm’s preferred resolution strategy (discussed below).
Application of exit cost methodology. Each dealer firm should have a methodology for forecasting the cost and liquidity needed to exit positions (e.g., terminate/tear-up, sell, novate, and compress), and the operational resources related to those exits, under the specific scenario adopted in the firm’s preferred resolution strategy. To help preserve sufficient optionality with respect to managing and de-risking its derivatives portfolios in a resolution, a dealer firm should have the systems capabilities to apply its exit cost methodology to its firm-wide derivatives portfolio, at the segmentation levels the firm would likely apply to exit the particular positions (e.g., valuation segment level). The dealer firm’s plan should provide detailed descriptions of the forecasting methodology (inclusive of any challenge and validation processes) and data systems and reporting capabilities. The firm should also describe and demonstrate the application of the exit cost method and systems capabilities to the firm-wide derivatives portfolio.
Analysis of operational capacity. In resolution, a dealer firm should have the capabilities to forecast the incremental operational needs and expenses related to executing specific aspects of its preferred resolution strategy (e.g., executing timely derivatives portfolio novations). Therefore, a dealer firm should have, and its resolution plan should describe and demonstrate, the capabilities to assess the operational resources and forecast the costs (e.g., monthly expense rate) related to its current derivatives activities at an appropriately granular level and the incremental impact from executing its preferred resolution strategy.35 In addition, a dealer firm should have the ability to manage the logistical and operational challenges related to novating (selling) derivatives portfolios during a resolution, including the design and adjustment of novation packages. A dealer firm’s resolution plan should describe its methodology and demonstrate its supporting systems capabilities for timely segmenting, packaging, and novating derivatives positions. In developing its methodology, a dealer firm should consider the systems capabilities that may be needed to reliably generate preliminary novation packages tailored to the risk appetites of potential step-in counterparties (buyers), as well as the novation portfolio profile information that may be most relevant to such counterparties.
Sensitivity analysis. A dealer firm should have a method to apply sensitivity analyses to the key drivers of the derivatives-related costs and liquidity flows under its preferred resolution strategy. A dealer firm’s resolution plan should describe its method for (i) evaluating the materiality of assumptions and (ii) identifying those assumptions (or combinations of assumptions) that constitute the key drivers for its forecasts of operational and financial resource needs under the preferred resolution strategy. In addition, using its preferred resolution strategy as a baseline, the dealer firm’s resolution plan should describe and demonstrate its approach to testing the sensitivities of the identified key drivers and the potential impact on its forecasts of resource needs.36
D. Prime Brokerage Customer Account Transfers
A dealer firm should have the operational capacity to facilitate the orderly transfer of prime brokerage accounts to peer prime brokers in periods of material financial distress and in resolution. The firm’s plan should include an assessment of how it would transfer such accounts. This assessment should be informed by clients’ relationships with other prime brokers, the use of automated and manual transaction processes, clients’ overall long and short positions facilitated by the firm, and the liquidity of clients’ portfolios. The assessment should also analyze the risks of and mitigants to the loss of customer-to-customer internalization (e.g., the inability to fund customer longs with customer shorts), operational challenges, and insufficient staffing to effectuate the scale and speed of prime brokerage account transfers envisioned under the firm’s preferred resolution strategy.
In addition, a dealer firm should describe and demonstrate its ability to segment and analyze the quality and composition of prime brokerage customer account balances based on a set of well-defined and consistently applied segmentation criteria (e.g., size, single-prime, platform, use of leverage, non-rehypothecatable securities, and liquidity of underlying assets). The capabilities should cover the firm’s prime brokerage customer account balances, and the resulting segments should represent a range in potential transfer speed (e.g., from fastest to longest to transfer, from most liquid to least liquid). The selected segmentation criteria should reflect characteristics37 that the firm believes could affect the speed at which the client account balance would be transferred to an alternate prime broker.
E. Derivatives Stabilization and De-Risking Strategy
A dealer firm’s plan should provide a detailed analysis of the strategy to stabilize and de-risk its derivatives portfolios (derivatives strategy) that has been incorporated into its preferred resolution strategy.38 In developing its derivatives strategy, a dealer firm should apply the following assumption constraints:
  • OTC derivatives market access: At or before the start of the resolution period, each derivatives entity should be assumed to lack an investment-grade credit rating (e.g., unrated or downgraded below investment grade). The derivatives entity should also be assumed to have failed to establish or reestablish investment-grade status for the duration of the resolution period, unless the plan provides well-supported analysis to the contrary. As a result of the lack of investment grade status, it should be further assumed that the derivatives entity has no access to the bilateral OTC derivatives markets and must use exchange-traded and/or centrally-cleared instruments where any new hedging needs arise during the resolution period. Nevertheless, a dealer firm may assume the ability to engage in certain risk-reducing derivatives trades with bilateral OTC derivatives counterparties during the resolution period to facilitate novations with third parties and to close out interaffiliate trades.39
  • Early exits (break clauses). A dealer firm should assume that counterparties (external or affiliates) will exercise any contractual termination right, consistent with any rights stayed by the ISDA 2015 Universal Resolution Stay protocol or other applicable protocols or amendments,40 (i) that is available to the counterparty at or following the start of the resolution period; and (ii) if exercising such right would economically benefit the counterparty (counterparty-initiated termination).
  • Time horizon: The duration of the resolution period should be between 12 and 24 months. The resolution period begins immediately after the parent company bankruptcy filing and extends through the completion of the preferred resolution strategy.
A dealer firm’s analysis of its derivatives strategy should take into account (i) the starting profile of its derivatives portfolios (e.g., nature, concentration, maturity, clearability, and liquidity of positions); (ii) the profile and function of the derivatives entities during the resolution period; (iii) the means, challenges, and capacity for managing and de-risking its derivatives portfolios (e.g., method for timely segmenting, packaging, and selling the derivatives positions; challenges with novating less liquid positions; re-hedging strategy); (iv) the financial and operational resources required to effect the derivatives strategy; and (v) any potential residual portfolio (further discussed below). In addition, the firm’s resolution plan should address the following areas in the analysis of its derivatives strategy:
Forecasts of resource needs. The forecasts of capital and liquidity resource needs of material entities required to adequately support the firm’s derivatives strategy should be incorporated into the firm’s RCEN and RLEN estimates for its overall preferred resolution strategy. These include, for example, the costs and/or liquidity flows resulting from (i) the close-out of OTC derivatives, (ii) the hedging of derivatives portfolios, (iii) the quantified losses that could be incurred due to basis and other risks that would result from hedging with only exchange-traded and centrally cleared instruments in a severely adverse stress environment, and (iv) the operational costs.41
Potential residual derivatives portfolio. A dealer firm’s resolution plan should include a method for estimating the composition of any potential residual derivatives portfolio transactions remaining at the end of the resolution period under its preferred resolution strategy. The method may be a combination of approaches (e.g., probabilistic and deterministic) but should demonstrate the dealer firm’s capabilities related to portfolio segmentation (discussed above). The dealer firm’s plan should also provide detailed descriptions of the trade characteristics used to identify the potential residual portfolio and of the resulting trades (or categories of trades).42 A dealer firm should assess the risk profile of the potential residual portfolio (including its anticipated size, composition, complexity, counterparties) and the potential counterparty and market impacts of non-performance on the stability of U.S. financial markets (e.g., on funding markets and the underlying asset markets and on clients and counterparties).
Non-surviving entity analysis. To the extent the preferred resolution strategy assumes a material derivatives entity enters its own resolution proceeding after the entry of the parent company into a bankruptcy proceeding (a non-surviving material derivatives entity), the dealer firm should provide a detailed analysis of how the non-surviving material derivatives entity’s resolution can be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk of serious adverse effects on U.S. financial stability and to the orderly execution of the firm’s preferred resolution strategy. In particular, the firm should provide an analysis of the potential impacts on funding markets and the underlying asset markets, on clients and counterparties (including affiliates), and on the preferred resolution strategy. If the non-surviving material derivatives entity is located in, or provides more than de minimis services to clients or counterparties located in, a non-U.S. jurisdiction, then the analysis should also specifically consider potential local market impacts.
23
A firm’s derivatives portfolios include its derivatives positions and linked non-derivatives trading positions. The firm may define linked non-derivatives trading positions based on its overall business and resolution strategy.
24
The description of controls should include any components of the firm-wide market, credit, and liquidity risk-management framework that are material to the management of its derivatives practices.
25
“Firm-wide derivatives portfolio” should represent the vast majority (for example, 95 percent) of a dealer firm’s derivatives transactions measured by firm-wide derivatives notional and by firm-wide gross market value of derivatives. Presumably, each asset class/product would have a booking model that is a function of the firm’s regulatory and risk-management requirements, client’s preference, and regulatory requirements specifically for the underlying asset class, and other transaction related considerations.
26
Some firms use trader mandates or similar controls to constrain the potential trading strategies that can be pursued by a business and to monitor the permissibility of booking activity. However, the mapping of trader mandates alone, especially those mandates that grant broad permissibility, may not provide sufficient distinction between booking model trade flows.
27
Effective preventative (up-front) and detective (post-booking) controls embedded in a dealer firm’s derivatives booking processes can help avoid and/or timely remediate trades that do not align with a documented booking model or related risk limits. Firms typically use a combination of manual and automated control functions. Although automation may not be best suited for all control functions, as compared to manual methods it can improve consistency and traceability with respect to derivatives booking practices. Nonetheless, non-automated methods can also be effective when supported by other internal controls (e.g., robust detective monitoring and escalation protocols).
28
The firm should leverage any existing methods and criteria it uses for other entity assessments (e.g., legal entity rationalization and/or the prepositioning of internal loss-absorbing resources). The firm’s method for determining the significance of derivatives entities is allowed to diverge from the parameters for material entity designation under the Resolution Plan Rule (i.e., entities significant to the activities of a critical operation or core business line) but should be adequately supported and any differences should be explained.
29
The interaffiliate market risk framework is a supplement to the firm’s systems capabilities to track and monitor market, credit, and liquidity risk transfers between entities.
30
A “material derivatives entity” is a material entity with a derivatives portfolio.
31
Firms may use industry market risk measures such as statistical risk measures (e.g., VaR or SVaR) or other risk measures (e.g., worst case scenario or stress test).
32
A dealer firm’s method may include an approach to identifying the risk factors and risk sensitivities, hedging instruments, and risk limits a derivatives entity would employ in its re-hedge strategy, and the quantification of any estimated basis risk that would result from hedging with only exchange-traded and centrally-cleared instruments in a severely adverse stress environment.
33
The enumerated segmentation dimensions are not intended as an exhaustive list of relevant dimensions. With respect to any product/asset class, a firm may have reasons for not capturing data on (or not using) one or more of the enumerated segmentation dimensions, but those reasons should be explained.
34
Examples of characteristics that may affect the level of financial incentive and operational effort could include: product, size, clearability, currency, maturity, level of collateralization, and other risk characteristics.
35
A dealer firm should have separate categories for fixed and variable expenses. For example, more granular operational expenses could roll-up into categories for (i) fixed-compensation, (ii) fixed non-compensation, and (iii) variable cost.
36
For example, key drivers of derivatives-related costs and liquidity flows might include the timing of derivatives unwind, cost of capital-related assumptions (target ROE, discount rate, WAL, capital constraints, tax rate), operational cost reduction rate, and operational capacity for novations. Other examples of key drivers likely also include CCP margin flow assumptions and risk-weighted assets forecast assumptions.
37
For example, relevant characteristics might include: product, size, clearability, currency, maturity, level of collateralization, and other risk characteristics.
38
Subject to the relevant constraints, a firm’s derivatives strategy may take the form of a going-concern strategy, an accelerated de-risking strategy (e.g., active wind-down) or an alternative, third strategy so long as the firm’s resolution plan adequately supports the execution of the chosen strategy. For example, a firm may choose a going-concern scenario (e.g., derivatives entities reestablish investment grade status and do not enter a wind-down) as its derivatives strategy. Likewise, a firm may choose to adopt a combination of going-concern and accelerated de-risking scenarios as its derivatives strategy. For example, the derivatives strategy could be a stabilization scenario for the lead bank entity and an accelerated de-risking scenario for the broker-dealer entities.
39
A firm may engage in bilateral OTC derivatives trades with, for example, (i) external counterparties, to effect the novation of the firm’s side of a derivatives contract to a new counterparty, bilateral OTC trades with the acquiring counterparty; and (ii) interaffiliate counterparties, where the trades with interaffiliate counterparties do not materially increase (a) the credit exposure of any participating counterparty and (b) the market risk of any such counterparty on a standalone basis, after taking into account hedging with exchange-traded and centrally-cleared instruments. The firm should provide analysis to support the risk nature of the trade on the basis of information that would be known to the firm at the time of the transaction.
40
For each of the derivatives entities that have adhered to the Protocol, the dealer firm may assume that the protocol is in effect for all counterparties of that derivatives entity (except for any affiliated counterparty of the derivatives entity that has not yet adhered to the Protocol).
41
A dealer firm may choose not to isolate and separately model the operational costs solely related to executing its derivatives strategy. However, the firm should provide transparency around operational cost estimation at a more granular level than material entity (e.g., business line level within a material entity, subject to wind-down).
42
If under the firm’s preferred resolution strategy, any derivatives portfolios are transferred during the resolution period by way of a line of business sale (or similar transaction), then those portfolios should nonetheless be included within the firm’s potential residual portfolio analysis.

VIII. FORMAT AND STRUCTURE OF PLANS

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 rapid and orderly resolution in bankruptcy or other applicable insolvency regimes (Narrative). The Narrative also should include a high level discussion of how the firm is addressing key vulnerabilities jointly identified by the agencies. This is not an exhaustive list and does not preclude identification of further vulnerabilities or impediments.
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.43
  • 3.
    The firm should not assume that it will be able to sell 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. The Plan should also discuss any changes to the resolution strategy under the adverse and baseline scenarios to the extent that these scenarios reflect obstacles to a rapid and orderly resolution that are not captured under the severely adverse scenario.
  • 5.
    The resolution strategy may be based on an idiosyncratic event or action. 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.
    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.
  • 8.
    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 projected statements of sources and uses of funds for the interim periods. The pro forma financial statements and accompanying notes in the Plan must 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 a 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:
  • a.
    Any U.S.-based or non U.S. affiliates, including any branches, that are significant to the activities of a critical operation conducted in whole or material part in the United States.
  • b.
    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 a critical operation.
  • c.
    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 a critical operation.
  • d.
    Subsidiaries or foreign offices that are engaged in derivatives booking activity that is significant to the activities of a critical operation, including those that conduct either the internal hedge side or the client-facing side of a transaction.
  • e.
    Subsidiaries or foreign offices engaged in asset custody or asset management that are significant to the activities of a critical operation.
  • f.
    Subsidiaries or foreign offices holding licenses or memberships in clearinghouses, exchanges, or other FMUs that are significant to the activities of a 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. 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.
43
12 CFR 243.4(a)(4)(ii) and 381.4(a)(4)(ii).

IX. PUBLIC SECTION

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 intragroup financial and operational interconnectedness (including the types of guarantees or support obligations in place that could impact the execution of the firm’s strategy). There should also be a high-level discussion of the liquidity resources and loss-absorbing capacity of the firm.
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 resolution 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.
Back to top