Source: https://www.federalregister.gov/documents/2011/11/01/2011-27377/resolution-plans-required
Timestamp: 2018-07-20 18:51:30
Document Index: 52579949

Matched Legal Cases: ['art 243', 'art 243', 'art 381', 'art 381', 'art 243', 'art 381', 'art 360']

Federal Register :: Resolution Plans Required
A Rule by the Federal Reserve System and the Federal Deposit Insurance Corporation on 11/01/2011
67323-67340 (18 pages)
PART [ ]—RESOLUTION PLANS
https://www.federalregister.gov/d/2011-27377 https://www.federalregister.gov/d/2011-27377
To promote financial stability, section 165(d) of the Dodd-Frank Act requires each nonbank financial company supervised by the Board and each bank holding company with total consolidated assets of $50 billion or more (each a “covered company”) to periodically submit to the Board, the Corporation, and the Council a plan for such company's rapid and orderly resolution in the event of material financial distress or failure. That section also requires each covered company to report on the nature and extent of credit exposures of such covered company to significant bank holding companies and significant nonbank financial companies and the nature and extent of credit exposures of significant bank holding companies and significant nonbank financial companies to such covered company.[1] This final rule implements the resolution plan requirement set forth in section 165(d)(1) of the Dodd-Frank Act.
The final rule requires each covered company to produce a resolution plan, or “living will,” that includes information regarding the manner and extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of nonbank subsidiaries of the company; detailed descriptions of the ownership structure, assets, liabilities, and contractual obligations of the company; identification of the cross-guarantees tied to different securities; identification of major counterparties; a process for determining to whom the collateral of the company is pledged; and other information that the Board and the Corporation jointly require by rule or order.[2] The final rule requires a strategic analysis by the covered company of how it can be resolved under Title 11 of the U.S. Code (the “Bankruptcy Code”) in a way that would not pose systemic risk to the financial system. In doing so, the company must map its core business lines and critical operations to material legal entities and provide integrated analyses of its corporate structure; credit and other exposures; funding, capital, and cash flows; the domestic and foreign jurisdictions in which it operates; and its supporting information systems for core business lines and critical operations.
On April 22, 2011, the Board and the Corporation invited public comment on a Notice of Proposed Rulemaking: Resolution Plans and Credit Exposure Reports Required (the “proposed rule” or “proposal”).[3] The comment period ended on June 10, 2011. The Board and the Corporation collectively received 22 comment letters from a range of individuals and banking organizations, as well as industry and trade groups representing banking, insurance, and the broader financial services industry. In addition, the Board and the Corporation met with industry representatives to discuss issues relating to the proposed rule.
Several commenters suggested that, given the lack of supervisory and market experience with resolution planning, the final rule should communicate the Board's and the Corporation's expectations for “first generation” resolution plans and should provide for meaningful feedback by the Agencies within the 60 day period the Agencies have to review an initial resolution plan. Commenters also noted that annual updates to the plan should not be due at the end of the first calendar quarter when firms have to meet other important reporting requirements. Commenters suggested that the timing of the annual update should be determined by agreement among the Start Printed Page 67325Board, the Corporation, and the covered company.
With respect to foreign based covered companies, some commenters suggested that the applicability of the resolution plan requirement be determined by Start Printed Page 67326reference to U.S. assets of the foreign firm and not with respect to the consolidated worldwide assets of the foreign firm. Alternatively, these commenters suggested that a foreign banking organization (“FBO”) with less than $50 billion in U.S. total consolidated assets be subject to reduced or streamlined reporting, and that the rule should be tailored to take account of the risk posed by an FBO to U.S. financial stability by focusing on the FBO's U.S. structure and complexity, the size of its U.S. operations, and the extent of its interconnectedness in U.S. financial markets. Commenters requested that the submission deadline be extended for FBOs to allow more time for these organizations to complete a resolution plan.
A frequent comment related to the confidentiality of resolution plans and credit exposure reports. Commenters argued that the information required to be included in resolution plans represented sensitive, confidential business information not otherwise available to the public, and the disclosure of which would significantly harm the competitiveness of reporting firms. Commenters expressed concern that the proposed rule did not provide a sufficient level of assurance that resolution plans and credit exposure reports submitted would be kept confidential, particularly in light of the disclosure requirements of the Freedom of Information Act (“FOIA”).[4] The commenters suggested the proposed rule acknowledge the applicability of certain FOIA exemptions. In particular, commenters expressed the view that information submitted in connection with the resolution plan and credit exposure report requirements should be treated as confidential supervisory information. Moreover, commenters suggested that the Board and the Corporation put in place procedures (either as part of the final rule or in guidance) to minimize the risk of leaks or inadvertent disclosures when information contained in the resolution plan and credit exposure report was shared among the covered company's regulators, including home-country supervisors.
The final rule applies to any bank holding company that has $50 billion or more in total consolidated assets, as determined based on the average of the company's four most recent Consolidated Financial Statements for Bank Holding Companies as reported on the Board's Form FR Y-9C. It also applies to any foreign bank or company that is, or is treated as, a bank holding company under section 8(a) of the International Banking Act of 1978 [5] and that has $50 billion or more in total consolidated assets, as determined based on the average of the foreign bank's or company's four most recent quarterly Capital and Asset Reports for Foreign Banking Organizations as reported on the Board's Form FR Y-7Q (or, if applicable, its most recent annual Form Y-7Q). A bank holding company that becomes a “covered company” remains a “covered company” unless and until it has less than $45 billion in total consolidated assets, as determined based on the most recent annual or, as applicable, the average of the four most recent quarterly reports made to the Board. A covered company that has reduced its total consolidated assets to below $45 billion, as described above, would again become a covered company if it has total consolidated assets of $50 billion or more at a later date, as determined based on the relevant reports. A firm may fall in or out of the definition of a “covered company” because of fluctuations in its asset size. This situation necessarily disrupts the continuity of resolution planning and increases regulatory uncertainty and burden for many covered companies. The $45 billion threshold was added to facilitate continuity in resolution planning for covered companies and thereby reduce regulatory uncertainty and its associated cost. In a multi-tiered bank holding company structure, covered company means the top-tier legal entity of the multi-tiered holding company only.
In determining applicability of the final rule to foreign banks, the final rule considers a firm's world-wide consolidated assets, rather than only its U.S. assets. However, as described in more detail below, covered companies (including foreign banks) with relatively small nonbanking operations in the U.S. are permitted to file tailored reports with reduced information requirements. Given the foregoing, the resolution plan of a foreign-based company that has limited assets or operations in the United States would be significantly limited in its scope and complexity. Moreover, the nature and extent of the home country's related crisis management and resolution planning requirements for the foreign-based company also will be considered as part of the Agencies' resolution plan review process.[6]
In addition, the final rule applies to any nonbank financial company that the Council has determined under section 113 of the Dodd-Frank Act [7] must be supervised by the Board and for which such determination is in effect.
Under the proposal, a firm would also have been required to submit a quarterly report on its credit exposure to other “significant” bank holding companies and financial firms, as well as their credit exposure to the firm. As noted above, commenters expressed significant concerns about the clarity of key definitions and the scope of the bi-directional and intraday reporting Start Printed Page 67327requirement of the proposal and suggested that the credit exposure report requirement be considered in conjunction with the proposal to implement the Dodd-Frank Act's single counterparty credit exposure limit.
“Rapid and orderly resolution” means a reorganization or liquidation of the covered company (or, in the case of a covered company that is incorporated or organized in a jurisdiction other than the United States, the subsidiaries and operations of such foreign company that are domiciled in the United States) under the Bankruptcy Code that can be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk that the failure of the covered company would have serious adverse effects on financial stability in the United States.[8] Under the final rule, each resolution plan submitted should provide for the rapid and orderly resolution of the covered company. The final rule does not specifically define or limit this time period in recognition that a reasonable period for resolution will depend on the size, complexity, and structure of the firm.
“Critical operations” are those operations, including associated services, functions and support the failure or discontinuance of which, in the view of the covered company or as jointly directed by the Board and the Corporation, would pose a threat to the financial stability of the United States. This definition is revised from the proposal to provide greater clarity as to which of a firm's operations would be deemed a “critical operation.” Initially defined as operations that, upon failure or discontinuance, “would likely result in a disruption to the U.S. economy or financial markets,” the Board and the Corporation revised this definition to more closely reflect the purpose of section 165 of the Dodd-Frank Act, i.e., “to prevent or mitigate risks to the financial stability of the United States.” [9] The revised definition clarifies that the threshold of significance for a disruption to U.S. financial stability resulting from the failure or discontinuance of a critical operation must be severe enough to pose a threat to the financial stability of the United States. For example, a critical operation of a covered company would include an operation, such as a clearing, payment, or settlement system, which plays a role in the financial markets for which other firms lack the expertise or capacity to provide a ready substitute. The resolution plan should address and provide for the continuation and funding of critical operations.
The Board and Corporation recognize the burden associated with developing an initial resolution plan as well as establishing the processes, procedures, and systems necessary to annually, or as otherwise appropriate, update a resolution plan. While an organization's Start Printed Page 67328initial resolution plan must include all informational elements required under this final rule, the Board and Corporation (as noted above) expect the process of submission and review of the initial resolution plan iterations to include an ongoing dialogue with firms. In developing their initial resolution plans, covered companies should therefore focus on the key elements of a resolution plan, including identifying critical and core operations, developing a robust strategic analysis, and identifying and describing the interconnections and interdependencies among material entities. To the extent practicable, covered companies should—with respect to the initial resolution plan—try to leverage off of and incorporate information already reported to the Board or Corporation or already publicly-disclosed, e.g., in securities or other similar filings.
A resolution plan must be sensitive to the economic conditions at the time the plan is triggered. To assist in establishing the assumptions for the economic conditions triggering a resolution plan, the Agencies propose referencing conditions developed pursuant to Section 165(i)(1) of the Dodd-Frank Act.[10] Under that section, the Board, in coordination with the appropriate primary financial regulatory agencies and the Federal Insurance Office, will conduct annual stress tests of covered companies. As part of that exercise, the Board expects to provide covered companies with different sets of economic conditions under which the evaluation will be conducted: Baseline, adverse, and severely adverse economic conditions. For its initial resolution plan, a covered company may assume that failure would occur under the baseline economic scenario, or, if a baseline scenario is not then available, a reasonable substitute developed by the covered company. Subsequent iterations of a covered company's resolution plan should assume that the failure of the covered company will occur under the same economic conditions consistent with the Board's final rule implementing Section 165(i)(1).
A number of commenters asked how this discussion of strategy was to be applied when a major subsidiary was not subject to the Bankruptcy Code, but rather to another specialized insolvency regime, such as the FDI Act, state liquidation regimes for state-licensed uninsured branches and agencies of foreign banks, the International Banking Act of 1978 for federally licensed branches and agencies, foreign insolvency regimes, state insolvency regimes for insurance companies, or the Securities Investor Protection Act applicable to broker-dealers. Recognizing many of the challenges that may be posed by such a requirement if a material entity is subject to an insolvency regime other than the Bankruptcy Code, the final rule provides that a covered company may limit its strategic analysis with respect to a material entity that is subject to an insolvency regime other than the Start Printed Page 67329Bankruptcy Code to a material entity that either has $50 billion or more in total assets or conducts a critical operation. Any such analysis should be in reference to that applicable regime. Thus, for example, if a covered company owns a national bank with $50 billion or more in total consolidated assets, the resolution plan of the covered company should assume the resolution of the bank under the FDI Act and the actions that will be taken by the covered company to prevent or mitigate any adverse effects of such failure or discontinuation on the financial stability of the United States.
Under a separate rulemaking, the Corporation is requiring insured depository institutions with total assets of $50 billion or more to develop their own strategies to facilitate a resolution under the FDI Act.[11] The Corporation's rulemaking is intended to complement the final rule and, together with the final rule, provide for comprehensive and coordinated resolution planning for both the insured depository institution and its parent holding company and affiliates in the event that an orderly liquidation is required.
The resolution plan must also describe the covered company's strategy for ensuring that its insured depository institution subsidiary will be adequately protected from risks arising from the activities of any nonbank subsidiaries of the covered company (other than those that are subsidiaries of an insured depository institution). This requirement is a specific statutory requirement and is applicable only to insured depository institutions and is not applicable to other types of regulated subsidiaries.[12]
The final rule also requires the covered company to provide a description of the interconnections and interdependencies among the covered company and its material entities and affiliates, and among the critical operations and core business lines of the covered company that, if disrupted, would materially affect the funding or operations of the covered company, its material entities, its critical operations, or core business lines. As noted above, the continued availability of key services and supporting business operations to core business lines and critical operations in an environment of Start Printed Page 67330material financial distress and after insolvency should be a focus of resolution planning. Steps to ensure that service level agreements for such services, whether provided by internal or external service providers, survive insolvency should be demonstrated in the resolution plan.
For covered companies with less than $100 billion in total nonbank assets that predominately operate through one or more insured depository institutions, i.e., the company's insured depository institution subsidiaries comprise at least 85 percent of its total consolidated assets (or, in the case of a foreign-based covered company, the assets of the U.S. depository institution operations, branches, and agencies of which comprise 85 percent or more of the company's U.S. total consolidated assets), the Board and Corporation have tailored the resolution plan requirements to focus on the nonbank operations of the covered company. Specifically, a firm meeting the above criteria, and not otherwise excluded or directed by the Board and Corporation to submit a standard resolution plan, shall in its resolution plan identify and describe interconnections and interdependencies pursuant to § [—].4(g) and provide the contact information required under § [—].4(i) with respect to the entire organization. Such resolution plan must also include the remaining resolution plan elements, i.e., the strategic analysis, organizational structure, description of management information systems, and the other content specified in § [—].4(c) through § [—].4(f) and § [—].4(h), only with respect to the covered company's nonbanking operations. Importantly, with respect to the information concerning interconnections and interdependencies, the resolution plan must describe in detail, and map to legal entity the interconnections and interdependencies among the nonbanking operations as well as between the nonbanking operations and the insured depository institution operations of the covered company.
This annual filing provides a regular opportunity for firms to update their resolution plans to reflect structural changes, acquisitions, and sales. Moreover, the Agencies expect that firms will integrate resolution planning into their business operations. Accordingly, the final rule no longer requires that a resolution plan be updated automatically upon the occurrence of a restructuring, acquisition, or sale. Instead, the final rule requires that a firm update its next annual resolution plan after the occurrence of a material event, such as a restructuring, acquisition, or sale. The final rule also requires the firm to file a simple notice with the Board and the Corporation that such an event has occurred. That notice must be provided within a time period specified by the Board and the Corporation, but no later than 45 days after any event, occurrence, change in conditions or circumstances or other change that results in, or could reasonably be foreseen to have, a material effect on the resolution plan of the covered company. The final rule requires such notice to summarize why the event, occurrence, Start Printed Page 67331or change may require changes to the resolution plan.
Failure to cure deficiencies on resubmission of a resolution plan. Section __.6 of the final rule provides that, if the covered company fails to submit a revised resolution plan or the Board and the Corporation jointly determine that a revised resolution plan submitted does not adequately remedy the deficiencies identified by the Board and the Corporation, then the Board and Corporation may jointly subject a covered company or any subsidiary of a covered company to more stringent capital, leverage, or liquidity requirements or restrictions on growth, activities, or operations. Any such requirements or restrictions would apply to the covered company or subsidiary, respectively, until the Board and the Corporation jointly determine the covered company has submitted a revised resolution plan that adequately remedies the deficiencies identified. In addition, if the covered company fails, within the two-year period beginning on the date on which the determination to impose such requirements or restrictions was made, to submit a revised resolution plan that adequately remedies the deficiencies jointly identified by the Board and the Corporation, then the Board and Corporation, in consultation with the Council, may jointly, by order, direct the covered company to divest such assets or operations as the Board and Corporation jointly determine necessary to facilitate an orderly resolution of the covered company under the Bankruptcy Code in the event the company were to fail.Start Printed Page 67332
Consultation. Section __.7 of the final rule provides that, prior to issuing any notice of deficiencies, determining to impose requirements or restrictions on a covered company, or issuing a divestiture order with respect to a covered company that is likely to have a significant effect on a functionally regulated subsidiary or a depository institution subsidiary of the covered company, the Board shall consult with each Council member that primarily supervises any such subsidiary and may consult with any other federal, state, or foreign supervisor as the Board considers appropriate.
Two commenters expressed concern about the Paperwork Reduction Act analysis published as part of the proposed rule, and noted that the Board and Corporation omitted nonbank financial companies designated by the Council for enhanced supervision by the Board from that analysis. While the final rule applies to any nonbank financial company supervised by the Board, no such covered company exists because the Council has, to date, not designated any such company for enhanced supervision by the Board. However, the Board expects that the amount of burden the final rule would impose on a nonbank financial company designated by the Council to be similar Start Printed Page 67333to the amount of burden estimated for other covered companies.
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (“RFA”), requires each Federal agency to prepare a final regulatory flexibility analysis in connection with the promulgation of a final rule, or certify that the final rule will not have a significant economic impact on a substantial number of small entities.[13] Based on the analysis and for the reasons stated below, the Corporation certifies that this final rule will not have a significant economic impact on a substantial number of small entities. The Board believes that the final rule will not have a significant economic impact on a substantial number of small entities, but nonetheless is conducting the Regulatory Flexibility Act Analysis for this final rule.
In accordance with section 165(d) of the Dodd-Frank Act, the Board is adopting the final rule as Regulation QQ and is proposing to add new Part 243 (12 CFR part 243) and the Corporation is proposing to add new Part 381 (12 CFR part 381) to establish the requirements that a covered company periodically submit a resolution plan to the Board and Corporation.[14] The final rule would also establish the procedures joint review of a resolution plan by the Board and Corporation. The reasons and justification for the final rule are described in the Supplementary Information. As further discussed in the Supplementary Information, the procedure, standards, and definitions that would be established by the final rule are relevant to the joint authority of the Board and Corporation to implement the resolution plan.
Under regulations issued by the Small Business Administration (“SBA”), a “small entity” includes those firms within the “Finance and Insurance” sector with asset sizes that vary from $7 million or less in assets to $175 million Start Printed Page 67334or less in assets.[15] The Board believes that the Finance and Insurance sector constitutes a reasonable universe of firms for these purposes because such firms generally engage in actives that are financial in nature. Consequently, bank holding companies or nonbank financial companies with assets sizes of $175 million or less are small entities for purposes of the RFA.
As discussed in the Supplementary Information, the final rule applies to a “covered company,” which includes only bank holding companies and foreign banks that are or are treated as a bank holding company (“foreign banking organization”) with $50 billion or more in total consolidated assets, and nonbank financial companies that the Council has determined under section 113 of the Dodd-Frank Act must be supervised by the Board and for which such determination is in effect. Bank holding companies and foreign banking organizations that are subject to the final rule therefore substantially exceed the $175 million asset threshold at which a banking entity is considered a “small entity” under SBA regulations.[16] The final rule would apply to a nonbank financial company supervised by the Board regardless of such a company's asset size. Although the asset size of nonbank financial companies may not be the determinative factor of whether such companies may pose systemic risks and would be designated by the Council for supervision by the Board, it is an important consideration.[17] It is therefore unlikely that a financial firm that is at or below the $175 million asset threshold would be designated by the Council under section 113 of the Dodd-Frank Act because material financial distress at such firms, or the nature, scope, size, scale, concentration, interconnectedness, or mix of it activities, are not likely to pose a threat to the financial stability of the United States.
Resolution plan required.
Informational content of a resolution plan.
Review of resolution plans; resubmission of deficient resolution plans.
Failure to cure deficiencies on resubmission of a resolution plan.
No limiting effect or private right of action; confidentiality of resolution plans.
(i) Average total consolidated assets as reported on the company's four most recent FR Y-9Cs, in the case of a covered company described in paragraph (f)(1)(ii) of this section; orStart Printed Page 67335
(ii) Total consolidated assets as reported on the company's most recent annual FR Y-7Q, or, as applicable, average total consolidated assets as reported on the company's four most recent quarterly FR Y-7Qs, in the case of a covered company described in paragraph (f)(1)(iii) of this section.
(2) Notice of material events. Each covered company shall provide the Board and the Corporation with a notice no later than 45 days after any event, occurrence, change in conditions or circumstances, or other change that results in, or could reasonably be foreseen to have, a material effect on the resolution plan of the covered company. Start Printed Page 67336Such notice should describe the event, occurrence or change and explain why the event, occurrence or change may require changes to the resolution plan. The covered company shall address any event, occurrence or change with respect to which it has provided notice pursuant to this paragraph (b)(2) in the following resolution plan submitted by the covered company.
(i) Take into account that such material financial distress or failure of the covered company may occur under the baseline, adverse and severely adverse economic conditions provided to the covered company by the Board pursuant to 12 U.S.C. 5365(i)(1)(B); provided, however, a covered company Start Printed Page 67337may submit its initial resolution plan assuming the baseline conditions only, or, if a baseline scenario is not then available, a reasonable substitute developed by the covered company; and
(ii) A mapping of the covered company's critical operations and core business lines, including material asset Start Printed Page 67338holdings and liabilities related to such critical operations and core business lines, to material entities;
(j) Inclusion of previously submitted resolution plan informational elements by reference. An annual submission of Start Printed Page 67339or update to a resolution plan submitted by a covered company may include by reference informational elements (but not strategic analysis or executive summary elements) from a resolution plan previously submitted by the covered company to the Board and the Corporation, provided that:
(1) The covered company fails to submit a revised resolution plan under § __.5(c) within the required time period; or
(2) The Board and the Corporation jointly determine that a revised resolution plan submitted under § __.5(c) does not adequately remedy the deficiencies jointly identified by the Board and the Corporation under § __.5(b).
(b) Duration of requirements or restrictions.—Any requirements or restrictions imposed on a covered company or a subsidiary thereof pursuant to paragraph (a) of this section shall cease to apply to the covered company or subsidiary, respectively, on the date that the Board and the Corporation jointly determine the covered company has submitted a revised resolution plan that adequately remedies the deficiencies jointly identified by the Board and the Corporation under § __.5(b).
(2) The covered company has failed, within the 2-year period beginning on the date on which the determination to impose such requirements or restrictions under paragraph (a) of this section was made, to submit a revised resolution plan that adequately remedies the deficiencies jointly identified by the Board and the Corporation under § __.5(b); and
Prior to issuing any notice of deficiencies under § __.5(b), determining to impose requirements or restrictions under § __.6(a), or issuing a divestiture order pursuant to § __.6(c) with respect to a covered company that is likely to have a significant impact on a functionally regulated subsidiary or a depository institution subsidiary of the covered company, the Board—
§ __.8
(1) A court or trustee in a proceeding commenced under the Bankruptcy Code;Start Printed Page 67340
§ __.9
The Board and Corporation may jointly enforce an order jointly issued by the Board and Corporation under § __.6(a) or __.6(c) of this part. The Board, in consultation with the Corporation, may take any action to address any violation of this part by a covered company under section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818).
1. The authority citation for part 243 reads as follows:
1. The authority citation for part 381 reads as follows:
11. See Special Reporting, Analysis and Contingent Resolution Plans at Certain Large Insured Depository Institutions, 75 FR 27,464 (May 17, 2010) (to be codified at 12 CFR part 360). On September 13, 2011, the Corporation approved an interim final rule to implement this requirement. The Corporation's rule is available at: http://fdic.gov/​news/​news/​press/​2011/​pr11150.html.