The FSB has produced a revised set of guidance on the implementation of recovery and resolution planning, based on a consultation issued last November. This may have an impact on how national authorities draft and interpret their RRP regimes, with consequences for legal, treasury and back office functions.
The direction taken gives welcome breathing room to firms on the issue of automatic triggering of recovery plan measures. Firms will be expected to constantly monitor certain metrics relating to their liquidity, capital and exposures. But consultation highlighted fears that a prescriptive regime could see drastic measures forced on firms for breaching certain predefined thresholds.
The FSB has scaled back expectations, adopting a more discretionary and context-sensitive approach, with indicators and thresholds tailored to a firm’s risk profile and ‘escalation procedures’, rather than automatic recovery measures, the only mandatory result of a breach. They also stress that indicators can be tailored to the individual business and risk profile of a firm.
While firms may welcome this greater discretion, elsewhere there may be cause for concern over the guidelines’ expanded list of functions which can be judged as ‘critical’. This list now includes custody functions – including primary and secondary custody and omnibus accounts – as well as wholesale funding market activities such as interbank, central bank and securities lending.
This will ultimately entail greater requirements for these functions, such as ensuring their continuity in case of insolvency and restrictions on outsourcing, and will require firms to identify external and internal interdependencies related to these services when preparing their plans.
With large banks in the US already submitting RRPs to the FDIC, and the EU RRD expected to be finalised in the Autumn and transposed through 2014, time is running out to set consistent standards before national differences widen.