32856 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

pursuant to the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841 et seq.) 

(BHC Act), Regulation Y (12 CFR part 

225), and all other applicable statutes 

and regulations to become a bank 

holding company and/or to acquire the 

assets or the ownership of, control of, or 

the power to vote shares of a bank or 

bank holding company and all of the 

banks and nonbanking companies 

owned by the bank holding company, 

including the companies listed below. 

The applications listed below, as well 

as other related filings required by the 

Board, are available for immediate 

inspection at the Federal Reserve Bank 

indicated. The applications will also be 

available for inspection at the offices of 

the Board of Governors. Interested 

persons may express their views in 

writing on the standards enumerated in 

the BHC Act (12 U.S.C. 1842(c)). If the 

proposal also involves the acquisition of 

a nonbanking company, the review also 

includes whether the acquisition of the 

nonbanking company complies with the 

standards in section 4 of the BHC Act 

(12 U.S.C. 1843). Unless otherwise 

noted, nonbanking activities will be 

conducted throughout the United States. 

Unless otherwise noted, comments 

regarding each of these applications 

must be received at the Reserve Bank 

indicated or the offices of the Board of 

Governors not later than August 8, 2018. 

A. Federal Reserve Bank of Chicago 

(Colette A. Fried, Assistant Vice 

President) 230 South LaSalle Street, 

Chicago, Illinois 60690–1414: 

1. Hometown Bancorp, Ltd., Fond du 

Lac, Wisconsin; to acquire 100 percent 

of the voting shares of United 

Community Bank, Poynette, Wisconsin. 

B. Federal Reserve Bank of St. Louis 

(David L. Hubbard, Senior Manager) 

P.O. Box 442, St. Louis, Missouri 

63166–2034. Comments can also be sent 

electronically to Comments.applications 

@stls.frb.org: 

1. Cross County Bancshares, Wynne, 

Arkansas; to acquire up to 35 percent of 

the voting shares of Central Bank, Little 

Rock, Arkansas. 

2. First Capital, Inc., Corydon, 

Indiana; to acquire 5.15 percent of the 

voting shares of First Bancorp of 

Indiana, Inc., Evansville, Indiana; and 

thereby indirectly acquire First Federal 

Savings Bank, Evansville, Indiana. 

Board of Governors of the Federal Reserve 

System, July 11, 2018. 

Ann Misback, 

Secretary of the Board. 

[FR Doc. 2018–15108 Filed 7–13–18; 8:45 am] 

BILLING CODE P 

FEDERAL RESERVE SYSTEM 

[Docket No. OP–1614] 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

Resolution Planning Guidance for 

Eight Large, Complex U.S. Banking 

Organizations 

AGENCY: Board of Governors of the 

Federal Reserve System (Board) and 

Federal Deposit Insurance Corporation 

(FDIC). 

ACTION: Proposed guidance; request for 

comments. 

SUMMARY: The Board and the FDIC 

(together, the ‘‘Agencies’’) are inviting 

comments on proposed guidance for the 

2019 and subsequent resolution plan 

submissions by the eight largest, 

complex U.S. banking organizations 

(‘‘Covered Companies’’ or ‘‘firms’’). The 

proposed guidance is meant to assist 

these firms in developing their 

resolution plans, which are required to 

be submitted pursuant to Section 165(d) 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act. The 

proposed guidance, which is largely 

based on prior guidance issued to these 

Covered Companies, describes the 

Agencies’ expectations regarding a 

number of key vulnerabilities in plans 

for an orderly resolution under the U.S. 

Bankruptcy Code (i.e., capital; liquidity; 

governance mechanisms; operational; 

legal entity rationalization and 

separability; and derivatives and trading 

activities). The proposed guidance also 

updates certain aspects of prior 

guidance based on the Agencies’ review 

of these firms’ recent resolution plan 

submissions. The Agencies invite public 

comment on all aspects of the proposed 

guidance. 

DATES: Comments should be received 

September 14, 2018. 

ADDRESSES: Interested parties are 

encouraged to submit written comments 

jointly to both Agencies. Comments 

should be directed to: Board: You may 

submit comments, identified by Docket 

No. OP–1614, by any of the following 

methods: 

• Agency Website: http://

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Email: regs.comments@

federalreserve.gov. Include docket 

number in the subject line of the 

message. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Ann E. Misback, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue NW, Washington, 

DC 20551. 

All public comments will be made 

available on the Board’s website at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfms 

submitted, unless modified for technical 

reasons or to remove personal 

information at the commenter’s request. 

Accordingly, comments will not be 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed electronically or in 

paper in Room 3515, 1801 K Street NW 

(between 18th and 19th Street NW), 

between 9:00 a.m. and 5:00 p.m. on 

weekdays. 

FDIC: You may submit comments by 

any of the following methods: 

• Agency Website: https://

www.fdic.gov/regulations/laws/federal. 

Follow the instructions for submitting 

comments on the Agency Website. 

• Email: comments@fdic.gov. Include 

‘‘Proposed 165(d) Guidance for the 

Domestic Firms’’ on the subject line of 

the message. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, Federal 

Deposit Insurance Corporation, 550 17th 

Street NW, Washington, DC 20429. 

• Hand Delivery/Courier: Guard 

station at the rear of the 550 17th Street 

Building (located on F Street) on 

business days between 7 a.m. and 5 p.m. 

• Public Inspection: All comments 

received, including any personal 

information provided, will be posted 

generally without change to https://

www.fdic.gov/regulations/laws/federal. 

FOR FURTHER INFORMATION CONTACT: 

Board: Michael Hsu, Associate 

Director, (202) 452–4330, Division of 

Supervision and Regulation, Jay 

Schwarz, Senior Counsel, (202) 452– 

2970, Will Giles, Senior Counsel, (202) 

452–3351, or Steve Bowne, Senior 

Attorney, (202) 452–3900, Legal 

Division. Users of Telecommunications 

Device for the Deaf (TDD) may call (202) 

263–4869. 

FDIC: Mike J. Morgan, Corporate 

Expert, mimorgan@fdic.gov, CFI 

Oversight Branch, Division of Risk 

Management Supervision; Alexandra 

Steinberg Barrage, Associate Director, 

Resolution Strategy and Policy, Office of 

Complex Financial Institutions, 

abarrage@fdic.gov; David N. Wall, 

Assistant General Counsel, dwall@

fdic.gov; Pauline E. Calande, Senior 

Counsel, pcalande@fdic.gov; or Celia 

Van Gorder, Supervisory Counsel, 

cvangorder@fdic.gov, Legal Division, 

Federal Deposit Insurance Corporation, 

550 17th Street NW, Washington, DC 

20429. 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32857 

1See the public sections of resolution plans 

submitted to the Agencies at 

www.federalreserve.gov/bankinforeg/ 

resolutionplans.htm and www.fdic.gov/regulations/ 

reform/resplans/. 

2Bank 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. 

3This includes Guidance for 2013 § 165(d) 

Annual Resolution Plan Submissions by Domestic 

Covered Companies that Submitted Initial 

Resolution Plans in 2012; detailed guidance and 

firm-specific feedback in August 2014 and February 

2015 for the development of firms’ 2015 resolution 

plan submissions; and Guidance for 2017 § 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’’). 

4Each firm’s resolution strategy is designed to 

have the parent company recapitalize and provide 

liquidity resources to its material entity subsidiaries 

prior to entering bankruptcy proceedings. This 

strategy calls for material entities to be provided 

with sufficient capital and liquidity resources to 

allow them to avoid multiple competing 

insolvencies and maintain continuity of operations 

throughout resolution. 

5See Letters dated December 19, 2017, from the 

Board and FDIC to 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, available 

at https://www.federalreserve.gov/supervisionreg/ 

resolution-plans.htm. 

6 Id. 

7Available at: https://www.federalreserve.gov/ 

newsevents/pressreleases/files/ 

bcreg20160413a1.pdf and at https://www.fdic.gov/ 

news/news/press/2016/pr16031b.pdf. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 165(d) of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (12 U.S.C. 5365(d)) and 

the jointly issued implementing 

regulation, 12 CFR part 243 and 12 CFR 

part 381 (‘‘the Rule’’), requires certain 

financial companies to report 

periodically to the Board and the FDIC 

their plans for rapid and orderly 

resolution under the U.S. Bankruptcy 

Code in the event of material financial 

distress or failure. 

Among other requirements, the Rule 

requires each financial company’s 

resolution plan to include a strategic 

analysis of the plan’s components, a 

description of the range of specific 

actions the company proposes to take in 

resolution, and a description of the 

company’s organizational structure, 

material entities and interconnections 

and interdependencies. The Rule also 

requires that resolution plans include a 

confidential section that contains 

confidential supervisory and proprietary 

information submitted to the Board and 

the FDIC (together, the ‘‘Agencies’’), and 

a section that the Agencies make 

available to the public. Public sections 

of resolution plans can be found on the 

Agencies’ websites.1

Objectives of the Resolution Planning 

Process 

The goal of the Dodd-Frank Act 

resolution planning process is to help 

ensure that a firm’s failure would not 

have serious adverse effects on financial 

stability in the United States. 

Specifically, the resolution planning 

process requires firms to demonstrate 

that they have adequately assessed the 

challenges that their structure and 

business activities pose to resolution 

and that they have taken action to 

address those issues. Management 

should also consider resolvability as 

part of day-to-day decision making, 

particularly those related to structure, 

business activities, capital and liquidity 

allocation, and governance. In addition, 

firms are expected to maintain a 

meaningful set of options for selling 

operations and business lines to 

generate resources and to allow for 

restructuring under stress, including 

through the sale or wind down of 

discrete businesses that could further 

minimize the direct impact of distress or 

failure on the broader financial system. 

While these measures cannot guarantee 

that a firm’s resolution would be simple 

or smoothly executed, these 

preparations can help ensure that the 

firm could be resolved under 

bankruptcy without government support 

or imperiling the broader financial 

system. 

The Rule describes an iterative 

process aimed at strengthening the 

resolution planning capabilities of each 

financial institution. With respect to the 

eight largest, complex U.S. banking 

organizations (‘‘Covered Companies’’ or 

‘‘firms’’),2 the Agencies have previously 

provided guidance and other feedback.3

In general, the feedback was intended to 

assist firms in their development of 

future resolution plan submissions and 

to provide additional clarity with 

respect to the expectations against 

which the Agencies will evaluate the 

resolution plan submissions. The 

Agencies are now proposing to update 

aspects of prior guidance based on the 

Agencies’ review of the firms’ recent 

resolution plan submissions.4 The 

Agencies reviewed the 2017 Plans and 

issued a letter to each firm indicating 

that it had taken important steps to 

enhance its resolvability and facilitate 

its orderly resolution in bankruptcy.5 As 

a result of those reviews and following 

the Agencies’ joint decisions in 

December 2017, the Agencies identified 

four areas where more work may need 

to be done to improve the resolvability 

of the firms.6 As described below, the 

Agencies are proposing updates to two 

areas of the guidance regarding 

payment, clearing, and settlement 

services and derivatives and trading 

activities. The Agencies intend to 

provide additional information on the 

two other areas: Intra-group liquidity 

and internal loss absorbing capacity. 

The Agencies invite public comment on 

all aspects of the proposed guidance. 

II. Overview of the Proposed Guidance 

The proposed guidance is organized 

into six substantive areas, consistent 

with the guidance the Agencies 

provided to Covered Companies in 

April 2016 to assist in the development 

of their 2017 resolution plans, Guidance 

for 2017 § 165(d) Annual Resolution 

Plan Submissions by Domestic Covered 

Companies that Submitted Resolution 

Plans in July 2015 (‘‘2016 Guidance’’).7

These areas are: 

1. Capital 

2. Liquidity 

3. Governance mechanisms 

4. Operational 

5. Legal entity rationalization and 

separability 

6. Derivatives and trading activities 

Each area is important to firms in 

resolution as each plays a part in 

helping to ensure that the firm can be 

resolved in an orderly manner. The 

guidance would describe the Agencies’ 

expectations for each of these areas. 

The proposed guidance is largely 

consistent with the 2016 Guidance, 

which the Covered Companies used to 

develop their 2017 resolution plan 

submissions. Accordingly, the firms 

have already incorporated significant 

aspects of the proposed guidance into 

their resolution planning. The proposal 

would update the derivatives and 

trading activities (DER), and payment, 

clearing, and settlement activities (PCS) 

areas of the 2016 Guidance based on the 

Agencies’ review of the Covered 

Companies’ 2017 plans. It would also 

make minor clarifications to certain 

areas of the 2016 Guidance. In general, 

the proposed revisions to the guidance 

are intended to streamline the firms’ 

submissions and to provide additional 

clarity. The proposed guidance is not 

meant to limit firms’ consideration of 

additional vulnerabilities or obstacles 

that might arise based on a firm’s 

particular structure, operations, or 

resolution strategy and that should be 

factored into the firm’s submission. 

Capital: The ability to provide 

sufficient capital to material entities 

without disruption from creditors is 


sradovich on DSK3GMQ082PROD with NOTICES
32858 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

8The Agencies are currently taking steps to better 

understand the purpose and treatment of the firms’ 

inter-affiliate transactions. The Agencies do not 

expect the firms to make major changes to their 

RLAP and RLEN models until after the Agencies 

have completed this review and provided further 

feedback. 

important in order to ensure that 

material entities can continue to provide 

critical services and maintain critical 

operations as the firm is resolved. The 

proposal describes expectations 

concerning the appropriate positioning 

of capital and other loss-absorbing 

instruments (e.g., debt that the parent 

may forgive or convert to equity) among 

the material entities within the firm 

(resolution capital adequacy and 

positioning or RCAP). The proposal also 

describes expectations regarding a 

methodology for periodically estimating 

the amount of capital that may be 

needed to support each material entity 

after the bankruptcy filing (resolution 

capital execution need or RCEN). 

Liquidity: A firm’s ability to reliably 

estimate and meet its liquidity needs 

prior to, and in, resolution is important 

to the execution of a Covered 

Company’s resolution strategy in that it 

enables the firm to respond quickly to 

demands from stakeholders and 

counterparties, including regulatory 

authorities in other jurisdictions and 

financial market utilities. Maintaining 

sufficient and appropriately-positioned 

liquidity also allows the subsidiaries to 

continue to operate while the firm is 

being resolved in accordance with the 

firm’s preferred resolution strategy.8

Governance Mechanisms: An 

adequate governance structure with 

triggers capable of identifying the onset 

of financial stress events is important to 

ensure that there is sufficient time to 

allow firms to prepare for resolution, 

and to ensure the timely execution of 

their preferred resolution strategies. The 

governance mechanism section 

proposes expectations that firms have 

playbooks that detail the board and 

senior management actions necessary to 

execute the firm’s preferred strategy. In 

addition, the proposal describes 

expectations that firms have triggers that 

are linked to specific actions outlined in 

these playbooks to ensure the timely 

escalation of information to senior 

management and the board, to address 

the successful recapitalization of 

subsidiaries prior to the parent’s 

bankruptcy to the extent called for by 

the firm’s preferred resolution strategy, 

and to address how the firm would 

ensure the timely execution of a 

bankruptcy filing. The proposal also 

describes the expectations that firms 

identify and analyze potential legal 

challenges to the provision of capital 

and liquidity to subsidiaries that would 

precede the parent’s bankruptcy filing, 

and any defenses and mitigants to such 

challenges. In addition, the proposal 

describes expectations that firms 

incorporate any developments from this 

analysis in their governance playbooks. 

Legal entity rationalization and 

separability: It is important that firms 

maintain a structure that facilitates 

orderly resolution. To achieve this, the 

proposal states that a firm should 

develop criteria supporting the 

preferred resolution strategy and 

integrate them into day-to-day decision 

making processes. The criteria would be 

expected to consider the best alignment 

of legal entities and business lines and 

facilitate resolvability as a firm’s 

activities, technology, business models, 

or geographic footprint change over 

time. In addition, the proposed 

guidance provides that the firm should 

identify discrete and actionable 

operations that could be sold or 

transferred in resolution to provide 

meaningful optionality for the 

resolution strategy under a range of 

potential failure scenarios. 

Operational: The development and 

maintenance of operational capabilities 

is important to support and enable 

execution of a firm’s preferred 

resolution strategy, including providing 

for the continuation of critical 

operations and preventing or mitigating 

adverse impacts on U.S. financial 

stability. The proposed operational 

capabilities include: 

Possessing fully developed 

capabilities related to managing, 

identifying, and valuing the collateral 

that is received from, and posted to, 

external parties and its affiliates; 

Having management information 

systems that readily produce key data 

on financial resources and positions on 

a legal entity basis, and that ensure data 

integrity and reliability; 

Developing a clear set of actions to be 

taken to maintain payment, clearing and 

settlement activities and to maintain 

access to financial market utilities, as 

further discussed below; and 

Maintaining an actionable plan to 

ensure the continuity of all of the shared 

and outsourced services that their 

critical operations rely on. 

In addition, the proposed guidance 

provides that a firm should analyze and 

address legal issues that may arise in 

connection with emergency motions the 

firm anticipates filing at the outset of its 

bankruptcy case seeking relief needed to 

pursue its preferred resolution strategy, 

including legal precedent and 

evidentiary support the firm expects to 

provide in support of such motions, key 

regulatory actions, and contingency 

arrangements. 

Derivatives and trading activities: It is 

important that a firm’s derivatives and 

trading activities can be stabilized and 

de-risked during resolution without 

causing significant market disruption. 

As such, firms should have capabilities 

to identify and mitigate the risks 

associated with their derivatives and 

trading activities and with the 

implementation of their preferred 

strategies, as further discussed below. 

Question 1: Do the topics in the 

proposed guidance discussed above 

represent the key vulnerabilities of the 

Covered Companies in resolution? If 

not, what key vulnerabilities are not 

captured? 

III. Proposed Changes to Prior 

Guidance 

In addition to making some 

clarifications, this proposal differs from 

prior guidance in that it reflects 

enhancements informed by the 

Agencies’ review of the Covered 

Companies 2017 plans in the areas of 

DER and PCS. 

The following description 

summarizes the changes relative to the 

topics outlined in the 2016 Guidance to 

which the Agencies are seeking 

comment and, where relevant, provides 

additional detail: 

Operational: Payment, Clearing, and 

Settlement Activities 

The provision of PCS by firms, 

financial market utilities (FMUs), and 

agent banks is an essential component 

of the U.S. financial system, and 

maintaining the continuity of PCS 

services is important for the orderly 

resolution of firms. Prior guidance from 

the Agencies indicated that a firm’s 

resolution plan submissions should 

describe arrangements to facilitate 

continued access to PCS services 

through the firm’s resolution. 

Based upon recent resolution plan 

submissions and the Agencies’ 

engagement with the firms, the Agencies 

believe that the firms have developed 

capabilities to identify and consider the 

risks associated with continuity of 

access to PCS services in resolution. All 

of the firms described methodologies to 

identify key FMUs and agent banks 

based on quantitative and qualitative 

criteria and included playbooks for 

identified key FMUs or agent banks. 

These playbooks described potential 

adverse actions that could be taken by 

the FMU or agent bank, described 

possible contingency arrangements, and 

discussed the operational and financial 

impacts of such actions or 

arrangements, all of which were 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32859 

9A client is an individual or entity, including 

affiliates of the firm, that relies upon continued 

access to the firm’s PCS services and any related 

credit or liquidity offered in connection with those 

services. As a result, key clients may not necessarily 

be limited to wholesale clients. 

10Examples of quantitative criteria include not 

only the aggregate volumes and values of all 

transactions processed through an FMU but also 

assets under custody with an agent bank, the value 

of cash and securities settled through an agent bank, 

and extensions of intraday credit. 

11Potential adverse actions may include 

increased collateral and margin requirements and 

enhanced reporting and monitoring. 

enhanced by the firms’ direct 

communications with these FMUs and 

agent banks. The proposed PCS 

guidance clarifies the expectations of 

the Agencies with respect to a firm’s 

capabilities to maintain continued 

access to PCS services through a 

framework. Considering the firms’ 

earlier resolution plan submissions, the 

firms have the methodologies and 

capabilities in place to address these 

expectations. 

Framework. The proposal states that 

firms should demonstrate capabilities 

for maintaining continued access to PCS 

services through a framework that 

incorporates the identification of key 

clients,9 FMUs, and agent banks, using 

both quantitative 10 and qualitative 

criteria, and the development of a 

playbook for each key FMU and agent 

bank. The proposed guidance builds 

upon existing guidance by specifying 

that the framework should consider key 

clients (which may include affiliates of 

the firm) and agent banks. The Agencies 

note that, although the existing 

guidance did not expressly suggest the 

identification of key agent banks and 

playbooks for such agent banks, the 

firms considered agent bank 

relationships and each provided a 

playbook for at least one key agent bank 

in its most recent resolution plan 

submission. Because agent bank 

relationships may essentially replicate 

PCS services provided by FMUs, the 

Agencies propose to revise the PCS 

guidance to include the identification 

and development of playbooks for key 

agent banks. 

In applying the framework, the firm 

would be expected to consider its role 

as a user and/or a provider of PCS 

services. The proposal refers to a user of 

PCS services as a firm that accesses the 

services of an FMU through its own 

membership in that FMU or through the 

membership of another firm that 

provides PCS services on an agency 

basis. A firm is a provider of PCS 

services under the proposed guidance if 

it provides its clients with access to an 

FMU or agent bank through the firm’s 

membership in or relationship with that 

service provider. A firm also would be 

a provider if it delivers PCS services 

critical to a client through the firm’s 

own operations in a manner similar to 

an FMU. 

The proposal provides that a firm’s 

framework should take into account the 

various relationships the firm and its 

key clients have with those key FMUs 

and agent banks by providing a mapping 

of material entities, critical operations, 

core business lines, and key clients to 

key FMUs and agent banks. This 

framework would be expected to 

consider both direct relationships (e.g., 

firm’s direct membership in the FMU, 

firm provides key clients with critical 

PCS services through its own 

operations, firm’s contractual 

relationship with an agent bank) and 

indirect relationships (e.g., firm 

provides its clients with access to the 

relevant FMU or agent bank through the 

firm’s membership in or relationship 

with that FMU or agent bank). 

By developing and evaluating these 

activities and relationships through a 

framework that incorporates the 

elements above, a firm should be able to 

consider the issue of maintaining 

continuity of PCS services in a 

systematic manner. 

Question 2: Is the guidance 

sufficiently clear with respect to the 

following concepts: Scope of PCS 

services, user vs. provider, direct vs. 

indirect relationships? What additional 

clarifications or alternatives concerning 

the proposed framework or its elements, 

if any, should the Agencies consider? 

For instance, would further examples of 

ways that firms may act as provider of 

PCS services be useful? Should the 

Agencies consider further distinguishing 

between providers based on the type of 

PCS service they provide? 

Playbooks for Continued Access to 

PCS Services. Firms also would be 

expected to provide a playbook for each 

key FMU and agent bank that addresses 

financial considerations and includes 

operational detail that would assist the 

firm in maintaining continued access to 

PCS services for itself and its clients in 

stress and in resolution. Under the 

proposal, each key FMU and agent bank 

playbook would be expected to provide 

analysis of the financial and operational 

impact to the firm’s material entities 

and key clients due to a loss of access 

to the FMU or agent bank. Each 

playbook also should discuss any 

possible alternative arrangements that 

would allow the firm and its key clients 

to maintain continued access to PCS 

services in resolution. However, the 

firm is not expected to incorporate a 

scenario in which it loses FMU or agent 

bank access into its preferred resolution 

strategy or its RLEN/RCEN estimates. 

Firms communicated with key FMUs 

and agent banks in preparing their most 

recent resolution plan submissions and 

indicated that such communication was 

helpful in refining their analysis 

concerning potential adverse actions 

and contingency arrangements. Firms 

would be expected to continue to 

engage with key FMUs, agent banks, and 

clients, and playbooks would be 

expected to reflect any feedback 

received during such ongoing outreach. 

Firms are encouraged to continue 

engaging with each other, key FMUs 

and agent banks, and other stakeholders 

to identify possible initiatives or 

additional ways to support continued 

access to PCS services. 

The proposed guidance differentiates 

the type of information to be included 

in a firm’s key FMU and agent bank 

playbooks based on whether a firm is a 

user of PCS services with respect to that 

FMU or agent bank, a provider of PCS 

services with respect to that FMU or 

agent bank, or both. To the extent a firm 

is both a user and a provider of PCS 

services with respect to a particular 

FMU or agent bank, the firm would be 

expected to provide the described 

content for both users and providers of 

PCS services. A firm would be able to 

do so either in the same playbook or in 

separate playbooks included in its 

resolution plan submission. 

Content related to Users of PCS 

Services. Under the proposal, each 

playbook for an individual FMU or 

agent bank should include, at a 

minimum, a description of the firm’s 

relationship as a user with the key FMU 

or agent bank and an identification and 

mapping of PCS services to the 

associated material entities, critical 

operations, and core business lines that 

use those PCS services, as well as a 

discussion of the potential range of 

adverse actions that could be taken by 

that key FMU or agent bank in a period 

of stress for the firm or upon the firm’s 

resolution.11 Playbooks submitted as 

part of the firms’ most recent resolution 

plan submissions mapped the PCS 

services provided to material entities, 

critical operations, and core business 

lines at a fairly granular level, which 

enhanced the utility of these playbooks. 

In discussing the potential range of 

adverse actions that a key FMU or agent 

bank could take, each playbook would 

be expected to address the operational 

and financial impact of such actions on 

each material entity and discuss 

contingency arrangements that the firm 

may initiate in response to such actions 

by the key FMU or key agent bank. 

Operational impacts may include effects 


sradovich on DSK3GMQ082PROD with NOTICES
32860 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

12 If these sample client contracts or agreements 

are included separately as part of the firm’s 

resolution plan submission, they may be 

incorporated into the playbook by reference. 

13 Dealer firms share many quantitative and 

qualitative characteristics. For example, each dealer 

firm is a Covered Company that (as of December 31, 

2017) (i) has total derivatives notional values 

greater than $5 trillion, (ii) has global gross market 

value of derivatives greater than $20 billion, (iii) 

has a sum of global trading assets and trading 

liabilities greater than $110 billion (each on the 

basis of a 3-year rolling average), (iv) is subject to 

the GSIB Surcharge and all components of the 

CCAR quantitative assessment (i.e., global market 

shock and counterparty default scenario 

components), and (v) is parent to a designated 

primary dealer. 

on governance mechanisms or resource 

allocation (including human resources), 

as well as any expected enhanced 

communication with key stakeholders 

(e.g., regulators, FMUs and agent banks). 

Financial impacts may include those 

directly associated with liquidity or any 

additional costs incurred by the firm as 

a result of such adverse actions and 

contingency arrangements. The 

proposed PCS guidance specifies that 

each playbook should discuss PCSrelated liquidity sources and uses in 

business-as-usual (BAU), in stress, and 

in the resolution period. Each firm 

would be expected to determine the 

relevant measurement points, and this 

information would be presented by 

currency type (with U.S. dollar 

equivalent) and by material entity. Each 

playbook also would be expected to 

describe any account features that might 

restrict the firm’s ready access to its 

intraday liquidity sources, the firm’s 

ability to control intraday liquidity 

outflows, and the firm’s capabilities to 

identify and prioritize time-specific 

payments. 

Content related to Providers of PCS 

Services. Under the proposal, a firm that 

is a direct or indirect provider of PCS 

services would be expected to identify 

key clients that rely upon PCS services 

provided by the firm in its playbook for 

the relevant FMU or agent bank. 

Playbooks would be expected to 

describe the scale and manner in which 

the firm’s material entities, critical 

operations, and core business lines 

provide PCS services and any related 

credit or liquidity offered by the firm in 

connection with such services. Similar 

to the playbook content expected of 

users of PCS services, each playbook 

would be expected to include a 

mapping of the PCS services provided to 

each material entity, critical operation, 

core business line, and key clients. In 

the case where a firm is a provider of 

PCS services through its own 

operations, the firm would expected to 

produce a playbook for the material 

entity that provides those services, and 

the playbook would focus on continuity 

of access for its key clients. 

The proposal states that playbooks 

should discuss the potential range of 

contingency arrangements available to 

the firm to minimize disruption to its 

provision of PCS services to its clients 

and the financial and operational 

impacts of such arrangements. 

Contingency arrangements may include 

viable transfer of client activity and any 

related assets or any alternative 

arrangements that would allow the 

firm’s key clients to maintain continued 

access to critical PCS services. The 

playbook also would be expected to 

describe the range of contingency 

actions that the firm may take 

concerning its provision of intraday 

credit to key clients and to provide 

analysis quantifying the potential 

liquidity that the firm could generate by 

taking each such action in stress and in 

the resolution period. To the extent a 

firm would not take any such actions as 

part of its preferred resolution strategy, 

the firm would be expected to describe 

its reasons for not taking any 

contingency action. 

Under the proposal, a firm should 

communicate the potential impacts of 

implementation of any identified 

contingency arrangements or 

alternatives to its key clients, and 

playbooks should describe the firm’s 

methodology for determining whether it 

should provide any additional 

communication to some or all key 

clients (e.g., due to the client’s usage of 

that access and/or related extensions of 

credit), as well as the expected timing 

and form of such communication. The 

Agencies note that in their most recent 

submissions, all of the firms addressed 

the issue of client communications and 

provided descriptions of planned or 

existing client communications, with 

some firms submitting specific samples 

of such communication. Firms would be 

expected to consider any benefit of 

communicating this information in 

multiple forms (e.g., verbal, written) and 

at multiple time periods (e.g., BAU, 

stress, some point in time in advance of 

taking contingency actions) in order to 

provide adequate notice to key clients of 

the action and the potential impact on 

the client of that action. In making 

decisions concerning communications 

to its key clients, the proposal states that 

firms also should consider any benefit 

of tailoring communications to different 

subsets of clients (e.g., based on 

different levels of activity or credit 

usage) in form, timing, or both. 

Playbooks may include sample client 

contracts or agreements containing 

provisions related to the firm’s 

provision of intraday credit or 

liquidity.12 Such sample contracts or 

agreements may be particularly 

important to the extent that the firm 

believes those documents sufficiently 

convey to clients the contingency 

arrangements available to the firm and 

the potential impacts of implementing 

such contingency arrangements. 

Question 3: Are the Agencies’ 

expectations with respect to playbook 

content for firms that are users or 

providers (or both) of PCS services 

sufficiently clear? What additional 

clarifications, alternatives, or additional 

information, if any, should the Agencies 

consider? 

Question 4: Should the guidance 

indicate that providers of PCS activities 

are expected to expressly consider 

particular contingency arrangements 

(e.g., methods to transfer client activity 

to other firms with whom the clients 

have relationships, alternate agent bank 

relationships)? Should the guidance 

also indicate that firms should expressly 

consider particular actions they may 

take concerning the provision of 

intraday credit to affiliate and thirdparty clients, such as requiring prefunding? If so, what particular actions 

should these firms address? 

Question 5: Specifically for users of 

PCS activities, should the guidance 

indicate that firms are expected to 

expressly include particular PCS-related 

liquidity sources and uses such as client 

pre-funding, or specific abilities to 

control intraday liquidity inflows and 

outflows (e.g., throttling or prioritizing 

of payments)? If so, what particular 

sources and uses should firms be 

expected to include? 

Question 6: Specifically for providers 

of PCS services are the Agencies’ 

expectations concerning a firm’s 

communication to its key clients 

(including affiliates as applicable) of the 

potential impacts of implementation of 

identified contingency arrangements 

sufficiently clear? What additional 

clarifications, if any, should the 

Agencies consider? Should the Agencies 

expect firms to communicate this 

information at specific times or in 

specific formats? 

Derivatives and Trading Activities 

This section of the proposed guidance 

is intended to explain expectations for 

Bank of America Corporation, Citigroup 

Inc., The Goldman Sachs Group, Inc., JP 

Morgan Chase & Co., Morgan Stanley, 

and Wells Fargo & Company (each, a 

‘‘dealer firm’’).13

The size, scope, complexity, and 

opacity of a firm’s global derivatives and 

trading activities may present 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32861 

14Consistent with prior guidance, ‘‘derivatives 

entities’’ should include both material and nonmaterial entities, in part because non-material 

entities, in the aggregate, may represent significant 

exposures. 

15Subject to the certain constraints, a firm’s 

derivatives strategy may take the form of a goingconcern 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 executability of the chosen 

strategy. 

significant risk to resolvability. To 

facilitate an orderly resolution, a dealer 

firm should be able to demonstrate the 

ability to stabilize and de-risk its 

derivatives and trading activities during 

resolution without posing a threat to 

U.S. financial stability. Therefore, dealer 

firms have developed capabilities to 

identify and mitigate the risks 

associated with their derivatives and 

trading activities and with the 

implementation of their preferred 

resolution strategies. These capabilities 

seek to facilitate a dealer firm’s 

planning, preparedness, and execution 

of an orderly resolution. The proposed 

guidance would clarify the Agencies’ 

expectations with respect to such 

capabilities and a firm’s analysis of its 

preferred strategy. The proposed 

guidance also would eliminate the 

expectations of the 2016 Guidance that 

a dealer firm’s resolution plan include 

separate passive and active wind-down 

scenario analyses, the agency-specified 

data templates, and rating agency 

playbooks. 

Over the past several years, the 

Agencies have engaged significantly 

with dealer firms to assess their 

resolution capabilities and to provide 

feedback with respect to their resolution 

preparedness. As a group, dealer firms 

have made meaningful improvements 

over previous resolution plan 

submissions. These improvements 

include efforts by dealer firms to 

enhance their resolution capabilities 

related to derivatives and trading 

activities and to integrate those 

capabilities with their business-as-usual 

practices. The expectations set out in 

this section of the proposed guidance 

reflect many of those improvements. As 

described in more detail below, this 

section of the proposed guidance is 

organized in five subsections. The first 

four of the subsections describe 

expectations for resolution capabilities 

that are commensurate with the size, 

scope and complexity of a firm’s 

derivatives portfolios and should help 

assure that dealer firms maintain the 

operational preparedness to implement 

an orderly resolution. The fifth 

subsection—derivatives stabilization 

and de-risking strategy—describes 

expectations for a dealer firm’s analysis 

of its approach to managing its 

derivatives portfolios in an orderly 

resolution. 

Booking practices. To minimize 

uncertainty and avoid excessive 

complexity and opacity that can 

frustrate a firm’s resolution 

preparedness, a dealer firm’s resolution 

capabilities should include booking 

practices commensurate with the size, 

scope and complexity of a firm’s 

derivatives portfolios. Dealer firms are 

currently developing booking practices 

that provide timely and up-to-date 

information regarding the structure, 

risks and resource needs associated with 

the management of its derivatives 

activities under a broad range of 

potential stress and failure scenarios. 

Therefore, the proposed guidance would 

clarify the capabilities a dealer firm is 

expected to have related to its booking 

practices, including descriptions of its 

comprehensive booking model 

framework and demonstrations of its 

ability to identify, assess, and report on 

each entity with derivatives portfolios (a 

‘‘derivatives entity’’).14

Inter-affiliate risk monitoring and 

controls. Affiliates of a derivatives 

entity may be forced to discontinue a 

trading relationship with that 

derivatives entity during resolution, 

which poses risks to the orderly 

resolution of a firm. The proposal 

describes the Agencies’ expectations 

that a dealer firm address this risk by 

being able to provide timely 

transparency into the current risk 

transfers between affiliates and the 

resolvability risks related to such 

transfers, including expectations 

regarding an inter-affiliate market risk 

framework that enables the firm to 

monitor and limit the exposures a 

derivatives entity that is a material 

entity could experience in an extreme 

resolution scenario. 

Portfolio segmentation and 

forecasting. The ability to quickly and 

reliably identify problematic derivatives 

positions and portfolios is critical to 

minimizing uncertainty and forecasting 

resource needs to enable an orderly 

resolution. Each dealer firm has 

developed various modeling approaches 

that are used to evidence the adequacy 

of the capabilities and resources needed 

to execute its preferred resolution 

strategy. The utility of these modeled 

results is often affected by the scope of 

readily available data on the underlying 

characteristics of a dealer firm’s 

derivatives portfolios. Therefore, the 

proposal confirms that a dealer firm 

should have the capabilities to produce 

analysis that reflects granular portfolio 

segmentation and differentiation of 

assumptions taking into account tradelevel characteristics. Similarly, the 

proposed guidance also provides 

additional detail regarding other 

segmentation and forecasting related 

capabilities that the dealer firm’s 

resolution plan should describe and 

demonstrate. These capabilities include 

(i) a method and supporting systems 

capabilities for categorizing and ranking 

the ease of exit for its derivatives 

positions (‘‘ease of exit’’ position 

analysis), (ii) the systems capabilities to 

apply the firm’s exit cost methodology 

to its firm-wide derivatives portfolio 

(application of exit cost methodology), 

(iii) capabilities to assess the operational 

resources and forecast the costs related 

to its current derivatives activities 

(analysis of operational capacity), and 

(iv) a method to apply sensitivity 

analyses to the key drivers of the 

derivatives-related costs and liquidity 

flows under its preferred resolution 

strategy (sensitivity analysis). 

Prime brokerage customer account 

transfers. The rapid withdrawal from a 

firm by prime brokerage clients can 

contribute to a disorderly resolution. 

Dealer firms’ resolution plans should 

address the risk that during a resolution 

the firm’s prime brokerage clients may 

seek to withdraw or transfer customer 

accounts balances in rates significantly 

higher than normal business conditions. 

The proposed guidance confirms that 

dealer firms should have the capabilities 

to facilitate the orderly transfer of prime 

brokerage account balances to peer 

prime brokers and describes the 

Agencies’ related expectations in greater 

detail. In particular, the proposed 

guidance clarifies that a dealer firm’s 

resolution plan should describe and 

demonstrate its ability to segment and 

analyze the quality and composition of 

such account balances and to rank 

account balances according to their 

potential transfer speed. 

Derivatives stabilization and derisking strategy. A key risk to the orderly 

resolution of a dealer firm is a volatile 

and risky derivatives portfolio. In the 

event of material financial distress or 

failure, the resolvability risks related to 

a dealer firm’s derivatives and trading 

activities would be a key obstacle to the 

firm’s rapid and orderly resolution. 

Dealer firms’ resolution plans should 

address this obstacle. The proposed 

guidance confirms that a dealer firm’s 

plan should provide a detailed analysis 

of the strategy to stabilize and de-risk its 

derivatives portfolios (‘‘derivatives 

strategy’’) and provides additional detail 

regarding the Agencies’ expectations.15

In particular, the proposed guidance 

clarifies that a dealer firm should 

incorporate into its derivatives strategy 


sradovich on DSK3GMQ082PROD with NOTICES
32862 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

16From the perspective of protecting U.S. 

financial stability, the risk of adverse regulatory 

actions that could impede an orderly resolution 

increases where a material entity’s failure would 

have extraordinary impacts on local markets. 

Therefore, analysis of non-surviving material 

entities located in a non-U.S. jurisdiction should 

contemplate the impact on local markets. 

17https://www.fdic.gov/resauthority/ 

2017faqsguidance.pdf; https://

www.federalreserve.gov/publications/files/ 

resolution-plan-faqs.pdf. 

18Capitalized terms not defined herein have the 

meaning set forth in the Rule. 

19 76 Fed. Reg. 67323 (November 1, 2011) 

20Bank 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. 

21The 2013 Guidance, the 2014 Letter, and the 

2015 Communication, as described in the 2016 

letters to the firms, continue to be applicable 

(relevant dates should be updated appropriately), 

except to the extent superseded or supplemented by 

the provisions of this document. See Letters dated 

April 12, 2016, from the Board and FDIC to 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, available at https://

www.federalreserve.gov/supervisionreg/resolutionplans.htm. 

assumptions consistent with the lack of 

access to the bilateral OTC derivatives 

market at the start of its resolution 

period. The proposed guidance also 

confirms or clarifies expectations 

related to other elements that should be 

addressed in the firm’s analysis of its 

derivatives strategy, including the 

incorporation of resource needs into 

RLEN and RCEN (forecast of resource 

needs), an analysis of any potential 

derivatives portfolio remaining after the 

resolution period (potential residual 

derivatives portfolio), and the impact 

(including on non-U.S. jurisdictions) 

from the assumed failure of a material 

derivatives entity (non-surviving 

material entity analysis).16

Question 7: Do the proposed changes 

relative to the 2016 Guidance provide 

sufficient clarity or are additional 

clarifications required? 

Consolidation of Existing Guidance 

In addition to the 2016 Guidance, the 

Agencies have also issued: the Guidance 

for 2013 § 165(d) Annual Resolution 

Plan Submissions by Domestic Covered 

Companies that Submitted Initial 

Resolution Plans in 2012 (the ‘‘2013 

Guidance’’); firm-specific feedback 

letters issued in 2014 and 2016; and the 

February 2015 staff communication 

regarding the 2016 plan submissions. 

The Agencies are considering 

consolidating all applicable guidance 

into a single document, which would 

provide the public with one source of 

applicable guidance to which to refer. 

The Agencies would also expect to 

incorporate aspects of the Resolution 

Plan Frequently Asked Questions issued 

May 2017 that may remain applicable.17

For example, the Agencies could add a 

section to the proposed guidance that 

includes the aspects of the 2013 

Guidance that should remain 

applicable, such as the plan format 

description in the ‘‘Format of 2013 

Plan’’ and ‘‘Additional Format and 

Content Guidance’’ sections, some of the 

central assumptions and stress scenarios 

in the ‘‘Assumptions’’ and ‘‘Stress 

Scenarios’’ sections, the process for 

addressing expected global cooperation 

described in the ‘‘Global Cooperation’’ 

section, and the considerations for 

identifying material entities in the 

‘‘Material Entities’’ section. 

Question 8: Should the Agencies 

consolidate all applicable guidance? If 

so, which aspects of the other guidance 

warrant inclusion, additional 

clarification or modification? 

IV. Paperwork Reduction Act 

Certain provisions of the Rule contain 

‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act (‘‘PRA’’) of 

1995 (44 U.S.C. 3501 through 3521). In 

accordance with the requirements of the 

PRA, a respondent is not required to 

respond to an information collection 

unless it displays a currently valid 

Office of Management and Budget 

(OMB) control number. The Agencies 

believe that the proposed changes to the 

2016 Guidance would not result in an 

increase in information collection 

burden to the Covered Companies. The 

Agencies invite public comment on this 

assessment. 

TEXT OF PROPOSED RESOLUTION 

PLANNING GUIDANCE FOR EIGHT 

LARGE, COMPLEX U.S. BANKING 

ORGANIZATIONS 

Resolution Planning Guidance for Eight 

Large, Complex U.S. Banking 

Organizations 

I. Introduction 

II. Capital 

a. Resolution Capital Adequacy and 

Positioning (RCAP) 

b. Resolution Capital Execution Need 

(RCEN) 

III. Liquidity 

a. Resolution Liquidity Adequacy and 

Positioning (RLAP) 

b. Resolution Liquidity Execution Need 

(RLEN) 

IV. Governance Mechanisms 

a. Playbooks and Triggers 

b. Pre-Bankruptcy Parent Support 

V. Operational 

a. Payment, Clearing, and Settlement 

Activities 

b. Managing, Identifying, and Valuing 

Collateral 

c. Management Information Systems 

d. Shared and Outsourced Services 

e. Legal Obstacles Associated with 

Emergency Motions 

VI. Legal Entity Rationalization and 

Separability 

a. Legal Entity Rationalization Criteria 

(LER Criteria) 

b. Separability 

VII. Derivatives and Trading Activities 

a. Booking Practices 

b. Inter-Affiliate Risk Monitoring and 

Controls 

c. Portfolio Segmentation and Forecasting 

d. Prime Brokerage Customer Account 

Transfers 

e. Derivatives Stabilization and De-risking 

Strategy 

VIII. Public Section 

I. Introduction 

Resolution Plan Requirement: 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’ 18 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 381.19

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. 

Overview of Guidance Document: 

This document is intended to assist the 

eight current U.S. Global Systemically 

Important Banks (‘‘GSIBs’’ or ‘‘firms’’) 20

in further developing their preferred 

resolution strategies. The document 

describes the expectations of the 

Agencies regarding these firms’ 

resolution plans, and highlights 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 

mitigate, obstacles to the successful 

implementation of the preferred 

strategy.21

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 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32863 

22The terms ‘‘material entities,’’ ‘‘critical 

operations,’’ and ‘‘core business lines’’ have the 

same meaning as in the Agencies’ Rule. 

23 82 Fed. Reg. 8266 (January 24, 2017). 

24The resolution period begins immediately after 

the parent company bankruptcy filing and extends 

through the completion of the preferred resolution 

strategy. 

25See 12 CFR 252.60–.65; 82 Fed. Reg. 8266 

(January 24, 2017). 

26SR Letter 14–1, ‘‘Heightened Supervisory 

Expectations for Recovery and Resolution 

Preparedness for Certain Large Bank Holding 

Companies—Supplemental Guidance on 

Consolidated Supervision Framework for Large 

Financial Institutions’’ (Jan. 24, 2014), available at 

http://www.federalreserve.gov/bankinforeg/ 

srletters/sr1401.pdf. 

27 ‘‘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. 

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. 

II. CAPITAL 

Resolution Capital Adequacy and 

Positioning (RCAP): To help ensure that 

a firm’s material entities 22 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).23

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 mitigate 

uncertainty related to potential creditor 

challenge; for example, by ensuring that 

the seniority and tenor of the 

intercompany debt is the same between 

all entities in the chain. 

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,24

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.25

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. 

III. LIQUIDITY 

The firm should have the liquidity 

capabilities necessary to execute its 

preferred resolution strategy, including 

those described in SR Letter 14–1.26 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. 

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 nonU.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 model 27 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 


sradovich on DSK3GMQ082PROD with NOTICES
32864 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

28 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 

‘‘OPERATIONAL—Legal Obstacles Associated with 

Emergency Motions,’’ below. 

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 inter-affiliate 

transactions; and (C) the daily stressed 

liquidity flows and trapped liquidity as 

a result of actions taken by clients, 

counterparties, key financial market 

utilities (FMUs), and foreign 

supervisors, among others. 

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 inter-affiliate 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 inter-affiliate 

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. Inter-affiliate 

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 resolutionrelated actions. 

IV. GOVERNANCE MECHANISMS 

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; (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 postrecovery 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.28

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. 

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 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32865 

29A firm is a user of PCS services if it uses the 

services of a financial market utility (FMU) through 

its membership in that FMU or an agent bank. A 

firm is a provider of PCS services if it provides its 

clients with access to an FMU or agent bank 

through the firm’s membership to or relationship 

with that service provider (including providing PCS 

services to its client as an agent bank) or if it 

provides key clients with critical PCS services (e.g., 

the suspension or termination of such services 

would impact the key client’s continued access to 

PCS services) through the firm’s own operations. 

30These capabilities may include those described 

in SR Letter 14–1. 

31For purposes of this section V, a client is an 

individual or entity, including affiliates of the firm, 

that relies upon continued access to the firm’s PCS 

services and any related credit or liquidity offered 

in connection with those services. 

32Examples of quantitative criteria include not 

only the aggregate volumes and values of all 

transactions processed through an FMU but also 

assets under custody with an agent bank, the value 

of cash and securities settled through an agent bank, 

and extensions of intraday credit. 

33Potential adverse actions may include 

increased collateral and margin requirements and 

enhanced reporting and monitoring. 

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. 

V. OPERATIONAL 

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,29 or both, of PCS services. 

A firm should demonstrate 

capabilities 30 for continued access to 

PCS services essential to an orderly 

resolution through a framework to 

support such access by: 

• Identifying key clients,31 FMUs, 

and agent banks, using both quantitative 

(volume and value) 32 and qualitative 

criteria; 

• Mapping material entities, critical 

operations, core business lines, and key 

clients to both key FMUs and agent 

banks; and 

• Developing a playbook for each key 

FMU and 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., firm’s direct 

membership in the FMU, firm provides 

key clients with critical PCS services 

through its own operations, firm’s 

contractual relationship with an agent 

bank) and indirect relationships (e.g., 

firm provides its clients with access to 

the relevant FMU or agent bank through 

the firm’s membership to 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 agent bank that addresses 

considerations that would assist the 

firm and its clients in maintaining 

continued access to PCS services in the 

period leading up to and including the 

firm’s resolution. While the firm is not 

expected to incorporate a scenario in 

which it loses FMU or agent bank access 

into its preferred resolution strategy or 

its RLEN/RCEN estimates, each 

playbook should provide analysis of the 

financial and operational impact to the 

firm’s material entities and key clients 

due to loss of access to the FMU or 

agent bank. 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 

should continue to engage with key 

FMUs, agent banks and clients, and 

playbooks should reflect any feedback 

received during such ongoing outreach. 

Content Related to Users of PCS 

Services. Individual FMU and agent 

bank playbooks should include at a 

minimum: 

• Description of the firm’s 

relationship as a user with the key FMU 

or 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 agent bank when the 

firm is in resolution,33 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. 

Æ PCS Liquidity Sources: These may 

include the amounts of intraday 

extensions of credit, liquidity buffer, 

inflows from FMU participants, and 

client prefunded amounts in BAU, in 

stress, and in the resolution period. The 

playbook should also describe intraday 

credit arrangements (e.g., facilities of the 

FMU, agent bank, or a central bank) and 

any similar custodial arrangements that 

allow ready access to a firm’s funds for 

PCS-related FMU and agent bank 

obligations (including margin 

requirements) in various currencies, 

including placements of firm liquidity 

at central banks, FMUs, and agent 

banks. 

Æ PCS Liquidity Uses: These may 

include firm and client margin, prefunding and intraday extensions of 

credit, including incremental amounts 

required during resolution. 


sradovich on DSK3GMQ082PROD with NOTICES
32866 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

34Where 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 

entity that provides those services, including 

contingency arrangements to permit the firm’s key 

clients to maintain continued access to PCS 

services. 

35The policy may reference subsidiary or related 

policies already in place, as implementation may 

differ based on business line or other factors. 

Æ 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 should also 

describe any account features that might 

restrict the firm’s ready access to its 

liquidity sources. 

Content Related to Providers of PCS 

Services. Individual FMU and agent 

bank playbooks 34 should include at a 

minimum: 

• 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 that rely upon the 

firm to provide those 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 clients, including 

the viability of transferring client 

activity and any related assets, as well 

as any alternative arrangements that 

would allow the firm’s key clients 

continued access to critical PCS services 

if the firm could no longer provide such 

access (e.g., due to the firm’s loss of 

FMU or agent bank access), and the 

financial and operational impacts of 

such arrangements; 

• Description of the range of 

contingency actions that the firm may 

take concerning its provision of intraday 

credit to 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 clients to 

designate or appropriately pre-position 

liquidity, including through pre-funding 

of settlement activity, for PCS-related 

FMU and agent bank obligations at 

specific material entities of the firm 

(e.g., direct members of FMUs) or any 

similar custodial arrangements that 

allow ready access to clients’ funds for 

such obligations in various currencies; 

(ii) delaying or restricting client PCS 

activity; and (iii) restricting, imposing 

conditions upon (e.g., requiring 

collateral), or eliminating the provision 

of intraday credit or liquidity to 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 

client’s BAU usage of that access and/ 

or related intraday credit or liquidity), 

and the expected timing and form of 

such communication. 

Managing, Identifying, and Valuing 

Collateral: The firm should have the 

capabilities described in SR Letter 14– 

1 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 crossdefault 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 interbranch 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.35

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, as described in 

SR Letter 14–1. 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. 

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. The 

firm should (A) maintain an 

identification of all shared services that 

support critical operations (critical 

services); (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’slength basis where appropriate, and 

incorporate appropriate terms and 

conditions to (A) prevent automatic 

termination upon certain resolutionrelated 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 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32867 

36U.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). 

37See 12 CFR part 47, 252.81-.88, and part 382 

(together, 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 

‘‘Legal Obstacles Associated with Emergency 

Motions’’ section, and how the firm plans to satisfy 

any different conditions or requirements of the 

alternative compliance method. 

38Under its terms, the Protocol also provides for 

the transfer of credit enhancements to transferees 

other than a Bankruptcy Bridge Company. 

39See Protocol sections 2(b)(ii) and (iii) and 

related definitions. 

the plan, the firm should document the 

amendment of any such agreements 

governing these services. 

Legal Obstacles Associated with 

Emergency Motions: The Plan should 

address legal issues associated with the 

implementation of the stay on crossdefault 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,36 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.37 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).38 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 posttransfer 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, ‘‘nonobjections’’). 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; 39 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. 


sradovich on DSK3GMQ082PROD with NOTICES
32868 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

40SR Letter 14–8, ‘‘Consolidated Recovery 

Planning for Certain Large Domestic Bank Holding 

Companies’’ (Sept. 25, 2014), available at http://

www.federalreserve.gov/bankinforeg/srletters/ 

sr1408.pdf. 

41A firm’s derivatives portfolios include its 

derivatives positions and linked non-derivatives 

trading positions. 

42The 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. 

43The firm should at least document booking 

models that, in the aggregate, represent the vast 

majority of the firm’s derivatives transactions, e.g., 

booking models that represent no less than 95% 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. 

44Some 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. 

45Effective 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, nonautomated methods can also be effective when 

supported by other internal controls (e.g., robust 

detective monitoring and escalation protocols). 

VI. LEGAL ENTITY 

RATIONALIZATION AND 

SEPARABILITY 

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. 

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. The actionability of those 

options should be supported by the 

firm’s criteria and analysis required by 

SR Letter 14–8.40 Additionally, this 

analysis should facilitate buyer due 

diligence and include carve-out 

financial statements, valuation analysis, 

and a legal risk assessment. Further, the 

firm should establish a data room to 

collect and refresh annually the 

analyses above, as well as other 

information pertinent to a potential 

divestiture of the business. 

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’’). 

Booking Practices. 

A dealer firm should have booking 

practices commensurate with the size, 

scope, and complexity of a firm’s 

derivatives portfolios,41 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 firm-wide 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) 42. 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.43

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.44 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.45


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32869 

46The 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. 

47The inter-affiliate market risk framework is a 

supplement to the firm’s systems capabilities to 

track and monitor market, credit, and liquidity risk 

transfers between entities. 

48Firms 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). 

49A 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. 

50The enumerated segmentation dimensions 

represent a minimum set of characteristics for 

differentiation of derivatives portfolios but 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. 

51Examples 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. 

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.46 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). 

Inter-Affiliate Risk Monitoring and 

Controls. 

A dealer firm should be able to assess 

how the management of inter-affiliate 

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 inter-affiliate market risk 

framework, consisting of at least the 

following two components 47: 

1. A method for measuring, 

monitoring, and reporting the market 

risk exposures for a given material 

derivatives entity 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) 48; 

and 

2. A method for identifying, 

estimating associated costs of, and 

evaluating the effectiveness of, a rehedge strategy in resolution put on by 

the same material derivatives entity.49

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 riskmanagement 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 inter-affiliate 

derivatives activities. The plan should 

also include detailed descriptions of the 

firm’s compression capabilities, the 

associated risks, and obstacles in 

resolution. 

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 tradelevel 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.50 A dealer firm 

should also have the capabilities to 

segment and analyze the full contractual 

maturity (run-off) profile of its external 

and inter-affiliate derivatives portfolios. 

The dealer firm’s resolution plan should 

describe and demonstrate the firm’s 

ability to segment and analyze its firmwide 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 

characteristics 51 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. 


sradovich on DSK3GMQ082PROD with NOTICES
32870 Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 

52At a minimum, 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) fixedcompensation, (ii) fixed non-compensation, and (iii) 

variable cost. 

53For 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 riskweighted assets forecast assumptions. 

54For example, relevant characteristics might 

include: product, size, clearability, currency, 

maturity, level of collateralization, and other risk 

characteristics. 

55Subject to the relevant constraints, a firm’s 

derivatives strategy may take the form of a goingconcern 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 goingconcern 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 goingconcern 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. 

56A 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) inter-affiliate counterparties, where the trades 

with inter-affiliate counterparties (a) reduce the 

credit exposure of each participating counterparty 

and (b) do not materially increase the market risk 

of any such counterparty on a standalone basis, 

after taking into account hedging with exchangetraded and centrally-cleared instruments. The firm 

should demonstrate the risk-reducing nature of the 

trade on the basis of information that would be 

known to the firm at the time of the transaction. 

57For 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). 

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.52 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.53

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-tocustomer 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, at a minimum, reflect 

characteristics 54 that the firm believes 

could affect the speed at which the 

client account balance would be 

transferred to an alternate prime broker. 

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.55 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 inter-affiliate 

trades.56

• 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 57, (i) that is available to 

the counterparty at or following the start 


sradovich on DSK3GMQ082PROD with NOTICES
Federal Register / Vol. 83, No. 136 / Monday, July 16, 2018 / Notices 32871 

58 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. 

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, at a 

minimum, 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 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 incur 

due to basis and other risks that would 

result from hedging with only exchangetraded and centrally cleared instruments 

in a severely adverse stress 

environment, and (iv) the operational 

costs. 

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).58 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 ‘‘nonsurviving material derivatives entity’’), 

the dealer firm should provide a 

detailed analysis of how the nonsurviving 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. 

VIII. 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. 

By the Board of Governors of the Federal 

Reserve System, June 28, 2018. 

Ann E. Misback, 

Secretary of the Board. 

Dated at Washington, DC on June 28, 2018. 

By order of the Board of Directors. 

Federal Deposit Insurance Corporation. 

Valerie Jean Best, 

Assistant Executive Secretary. 

[FR Doc. 2018–15066 Filed 7–13–18; 8:45 am] 

BILLING CODE P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Agency for Healthcare Research and 

Quality 

Meeting of the National Advisory 

Council for Healthcare Research and 

Quality 

AGENCY: Agency for Healthcare Research 

and Quality (AHRQ), HHS. 

ACTION: Notice of public meeting. 

SUMMARY: In accordance with the 

Federal Advisory Committee Act, this 

notice announces a meeting of the 

National Advisory Council for 

Healthcare Research and Quality. 

DATES: The meeting will be held on 

Wednesday, July 18, 2018, from 8:30 

a.m. to 2:45 p.m. 

ADDRESSES: The meeting will be held at 

AHRQ, 5600 Fishers Lane, Rockville, 

Maryland, 20857. 

FOR FURTHER INFORMATION CONTACT: 

Jaime Zimmerman, Designated 

Management Official, at the Agency for 

Healthcare Research and Quality, 5600 

Fishers Lane, Mail Stop 06E37A, 

Rockville, Maryland 20857, (301) 427– 


sradovich on DSK3GMQ082PROD with NOTICES