Key Attributes of Effective Resolution Regimes for Financial Institutions

Key Attributes of Effective Resolution Regimes

for Financial Institutions

15 October 2014

A revised version was published in April 2024:

https://www.fsb.org/2024/04/key-attributes-of-effective-resolution-regimes-

for-financial-institutions-revised-version-2024/

Content Page

Foreword .................................................................................................................................... 1

Preamble ..................................................................................................................................... 3

1. Scope .................................................................................................................................. 5

2. Resolution authority ........................................................................................................... 5

3. Resolution powers .............................................................................................................. 6

4. Set-off, netting, collateralisation, segregation of client assets ......................................... 10

5. Safeguards ........................................................................................................................ 11

6. Funding of firms in resolution .......................................................................................... 12

7. Legal framework conditions for cross-border cooperation .............................................. 12

8. Crisis Management Groups (CMGs)................................................................................ 14

9. Institution-specific cross-border cooperation agreements................................................ 14

10. Resolvability assessments ................................................................................................ 15

11. Recovery and resolution planning .................................................................................... 16

12. Access to information and information sharing ............................................................... 18

Appendix I: General guidance on the implementation of the Key Attributes .......................... 21

I-Annex 1: Information Sharing for Resolution Purposes ....................................................... 23

I-Annex 2: Essential Elements of Institution-Specific Cross-border Cooperation Agreements .. 31

I-Annex 3: Resolvability Assessments ..................................................................................... 37

I-Annex 4: Essential Elements of Recovery and Resolution Plans .......................................... 43

I-Annex 5: Temporary stay on early termination rights ........................................................... 51

Appendix II: Sector-specific Guidance .................................................................................... 55

II-Annex 1: Resolution of Financial Market Infrastructures (FMIs) and FMI Participants .... 57

II-Annex 2: Resolution of Insurers ........................................................................................... 75

II-Annex 3: Client Asset Protection in Resolution ................................................................... 85

iii

Foreword

The Key Attributes of Effective Resolution Regimes for Financial Institutions (the ‘Key

Attributes’ KA) set out the core elements that the FSB considers to be necessary for an

effective resolution regime. Their implementation should allow authorities to resolve financial

institutions in an orderly manner

without taxpayer exposure to loss from solvency support, while

maintaining continuity of their vital economic functions

The FSB adopted the ‘Key Attributes’ at its Plenary meeting in October 2011. The G20 Heads

of States and Government subsequently endorsed the ‘Key Attributes’ at the Cannes Summit

in November 2011 as “a new international standards for resolution regimes”.

The Key Attributes set out twelve essential features that should be part of the resolution

regimes of all jurisdictions. They relate to:

1. Scope

2. Resolution authority

3. Resolution powers

4. Set-off, netting, collateralisation, segregation of client assets

5. Safeguards

6. Funding of firms in resolution

7. Legal framework conditions for cross-border cooperation

8. Crisis Management Groups (CMGs)

9. Institution-specific cross-border cooperation agreements

10. Resolvability assessments

11. Recovery and resolution planning

12. Access to information and information sharing.

The 2014 version of the Key Attributes document

When the FSB adopted the Key Attributes in 2011 it was agreed to develop further guidance

on the implementation of the Key Attributes, taking into account the need for implementation

to accommodate different national legal systems and market environments and sector-specific

considerations (e.g., insurance, financial market infrastructures) to promote effective and

consistent implementation across jurisdictions.

On 15 October 2014, the FSB adopted additional guidance that elaborates on specific KAs

relating to information sharing for resolution purposes and sector-specific guidance that sets

out how the Key Attributes should applied for insurers, financial market infrastructures

(FMIs) and the protection of client assets in resolution.

Communiqué G20 Leaders Summit – Cannes – 3-4 November 2011, Section 13.

The newly adopted guidance documents have been incorporated as annexes into the 2014

version of the Key Attributes document. No changes were made to the text of the twelve Key

Attributes of October 2011. The twelve Key Attributes remain the umbrella standard for

resolution regimes covering financial institutions of all types that could be systemic in failure.

The FSB will continue its work to develop further guidance as needed to promote the

effective and consistent implementation of the Key Attributes.

The Annexes to the Key Attributes

The Annexes to the Key Attributes provide guidance on implementing and interpreting the

Key Attributes. They do not form part of the Key Attributes standard. Where components of

the Annexes have been deemed important for purposes of assessing compliance with the Key

Attributes, those components are explicitly reflected in the Key Attributes Assessment

Methodology.

The Annexes to the Key Attributes fall into two categories:

General guidance on the implementation of the Key Attributes (Appendix I):

I-Annex 1: Information sharing for Resolution Purposes (KAs 7 and 12)

I-Annex 2: Institution-specific Cross-border Cooperation Agreements (KA 9)

I-Annex 3: Resolvability Assessments (KA 10)

I-Annex 4: Recovery and Resolution Plans (KA 11)

I-Annex 5: Temporary Stays on Early Termination Rights (KA 4)

Sector-specific Guidance (Appendix II)

II-Annex 1: Resolution of FMIs and FMI Participants

II-Annex 1: Resolution of Insurers

II-Annex 1: Protection of Client Assets in Resolution

The sector-specific guidance recognises that not all Key Attributes are equally relevant for all

sectors and that some require further explanation and interpretation, or some adaptation in

order to be effectively implemented in a certain sector. The sector-specific guidance sets out

how the Key Attributes should understood in a sector-specific context. It complements the Key

Attributes, and the

sector-specific guidance on individual KAs should be considered in

conjunction with the KA to which it relates. There should be no inference that a particular KA

or element of a KA does not apply simply because there is no supporting provision in the

relevant Annex.

A final version of the assessment methodology is expected to be released in early 2015.

Preamble

The objective of an effective resolution regime is to make feasible the resolution of financial

institutions without severe systemic disruption and without exposing taxpayers to loss, while

protecting vital economic functions through mechanisms which make it possible for

shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects

the hierarchy of claims in liquidation.

An effective resolution regime (interacting with applicable schemes and arrangements for the

protection of depositors, insurance policy holders and retail investors) should:

(i) ensure continuity of systemically important financial services, and

payment, clearing and settlement functions;

(ii) protect, where applicable and in coordination with the relevant insurance

schemes and arrangements such depositors, insurance policy holders and

investors as are covered by such schemes and arrangements, and ensure

the rapid return of segregated client assets;

(iii) allocate losses to firm owners (shareholders) and unsecured and uninsured

creditors in a manner that respects the hierarchy of claims;

(iv) not rely on public solvency support and not create an expectation that such

support will be available;

(v) avoid unnecessary destruction of value, and therefore seek to minimise the

overall costs of resolution in home and host jurisdictions and, where

consistent with the other objectives, losses for creditors;

(vi) provide for speed and transparency and as much predictability as possible

through legal and procedural clarity and advanced planning for orderly

resolution;

(vii) provide a mandate in law for cooperation, information exchange and

coordination domestically and with relevant foreign resolution authorities

before and during a resolution;

(viii) ensure that non-viable firms can exit the market in an orderly way; and

(ix) be credible, and thereby enhance market discipline and provide incentives

for market-based solutions.

Jurisdictions should have in place a resolution regime that provides the resolution authority

with a broad range of powers and options to resolve a firm that is no longer viable and has no

reasonable prospect of becoming so. The resolution regime should include:

(i) stabilisation options that achieve continuity of systemically important functions by

way of a sale or transfer of the shares in the firm or of all or parts of the firm’s

business to a third party, either directly or through a bridge institution, and/or an

officially mandated creditor-financed recapitalisation of the entity that continues

providing the critical functions; and

(ii) liquidation options that provide for the orderly closure and wind-down of all or

parts of the firm’s business in a manner that protects insured depositors, insurance

policy holders and other retail customers.

In order to facilitate the coordinated resolution of firms active in multiple countries,

jurisdictions should seek convergence of their resolution regimes through the legislative

changes needed to incorporate the tools and powers set out in these Key Attributes into their

national regimes.

1. Scope

1.1 Any financial institution that could be systemically significant or critical if it fails

should be subject to a resolution regime that has the attributes set out in this

document (“Key Attributes”). The regime should be clear and transparent as to the

financial institutions (hereinafter “firms”) within its scope. It should extend to:

(i) holding companies of a firm;

(ii) non-regulated operational entities within a financial group or conglomerate that

are significant to the business of the group or conglomerate; and

(iii) branches of foreign firms.

1.2 Financial market infrastructures (“FMIs”)

should be subject to resolution regimes

that apply the objectives and provisions of the Key Attributes in a manner as

appropriate to FMIs and their critical role in financial markets. The choice of

resolution powers should be guided by the need to maintain continuity of critical

FMI functions.

1.3 The resolution regime should require that at least all domestically incorporated

global SIFIs (“G-SIFIs”):

(i) have in place a recovery and resolution plan (“RRP”), including a group

resolution plan, containing all elements set out in I-Annex 4 (see Key Attribute

11);

(ii) are subject to regular resolvability assessments (see Key Attribute 10); and

(iii) are the subject of institution-specific cross-border cooperation agreements (see

Key Attribute 9).

2. Resolution authority

2.1 Each jurisdiction should have a designated administrative authority or authorities

responsible for exercising the resolution powers over firms within the scope of the

resolution regime (“resolution authority”). Where there are multiple resolution

authorities within a jurisdiction their respective mandates, roles and responsibilities

should be clearly defined and coordinated.

This should not apply where jurisdictions are subject to a binding obligation to respect resolution of financial

institutions under the authority of the home jurisdiction (for example, the EU Winding up and Reorganisation

Directives).

For the purposes of this document, the term “financial market infrastructure” is defined as “a multilateral

system among participating financial institutions, including the operator of the system, used for the purposes

of recording, clearing, or settling payments, securities, derivatives, or other financial transactions”. It

includes payment systems, central securities depositories (CSDs), securities settlement systems (SSSs),

central counterparties (CCPs), and trade repositories (TRs). See CPSS-IOSCO Principles for Financial

Market Infrastructures - April 2012 (http://www.bis.org/cpmi/publ/d101.htm

2.2 Where different resolution authorities are in charge of resolving entities of the same

group within a single jurisdiction, the resolution regime of that jurisdiction should

identify a lead authority that coordinates the resolution of the legal entities within

that jurisdiction.

2.3 As part of its statutory objectives and functions, and where appropriate in

coordination with other authorities, the resolution authority should:

(i) pursue financial stability and ensure continuity of systemically important

financial services, and payment, clearing and settlement functions;

(ii) protect, where applicable and in coordination with the relevant insurance

schemes and arrangements, such depositors, insurance policy holders and

investors as are covered by such schemes and arrangements;

(iii) avoid unnecessary destruction of value and seek to minimise the overall costs

of resolution in home and host jurisdictions and losses to creditors, where that

is consistent with the other statutory objectives; and

(iv) duly consider the potential impact of its resolution actions on financial stability

in other jurisdictions.

2.4 The resolution authority should have the authority to enter into agreements with

resolution authorities of other jurisdictions.

2.5 The resolution authority should have operational independence consistent with its

statutory responsibilities, transparent processes, sound governance and adequate

resources and be subject to rigorous evaluation and accountability mechanisms to

assess the effectiveness of any resolution measures. It should have the expertise,

resources and the operational capacity to implement resolution measures with respect

to large and complex firms.

2.6 The resolution authority and its staff should be protected against liability for actions

taken and omissions made while discharging their duties in the exercise of resolution

powers in good faith, including actions in support of foreign resolution proceedings.

2.7 The resolution authority should have unimpeded access to firms where that is

material for the purposes of resolution planning and the preparation and

implementation of resolution measures.

3. Resolution powers

Entry into resolution

3.1 Resolution should be initiated when a firm is no longer viable or likely to be no

longer viable, and has no reasonable prospect of becoming so. The resolution regime

should provide for timely and early entry into resolution before a firm is balance-

sheet insolvent and before all equity has been fully wiped out. There should be clear

standards or suitable indicators of non-viability to help guide decisions on whether

firms meet the conditions for entry into resolution.

General resolution powers

3.2 Resolution authorities should have at their disposal a broad range of resolution

powers, which should include powers to do the following:

(i) Remove and replace the senior management and directors and recover monies from

responsible persons, including claw-back of variable remuneration;

(ii) Appoint an administrator to take control of and manage the affected firm with the

objective of restoring the firm, or parts of its business, to ongoing and sustainable

viability;

(iii) Operate and resolve the firm, including powers to terminate contracts, continue or

assign contracts, purchase or sell assets, write down debt and take any other action

necessary to restructure or wind down the firm’s operations;

(iv) Ensure continuity of essential services and functions by requiring other companies in

the same group to continue to provide essential services to the entity in resolution, any

successor or an acquiring entity; ensuring that the residual entity in resolution can

temporarily provide such services to a successor or an acquiring entity; or procuring

necessary services from unaffiliated third parties;

(v) Override rights of shareholders of the firm in resolution, including requirements for

approval by shareholders of particular transactions, in order to permit a merger,

acquisition, sale of substantial business operations, recapitalisation or other measures to

restructure and dispose of the firm’s business or its liabilities and assets;

(vi) Transfer or sell assets and liabilities, legal rights and obligations, including deposit

liabilities and ownership in shares, to a solvent third party, notwithstanding any

requirements for consent or novation that would otherwise apply (see Key Attribute

3.3);

(vii) Establish a temporary bridge institution to take over and continue operating certain

critical functions and viable operations of a failed firm (see Key Attribute 3.4);

(viii) Establish a separate asset management vehicle (for example, as a subsidiary of the

distressed firm, an entity with a separate charter, or as a trust or asset management

company) and transfer to the vehicle for management and run-down non-performing

loans or difficult-to-value assets;

(ix) Carry out bail-in within resolution as a means to achieve or help achieve continuity of

essential functions either (i) by recapitalising the entity hitherto providing these

functions that is no longer viable, or, alternatively, (ii) by capitalising a newly

established entity or bridge institution to which these functions have been transferred

following closure of the non-viable firm (the residual business of which would then be

wound up and the firm liquidated) (see Key Attribute 3.5);

(x) Temporarily stay the exercise of early termination rights that may otherwise be

triggered upon entry of a firm into resolution or in connection with the use of resolution

powers (see Key Attribute 4.3 and Annex IV);

(xi) Impose a moratorium with a suspension of payments to unsecured creditors and

customers (except for payments and property transfers to central counterparties (CCPs)

and those entered into the payment, clearing and settlements systems) and a stay on

creditor actions to attach assets or otherwise collect money or property from the firm,

while protecting the enforcement of eligible netting and collateral agreements; and

(xii) Effect the closure and orderly wind-down (liquidation) of the whole or part of a failing

firm with timely payout or transfer of insured deposits and prompt (for example, within

seven days) access to transaction accounts and to segregated client funds).

Transfer of assets and liabilities

3.3 Resolution authorities should have the power to transfer selected assets and liabilities

of the failed firm to a third party institution or to a newly established bridge

institution. Any transfer of assets or liabilities should not:

(i) require the consent of any interested party or creditor to be valid; and

(ii) constitute a default or termination event in relation to any obligation relating to

such assets or liabilities or under any contract to which the failed firm is a party

(see Key Attribute 4.2).

Bridge institution

3.4 Resolution authorities should have the power to establish one or more bridge

institutions to take over and continue operating certain critical functions and viable

operations of a failed firm, including:

(i) the power to enter into legally enforceable agreements by which the authority

transfers, and the bridge institution receives, assets and liabilities of the failed

firm as selected by the authority;

(ii) the power to establish the terms and conditions under which the bridge

institution has the capacity to operate as a going concern, including the manner

under which the bridge institution obtains capital or operational financing and

other liquidity support; the prudential and other regulatory requirements that

apply to the operations of the bridge institution; the selection of management

and the manner by which the corporate governance of the bridge institution

may be conducted; and the performance by the bridge institution of such other

temporary functions as the authority may from time to time prescribe;

(iii) the power to reverse, if necessary, asset and liability transfers to a bridge

institution subject to appropriate safeguards, such as time restrictions; and

(iv) the power to arrange the sale or wind-down of the bridge institution, or the sale

of some or all of its assets and liabilities to a purchasing institution, so as best

to effect the objectives of the resolution authority.

Bail-in within resolution

3.5 Powers to carry out bail-in within resolution should enable resolution authorities to:

(i) write down in a manner that respects the hierarchy of claims in liquidation (see

Key Attribute 5.1) equity or other instruments of ownership of the firm,

unsecured and uninsured creditor claims to the extent necessary to absorb the

losses; and to

(ii) convert into equity or other instruments of ownership of the firm under

resolution (or any successor in resolution or the parent company within the

same jurisdiction), all or parts of unsecured and uninsured creditor claims in a

manner that respects the hierarchy of claims in liquidation;

(iii) upon entry into resolution, convert or write-down any contingent convertible or

contractual bail-in instruments whose terms had not been triggered prior to

entry into resolution and treat the resulting instruments in line with (i) or (ii).

3.6 The resolution regime should make it possible to apply bail-in within resolution in

conjunction with other resolution powers (for example, removal of problem assets,

replacement of senior management and adoption of a new business plan) to ensure

the viability of the firm or newly established entity following the implementation of

bail-in.

Resolution of insurers

3.7 In the case of insurance firms, resolution authorities should also have powers to:

(i) undertake a portfolio transfer moving all or part of the insurance business to

another insurer without the consent of each and every policyholder; and

(ii) discontinue the writing of new business by an insurance firm in resolution

while continuing to administer existing contractual policy obligations for in-

force business (run-off).

Exercise of resolution powers

3.8 Resolution authorities should have the legal and operational capacity to:

(i) apply one or a combination of resolution powers, with resolution actions

being either combined or applied sequentially;

(ii) apply different types of resolution powers to different parts of the firm’s

business (for example, retail and commercial banking, trading operations,

insurance); and

(iii) initiate a wind-down for those operations that, in the particular circumstances,

are judged by the authorities to be not critical to the financial system or the

economy (see Key Attribute 3.2 xii).

3.9 In applying resolution powers to individual components of a financial group located

in its jurisdiction, the resolution authority should take into account the impact on the

group as a whole and on financial stability in other affected jurisdictions, and

undertake best efforts to avoid taking actions that could reasonably be expected to

trigger instability elsewhere in the group or in the financial system.

4. Set-off, netting, collateralisation, segregation of client assets

4.1 The legal framework governing set-off rights, contractual netting and

collateralisation agreements and the segregation of client assets should be clear,

transparent and enforceable during a crisis or resolution of firms, and should not

hamper the effective implementation of resolution measures.

4.2 Subject to adequate safeguards, entry into resolution and the exercise of any

resolution powers should not trigger statutory or contractual set-off rights, or

constitute an event that entitles any counterparty of the firm in resolution to exercise

contractual acceleration or early termination rights provided the substantive

obligations under the contract continue to be performed.

4.3 Should contractual acceleration or early termination rights nevertheless be

exercisable, the resolution authority should have the power to stay temporarily such

rights where they arise by reason only of entry into resolution or in connection with

the exercise of any resolution powers. The stay should:

(i) be strictly limited in time (for example, for a period not exceeding 2 business

days);

(ii) be subject to adequate safeguards that protect the integrity of financial

contracts and provide certainty to counterparties (see I-Annex 5 on Conditions

for a temporary stay); and

(iii) not affect the exercise of early termination rights of a counterparty against the

firm being resolved in the case of any event of default not related to entry into

resolution or the exercise of the relevant resolution power occurring before,

during or after the period of the stay (for example, failure to make a payment,

deliver or return collateral on a due date).

The stay may be discretionary (imposed by the resolution authority) or automatic in

its operation. In either case, jurisdictions should ensure that there is clarity as to the

beginning and the end of the stay.

4.4 Resolution authorities should apply the temporary stay on early termination rights in

accordance with the guidance set out in I-Annex 5 to ensure that it does not

compromise the safe and orderly operations of regulated exchanges and FMIs.

5. Safeguards

Respect of creditor hierarchy and “no creditors worse off” principle

5.1 Resolution powers should be exercised in a way that respects the hierarchy of claims

while providing flexibility to depart from the general principle of equal (pari passu)

treatment of creditors of the same class, with transparency about the reasons for such

departures, if necessary to contain the potential systemic impact of a firm’s failure or

to maximise the value for the benefit of all creditors as a whole. In particular, equity

should absorb losses first, and no loss should be imposed on senior debt holders until

subordinated debt (including all regulatory capital instruments) has been written-off

entirely (whether or not that loss-absorption through write-down is accompanied by

conversion to equity).

5.2 Creditors should have a right to compensation where they do not receive at a

minimum what they would have received in a liquidation of the firm under the

applicable insolvency regime (“no creditor worse off than in liquidation” safeguard).

5.3 Directors and officers of the firm under resolution should be protected in law (for

example, from law suits by shareholders or creditors) for actions taken when

complying with decisions of the resolution authority.

Legal remedies and judicial action

5.4 The resolution authority should have the capacity to exercise the resolution powers

with the necessary speed and flexibility, subject to constitutionally protected legal

remedies and due process. In those jurisdictions where a court order is still required

to apply resolution measures, resolution authorities should take this into account in

the resolution planning process so as to ensure that the time required for court

proceedings will not compromise the effective implementation of resolution measures.

5.5 The legislation establishing resolution regimes should not provide for judicial actions

that could constrain the implementation of, or result in a reversal of, measures taken

by resolution authorities acting within their legal powers and in good faith. Instead, it

should provide for redress by awarding compensation, if justified.

5.6 In order to preserve market confidence, jurisdictions should provide for flexibility to

allow temporary exemptions from disclosure requirements or a postponement of

disclosures required by the firm, for example, under market reporting, takeover

provisions and listing rules, where the disclosure by the firm could affect the

successful implementation of resolution measures.

6. Funding of firms in resolution

6.1 Jurisdictions should have statutory or other policies in place so that authorities are

not constrained to rely on public ownership or bail-out funds as a means of resolving

firms.

6.2 Where temporary sources of funding to maintain essential functions are needed to

accomplish orderly resolution, the resolution authority or authority extending the

temporary funding should make provision to recover any losses incurred (i) from

shareholders and unsecured creditors subject to the “no creditor worse off than in

liquidation” safeguard (see Key Attribute 5.2); or (ii) if necessary, from the financial

system more widely.

6.3 Jurisdictions should have in place privately-financed deposit insurance or resolution

funds, or a funding mechanism with ex post recovery from the industry of the costs

of providing temporary financing to facilitate the resolution of the firm.

6.4 Any provision by the authorities of temporary funding should be subject to strict

conditions that minimise the risk of moral hazard, and should include the following:

(i) a determination that the provision of temporary funding is necessary to

foster financial stability and will permit implementation of a resolution

option that is best able to achieve the objectives of an orderly resolution,

and that private sources of funding have been exhausted or cannot achieve

these objectives; and

(ii) the allocation of losses to equity holders and residual costs, as appropriate,

to unsecured and uninsured creditors and the industry through ex-post

assessments, insurance premium or other mechanisms.

6.5 As a last resort and for the overarching purpose of maintaining financial stability,

some countries may decide to have a power to place the firm under temporary public

ownership and control in order to continue critical operations, while seeking to

arrange a permanent solution such as a sale or merger with a commercial private

sector purchaser. Where countries do equip themselves with such powers, they

should make provision to recover any losses incurred by the state from unsecured

creditors or, if necessary, the financial system more widely.

7. Legal framework conditions for cross-border cooperation

7.1 The statutory mandate of a resolution authority should empower and strongly

encourage the authority wherever possible to act to achieve a cooperative solution

with foreign resolution authorities.

7.2 Legislation and regulations in jurisdictions should not contain provisions that trigger

automatic action in that jurisdiction as a result of official intervention or the initiation

of resolution or insolvency proceedings in another jurisdiction, while reserving the

right of discretionary national action if necessary to achieve domestic stability in the

absence of effective international cooperation and information sharing. Where a

resolution authority takes discretionary national action it should consider the impact

on financial stability in other jurisdictions.

7.3 The resolution authority should have resolution powers over local branches of

foreign firms and the capacity to use its powers either to support a resolution carried

out by a foreign home authority (for example, by ordering a transfer of property

located in its jurisdiction to a bridge institution established by the foreign home

authority) or, in exceptional cases, to take measures on its own initiative where the

home jurisdiction is not taking action or acts in a manner that does not take sufficient

account of the need to preserve the local jurisdiction’s financial stability.

Where a

resolution authority acting as host authority takes discretionary national action, it

should give prior notification and consult the foreign home authority.

7.4 National laws and regulations should not discriminate against creditors on the basis

of their nationality, the location of their claim or the jurisdiction where it is payable.

The treatment of creditors and ranking in insolvency should be transparent and

properly disclosed to depositors, insurance policy holders and other creditors.

7.5 Jurisdictions should provide for transparent and expedited processes to give effect to

foreign resolution measures, either by way of a mutual recognition process or by

taking measures under the domestic resolution regime that support and are consistent

with the resolution measures taken by the foreign home resolution authority. Such

recognition or support measures would enable a foreign home resolution authority to

gain rapid control over the firm (branch or shares in a subsidiary) or its assets that are

located in the host jurisdiction, as appropriate, in cases where the firm is being

resolved under the law of the foreign home jurisdiction. Recognition or support of

foreign measures should be provisional on the equitable treatment of creditors in the

foreign resolution proceeding.

7.6 The resolution authority should have the capacity in law, subject to adequate

confidentiality requirements and protections for sensitive data, to share information,

including recovery and resolution plans (RRPs), pertaining to the group as a whole or

to individual subsidiaries or branches, with relevant foreign authorities (for example,

members of a CMG), where sharing is necessary for recovery and resolution

planning or for implementing a coordinated resolution.

7.7 Jurisdictions should provide for confidentiality requirements and statutory safeguards

for the protection of information received from foreign authorities.

This should not apply where jurisdictions are subject to a binding obligation to respect resolution of financial

institutions under the authority of the home jurisdiction (for example, the EU Winding up and Reorganisation

Directives).

8. Crisis Management Groups (CMGs)

8.1 Home and key host authorities of all G-SIFIs should maintain CMGs with the

objective of enhancing preparedness for, and facilitating the management and

resolution of, a cross-border financial crisis affecting the firm. CMGs should include

the supervisory authorities, central banks, resolution authorities, finance ministries

and the public authorities responsible for guarantee schemes of jurisdictions that are

home or host to entities of the group that are material to its resolution, and should

cooperate closely with authorities in other jurisdictions where firms have a systemic

presence.

8.2 CMGs should keep under active review, and report as appropriate to the FSB and the

FSB Peer Review Council

on:

(i) progress in coordination and information sharing within the CMGs and with

host authorities that are not represented in the CMGs;

(ii) the recovery and resolution planning process for G-SIFIs under institution-

specific cooperation agreements; and

(iii) the resolvability of G-SIFIs.

9. Institution-specific cross-border cooperation agreements

9.1 For all G-SIFIs, at a minimum, institution-specific cooperation agreements,

containing the essential elements set out in Annex I, should be in place between the

home and relevant host authorities that need to be involved in the planning and crisis

resolution stages. These agreements should, inter alia:

(i) establish the objectives and processes for cooperation through CMGs;

(ii) define the roles and responsibilities of the authorities pre-crisis (that is, in the

recovery and resolution planning phases) and during a crisis;

(iii) set out the process for information sharing before and during a crisis, including

sharing with any host authorities that are not represented in the CMG, with

clear reference to the legal bases for information sharing in the respective

national laws and to the arrangements that protect the confidentiality of the

shared information;

(iv) set out the processes for coordination in the development of the RRPs for the

firm, including parent or holding company and significant subsidiaries,

branches and affiliates that are within the scope of the agreement, and for

engagement with the firm as part of this process;

6 The FSB has for the time being not established a Peer Review Council. Instead it launched a Resolvability

Assessment Process (RAP). The objective of the RAP, which should be conducted by senior policy makers

from CMG member authorities, is to facilitate adequate and consistent reporting on the resolvability of each

G-SIFI and overall status of the resolution planning process

(v) set out the processes for coordination among home and host authorities in the

conduct of resolvability assessments;

(vi) include agreed procedures for the home authority to inform and consult host

authorities in a timely manner when there are material adverse developments

affecting the firm and before taking any significant action or crisis measures;

(vii) include agreed procedures for the host authority to inform and consult the

home authority in a timely manner when there are material adverse

developments affecting the firm and before taking any discretionary action or

crisis measure;

(viii) provide an appropriate level of detail with regard to the cross-border

implementation of specific resolution measures, including with respect to the

use of bridge institution and bail-in powers;

(ix) provide for meetings to be held at least annually, involving top officials of the

home and relevant host authorities, to review the robustness of the overall

resolution strategy for G-SIFIs; and

(x) provide for regular (at least annual) reviews by appropriate senior officials of

the operational plans implementing the resolution strategies.

9.2 The existence of agreements should be made public. The home authorities may

publish the broad structure of the agreements, if agreed by the authorities that are

party to the agreement.

10. Resolvability assessments

10.1 Resolution authorities should regularly undertake, at least for G-SIFIs, resolvability

assessments that evaluate the feasibility of resolution strategies and their credibility

in light of the likely impact of the firm’s failure on the financial system and the

overall economy. Those assessments should be conducted in accordance with the

guidance set out in I-Annex 3.

10.2 In undertaking resolvability assessments, resolution authorities should in

coordination with other relevant authorities assess, in particular:

(i) the extent to which critical financial services, and payment, clearing and

settlement functions can continue to be performed;

(ii) the nature and extent of intra-group exposures and their impact on resolution if

they need to be unwound;

(iii) the capacity of the firm to deliver sufficiently detailed accurate and timely

information to support resolution; and

(iv) the robustness of cross-border cooperation and information sharing

arrangements.

10.3 Group resolvability assessments should be conducted by the home authority of the

G-SIFI and coordinated within the firm’s CMG taking into account national

assessments by host authorities.

10.4 Host resolution authorities that conduct resolvability assessments of subsidiaries

located in their jurisdiction should coordinate as far as possible with the home

authority that conducts resolvability assessment for the group as a whole.

10.5 To improve a firm’s resolvability, supervisory authorities or resolution authorities

should have powers to require, where necessary, the adoption of appropriate

measures, such as changes to a firm’s business practices, structure or organisation, to

reduce the complexity and costliness of resolution, duly taking into account the effect

on the soundness and stability of ongoing business. To enable the continued

operations of systemically important functions, authorities should evaluate whether

to require that these functions be segregated in legally and operationally independent

entities that are shielded from group problems.

11. Recovery and resolution planning

11.1 Jurisdictions should put in place an ongoing process for recovery and resolution

planning, covering at a minimum domestically incorporated firms that could be

systemically significant or critical if they fail.

11.2 Jurisdictions should require that robust and credible RRPs, containing the essential

elements of Recovery and Resolution Plans set out in I-Annex 4, are in place for all

G-SIFIs and for any other firm that its home authority assesses could have an impact

on financial stability in the event of its failure.

11.3 The RRP should be informed by resolvability assessments (see Key Attribute 10) and

take account of the specific circumstances of the firm and reflect its nature,

complexity, interconnectedness, level of substitutability and size.

11.4 Jurisdictions should require that the firm’s senior management be responsible for

providing the necessary input to the resolution authorities for (i) the assessment of

the recovery plans; and (ii) the preparation by the resolution authority of resolution

plans.

Recovery plan

11.5 Supervisory and resolution authorities should ensure that the firms for which a RRP

is required maintain a recovery plan that identifies options to restore financial

strength and viability when the firm comes under severe stress. Recovery plans

should include:

(i) credible options to cope with a range of scenarios including both idiosyncratic

and market wide stress;

(ii) scenarios that address capital shortfalls and liquidity pressures; and

(iii) processes to ensure timely implementation of recovery options in a range of

stress situations.

Resolution plan

11.6 The resolution plan is intended to facilitate the effective use of resolution powers to

protect systemically important functions, with the aim of making the resolution of

any firm feasible without severe disruption and without exposing taxpayers to loss. It

should include a substantive resolution strategy agreed by top officials and an

operational plan for its implementation and identify, in particular:

(i) financial and economic functions for which continuity is critical;

(ii) suitable resolution options to preserve those functions or wind them down in

an orderly manner;

(iii) data requirements on the firm’s business operations, structures, and

systemically important functions;

(iv) potential barriers to effective resolution and actions to mitigate those barriers;

(v) actions to protect insured depositors and insurance policy holders and ensure

the rapid return of segregated client assets; and

(vi) clear options or principles for the exit from the resolution process.

11.7 Firms should be required to ensure that key Service Level Agreements can be

maintained in crisis situations and in resolution, and that the underlying contracts

include provisions that prevent termination triggered by recovery or resolution events

and facilitate transfer of the contract to a bridge institution or a third party acquirer.

11.8 At least for G-SIFIs, the home resolution authority should lead the development of

the group resolution plan in coordination with all members of the firm’s CMG. Host

authorities that are involved in the CMG or are the authorities of jurisdictions where

the firm has a systemic presence should be given access to RRPs and the information

and measures that would have an impact on their jurisdiction.

11.9 Host resolution authorities may maintain their own resolution plans for the firm’s

operations in their jurisdictions cooperating with the home authority to ensure that

the plan is as consistent as possible with the group plan.

Regular updates and review

11.10 Supervisory and resolution authorities should ensure that RRPs are updated

regularly, at least annually or when there are material changes to a firm’s business or

structure, and subject to regular reviews within the firm’s CMG.

11.11 The substantive resolution strategy for each G-SIFI should be subject, at least

annually, to a review by top officials of home and relevant host authorities and,

where appropriate, the review should involve the firm’s CEO. The operational plans

for implementing each resolution strategy should be, at least annually, reviewed by

appropriate senior officials of the home and relevant host authorities.

11.12 If resolution authorities are not satisfied with a firm’s RRP, the authorities should

require appropriate measures to address the deficiencies. Relevant home and host

authorities should provide for prior consultation on the actions contemplated.

12. Access to information and information sharing

12.1 Jurisdictions should ensure that no legal, regulatory or policy impediments exist that

hinder the appropriate exchange of information, including firm-specific information,

between supervisory authorities, central banks, resolution authorities, finance

ministries and the public authorities responsible for guarantee schemes. In particular:

(i) the sharing of all information relevant for recovery and resolution planning and

for resolution should be possible in normal times and during a crisis at a

domestic and a cross-border level;

(ii) the procedures for the sharing of information relating to G-SIFIs should be set

out in institution-specific cooperation agreements (see Annex I); and

(iii) where appropriate and necessary to respect the sensitive nature of information,

information sharing may be restricted, but should be possible among the top

officials of the relevant home and host authorities.

12.2 Jurisdictions should require firms to maintain Management Information Systems

(MIS) that are able to produce information on a timely basis, both in normal times

for recovery and resolution planning and in resolution. Information should be

available at the group level and the legal entity level (taking into account information

needs under different resolution scenarios, including the separation of individual

entities from the group). Firms should be required, in particular, to:

(i) maintain a detailed inventory, including a description and the location of

the key MIS used in their material legal entities, mapped to their core

services and critical functions;

(ii) identify and address exogenous legal constraints on the exchange of

management information among the constituent entities of a financial

group (for example, as regards the information flow from individual

entities of the group to the parent);

(iii) demonstrate, as part of the recovery and resolution planning process, that

they are able to produce the essential information needed to implement

such plans within a short period of time (for example, 24 hours); and

(iv) maintain specific information at a legal entity level, including, for

example, information on intra-group guarantees and intra-group trades

booked on a back-to-back basis.

Appendix I:

General guidance on the implementation of the Key Attributes

I-Annex 1: Information Sharing for Resolution Purposes

I-Annex 2: Essential Elements of Institution-specific Cross-border Cooperation

Agreements

I-Annex 3: Resolvability assessments

I-Annex 4: Essential elements of recovery and resolution plans

I-Annex 5: Temporary stay on early termination rights

I-Annex 1 – Information Sharing for Resolution Purposes

I-Annex 1:

Information Sharing for Resolution Purposes

This Annex to the Key Attributes of Effective Resolution Regimes for Financial Institutions

(the ‘Key Attributes’, KAs)

provides implementation guidance for jurisdictions and national

authorities on the standards on information sharing set out in KAs 7.6, 7.7 and 12 and for

Crisis Management Groups (CMGs) that are developing institution-specific cross-border

cooperation agreements (COAGs). It complements the provisions in Annex 2 of this

Appendix on essential elements of COAGs and, in particular, the provisions in section 6 of

that Annex on cooperation mechanisms and information sharing frameworks, by providing

additional detail on elements of the framework to support information sharing as required by

KAs 7.6, 7.7 and 12.

Those elements are divided into two sections.

1. Principles on information sharing for resolution purposes – setting out principles

for the design of national legal gateways and related confidentiality regimes to

facilitate effective sharing of non-public information between domestic and foreign

authorities for the purposes of carrying out functions relating to resolution. This first

section elaborates on the standards for information sharing, confidentiality

requirements and statutory safeguards set out in KAs 7.6, 7.7 and 12.

2. Information sharing provisions for COAGs – setting out the provisions relating to

information sharing that should be included in a COAG, including information to be

shared, confidentiality of information, procedures for information sharing,

observance of the commitments to information sharing and regular review. This

second section complements, and should be read with, I-Annex 2.

http://www.financialstabilityboard.org/publications/r_111104cc.pdf

Where components of this Annex have been deemed important for purposes of assessing compliance with the

Key Attributes, those components are explicitly reflected in the Key Attributes Assessment Methodology.

I-Annex 1 – Information Sharing for Resolution Purposes

Glossary

‘Functions relating to resolution’ refer to resolution planning and preparing for, carrying

out and coordinating resolution actions, including the activities set out in paragraph 1.9.

‘Information’ refers to non-public information including, but not limited to, client and

counterparty information, information about financial institutions that has not been disclosed

in accordance with normal disclosure requirements, and analyses, evaluations and other work

products derived from non-public information.

‘Legal gateways’ refers to provisions set out in statute or other instruments with the force of

law that enable the disclosure of non-public information to specified recipients or for

specified purposes. Legal gateways may be contingent on, or supported by, memoranda of

understanding (‘MoUs’) or other forms of agreement between the providing and recipient

authorities.

‘Party’ refers to an authority that signs a COAG.

1. Principles on information sharing for resolution purposes

Legal gateways for disclosure of non-public information

1.1 Jurisdictions should ensure that their legal framework establishes clear legal

gateways that authorise national authorities to disclose information in a timely

fashion to other domestic and foreign authorities with functions relating to resolution

where that information is necessary for the receiving authority to carry out functions

relating to the resolution of the firm to which the information relates. Authorities

with functions relating to resolution may include designated resolution authorities,

supervisory authorities, central banks, Ministries of Finance and public bodies

administering resolution funds, deposit insurance and other protection schemes.

1.2 Those legal gateways should permit authorities that do not have functions relating to

resolution, such as purely supervisory authorities, to disclose information to domestic

and foreign authorities where that information is necessary for the recipient authority

to carry out functions relating to resolution.

1.3 Subject to any applicable requirements relating to data protection or banking secrecy,

those legal gateways should permit commercially and legally sensitive information,

such as information relating to customers or the counterparties of a firm, to be

disclosed to domestic and foreign authorities if it is necessary for the recipient

authority to carry out functions relating to resolution.

1.4 Disclosure under those legal gateways should be conditional on the recipient

authority being subject to adequate confidentiality requirements and safeguards that

are appropriate to the nature of the information and the level of sensitivity (see

paragraphs 1.10 to 1.14).

I-Annex 1 – Information Sharing for Resolution Purposes

1.5 The legal framework should be clear about the conditions (for example, prior

approval of the originating supervisory authority) under which information received

from a foreign authority may be disclosed to another domestic or foreign authority

for purposes of the recipient authority’s functions relating to resolution.

1.6 The legal framework should protect the authorities and their current and former

employees and agents against criminal and civil actions for breach of confidentiality

based on the disclosure of information if the disclosure was made in accordance with

the legal gateways, including any applicable conditions or safeguards.

1.7 Where legal gateways are conditional on reciprocity (meaning that disclosure of

information is only permitted if the jurisdiction of the recipient authority has

comparable gateways that permit disclosure to the jurisdiction of the providing

authority), the legal framework should set out clear criteria and procedures for

determining comparability.

1.8 Legal gateways should not prevent or restrict the reasonable and effective use of

information by a recipient authority to carry out functions relating to resolution (for

example, by requiring that disclosure is subject to conditions on its handling and use

by the recipient authority that are unduly restrictive).

Purposes for which information may be disclosed

1.9 The legal gateways should be sufficient to permit appropriate disclosure to

authorities for the purposes of carrying out functions relating to resolution with

regard to a firm, including:

(i) the assessment of resolvability;

(ii) the development of resolution strategies;

(iii) the development of operational resolution plans;

(iv) the conduct of simulation exercises and scenario analyses for the purposes of

resolution planning;

(v) early detection and monitoring, and the supervision, regulation, and oversight

of firms;

(vi) implementation of recovery measures;

(vii) the assessment of the effectiveness of recovery measures for restoring viability,

the likelihood that resolution measures might be required and the possible

timeframe in which those measures might be required;

I-Annex 1 – Information Sharing for Resolution Purposes

(viii) preparation for the implementation of resolution measures; and

(ix) the exercise of resolution powers.

Confidentiality

1.10 Jurisdictions should ensure that their legal framework establishes a regime for the

protection of confidential information that imposes adequate confidentiality

requirements on authorities and their current and former employees and agents that

receive or have received confidential information, and provides for effective

sanctions and penalties for breach of confidentiality requirements. When considering

whether a recipient authority is subject to adequate confidentiality requirements,

authorities should take into account whether the recipient authority and its current

and former employees and agents:

(i) are required to maintain the confidentiality of information received from

another authority;

(ii) are required, and have the capacity, to restrict the use of information received

from another authority to the purposes for which it was supplied, consistent

with the terms under which it was provided;

(iii) can refuse to disclose information received from another authority to third

parties that were not the original recipients of the information without prior

notification to and express consent of the originating Party (unless the

circumstances described in paragraph 2.4 (v) apply); and

(iv) are subject to effective sanctions and penalties for breach of confidentiality

requirements.

Authorities should assist in any assessment of their own confidentiality requirements.

1.11 Authorities should not refuse disclosure of information for the purposes of functions

relating to resolution for reasons of the confidentiality of the information where the

recipient authority is subject to adequate confidentiality requirements, having regard

to the nature and sensitivity of the information.

1.12 Access to confidential information received from other domestic or foreign

authorities should be limited by law, policy or practice to officials, employees and

agents of the recipient authority and any other persons retained by contract to provide

services to that authority that (in every case) require that information in order to

perform their functions relating to resolution.

1.13 Authorities should have in place technical safeguards and administrative policies and

procedures to control and monitor the dissemination of all confidential information

within the authority, under the responsibility and supervision of officials of

appropriate seniority. Matters covered by those safeguards, policies and procedures

should include access to, storage, modes of transmission reproduction, retention

I-Annex 1 – Information Sharing for Resolution Purposes

periods and destruction of the information and maintenance of its physical security.

1.14 The legal framework should exclude the application of freedom of information

legislation to information received from foreign authorities or to treat such

information as falling within an exemption under the regime.

2. Information sharing provisions for COAGs

Minimum content

2.1 In order to support the commitments and provisions set out in I-Annex 2 (Essential

Elements of Institution-Specific Cross-border Cooperation Agreements) in relation to

information sharing, and in particular those in paragraphs 3.8, 3.9, 4.1(iii), 5.1(i), 6.3,

6.4 and 6.6 of that Annex, the COAG or an ancillary document should set out:

(i) the functions relating to resolution for which Parties may need to receive

confidential information;

(ii) the circumstances in which Parties agree to share information on an ad hoc

basis (for example, stress situations, implementation of recovery measures,

imminent and actual entry into resolution or material changes in the legal

framework affecting the operation of the COAG);

(iii) a generic description of the classes of information that will be shared on a

routine or ad hoc basis;

(iv) the applicable confidentiality requirements, any relevant restrictions or

conditions and any specific procedures and practices employed by the

authorities for protection of confidential information (see paragraph 2.4);

(v) the procedures for information sharing between authorities within the CMG

(for example, how information will be shared on a routine basis and how and to

whom requests for additional or ad hoc information should be made) (see

paragraphs 2.6 to 2.10);

(vi) the timeframes in which authorities agree to make all reasonable efforts to meet

requests for information;

(vii) the means by which information will be communicated; and

(viii) the procedure for the regular review of operation of the COAGs and the firm-

specific elements (see paragraph 2.14).

2.2 The terms for information sharing in COAGs should be framed in a purposive,

outcome-oriented manner and be sufficiently flexible to accommodate changing

circumstances.

2.3 The COAG should recognise that the type, extent and granularity of information

I-Annex 1 – Information Sharing for Resolution Purposes

needed and the speed and frequency at which it is required vary in accordance with

changes in the circumstances of the firm or external market conditions and can intensify

as a crisis develops. The COAG, where relevant, should note such possible variations.

Confidentiality of information provided under the COAG

2.4 The COAG should set out the agreement of the Parties on the arrangements to

protect the confidentiality of information shared under the COAG including,

specifically, on the following topics:

(i) information provided by a Party to other Parties will only be used for the

purposes of carrying out the functions relating to resolution;

(ii) dissemination of information received from a Party will be restricted internally

within the recipient Party to personnel that require that information to carry out

their functions relating to resolution;

(iii) information received by a Party from another will not be further disclosed by

the recipient Party to other Parties that were not the original recipients of the

information, or to third parties, without the prior notification to and express

consent of the originating Party (unless the circumstances described in point

(v) apply);

(iv) where an express consent for onward disclosure is given, the information

should only be disclosed to the extent and for the purposes agreed by the

originating Party; and

(v) where a Party is the subject of a legally enforceable demand (for example, by

court order or a mandate from a legislative body) to disclose information

received from another Party, it should, unless prohibited by law from doing so,

promptly notify the originating authority and take all reasonable steps to resist

disclosure of confidential information to the extent appropriate and permitted

by applicable laws and legal process.

2.5 The Party providing information under the COAG should inform recipient Parties if

it becomes aware that the information is no longer confidential.

Procedures for information sharing between Parties to the COAG

2.6 A request should generally specify the information sought and the purpose for which

it is required and indicate the urgency of the request.

2.7 The Party that receives a request for information should make all reasonable efforts

to respond in a timely manner and within any timeframe set out in the COAG, taking

into consideration the urgency of the request.

2.8 As a general principle, information should be disclosed through secure modes of

transmission appropriate to the information and its level of sensitivity.

I-Annex 1 – Information Sharing for Resolution Purposes

2.9 COAGs may designate a central authority in the home jurisdiction to coordinate

information exchange within the CMG. Jurisdictions may also designate a domestic

authority to coordinate the exchange and flow of information at a domestic level.

2.10 Non-core operational details, such as contact details of the personnel in each

authority that are designated as contact points for the exchange of information, may

be provided in ancillary documents to the COAG to facilitate the procedure for

updating those details (for example, to avoid the need for all parties to agree to a

formal amendment of the COAG).

Observance of the COAG and regular review

2.11 Parties should use their best endeavours to comply with the terms of the COAGs.

Where a Party encounters legal or operational obstacles to the disclosure of

information in accordance with the COAG, it should consult the other Parties to

identify appropriate measures to address those obstacles and take reasonable steps to

remove the obstacles or find ‘work-around’ solutions.

2.12 Parties should inform other Parties through officials and employees at an appropriate

level of seniority if they are unable to disclose material parts of resolution strategies

and plans or other information relevant for resolution purposes and explain the

obstacles to disclosure. Parties should use their best endeavours to comply with the

terms of the COAGs.

2.13 Where obstacles arise from restrictions on the disclosure of information imposed by

the legal framework that applies to an authority, that authority should take reasonable

steps to alert the national legislative bodies to those obstacles and their effect on the

ability of the authority to participate in the information sharing necessary for

carrying out functions relating to resolution.

2.14 The provisions in COAGs on information sharing, including the classes of

information to be shared on a regular basis and the frequency with which it is shared,

should be reviewed regularly by appropriate staff members of all Parties. That review

should be carried out in conjunction with the regular review of the resolution plan,

and Parties should maintain processes to ensure that, where necessary, the provisions

on information sharing in the COAG or ancillary documents are updated to ensure

that their terms are consistent with any amendments to the plan and continue to

support its execution.

I-Annex 2 – Essential Elements of Institution-Specific Cross-border Cooperation Agreements

I-Annex 2:

Essential Elements of Institution-Specific

Cross-border Cooperation Agreements

Cross-border cooperation agreements should help facilitate institution-specific crisis

management planning and cooperation between relevant authorities, with a presumption in

favour of cooperation in the event of the firm’s resolution. They should support the

preparation of RRPs and the effective implementation of resolution measures in a crisis by

providing a framework for possible solutions to legal or other impediments that may exist.

This will require firm-specific agreements involving all members of a firm’s cross-border

CMG, including the relevant authorities from the home and all key host jurisdictions. Bi-

national agreements between the relevant authorities of the home and a host jurisdiction

should set out how national legal and resolution regimes would interact given a firm’s

business. They may complement firm-specific multinational agreements among home and all

key host jurisdictions.

The effectiveness of institution-specific cooperation agreements hinges on the home and host

authorities having the necessary resolution powers in relation to the firm’s operations,

including the branch operation of a foreign firm (see Key Attribute 7).

The institution-specific cooperation agreement establishes a framework for the development

of RRPs, based on the conduct of pre-crisis resolvability assessments, and for cooperation and

coordination in a crisis in accordance with the agreed RRPs. Both RRPs and cooperation

agreements are expected to be regularly updated and evolve over time.

Institution-specific cross-border cooperation agreements should, at a minimum, include the

following elements.

1. Objectives, nature and scope of the agreement

1.1 A declarative statement of its objectives and scope (for example, “we, as home and

host authorities for [the firm], have signed this cooperation agreement setting out

how we will work together with a view to facilitating institution-specific crisis

management planning and cooperation between relevant authorities, with an

emphasis on cooperation in the event of [the firm’s] resolution....The objective is to

minimise the impact of the failure of [the firm] in each of the jurisdictions

represented by the Parties to the Agreements”).

1.2 The home and host authorities that sign the agreement (“the Parties”).

1.3 Description of the firm, parent or holding company and significant subsidiaries,

branches and affiliates that are within the scope of the agreement.

These elements build upon the FSF’s Principles for cross-border cooperation in crisis management as

endorsed by the G20 Leaders Summit in London in April 2009.

I-Annex 2 – Essential Elements of Institution-Specific Cross-border Cooperation Agreements

1.4 The legal nature of agreement (that is, whether and to what extent the agreement is

binding).

1.5 Rules on public disclosure (for example, whether and to what extent its content

should be disclosed to the public).

2. General framework for cooperation

2.1 The roles, responsibilities and powers of the Parties “pre-crisis” (that is, in the

recovery and resolution planning phases) and “in crisis” with respect to the firm,

including the parent or holding company and significant subsidiaries, branches and

affiliates that are within the scope of the agreement.

2.2 The components of the RRP for the firm, parent or holding company and significant

subsidiaries, branches and affiliates that relate to the preparation and execution of

resolution measures in a cross-border context (recognising that the plan is regularly

reviewed and updated).

3. Commitments to cooperate

3.1 The Parties’ agreement that the Key Attributes should guide their actions in any crisis

management and resolution measures adopted in respect of the firm.

3.2 The Parties’ commitment to implement resolution options that are aimed at pursuing

financial stability, the protection of insured depositors, insurance policy holders and

other retail customers, duly considering the potential impact of their resolution

actions on financial stability of other jurisdictions.

3.3 The Parties’ commitment to cooperate in the recovery and resolution planning

process and share all relevant information, including RRPs pertaining to the group as

a whole or to individual subsidiaries where plans of subsidiaries exist, in order to

ensure that the plans are consistent and help prepare for a coordinated resolution of

the whole firm.

3.4 The Parties’ commitment to participate at the level of top officials in reviewing the

firm’s overall resolution strategy; and to participate through representation on the

CMG at an appropriately senior level in the development and maintenance of the

firm’s group-wide resolution plan.

3.5 The Parties’ commitment to engage in periodic (table top) simulation or scenario

exercises within the CMG in order to ensure that the plans are viable and to help

prepare for a coordinated resolution.

I-Annex 2 – Essential Elements of Institution-Specific Cross-border Cooperation Agreements

3.6 The Parties’ commitment to conduct an assessment of the firm’s resolvability, using

the guidance on Resolvability Assessments set out in I-Annex 3, including the firm’s

demonstrated ability, as part of the recovery and resolution planning process, to

produce the essential information needed to implement such plans in a timely fashion

in a crisis; to share the results of the assessment and use them to inform the

resolution planning process with respect to the implementation of cross-border

resolution measures.

3.7 The agreed frequency of review and sharing of RRPs.

(i) The substantive resolution strategy for each G-SIFI should be subject, at least

annually, to a review by top officials of home and relevant host authorities.

(ii) Each operational plan should be subject, at least annually, to a review by

appropriate senior officials of the home and relevant host authorities.

3.8 The Parties’ commitment to inform and consult each other in a timely manner before

taking any crisis management or resolution measures (with precise definition of crisis

management or resolution measures).

3.9 The Parties’ commitment to inform each other promptly of material changes to their

crisis management and resolution frameworks.

3.10 The Parties’ commitment to share information at both senior and technical levels as

appropriate subject to appropriate confidentiality arrangements. Where appropriate

and necessary to respect the sensitive nature of information, information sharing may

be restricted, but should be possible among the top officials of the relevant home and

host authorities.

4. Home authority’s commitments

4.1 The home (resolution or supervisory) authority’s commitment to:

(i) coordinate in the CMG, with the benefit of the active participation of the other

Parties, the assessment of the firm’s resolvability in line with the guidance on

Resolvability Assessments (see I-Annex 3) and the identification of actions that

home or host authorities or the firm may need to take to ensure the resolvability

of the firm;

(ii) facilitate and chair meetings of the CMG and lead the review of the firm’s RRP

within the CMG, with the active participation of the other Parties and in line

with the Essential Elements of RRPs (see I-Annex 4);

(iii) alert other Parties without undue delay, so as to allow practical cooperation, if

the firm encounters difficulties or if it becomes apparent that it is likely to enter

the home authority’s resolution regime;

I-Annex 2 – Essential Elements of Institution-Specific Cross-border Cooperation Agreements

(iv) take into account the overall effect on the group as a whole and on financial

stability in other jurisdictions concerned and undertake best efforts to avoid

taking actions that could reasonably be expected to trigger instability elsewhere

in the group or in the financial system; and

(v) where possible and feasible, coordinate a resolution of the firm as a whole,

with the aim of maintaining financial stability, and protecting depositors,

insurance policy holders, and retail investors in all relevant jurisdictions.

5. Host authorities’ commitments

5.1 The host authorities’ commitments:

(i) to alert other Parties without undue delay if a local branch or locally-

incorporated part of the firm encounters difficulties or if it becomes apparent

that it is likely to enter the host authority’s resolution regime;

(ii) to work with the other Parties towards the coordinated resolution of the firm as

a whole, with the aim of maintaining financial stability and protecting

depositors, insurance policy holders and retail investors in all relevant

jurisdictions; and

(iii) not to pre-empt resolution actions by home authorities while reserving the right

to act on their own initiative if necessary to achieve domestic stability in the

absence of effective action by the home authority;

6. Cooperation mechanisms and information sharing framework

6.1 Provision for regular meetings of the Parties (for example, number of meetings per

year, level of participants, ad hoc meetings in emergency situations and meetings

upon request by Parties), and the relationship with existing cooperative structures

(CMG, supervisory college).

6.2 The statutory and contractual bases for prompt information sharing, including

sharing among the different CMG members, and with any host authorities that are

not represented in the CMG; existing constraints and how these could be addressed.

6.3 The level of detail in regard to information sharing; whether and how it would

change “pre-crisis and “in crisis”.

6.4 Procedures for information sharing at both senior and technical levels, tools of

information exchange (for example, use of secured website).

6.5 Commitment to maintain up-to-date contact lists with contact details for key senior

and working-level staff covering multiple means of communication.

I-Annex 2 – Essential Elements of Institution-Specific Cross-border Cooperation Agreements

6.6 Commitment to maintain confidentiality of shared information and measures to

ensure confidentiality (for example, limiting the personnel with access to the data;

confidentiality agreement signed by all relevant personnel; procedure and

responsibility if confidentiality is breached).

7. Cross-border implementation of resolution measures

7.1 Process for the evaluation of the application of resolution options and processes to

the firm, including the parent or holding company and significant subsidiaries,

branches and affiliates that are within the scope of the agreement.

7.2 Commitments to address the legal and operational impediments to cross-border

implementation of resolution actions; and commitments to specify legal and

operational procedures for implementing resolution strategies in a cross-border

context. For example:

(i) Procedural requirements and conditions for (a) recognition of the transfer to a

bridge or third party purchaser of assets and liabilities relating to branches of

the failed firm in the host jurisdiction; (b) recognition of the transfer to a bridge

or third party purchaser of assets or shares of majority or wholly owned

subsidiaries in the host jurisdiction; and (c) execution of a bail-in within

resolution;

(ii) Identification of types of financial contracts and assets that cannot be

transferred with legal certainty (for example, contracts governed by the law of

a jurisdiction where the firm does not have a physical presence) and

implications for the successful application of the resolution tool;

(iii) Availability of funding arrangements in home and host jurisdictions to support

the implementation of the resolution measures and restore market confidence;

and

(iv) Application of insurance schemes (for depositors, insurance policy holders, and

retail investors) and of applicable segregation and customer asset protection

rules.

I-Annex 3 – Resolvability Assessments

I-Annex 3:

Resolvability Assessments

1. Defining resolvability

A SIFI is “resolvable” if it is feasible and credible for the resolution authorities to resolve it in

a way that protects systemically important functions without severe systemic disruption and

without exposing taxpayers to loss. For resolution to be feasible, the authorities should have

the necessary legal powers - and the practical capacity to apply them - to ensure the continuity

of functions critical to the economy. For resolution to be credible, the application of those

resolution tools should not itself give rise to unacceptably adverse broader consequences for

the financial system and the real economy.

2. Objectives of resolvability assessments

The objectives of resolvability assessments are to:

(i) make authorities and firms aware of the implications of resolution for systemic

risk both nationally and globally;

(ii) identify factors and conditions affecting the effective implementation of

resolution actions, both endogenous (firm structure) and exogenous (resolution

regime and cross-border cooperation framework), in relation to firms, and the

degree of contingency preparedness (adequacy of RRPs); and

(iii) help determine the specific actions necessary to achieve greater resolvability

without severe systemic disruption and without taxpayer exposure to loss,

while protecting systemically important functions.

3. Process for assessing resolvability

Resolvability assessments are necessarily qualitative and are not binary. Group resolvability

assessments of G-SIFIs should be conducted by the home authority and coordinated within

the firm’s CMG, taking into account national assessments by host authorities. The process for

group resolvability assessment should be established in institution-specific cross-border

cooperation agreements (see I-Annex 2). Host authorities that conduct resolvability

assessments of local subsidiaries of foreign firms should coordinate as far as possible with the

home authorities conducting the group resolvability assessment. The results of those

resolvability assessments should inform the recovery and resolution planning for that firm.

The process for assessing resolvability consists of three stages.

Stage 1 - Feasibility of resolution strategies: Identify the set of resolution strategies which

would be feasible, given the current resolution tools available, the RRP for the firm,

and the authorities’ capacity to apply them at short notice to the firm in question.

I-Annex 3 – Resolvability Assessments

Stage 2 - Systemic impact assessment: Determine the credibility of all feasible resolution

strategies by capturing the likely impact of the firm’s failure and resolution on global

and national financial systems and real economies.

Stage 3 - Actions to improve resolvability: Conclude whether resolution is likely to be both

feasible and credible and identify any changes necessary to the RRP or to the

structure or operations of the firm to improve resolvability. Timelines for completing

the requisite changes should be established. Progress should also be monitored.

Resolvability assessments, and the actions flowing from them, form a key part of the

resolution planning process and are a continuous process consisting of:

(i) qualitative assessments by national authorities of the extent to which a firm is

resolvable given its structure and the resolution regimes under which it

operates;

(ii) assessments conducted by the home authority and coordinated within the firm’s

CMG drawing on shared national assessments of the resolvability of

subsidiaries by members of the CMG, and identification of the issues to be

addressed by the firm or by specific authorities;

(iii) presentation of issues to be addressed to the firm (or relevant regulatory

authorities);

(iv) remediation by the firm or relevant regulatory authorities; and

(v) re-assessment of resolvability coordinated by the home authority.

4. Assessing the feasibility of resolution strategies

Set out below are some of the questions that, at a minimum, would need to be explored in

order to assess the feasibility of resolution strategies.

Firm structure and operations

4.1 Firm’s essential functions and systemically important functions. Based on the

firm’s strategic analysis, what are the principal businesses and what are the services

that are core to the firm’s franchise value? What critical financial and economic

functions does it perform for the global and national financial systems and the non-

financial sector?

4.2 Mapping of essential functions and systemically important functions and

corporate structures. How do legal and corporate structures relate to principal

business lines and critical and core functions?

4.3 Continuity of Service Level Agreements. What is the extent to which key

operational functions such as payment operations, trade settlements and custody are

outsourced to other group entities or third party service providers? How robust are

I-Annex 3 – Resolvability Assessments

the existing Service Level Agreements in ensuring that the key operational functions

will continue to be provided to a bridge institution or surviving parts of a resolved

firm when necessary?

4.4 Assessment. What are the obstacles to separating systemically critical functions from

the rest of the firm in a resolution and for ensuring their continuity, given the issues

referred to in paragraphs 4.1 to 4.3 above?

Internal interconnectedness

4.5 Intra-group exposures. What is the extent of the use of intra-group guarantees,

booking practices and cross-default clauses? Are intra-group transactions well

documented? How strong is the relevant risk management? To what extent are these

transactions conducted at arm’s length? Could back-to-back trades be unwound (for

example, to facilitate a partial sale), if necessary? Do firms maintain at the legal

entity level information on intra-group guarantees and intra-group trades booked on a

back-to-back basis?

4.6 Assessment. Do intra-group transactions result in material imbalances of value

across legal entities that affect incentives for cooperation? How quickly could intra-

group transactions be unwound?

Membership in FMIs

4.7 Continuity of membership in FMIs. Can the firm being resolved retain

membership of FMIs? Will a newly established bridge institution be able to access

FMIs?

4.8 Transfer of centrally cleared contracts to a bridge institution. Can centrally

cleared financial contracts of a failed institution be transferred to a bridge institution

pending the bridge institution’s access to the CCP?

4.9 Transferability of payment operations. Do firms have in place arrangements that

facilitate the transfer of payment operations to a bridge institution or third party

purchaser? In particular, is there:

(i) a centralised repository for all their FMI membership agreements;

(ii) standardised documentation for payment services, covering issues including

notice periods, termination provisions and continuing obligations, to facilitate

orderly exit;

(iii) a draft Transitional Services Agreement as part of RRPs that, if needed, will

allow the firm to continue to provide uninterrupted payment services (including

See Key Attributes, footnote 2.

I-Annex 3 – Resolvability Assessments

access to FMIs) on behalf of the new purchaser, by using existing staff and

infrastructure; and

(iv) a “purchaser’s pack” that includes key information on the payment operations

and credit exposures, and lists of key staff, to facilitate transfers of payment

operations to a surviving entity, bridge institution or purchaser?

4.10 Second-tier firms. Do firms that are not direct FMI participants have contingency

arrangements to access FMIs via more than one firm? Can they quickly switch if one

direct participant fails?

4.11 Assessment. Can critical payment functions continue? Can access to FMIs be

maintained?

Management information systems (MIS)

4.12 Adequacy of MIS. To what extent do the firm’s MIS capabilities permit it to

construct a complete and accurate view of its aggregate risk profile under rapidly

changing conditions? Can the firm provide key information such as risk exposures,

liquidity positions, interbank deposits and short-term exposures to and of major

counterparties (including CCPs) on a daily basis? Can the firm ensure the continuity

of MIS for both the remaining and successor entities if the firm or one or more

component legal entities have entered into resolution or insolvency? Are the

necessary MIS available at the legal entity level, including on intra-group

transactions and collateral?

4.13 Prompt provision of necessary information to relevant authorities. How quickly

could information (for example, financial, credit exposure, legal entity specific and

regulatory) be provided to the home supervisor, to functional supervisors, to

resolution authorities and to host supervisors, as appropriate? What types of legal

impediments preclude information sharing among authorities? Does the firm have

processes and tools to provide authorities with the information necessary to allow the

rapid identification of depositors and amounts protected by a deposit insurance

scheme?

4.14 Assessment. To what extent is it likely that the firm could deliver sufficiently

detailed, accurate and timely information to support an effective resolution?

Coordination of national resolution regimes and tools

4.15 Domestic powers and tools to maintain continuity of systemically important

functions. Do the resolution regimes in the jurisdictions where the SIFI performs

systemically important functions (or has subsidiaries which provide crucial services

to those functions) provide for the resolution powers set out Key Attribute 3?

I-Annex 3 – Resolvability Assessments

4.16 Cross-border resolution powers. Do home and host country authorities have the

requisite powers to act in a manner that supports implementation of a coordinated

resolution, as set out in the Key Attributes? For example:

(i) What are the mechanisms in place to coordinate with a host authority the cross-

border operation and recognition of a bridge institution when the home

authority has decided to use such a tool as part of a resolution procedure;

(ii) Do resolution regimes provide for a differential treatment of creditor claims on

the basis of the location of the claim, or the jurisdiction where it is payable; and

(iii) Could resolution measures in one foreign jurisdiction trigger action in other

jurisdictions? How does this affect the resolution process and likelihood to

achieve a coordinated solution?

4.17 Information sharing between home and host authorities. Are there any legal

impediments to information sharing? How willing and able are home and host

authorities to share the information necessary to effect a coordinated resolution?

4.18 Practical cross-border coordination. Do existing cross-border cooperation

agreements reflect the requirements set out in the Key Attributes and give authorities

confidence that they have the practical, operational and legal capacity to coordinate

effectively with their foreign counterparts?

4.19 Assessment. Are the authorities confident that they have the necessary legal tools

and operational capacity to achieve an internationally coordinated resolution of the

SIFI?

5. Assessing the systemic impact

The assessment of the expected adverse consequences for the financial system and the overall

economy resulting from the failure should help identify and develop measures that mitigate

the systemic impact of the firm’s failure.

The residual systemic impact of the firm’s failure reflects three sets of factors:

(i) The inherent systemic risks in the firm’s business profile;

(ii) Mitigating actions taken by the firm through sound business structures,

governance, management practices and well-articulated resolution planning;

and

(iii) The robustness of the identified institution-specific resolution strategies.

The criteria for evaluating the systemic impact of a firm’s failure are still at a nascent stage

and therefore the evaluation process is largely qualitative and judgmental. The core of the

analysis, however, is assessing the residual systemic risks as they relate to the principal

channels of systemic spillovers. Below are some suggested qualitative criteria to aid

authorities’ judgement of a given resolution strategy. The criteria should be assessed

individually for each jurisdiction involved, and collectively for the firm as a whole.

I-Annex 3 – Resolvability Assessments

5.1 Impact on financial markets. To what extent is the firm’s resolution likely to cause

disruptions in domestic or international financial markets, for example, because of

lack of confidence or uncertainty effects?

5.2 Impact on FMI. Could the firm’s resolution cause contagion through FMIs, for

example by triggering of default arrangements in FMIs, or leaving other firms

without access to FMIs?

5.3 Impact on funding conditions. What are the likely impacts of the firm’s resolution

on other (similarly situated) firms in rolling over and raising funds?

5.4 Impact on capital. To what extent could the exposure of systemically important

counterparties to the firm in resolution result in their capital, individually or in

aggregate, falling to levels below the regulatory thresholds?

5.5 Impact on the economy. To what extent could the firm’s resolution and its

consequences have an impact on the economy and through which channels? Is there

a potential for credit and capital flows to constrict? Are there important wealth

effects?

I-Annex 4 – Essential Elements of Recovery and Resolution Plans

I-Annex 4:

Essential Elements of Recovery and Resolution Plans

The Key Attributes call on jurisdictions to put in place an ongoing recovery and resolution

planning process to promote resolvability as part of the overall supervisory process (see Key

Attribute 11). The process should involve the resolution authorities and all other relevant

authorities.

1. Objectives and governance of the RRP

1.1 An adequate, credible RRP is required for any firm when its failure is assessed by its

home authority to have a potential impact on financial stability. This would include,

at a minimum, all G-SIFIs (see Key Attribute 11.2).

1.2 The RRP should take account of the specific circumstances of the firm and reflect the

nature, complexity, interconnectedness, level of substitutability and size of the firm.

1.3 The underlying assumptions of the RRP and stress scenarios should be sufficiently

severe. Both firm (group) specific and system-wide stress scenarios should be

considered taking into account the potential impact of cross-border contagion in

crisis scenarios, as well as simultaneous stress situations in several significant

markets. RRPs should make no assumption that taxpayers’ funds can be relied on to

resolve the firm.

1.4 RRPs should serve as guidance to firms and authorities in a recovery or resolution

scenario. They do not in any way imply that the authorities would be obliged to

implement them, or be prevented from implementing a different strategy in the event

that the firm needs to be resolved.

Recovery plan

1.5 The recovery plan serves as a guide to the recovery of a distressed firm. In the

recovery phase, the firm has not yet met the conditions for resolution or entered the

resolution regime. There should be a reasonable prospect of recovery if appropriate

recovery measures are taken. The recovery plan should include measures to reduce

the risk profile of a firm and conserve capital, as well as strategic options, such as the

divestiture of business lines and restructuring of liabilities.

1.6 The responsibility for developing and maintaining, and where necessary, executing

the recovery plan lies with the firm’s senior management. Authorities should review

the recovery plan as part of the overall supervisory process, assessing its credibility

and ability to be effectively implemented. The authorities should have the requisite

powers to require the implementation of recovery measures.

I-Annex 4 – Essential Elements of Recovery and Resolution Plans

1.7 Firms should be required to update the recovery plan at regular intervals, and upon

the occurrence of events that materially change the firm’s structure or operations, its

strategy or aggregated risk exposure. They should be required to regularly review the

exogenous and firm-specific assumptions a recovery plan is based upon and assess

on an ongoing basis the relevance and applicability of the plans. If necessary, firms

should adapt their recovery plan accordingly.

Resolution plan

1.8 The resolution plan should facilitate the effective use of the resolution authority’s

powers with the aim of making feasible the resolution of any firm without severe

systemic disruption and without exposing taxpayers to loss while protecting

systemically important functions. It should serve as a guide to the authorities for

achieving an orderly resolution, in the event that recovery measures are not feasible

or have proven ineffective.

1.9 The responsibility for developing and maintaining, and where necessary, executing

the resolution strategies set out in resolution plan lies with the authorities.

1.10 At the national level, all relevant authorities involved in supervision, implementation

of corrective actions and resolution should participate in the RRP process.

1.11 Firms should be required to provide the authorities with the data and information,

including strategy and scenario analysis, required for purposes of resolution planning

on a timely basis. Authorities should identify the specific information requirements

and satisfy themselves that the firm has the capacity to provide the information upon

request and in a timely manner.

1.12 Authorities should review resolution plans with the firms to the extent necessary.

Authorities may decide not to disclose a resolution plan or parts of it to the firm.

Governance and oversight of the RRP

Authorities

1.13 Authorities should establish a robust governance structure for the oversight of the

recovery and resolution planning processes, including the ongoing review and

updating of RRPs to take into account any changes in circumstances facing the firm

or the financial system. Responsibilities for the development, review, approval and

maintenance of RRPs should be clearly assigned. Authorities should define and

communicate a clear process for interaction with the firms in recovery and resolution

planning. In those jurisdictions where court orders are required to apply resolution

measures, resolution authorities should take this into account in the resolution

planning process, so as to ensure that the time required for court proceedings will not

compromise the effective implementation of resolution actions.

I-Annex 4 – Essential Elements of Recovery and Resolution Plans

1.14 Authorities should have sufficient resources and expertise to support the preparation

and assessment of RRPs on an ongoing basis.

1.15 Authorities should review, and where necessary, direct changes to the assumptions and

stress scenarios underlying a firm’s RRP and require the firms to prepare additional

stress scenarios. The stress scenarios should adequately consider all relevant

endogenous and exogenous risk exposures that the firm faces, taking into account the

firm’s specific situation, strategy and positions. Authorities should seek to achieve a

reasonable degree of consistency in the severity of stress scenarios used by different

firms. However, the stress scenarios used need not be the same for each firm.

1.16 Authorities should assess the willingness of the firm’s management to implement

corrective measures, and where necessary, enforce the implementation of recovery

measures.

1.17 Authorities should consider the systemic impact of measures if these were being

implemented by several firms at the same time.

Firms

1.18 Firms should be required to have in place a robust governance structure and

sufficient resources to support the recovery and resolution planning process. This

includes clear responsibilities of business units, senior managers up to and including

board members, and identifying a senior level executive responsible for ensuring the

firm is and remains in compliance with RRP requirements and for ensuring that

recovery and resolution planning is integrated into the firm’s overall governance

processes.

1.19 Firms should be required to have in place systems to generate on a timely basis the

information required to support the recovery and resolution planning process to

enable both the firm and the authorities effectively to carry out recovery and

resolution planning, and where necessary, implement the RRP.

1.20 Firms should be required to draw up concrete firm-specific stress scenarios,

including both idiosyncratic and market-wide stress and, upon request, provide

strategy and scenario analysis.

1.21 Firms should upon request engage in periodic simulation or scenario exercises with

home and host authorities to assess whether the RRPs are feasible and credible.

Cross-border coordination

1.22 The top officials of the home and key host authorities of G-SIFIs should meet, where

appropriate with the CEO of the firm, and review at least annually the overall

resolution strategy (see Key Attribute11.6).

I-Annex 4 – Essential Elements of Recovery and Resolution Plans

1.23 Appropriate senior officials of the home and host authorities should, at least

annually, review the operational resolution plans for each G-SIFI and engage in

periodic simulation or scenario exercises to test the viability of the plans. These

exercises may include the firm in question.

1.24 At least for G-SIFIs, the home resolution authority should lead the development of

the group resolution plan in coordination with all members of the firm’s CMG. Host

resolution authorities may maintain their own resolution plans for the firm’s

operations in their jurisdictions, cooperating as far as possible with the home

authority to ensure that the plan is as consistent as possible with the group plan.

1.25 For all G-SIFIs, the home authorities should have a process to ascertain which

jurisdictions that are not included in the CMG assess the local operations of the firm

as systemically important to the local financial system, and the reasons for that

assessment. The home authorities should establish a process for maintaining contact

with such non-CMG jurisdictions and ensure that appropriate modalities for

cooperation and information sharing are in place.

2. General outline of RRPs

Structure of RRPs

2.1 To support rapid execution, both recovery and resolution plans should include:

(i) a high-level substantive summary of the key recovery and resolution strategies

and an operational plan for implementation;

(ii) the strategic analysis that underlies the recovery and resolution strategies;

(iii) conditions for intervention, describing necessary and sufficient prerequisites

for triggering the implementation of recovery or resolution actions;

(iv) concrete and practical options for recovery and resolution measures;

(v) preparatory actions to ensure that the measures can be implemented effectively

and in a timely manner;

(vi) details of any potential material impediments to an effective and timely

execution of the plan; and

(vii) responsibilities for executing preparatory actions, triggering the

implementation of the plan and the actual measures.

Recovery and resolution strategies

2.2 RRPs should contain a high-level substantive summary of the key recovery and

resolution strategies and an operational plan for their implementation. This should

include the identification of the firm’s essential and systemically important functions

(for example, illustrated with an organisational chart of the firm’s major operations),

I-Annex 4 – Essential Elements of Recovery and Resolution Plans

a description of the critical measures to implement the key recovery and resolution

strategies and an assessment of potential impediments to their successful

implementation, as well as any material changes or actions taken since the firm’s last

submitted RRP.

Strategic analysis

2.3 A key component of RRPs is a strategic analysis that identifies the firm’s essential

and systemically important functions and sets out the key steps to maintaining them

in recovery as well as in resolution scenarios. Elements of such analysis should

include:

(i) identification of essential and systemically important functions, mapped to the

legal entities under which they are conducted;

(ii) actions necessary for maintaining operations of, and funding for, those

essential and systemically important functions;

(iii) assessment of the viability of any business lines and legal entities which may

be subject to separation in a recovery or resolution scenario, as well as the

impact of such separation on the remaining group structure and its viability;

(iv) assessment of the likely effectiveness and potential risks of each material

aspect of the recovery and resolution actions, including potential impact on

customers, counterparties and market confidence;

(v) estimates of the sequencing and the time needed to implement each material

aspect of the plan;

(vi) underlying assumptions for the preparation of the RRPs;

(vii) potential material impediments to effective and timely execution of the plan;

and

(viii) processes for determining the value and marketability of the material business

lines, operations, and assets.

3. Essential elements of a recovery plan

3.1 Firms should identify possible recovery measures and the necessary steps and time

needed to implement such measures and assess the associated risks. The range of

possible recovery measures should include:

(i) actions to strengthen the capital situation, for example, recapitalisations after

extraordinary losses, capital conservation measures such as suspension of

dividends and payments of variable remuneration;

(ii) possible sales of subsidiaries and spin-off of business units;

(iii) a possible voluntary restructuring of liabilities through debt-to-equity

conversion; and

I-Annex 4 – Essential Elements of Recovery and Resolution Plans

(iv) measures to secure sufficient funding while ensuring sufficient diversification

of funding sources and adequate availability of collateral in terms of volume,

location and quality. Proper consideration should also be given to possible

transfers of liquidity and assets within the group.

3.2 Firms should assess the additional requirements to which they may potentially

become subject during crisis situations in order to maintain their membership of

FMIs, for example, as regards pre-funding or collateralising of positions, and identify

options for addressing the additional requirements (for example, plan for the

sourcing of additional collateral, and assess potential constraints on the firm’s total

payment flows).

3.3 Firms should ensure that they have in place appropriate contingency arrangements

(for example, functioning of internal processes, IT systems, clearing and settlement

facilities, supplier and employee contracts) that enable them to continue to operate as

they implement recovery measures.

3.4 Firms should define clear backstops and escalation procedures, identifying the

criteria (both quantitative and qualitative) which would trigger the implementation of

the recovery plan or individual measures by the management of the firm, in

consultation with the authorities. Such triggers should be designed to prevent undue

delays in the implementation of recovery measures.

3.5 Firms should develop a proper communication strategy with the authorities, public,

financial markets, staff and other stakeholders.

4. Essential elements of a resolution plan

4.1 Authorities should identify potential resolution strategies and assess the necessary

preconditions and operational requirements for their implementation, including with

regard to arrangements for cross-border coordination. In addition to the overall

resolution strategy and the underlying strategic analysis, authorities should identify:

(i) regulatory thresholds and legal conditions that provide grounds for the

initiation of official actions (including thresholds for entry into resolution) and

scope for authorities’ discretion (for example, the extent to which authorities

can refrain from taking actions or not avoid acting under certain conditions);

(ii) the critical interdependencies and the impact of resolution actions on other

business lines and legal entities (would other entities be able to continue to

operate?); financial contracts (do authorities have powers to limit or suspend

termination or close-out rights?); markets and other firms with similar business

lines; and include a comparative estimate of losses to be borne by creditors and

any premium associated with various resolution strategies;

(iii) the range of sources available for resolution funding;

I-Annex 4 – Essential Elements of Recovery and Resolution Plans

(iv) the process for disbursements by deposit insurance funds and other insurance

schemes (including, for example, identification of insured and uninsured

depositors);

(v) the processes for preserving uninterrupted access to payment, clearing and

settlement facilities, exchanges and trading platforms;

(vi) the internal processes and systems necessary to support the continued operation

of the firm’s critical functions;

(vii) processes for their cross-border implementation; and

(viii) proper communication strategies and processes to coordinate communication

with foreign authorities.

5. Information requirements for recovery and resolution planning

Firms should have the capacity to provide the essential information needed to implement the

RRPs on a timely basis for purposes of recovery and resolution planning, as well as in crisis

situations, including information on the following:

5.1 Intra-group inter-linkages, for example, core business operations and

interconnectedness by reference to business lines, legal entities and jurisdictions, intra-

group exposures through intra-group guarantees and loans, and trades booked on a

back-to-back basis; dependencies of the firm’s legal entities on other group entities for

liquidity or capital support as well as other (for example, operational) support.

5.2 Operational data, for example, the extent of asset encumbrance, amount of liquid

assets, off-balance sheet activities, etc.

5.3 Organisation and operations that support the execution of recovery and resolution

measures, for example, information on dealing room operations, including trade

booking practices, hedging strategies, custody of assets; information on payment,

clearing and settlement systems; and inventory of the key management information

systems, including accounting, position keeping and risk systems.

5.4 Key crisis-management roles and responsibilities, for example, contact information,

communication facilities for in-crisis communication, and the firm’s procedures for

providing relevant home and host authorities with access to information, both in

normal times and during a crisis.

5.5 Legal and regulatory framework in which the firm operates, for example, the relevant

home and host authorities and their roles, functions and responsibilities in financial

crisis management; resolution regimes, including the relevant aspects of applicable

corporate, commercial, insolvency, and securities laws and insolvency regimes

affecting major portions of the group; liquidity sources, including both private and

central bank sources.

I-Annex 5 – Temporary stay on early termination rights

I-Annex 5:

Temporary stay on early termination rights

1. Objectives

1.1 Under standard market documentation for financial contracts and absent any

statutory or regulatory provisions to the contrary, contractual acceleration,

termination and other close-out rights (collectively, “early termination rights”) in

financial contracts may be triggered upon entry of a firm into resolution or in

connection with the use of resolution powers. In the case of a SIFI, the termination of

large volumes of financial contracts upon entry into resolution could result in a

disorderly rush for the exits that creates further market instability and frustrates the

implementation of resolution measures aimed at achieving continuity.

1.2 The Key Attributes (see Key Attribute 4.3) stipulate that, subject to adequate

safeguards, entry into resolution and the exercise of any resolution powers should not

constitute an event that entitles the counterparty of the firm in resolution to exercise

early termination rights provided the substantive obligations under the contract,

including payment and delivery obligations, and provision of collateral, continue to

be performed. Should early termination rights nevertheless be exercisable, the

resolution authority should have the power to stay temporarily such rights where they

arise by reason only of entry into resolution or in connection with the use of

resolution powers and provided that the substantive obligations under the contract,

including payment and delivery obligations, and provision of collateral, continue to

be performed.

1.3 Limited in this way, the restrictions on early termination rights set out in paragraph

1.2 do not affect other rights of counterparties under a netting and collateralisation

agreements and do not interfere with payment or delivery obligations to FMIs.

If a

firm in resolution fails to meet any margin, collateral or settlement obligations that

arise under a financial contract or as a result of the firm’s membership or

participation in an FMI, its counterparty or the FMI would have the immediate right

to exercise an early termination right against the firm in resolution. The counterparty

and the FMI could not terminate and close-out the contract based solely upon the

entry into resolution or the exercise of resolution powers. They would have such

right if the firm in resolution or the resolution authority failed to meet any margin,

Where components of this Annex have been deemed important for purposes of assessing compliance with the

Key Attributes, those components are explicitly reflected in the Key Attributes Assessment Methodology.

For the purposes of this document, the term “financial market infrastructure” is defined as “a multilateral

system among participating financial institutions, including the operator of the system, used for the purposes

of recording, clearing, or settling payments, securities, derivatives, or other financial transactions”. It

includes payment systems, central securities depositories (CSDs), securities settlement systems (SSSs),

central counterparties (CCPs), and trade repositories (TRs). See CPSS-IOSCO report on Principles for

financial market infrastructures - March 2012 (http://www.bis.org/cpmi/publ/d101.htm).

I-Annex 5 – Temporary stay on early termination rights

collateral or settlement obligations that arise under a financial contract or as a result

of the firm’s membership or participation in an FMI.

2. Conditions for a temporary stay

2.1 A temporary stay of the exercise of early termination rights should be subject to the

following conditions:

(i) The stay only applies to early termination rights that arise for reasons only of

entry into resolution or in connection with the use of resolution powers

(including, for example, a change in control of the relevant firm or its business

arising from such proceedings);

(ii)

The stay is strictly limited in time (for example, for a period not exceeding two

business days);

(iii) The resolution authority would only be permitted to transfer all of the eligible

contracts with a particular counterparty to a new entity and would not be

permitted to select for transfer individual contracts with the same counterparty

and subject to the same netting agreement (“no cherry-picking” rule);

(iv) For contracts that are transferred to a third party or bridge institution, the

acquiring entity would assume all the rights and obligations of the firm from

which the contracts were transferred;

(v) The early termination rights of the counterparty are preserved against the firm

in resolution in the case of any default occurring before, during or after the

period of the stay that is not related to entry into resolution or the exercise of a

resolution power (for example, a failure to make a payment or the failure to

deliver or return collateral on a due date);

(vi) Following a transfer of financial contracts the early termination rights of the

counterparty are preserved against the acquiring entity in the case of any

subsequent independent default by the acquiring entity;

(vii) The counterparty can exercise the right to close out immediately against the

firm in resolution on expiry of the stay or earlier if the authorities inform the

firm that the relevant contracts will not be transferred; and

(viii) After the period of the stay, early termination rights could be exercised for

those financial contracts that are not transferred to a sound firm, bridge

institution or other public entity.

Operation of the stay

2.2 The stay may be discretionary (imposed by the resolution authority on a case-by-case

basis) or automatic in its operation. In either case, jurisdictions should ensure that the

counterparties to the firm in resolution have clarity as to the beginning and the end of

the stay.

I-Annex 5 – Temporary stay on early termination rights

2.3 As part of the resolution planning process and resolvability assessments, authorities

should consider the implications of a temporary stay on the exercise of early

termination rights for FMIs and other counterparties of the firm (see I-Annex 3, 4.8;

I-Annex 4, 4.1).

Appendix II:

Sector-specific Guidance

II-Annex 1: Resolution of FMIs and FMI Participants

II-Annex 2: Resolution of Insurers

II-Annex 3: Protection of Client Assets in Resolution

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

II-Annex 1:

Resolution of Financial Market Infrastructures (FMIs)

and FMI Participants

Part I of this Annex (“Resolution of Financial Market Infrastructures”) provides guidance on

the implementation of the Key Attributes of Effective Resolution Regimes for Financial

Institutions (the ‘Key Attributes’, KAs) in relation to resolution regimes for systemically

important FMIs.

Part II of this Annex (“Resolution of FMI Participants”) deals with the resolution of FMI

participants that could be systemically significant or critical in the event of failure.

I. Resolution of Financial Market Infrastructures

The Key Attributes state that FMIs – defined to include payment systems, central securities

depositories (CSDs), securities settlement systems (SSSs), central counterparties (CCPs) and

trade repositories (TRs) – should be subject to resolution regimes that apply the objectives

and provisions of the Key Attributes in a manner appropriate to FMIs and their critical role in

financial markets (KA 1.2).

This guidance supplements the Key Attributes – which apply generally to resolution regimes

for all systemically significant or critical financial institutions, including FMIs - by indicating

how particular KAs, or elements of particular KAs, should be interpreted when applying to

resolution regimes for FMIs or specific classes of FMI. The presumption is that all FMIs are

systemically important or critical, at least in the jurisdiction where they are located, typically

because of their critical roles in the markets they serve. However, an authority may determine

that an FMI in its jurisdiction is not systemically important or critical and, therefore, not

subject to the Key Attributes. The scope of the guidance is aligned with that of the CPSS-

IOSCO Principles for financial market infrastructures (PFMI)

and makes clear that FMIs

owned and operated by central banks are not subject to the Key Attributes.

Where relevant, this guidance sets out specific features of resolution regimes appropriate for

different types of FMIs. This Annex should be read with the Key Attributes, and the guidance

on individual KAs should be considered in conjunction with the KA to which it relates. The

Annex does not replace the Key Attributes, and there should be no inference that a particular

KA or element of a KA does not apply to an FMI simply because there is no supporting

provision in this Annex.

This Annex should also be read alongside PFMI which require systemically important FMIs

to have a comprehensive and effective recovery plan.

More specifically, the PFMI require

http://www.bis.org/cpmi/publ/d101.htm

Where components of this Annex have been deemed important for purposes of assessing compliance with the

Key Attributes, those components are explicitly reflected in the Key Attributes Assessment Methodology.

Further guidance on the recovery planning process and the content of recovery plans is set out in the CPMI-

IOSCO report on Recovery of financial market infrastructures. [To add hyperlink when guidance is

published.]

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

FMIs to establish explicit rules and procedures that address fully any credit losses they may

face as a result of any individual or combined default by participants with respect to any of

their obligations to the FMI; how potentially uncovered credit losses would be allocated; and

how financial resources that the FMI may deploy during a stress event are replenished.

The

PFMI also require FMIs to establish explicit rules and procedures that enable the FMI to

effect same-day, and where appropriate, intra-day and multi-day settlement of payment

obligations on time following any individual or combined default among its participants.

Nevertheless, there may be circumstances where resolution of the FMI is necessary. Entry

into resolution should be possible, subject to determination by the relevant authorities, if the

recovery plan and any rules and procedures for loss allocation have failed to return the FMI to

viability or have not been implemented in a timely manner, or the relevant regulator,

oversight, supervisory, or resolution authority determines that, even though the plan may not

yet have been fully implemented or exhausted, recovery measures are not reasonably likely to

return the FMI to viability or would otherwise be likely to compromise financial stability.

This requires FMIs to be subject to resolution regimes that apply the objectives and provisions

of the Key Attributes in a manner as appropriate to FMIs and their critical role in financial markets

(KA 1.2).

1. Objectives (KA Preamble)

1.1 An effective resolution regime for FMIs should pursue financial stability and allow

for the continuity of critical FMI functions without exposing taxpayers to loss, either

by restoring the ability of the FMI to perform those functions as a going concern or

ensuring the performance of those functions by another entity or arrangement

coupled with the orderly wind-down of the FMI in resolution. It should, as

applicable, aim to:

(i) achieve continuity and timely completion of critical payment, clearing,

settlement and recording functions;

(ii) facilitate the timely settlement of obligations of the FMI;

(iii) maintain continuous access of participants to securities or cash accounts

provided by the FMI and securities or cash collateral posted to and held by the

FMI that is owed to such participants;

(iv) avoid any disruption in the operation of links between the FMI in resolution

and other FMIs that would have a material negative effect on financial stability

or the functioning of markets; and

(v) safeguard, preserve and enable continuous processing of, and access to, data

stored in a TR.

Principle 4, Key Consideration 7.

Principle 7, Key Consideration 10.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

2. Scope of resolution regimes for FMIs (KA 1)

Application to systemically important FMIs

2.1 FMIs that are systemically important should, irrespective of their licensing status (for

example, FMIs licensed as banks), be subject to a resolution regime that applies the

Key Attributes in a manner appropriate to the specific characteristics of the type of

FMI in question and its critical role in financial markets. The resolution regime

should include the features that are relevant to the specific types of FMI covered by

the scope of that regime.

2.2 The Key Attributes and Guidance set out in this Annex do not apply to FMIs owned

and operated by central banks.

Systemic importance

2.3 Authorities should have regard to the presumptions set out in paragraph 1.20 of the

CPSS-IOSCO Principles for Financial Market Infrastructures

regarding the

systemic importance of FMIs.

3. Resolution authority

for FMIs (KA 2)

Statutory objectives

3.1 As part of its statutory objectives and functions, an authority responsible for the

resolution of FMIs should be guided in the exercise of its resolution powers by the

specific objectives of pursuing financial stability and maintaining continuity of the

critical functions of an FMI in resolution without losses for taxpayers (see KA 2.3 (i) and

paragraph 1.1), in addition to the other relevant general objectives set out in KA 2.3.

Appointment of an administrator, conservator or other official

3.2 The resolution of an FMI may be carried out by the resolution authority directly or

through a special administrator, conservator, receiver or other official with similar

functions. A special administrator, conservator, receiver or other official should be

guided by the objectives specified in paragraphs 1.1 and 3.1 (including those set out

in KA 2.3) when carrying out that resolution.

Resolution authority expertise

3.3 The staff of the resolution authority should have the necessary knowledge and

expertise regarding systemically important FMIs. Where the resolution authority is

separate from the supervisory authority, it should have the ability to draw on the

expertise of the latter.

http://www.bis.org/cpmi/publ/d101.htm

Consistent with KA 2.1, references to “resolution authority” include references to more than one authority

where two or more authorities are responsible for exercising resolution powers under the resolution regime.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

Consultation and cooperation with central banks and other authorities

3.4 Where the central bank is not also the resolution authority, supervisory or oversight

authority of an FMI that settles through, or is otherwise linked to, systems operated

by the central bank, the resolution authority or appointed administrator should

consult and cooperate with the central bank when planning or carrying out the

resolution of that FMI.

3.5 The resolution authority or appointed administrator should consult any other market

regulatory authority where the services of the FMI are material for the adequate

functioning of the capital markets that are overseen by that authority.

4. Resolution powers for FMIs (KA 3)

Choice of resolution powers

4.1 The choice of resolution powers that are applied to an FMI should take into account:

(i) the type of FMI and the critical functions that it provides;

(ii) the risk profile of the FMI, including its exposure to credit, liquidity and

general business risks and, in particular, whether it takes credit risk through

exposures to its participants as principal;

(iii) the FMI’s capital structure, available assets, default resources and loss

allocation arrangements;

(iv) any recovery measures taken by the FMI;

(v) in the case of an FMI that has rules-based loss allocation procedures, the

extent to which those procedures have not been exhausted before entry into

resolution;

(vi) the type of the stress (for example, credit losses or liquidity shortfalls) and its

source (for example, stress arising from participant default or from other

causes, such as, business, operational or other structural weaknesses); and

(vii) the market structure in which it operates (for example, the existence of

alternative providers).

4.2 The choice of resolution powers should take into account the expected impact of

those powers on direct and indirect FMI participants, any linked FMIs and third

parties, regardless of where they are located, and the expected impact on financial

markets more widely.

Entry into resolution (KA 3.1)

4.3 Entry into resolution should be possible when an FMI is, or is likely to be, no longer

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

viable or no longer able to meet applicable legal or regulatory requirements on a

continuing basis, and has no reasonable prospect of returning to viability within a

reasonable timeframe through other actions that could be taken by the FMI (that do

not themselves compromise financial stability). Entry into resolution should be

possible, in particular, if:

(i) recovery measures available to the FMI, including the use of its available

assets and default resources and the application of any loss allocation rules, are

exhausted and have failed to return the FMI to viability and continuing

compliance with applicable legal and regulatory requirements, or are not being

implemented in a timely manner; or

(ii) the relevant oversight, supervisory or resolution authority determines that the

recovery measures available to the FMI are not reasonably likely to return the

FMI to viability within the timeframe required to enable continued compliance

with applicable legal and regulatory requirements, or that they are otherwise

likely to compromise financial stability.

Implementation of loss allocation rules and procedures prior to entry into resolution

4.4 Where the FMI has rules and procedures for loss mutualisation or allocation, those

rules and procedures should generally be exhausted prior to the entry into resolution

of the FMI unless it is necessary or appropriate for achieving the resolution

objectives (paragraph 3.1.) to initiate resolution before those rules and procedures

have been exhausted. Where any such rules and procedures have not been exhausted

prior to entry into resolution, the resolution authority should have the power to

enforce implementation of those rules and procedures (see paragraph 4.9 (i)).

Continuity upon entry into resolution

4.5 Settlement finality rules should continue to apply in resolution.

4.6 Any licenses, authorisations, recognitions and legal designations of a (domestic or

foreign) FMI necessary for the continued performance of the FMI’s critical functions

in resolution, including its recognition for the purposes of the application of relevant

settlement finality rules, should not be revoked automatically solely as a result of

entry into resolution under either domestic or foreign law and should remain

effective to the extent necessary to allow for continuity of the critical functions of the

FMI in resolution.

4.7 The entry into resolution of an FMI should not lead automatically to the restriction,

suspension or termination of its participation in, or link with, other FMIs (wherever

located) and FMIs should not be prevented (including by law or regulations) from

maintaining the participation of, or link with another FMI that is in resolution

provided that the FMI in resolution continues to meet its payment and delivery

obligations when due and to comply with any other applicable obligations under the

rules of the FMI.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

Temporary administration

4.8 The resolution authority or an appointed administrator, conservator, receiver or

similar official should have the power and the capacity to ensure the continued

provision of the critical functions of an FMI in resolution and to fulfil the FMI’s

payment and settlement obligations on time, including on the day that the FMI enters

into resolution, until the FMI is restored to viability or those functions transferred,

replaced by another provider or wound down in an orderly manner.

Powers to allocate losses and allocate or terminate contracts (KA 3.2 (iii), KA 3.5)

4.9 Subject to the relevant safeguards set out in paragraph 4.11 and in KA 5 (as

elaborated in paragraph 6.1) resolution authorities should have powers to:

(i) enforce any existing and outstanding contractual obligations of the FMI’s

participants to meet cash calls or make further contributions to a guarantee or

default fund, or any other rules and procedures of the FMI for loss allocation

(including for the repayment of liquidity providers) where they have not been

already applied exhaustively by the FMI prior to the entry of the FMI into

resolution;

(ii) enforce any existing and outstanding obligations of the FMI’s participants

pursuant to the rules and procedures of the FMI to accept allocations of the

positions of a defaulting participant;

(iii) write down (fully or partially) equity of the FMI;

(iv) write down and/or convert to equity (“bail in”) unsecured debt of the FMI in a

manner that respects the hierarchy of claims under the applicable insolvency

regime;

(v) reduce the value of any gains payable by the FMI to participants (for example,

by variation margin hair-cutting);

(vi) terminate (“tear up”) or close out contracts.

Termination of some but not all contracts (“partial tear up”) or any reduction in value

of gains payable by the FMI to participants should only be performed where

consistent with the legal framework and the rules of the FMI drawn up in accordance

with the legal framework.

4.10 Resolution authorities may write down initial margin of direct participants and,

where permitted, indirect participants, where the initial margin is not remote from the

insolvency of the FMI and where consistent with the legal framework and the rules

For example, to the extent defaulting participants with ‘out-of-the-money’ positions had been unable to pay

variation margin to a CCP, the CCP’s obligations and variation margin payments to all ‘in-the-money’

participants could be haircut pro rata to the size of their variation margin claims.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

of the FMI drawn up in accordance with the legal framework.

4.11 Any power to allocate losses to participants of the FMI by reducing the value of any

gains payable to such participants (for example, by variation margin hair-cutting) in

accordance with paragraph 4.9 (v) or by writing down initial margin

in accordance

with paragraph 4.10, should be subject to the following conditions:

(i) the FMI’s pre-funded resources have been exhausted and other mechanisms

under its rules to cover losses and restore viability have either been

unsuccessful or have not been implemented (because the resolution authorities

determine that their implementation would be likely to compromise financial

stability or unlikely to be successful having regard to the circumstances, or for

any other reason);

(ii) the loss allocation respects the rules of the FMI and the hierarchy of claims

under the applicable insolvency regime; and

(iii) the loss allocation applies to collateral and margin only to the extent that such

collateral or margin would be used to cover losses other than those related to

the obligations of the participant that posted them either under the loss

allocation rules of the FMI or if the FMI entered into insolvency.

In a situation where an FMI participant has failed to meets its obligations to the FMI

under the rules and procedures of the FMI prior to the FMI’s entry into resolution,

these conditions do not preclude the use of the participant’s initial margin to meet

those obligations (where consistent with the legal framework and the rules of the

FMI).

Termination (“tear up”) or close out of contracts

4.12 When considering whether to terminate the outstanding contracts of a CCP, the

resolution authority should take into account, among other things, the impact of that

action on:

(i) the risk management of the CCP’s participants; and

(ii) financial stability.

Transfer of critical functions to a solvent third party or bridge institution (KAs 3.2 (vi) and

(vii), 3.3 and 3.4)

4.13 Resolution authorities should have the power, subject to legal safeguards for

counterparties relating, in particular, to netting sets and collateral arrangements, to

transfer to a third party purchaser or bridge institution the ownership of an FMI or all

Initial margin is in principle only available to cover obligations of the participant that posted it. In some

jurisdictions, however, where the initial margin is not held in a manner that is remote from the insolvency of

the CCP, the initial margin may, in the event of a CCP's insolvency, be exposed to the claims of creditors

other than the participant that posted such initial margin.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

or part of an FMI’s critical operations (for example, clearing in one specific product),

including all associated rights and obligations and necessary service-level

agreements. Any such power should be exercisable notwithstanding any

requirements for consent or novation that would otherwise apply.

4.14 Where functions of an FMI are transferred to a third party purchaser or bridge

institution, the resolution authority should aim to ensure continuity of the FMI’s legal

and technical arrangements, such as delivery-versus-payments arrangements,

domestic or cross-border links with other FMIs or other critical service providers and

relevant contractual arrangements.

4.15 Where functions are transferred to a bridge institution, any licenses, authorisations,

recognitions and legal designations of the FMI necessary for the continued

performance of those functions in resolution, including its recognition for the

purposes of the application of relevant settlement finality rules, should be transferred

or otherwise applied to the bridge institution (or institutions).

4.16 The transfer powers of resolution authorities should enable the authority, in cases

where the FMI in resolution holds client assets in a capacity as custodian, to transfer

those assets to another institution for custody without affecting the ownership rights

or entitlements of the relevant clients to those assets.

Moratorium (KA 3.2(xi))

4.17 A resolution authority should not impose a moratorium on payments due by the FMI

to its participants or to any linked FMI if that moratorium would:

(i) affect the ordinary flow of payments, settlements and deliveries being

processed by the FMI in the course of its core functions; or

(ii) otherwise jeopardise or prevent continuity of other critical functions

performed by the FMI in resolution or linked FMI.

This should not prevent a resolution authority from imposing a moratorium on

payments to general creditors, that is, creditors whose claims on the FMI (a) are not

the result of the use of the FMI’s critical functions or (b) do not arise from services

necessary for the provision of those functions.

4.18 A resolution authority should not be prevented from using any loss allocation powers

referred to in paragraph 4.9 or 4.10 in relation to payments, settlements and

deliveries subject to a moratorium.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

5 Set-off, netting, collateralisation, segregation of client assets (KA 4)

Temporary stay on early termination rights (KA 4)

5.1 Entry into resolution of, or the exercise of any resolution power in relation to, an

FMI should not trigger a right to acceleration or early termination by any participant

in an FMI or any other counterparty of an FMI. Such rights should remain

exercisable where the FMI (or the authority, administrator, receiver or other person

exercising control over the FMI in resolution) fails to meet payment or delivery

obligations, including collateral transfers, when due in accordance with its rules, but

subject to any application of loss allocation to margin or collateral under the rules of

the FMI or through the exercise of statutory loss allocation powers.

5.2 Where such rights to acceleration or early termination nevertheless arise by reason

only of entry into resolution or in connection with the exercise of any resolution

powers, the resolution authority should have the power to stay temporarily such

rights. When considering whether to impose a temporary stay on the exercise by FMI

participants and other relevant counterparties of acceleration or early termination

rights triggered by entry into resolution of the FMI, the resolution authority should

take into account the impact on the financial markets and on the safe and orderly

operations of the FMI and any linked FMI.

6 Safeguards (KA 5)

“No creditor worse off” principle (KA 5.2)

6.1 For the purposes of determining whether a participant is worse off as a result of

resolution measures than in liquidation (application of the “no creditor worse off

safeguard” set out in KA 5.2), the assessment of the losses that would have been

incurred and the recoveries that would have been made by FMI participants if the

FMI had been subject to liquidation should assume the full application of the FMI’s

rules and procedures for loss allocation.

7 Funding of FMI resolution (KA 6)

7.1 Jurisdictions should have in place appropriate arrangements and powers to provide

temporary funding to facilitate resolution and to recover any resulting losses to

public funds from the FMI, unsecured creditors (including FMI participants) or, if

necessary, participants in the financial system more widely (see KA 6.2 and 6.4).

7.2 Where jurisdictions provide for the power to place an FMI under temporary public

ownership and control in order to ensure continuity of its critical functions, they

should make provision to recover any losses to public funds from the FMI, its

unsecured creditors (including FMI participants) or, if necessary, participants in the

financial system more widely (see KA 6.5).

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

8 Cross-border cooperation (KA 7)

8.1 The legal framework should not provide for the automatic revocation of any licenses,

authorisations, recognitions and legal designations of an FMI necessary for the

continued performance of the FMI’s critical functions in resolution, including its

recognition for the purposes of the application of relevant settlement finality rules, or

automatically restrict, suspend or terminate its participation in or links with other

FMIs, as a result of official intervention or its entry into resolution in another

jurisdiction.

9 Cooperation, coordination and information sharing (KA 8, 9, 12)

9.1 Crisis Management Groups (CMGs) or other arrangements based on the cooperative

arrangements maintained under Responsibility E

that achieve an equivalent

outcome should be maintained for all FMIs that are systemically important in more

than one jurisdiction, as determined by the oversight or supervisory authorities and

resolution authorities in those jurisdictions.

9.2 For any such FMI, the CMG (or equivalent arrangement) should include the

resolution authorities responsible for the FMI, the authorities that participate in the

cooperation arrangements adopted in accordance with Responsibility E and other

relevant authorities, of the jurisdictions where the FMI has operations that are

material to its resolution.

9.3 The requirement for institution-specific cross-border cooperation agreements (KA 9)

may be met by crisis coordination and communication agreements, protocols or

MoUs adopted in accordance with Responsibility E, provided that those

arrangements are adapted, amended or supplemented where necessary to support the

cooperation, coordination and information sharing needed to carry out the functions

relating to recovery and resolution that are specified by the Key Attributes. In

particular, they should:

(i) provide for the resolution authority and other authorities that do not participate

in the arrangements adopted under Responsibility E (for the purposes of

regulation, supervision or oversight of the FMI) to participate in planning,

preparing for and carrying out resolution of the FMI;

(ii) define the roles and responsibilities of the authorities involved in planning,

preparing for and carrying out resolution;

(iii) include arrangements and procedures for sharing information necessary for the

purposes of planning, preparing for and carrying out resolution; and

Responsibility E of the Responsibilities of central banks, market regulators and other relevant authorities for

financial market infrastructure, CPSS-IOSCO Principles for Financial Market Infrastructures, section 4:

http://www.bis.org/cpmi/publ/d101.htm

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

(iv) include institution-specific details regarding the implementation of the

resolution measures set out in the resolution plan for the FMI.

10 Resolvability assessments of FMIs (KA 10)

10.1 Systemically important FMIs within the scope of this guidance (see Section 2)

should be subject to regular resolvability assessments that are conducted in

accordance with KA 10 and I-Annex 3.

10.2 In the case of an FMI that is systemically important in more than one jurisdiction, the

resolvability assessment should be carried out by the home resolution authority of the

FMI and coordinated within the FMI’s CMG or under an equivalent arrangement.

10.3 When conducting a resolvability assessment of an FMI, authorities should assess the

feasibility and credibility of implementing the resolution strategy and operational

resolution plan developed for the FMI, by assessing in particular:

(i) the likely implications for resolution (including the availability of funds to

repay liquidity providers) of the implementation of the FMI’s recovery plan,

including of any rules and procedures for loss allocation or for the allocation of

contracts;

(ii) technical and legal barriers to the transfer of the critical functions of the FMI to

another entity, including those arising from the bespoke nature of the risk

management and technical processes of individual FMIs;

(iii) where the resolution plan provides for transfer of the critical FMI functions to

another entity or bridge institution, the robustness of any arrangements in place

to facilitate the transfer and to maintain continuity, including of the legal and

technical arrangements, such as delivery-versus-payments arrangements;

(iv) the impact of resolution strategies and measures set out in the operational

resolution plan on FMI participants and on any linked FMIs, including the

ability of participants and those linked FMIs to retain continuous access to the

FMI’s critical functions during the resolution;

(v) the ability of the FMI in resolution or of a successor entity or bridge institution

to which critical FMI functions have been transferred to maintain access to the

services of any linked FMIs and other service providers during the resolution;

(vi) the rights and obligations of linked FMIs in the event of the failure of one of

those FMIs that could affect the conduct of resolution and the ability to

maintain enforcement rights over collateral; and

(vii) any interoperability agreements and cross-margining or loss-sharing

arrangements with other FMIs.

10.4 The oversight, supervisory or resolution authorities for FMIs should have powers to

require an FMI, to adopt measures consistent with the legal framework to improve

the resolvability of the FMI including, where necessary and appropriate:

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

(i) operational, structural or legal changes so that different FMI functions or

services (for example, the clearing of different products) can be dealt with

separately in resolution;

(ii) changes to the terms or operation of its links with other FMIs; and

(iii) changes to delivery, segregation or portability arrangements of participants’

positions or related collateral.

Any such requirements should take due account of the likely effects of such changes

on the soundness of operations of the FMI, including its risk management, the

functioning of markets, the provision of liquidity, and the incentives of direct and

indirect participants to use the FMI.

11 Recovery and resolution planning for FMIs (KA 11)

11.1 FMIs that are systemically important should be subject to a requirement for ongoing

recovery and resolution planning.

11.2 Recovery and resolution plans need to be tailored to the specific risks and systemic

implications that a particular type of FMI may be exposed to or create.

Recovery plans

11.3 FMI recovery plans should be consistent with the CPSS-IOSCO Principles for

Financial Market Infrastructures (including Principle 3, key consideration 4) and

take into account the guidance in the CPMI-IOSCO report on Recovery of financial

market infrastructures.

Resolution strategies and plans

11.4 Resolution authorities for an FMI should, in cooperation with the FMI’s oversight or

supervisory authorities (where distinct from the resolution authority), develop

resolution strategies and operational plans to facilitate the effective resolution of the

FMI in a way that ensures continuity of the critical functions carried out by the FMI.

11.5 In the case of an FMI that is systemically important in more than one jurisdiction, the

resolution strategy and plan should be developed by the home authority of the FMI

and coordinated within the FMI’s CMG or equivalent arrangements.

11.6 Resolution plans for FMIs should:

(i) contemplate scenarios where some or all existing loss allocation

arrangements between participants under the FMI rules have been fully or

partially put into effect or not implemented;

See footnote 15.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

(ii) contemplate scenarios where there may be no existing alternative provider to

which the critical functions of an FMI can be transferred in the short term;

(iii) consider and address the potential technical and legal barriers to a transfer of

FMI functions;

(iv) where necessary to ensure continuity of the FMI’s legal and technical

arrangement and support the transfer of its functions, provide for advance

agreement with other FMIs or relevant service providers;

(v) take into account the legal mechanism by which collateral is provided,

including whether collateral is provided as a security interest or pledge or by

way of title transfer, the status of that collateral in insolvency (that is, whether

it could be considered ‘bankruptcy remote’), and the implications of that

status for the extent to which losses can be imposed under loss allocation

rules of the FMI and the exercise of statutory powers;

(vi) consider whether assets pledged or available to the FMI would in fact be

available for use in resolution or whether such use or the transfer of functions

could be hampered or prevented by residual interests of direct and indirect

participants in those assets;

(vii) if resolution measures would split netting sets, consider the impact of that

splitting on liquidity and collateral requirements;

(viii) address how providers of liquidity to the FMI before and during resolution

will be repaid;

(ix) take into account the structure of the FMI, for example, whether it is part of a

broader group of FMIs, and the different legal and regulatory regimes under

which it operates;

(x) address any need to maintain links with other FMIs (both domestic or in

another jurisdiction) that are necessary for the continuity of critical FMI

services in any relevant jurisdiction; and

(xi) take into account the impact on direct and indirect participants.

11.7 Resolution plans for FMIs should contain the essential elements set out in I-Annex 4

to the Key Attributes and include in addition, as appropriate to the type and specific

characteristics of each FMI and its critical functions, the following elements in

particular:

For many FMIs there will, in the short term, be no alternative providers of its critical functions to which

operations can be transferred.

Practical challenges (such as IT incompatibility) may make a transfer difficult unless the alternative provider is

willing and able to take over the failing FMI’s operations in their entirety and run them separately until they can

be integrated. Where an alternative provider exists, FMIs and resolution authorities should therefore consider in

advance the potential technical and legal barriers to the transfer of activities and seek to address them.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

(i) draft transition agreements that would allow the FMI to continue to provide

uninterrupted critical services on behalf of a purchaser or bridge institution

using existing staff and infrastructure or, where it is not possible to develop

such draft agreements in advance, an issues list and the information necessary

to draw up such an agreement at short notice; and

(ii) key information on the critical operations, IT procedures, creditors and list of

key staff and service providers necessary to facilitate the continued operation

of critical functions in resolution or the transfer of some or all of the operations

to another FMI or bridge institution.

12 Access to information and information sharing (KA 12)

12.1 In order to facilitate the implementation of resolution measures, FMIs should be

required to maintain information systems and controls that can promptly produce and

make available, both in normal times and during resolution, relevant data and

information needed by the authorities for the purposes of timely resolution planning

and resolution, in particular, on the following:

(i) FMI rules, default fund and other loss allocation arrangements;

(ii) stakeholders, including the FMI’s direct and indirect participants, owners,

settlement agents, liquidity providers, linked FMIs, custodians and other

service providers;

(iii) data and information needed for effective and timely risk control during

resolution, including gross or net exposures or risk and margin requirements,

where appropriate, between the FMI and each participant;

(iv) the status of obligations of FMI participants (for example, the extent to which

FMI participants have fulfilled their obligations to make default fund

contributions);

(v) links and interoperability arrangements with other FMIs, including exposures

to and collateral provided to and received from linked FMI;

(vi) the location of participant collateral, the arrangements under which it is held

and any rights of use or rehypothecation that have been exercised in relation to

collateral; and

(vii) netting arrangements, so that authorities can assess the impact of possible

transfers of part of the business of an FMI on participants’ netting rights).

12.2 Oversight, supervisory and resolution authorities should take into account the impact

of any contractual agreement between an FMI, its direct participants and, where

relevant, its indirect participants on the information available on the positions or

flows of indirect participants.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

II. Resolution of FMI participants

The Preamble to the Key Attributes states that an effective resolution regime should ensure

continuity of systemically important financial services and payment, clearing and settlement

functions. FMIs play an important role in the resolution of any of their participants and should

endeavour to minimise disruption caused by the failure of a participant to any such functions

that are provided by the FMI. To resolve a failing firm in a manner that maintains continuity

of its critical functions, it is necessary that the firm in resolution (or a successor firm

) can

continue to rely on services provided by FMIs in which it participates, as long as it promptly

performs its margin, collateral or settlement obligations that arise under a financial contract or

as a result of its participation in the FMI. It is important that FMIs’ rules and procedures

adequately address circumstances where FMI participants enter resolution, and that the

resolution plans for FMI participants are compatible with the rules and procedures of the

FMIs in which they participate.

This guidance sets out certain objectives as regards resolution planning for FMI participants

and FMI rules and procedures to ensure consistency with and support for actions by a

resolution authority to manage the failure of a participant that could be systemically

significant or critical if it fails.

1. Rules and procedures governing a participant’s default

1.1 Jurisdictions should ensure that the participation requirements and rules and

procedures of an FMI governing a participant’s default (see Principle 13 of CPSS-

IOSCO Principles for Financial Market Infrastructures) (“FMI rules”) are not likely

to hamper unnecessarily the orderly resolution of participants in the FMI.

1.2 The entry into resolution of an FMI participant or use of a resolution tool should not

lead to an automatic termination of its participation in the FMI. Jurisdictions should

ensure that laws and regulations applicable to FMIs should not prevent FMIs from

maintaining the participation of a firm in resolution provided that the safe and

orderly operation of the FMI is not compromised. FMI rules should provide the FMI

with sufficient flexibility to cooperate with the resolution authority of the FMI

participant in order to prepare for and implement an orderly resolution in a way that

does not increase risk to the FMI, its risk management or its safe and orderly

operations.

1.3 To support the continuity of critical functions of a participant in resolution, FMI

rules should:

(i) allow for a firm or a successor entity to maintain its participation during a

resolution process, subject to adequate safeguards to protect the continued

safe and orderly operations of the FMI, including the condition that the firm

or successor entity continues to meet payment and delivery obligations when

This may include a bridge institution or a private sector entity to which to functions of the firm in resolution

have been transferred.

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

due and comply with any other obligations of participants under the rules of

the FMI;

(ii) facilitate, for example, through a fast-track application process, the

participation of a third party successor or bridge institution that assumes

particular functions or positions of the failing firm, subject to the

maintenance of adequate risk control standards; and

(iii) facilitate, where appropriate, the transfer of positions of the clients of a

participant in resolution to other participants in the FMI.

2. Resolvability assessments of FMI participants (engagement of

resolution authorities with FMIs)

2.1 As part of resolution planning and resolvability assessments for firms that are FMI

participants, resolution authorities should engage regularly with the FMIs in which

those firms are participants in order to have a clear understanding of:

(i) the implication of the application of resolution tools on the firm’s FMI

membership (including circumstances where resolution leads to a change of

control of the participant);

(ii) the conditions that the firm needs to meet to maintain its participation in the

FMI, such as requirements to contribute to default funds, liquidity

commitments, payment and settlement obligations (including collateral and

margin);

(iii) the implication for the risk management of the FMI and for its other

participants of continued participation in the FMI of a participant in resolution;

(iv) the conditions for a bridge entity or another firm to which functions of the firm

in resolution would be transferred to participate in the FMI and the time any

application process would take;

(v) the technological changes needed to implement the resolution measures, for

example, transfer or integration of IT systems, and the preparations needed to

facilitate the rapid execution of such transfer or integration;

(vi) the operational arrangements necessary to ensure that all of the firm’s

obligations to the FMI, including margin, collateral and settlement obligations,

are met as they fall due, including on the day the firm enters into resolution

whether by the firm directly or by the resolution authority on behalf of the

firm;

(vii) the FMI’s segregation and portability regime, where relevant and the

implications for assets of clients of FMI participants to ensure that those assets

are dealt with in a way consistent with domestic laws and regulations;

(viii) the process for and consequences of termination of membership and its impact

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

on other participants, any linked FMIs and the operations of the FMI;

(ix) the FMI’s internal governance policies and policies for communication in a

crisis;

(x) the FMI’s procedures for evaluating the financial health of its participants;

(xi) the ability of the FMI to segregate information regarding the outstanding

activity at and obligations to the FMI of a single participant and to report it

promptly in an organised format to the resolution authority; and

(xii) the FMI’s risk management protocols with respect to a participant that it

determines to be in danger of default.

2.2 FMIs should be required as part of their contingency arrangements to test the

effectiveness of their procedures if a major participant were to enter into resolution,

including the conditions and requirements for continuing participation or admitting

as a new participant in the FMI an entity to which that participants’ activities have

been transferred.

3. Temporary stay on early termination rights of FMIs

3.1 If a participant in resolution fails to meet any margin, collateral or settlement

obligations to the FMI, the FMI should retain the right to exercise any acceleration or

early termination rights that arise as a result of that failure.

3.2 The power for resolution authorities to impose a temporary stay on the exercise of

contractual acceleration or early termination rights should apply to any such rights

that are exercisable by an FMI that arise by reason only of the entry into resolution

of, or the exercise of resolution powers in relation to, an FMI participant. Any such

power should be exercised in relation to an FMI with due regard to the need to

ensure that it does not compromise the safe and orderly operations of the FMI.

4. Potential impediments to resolvability

4.1 Resolution authorities should inform FMIs and the relevant authorities responsible

for oversight or supervision of FMIs of any impediments arising from FMI rules and

procedures that could affect the effective implementation of a resolution of an FMI

participant. The oversight, supervisory and resolution authorities should consider

whether rule changes (for example, introduction of carve-outs or exemptions in FMI

rules or fast-track application processes) or other actions can be taken to address

those reported impediments without compromising the risk management and safe

operation of the FMI.

5. Provision of information by resolution authorities to FMIs

5.1 Resolution authorities should inform FMIs as soon as possible of the resolution of a

participant, and if possible in advance of the firm’s entry into resolution. Throughout

the period that a participant is in resolution, authorities should provide the FMI with

II-Annex 1 – Resolution of Financial Market Infrastructures (FMIs) and FMI Participants

information about the participant or any bridge institution to which its functions have

been transferred relevant to the continued participation of that firm or bridge

institution in the FMI.

II-Annex 2 – Resolution of Insurers

II-Annex 2:

Resolution of Insurers

The Key Attributes of Effective Resolution Regimes for Financial Institutions (the ‘Key

Attributes’, KAs) state that any financial institution that could be systemically significant or

critical if it fails should be subject to a resolution regime consistent with the Key Attributes.

The systemic impact of an insurance failure can materialise in various ways, including

through contagion (where policyholders or markets consider that similar problems may exist

in similar products from other insurers) and financial links (for example, in the derivatives

markets), and may have an impact on the broader economy through a failure to make good on

promises to policyholders or to engage in new transactions that would foster economic

activity.

The general assumption is that traditional insurance activities and even some non-traditional

insurance activities that are no longer viable will typically be resolved through run-off and

portfolio transfer procedures. It may not be possible, however, to rely on these tools in all

circumstances, and particularly in those cases in which the business model is complex or there

is no corresponding market for portfolio transfers. Run-off and portfolio transfer tools may

not, for example, be sufficient to mitigate the systemic impact of a sudden deterioration in the

viability of a larger, complex insurance group engaging in other non-traditional insurance and

non-insurance activities that may involve some degree of bank-like leverage and maturity

transformation. Insurance or reinsurance companies, groups

and conglomerates that could be

systemically significant or critical if they fail (hereinafter collectively referred to as

“insurers”) should therefore be subject to resolution regimes that meet the standard set out in

the Key Attributes. Consistent with the scope of the Key Attributes set out in KA 1.1 the term

“insurer” also includes holding companies and significant non-regulated operational entities

within a financial group or conglomerate that are significant to the business of the group or

conglomerate; and branches of foreign insurers.

This Annex provides guidance on the implementation of the Key Attributes in relation to

resolution regimes for insurers. It supplements the Key Attributes by indicating how particular

KAs, or elements of particular KAs, should be interpreted when applied to resolution regimes

for insurers. The guidance on individual KAs should be read in conjunction with the KA to

which it relates.

1. Objectives

1.1 A resolution regime for insurers should meet the general objectives set out in the Key

Attributes (Preamble and KA 2.3)

. It should make it feasible to resolve an insurer

Where components of this Annex have been deemed important for purposes of assessing compliance with the

Key Attributes, those components are explicitly reflected in the Key Attributes Assessment Methodology.

KA 2.3 provides that resolution authorities should have as their objectives both to pursue financial stability

and to protect insurance policy holders. KA 2.3 does not rank the specific objectives and functions. The

relative weighting and balancing of objectives may therefore vary according to the particular circumstances

specific to the failing institution.

II-Annex 2 – Resolution of Insurers

without severe systemic disruption or exposing taxpayers to loss, while protecting

vital economic functions through mechanisms that make it possible for shareholders

and unsecured creditors to absorb losses in a manner that respects the hierarchy of

claims in liquidation. For insurers, the resolution regime should have as specific

objective the protection of policyholders, beneficiaries and claimants (collectively

hereafter, ‘policyholders’). This however does not mean that policyholders will be

fully protected under all circumstances and does not exclude the possibility that

losses be absorbed by policyholders to the extent they are not covered by

policyholder protection arrangements.

2. Scope of resolution regimes

2.1 Any insurer that could be systemically significant or critical if it fails and, in

particular, all insurers designated as Globally Systemically Important Insurers

(“G-

SIIs”), should be subject to a resolution regime consistent with the Key Attributes.

3. Resolution authority

3.1 As part of its statutory objectives and functions, the authority responsible for the

resolution of insurers (‘resolution authority’) should exercise its resolution functions

in a way that meets the relevant general objectives set out in the Preamble and KA

2.3 and the specific objective of protecting policyholders (see Section 1).

3.2 To achieve its objectives, the resolution authority should coordinate with applicable

schemes for the protection of insurance policyholders (‘policyholder protection

schemes’). The respective mandates, roles and responsibilities of the resolution

authority and policyholder protection schemes should be clearly defined and

coordinated.

3.3 The resolution powers may be exercised by the resolution authority directly or

through a special administrator, receiver, conservator or other official subject to the

same objectives as the resolution authority.

4. Resolution powers

Entry into resolution (KA 3.1)

4.1 The resolution regime should set out clear standards or suitable indicators of non-

viability to guide the decision as to whether an insurer meets the conditions for entry

into resolution. Such standards or indicators should allow for timely and early entry

An initial list of G-SIIs was published by the FSB on 18 July 2013:

http://www.financialstabilityboard.org/publications/r_130718.pdf. The group of G-SIIs will be updated

annually and published by the FSB each November, starting from November 2014.

Consistent with KA 2.1 references to “resolution authority” include a reference to more than one authority

where multiple authorities are responsible for exercising resolution powers under the resolution regime.

II-Annex 2 – Resolution of Insurers

into resolution when the insurer is no longer viable or likely to be no longer viable,

and has no reasonable prospect of becoming so, and before it is balance-sheet

insolvent. Suitable standards or indicators may include a determination by the

supervisory authority, in consultation with the resolution authority (where the

supervisory authority is not also the resolution authority) that, for example:

(i) The insurer is in breach of minimum capital, assets backing technical

provisions, or other prudential requirements and there are not reasonable

prospects of restoring compliance with these requirements;

(ii) there is a strong likelihood that policyholders or creditors will not receive

payments as they fall due; and

(iii) recovery measures have failed, or there is a strong likelihood that proposed

recovery measures will not be sufficient, to return the insurer to viability or

cannot be implemented in a timely manner.

Choice of resolution powers

4.2 Resolution authorities should have at their disposal a broad range of resolution

powers, but should in each case only use those powers that are suitable and necessary

to meet the resolution objectives. The choice and application of the resolution powers

provided for in KA 3 should take into account insurance specificities and, in

particular, the types of business the insurer engages in and the nature of its assets and

liabilities. Before the exercise of other resolution powers, the resolution authorities

should consider whether the resolution objectives (see section 1) can be effectively

achieved through ordinary run-off, or portfolio transfer procedures.

Control, manage and operate the insurer or bridge institution (KA 3.2 (i, ii, iii and iv))

4.3 Resolution authorities should have power, directly or indirectly, over an insurer in

resolution (see section 3.3) or the bridge institution, so that the insurance business or

parts of it can be carried on and the insurer or bridge institution can, where

appropriate:

(i) continue to fulfil in whole or in part existing obligations under contracts of

insurance;

(ii) permit the exercise of options under existing contracts of insurance, including

the surrender or withdrawal of contract cash value and the payment of further

premiums provided for under the existing contracts; and

(iii) buy reinsurance (or retrocession) coverage.

Restructuring of liabilities (KA 3.2 (iii))

4.4 The resolution authority should have the power to restructure, limit or write down

liabilities, including insurance, reinsurance and other liabilities, and allocate losses to

creditors and policyholders in a way consistent with the statutory creditor hierarchy,

subject to the safeguards set out in KA 5. Powers to restructure liabilities, as

II-Annex 2 – Resolution of Insurers

appropriate and in a manner consistent with the jurisdiction’s legal framework (see

Section 5), may include but are not limited to the following:

(i) reducing or terminating future (or contingent) benefits and guarantees, such as

the sum assured or the annuity provided, or the guaranteed minimum sum

assured or the guaranteed annuity rate, in a manner that allocates losses as

appropriate to policyholders whilst maintaining continuity of insurance

coverage and payments falling due;

(ii) reducing the value of contracts upon surrender, where insurance contracts have

a surrender value to enable losses to be imposed as appropriate on

policyholders that seek to surrender their contracts;

(iii) terminating or restructuring options provided to policyholders, for example as

part of a deferred or variable annuity contract;

(iv) settling crystallised and contingent insurance obligations

by payment of an

amount calculated as a proportion of estimated present and, if possible, future

claims, to provide a more rapid and cost-effective resolution where future

claims are uncertain and run-off is not feasible or there is not time to carry out

a detailed actuarial valuation; and

(iv) reducing the value of, or restructuring reinsurance contracts issued by the firm,

for example by imposing limits on a policy, to allow losses to be imposed on

cedants, as appropriate and where this does not compromise financial stability.

4.5 The resolution authority should be able to exercise powers to restructure liabilities,

subject to the safeguards set out in KA 5, without a requirement of prior individual

notification to and consent from creditors, including policyholders. It should be able

to exercise the powers effectively and in a way that binds unknown policyholders

where:

(i) claims have not yet arisen;

(ii) claims have arisen but have not yet been notified;

(iii) claims have arisen, been notified, but not yet been estimated; or

(iv) the identity of policyholders is not known (for example because cover has been

written through third parties and the claim investigation has not progressed to

the point whereby all relevant parties have been identified).

Portfolio Transfer (KA 3.2(vi) and 3.7(i))

4.6 Resolution authorities should have the power to transfer contracts of insurance and

reinsurance, including the power to vary or reduce the value of those contracts

transferred subject to the applicable laws in each jurisdiction.

This includes obligations under inwards reinsurance contracts.

II-Annex 2 – Resolution of Insurers

4.7 Resolution authorities should have the power to transfer any reinsurance associated

with the transferred policies without the consent of the reinsurer subject to adequate

safeguards.

Power to suspend insurance policyholders’ surrender rights

4.8 In order to achieve an effective resolution, the power of the resolution authority to

suspend policyholders’ rights in resolution should extend to the ability to temporarily

restrict or suspend the rights of policyholders to withdraw from their insurance

contracts with an insurer. The exercise of the power, its scope of application, and the

duration of the stay should be appropriate to the nature of the insurance product (for

example, the different nature of life and non-life insurance).

4.9 The resolution authority should, subject to adequate safeguards, have the power to

stay rights of reinsurers of an insurer or of another reinsurer in resolution to

terminate or not reinstate coverage relating to periods after the commencement of

resolution.

5. Safeguards

Respect for hierarchy of claims in liquidation (KA 5.1)

5.1 The position of policyholders in the creditor hierarchy should be consistent with the

objective of policyholder protection.

Pari passu principle (KA 5.1)

5.2 The resolution authority should have the flexibility to depart from the general

principle of equal (pari passu) treatment of creditors of the same class and treat

policyholders of different types of policies or policyholders (for example,

policyholders covered by a policyholder protection scheme versus policyholders not

covered by policyholder protection schemes) differently in a resolution, including in

run-off or wind down proceedings, if necessary to maximise the value for creditors

(including policyholders) as a whole - subject to the “no creditor worse off”

safeguard (KA 5.2) - or to minimise the potential systemic impact of a firm’s failure.

There should be no differential treatment of policyholders holding the same type of

product or policies.

6. Funding resolution

6.1 Jurisdictions should have in place privately-financed policyholder protection

schemes or resolution funds that can assist in:

(i) securing continuity of insurance coverage and payments by the transfer of

insurance policies to a bridge insurer or other insurer or use of any other

resolution powers; and

II-Annex 2 – Resolution of Insurers

(ii) compensating policyholders for their losses in the event of a wind-up or

liquidation.

7. Crisis Management Groups (CMGs) and Cooperation Agreements

(COAGs)

7.1 Crisis Management Groups (CMGs) and institution-specific cooperation agreements

(COAGs) should be maintained or developed for G-SIIs. They can build upon

existing supervisory colleges and cooperation agreements.

8. Resolvability assessments

8.1 Any insurer that could be systemically significant or critical upon failure, and at a

minimum all G-SIIs, should be subject to regular resolvability assessments that are

conducted in accordance with KA 10 and I-Annex 3.

8.2 In undertaking a resolvability assessment to evaluate the feasibility and credibility of

implementing the resolution strategy and operational resolution plan developed for

the insurer, resolution authorities, in coordination with other relevant authorities,

should assess in particular whether the chosen resolution strategy ensures the

continuity of critical functions and can be implemented without severe systemic

disruption and without exposing taxpayers to loss.

8.3 The assessment of the feasibility of the resolution strategy should cover as

appropriate:

(i) the likely availability of a transferee or purchaser for any business activities

of the insurer in resolution, taking into consideration the ability to use a

bridge institution to operate the business on a temporary basis;

(ii) the time needed to evaluate policyholder liabilities and the assets supporting,

backing or to be transferred as consideration for assuming the liabilities, and

for a potential transferee to carry out due diligence;

(iii) the capacity of the policyholder protection scheme or resolution funds to fund

a transfer where there are insufficient assets to resolve all insurance liabilities

in a timely manner;

(iv) where the resolution strategy includes a solvent run-off, back-up plans to

address the risk that the insurer will not remain solvent for the whole duration

of the run-off;

(v) where the resolution strategy includes a run-off (whether solvent or

insolvent), the feasibility of maintaining a risk management programme (such

as a hedging strategy ) which ensures that the risks to policyholders

appropriately reflect the features of the policies they hold (including any

options and guarantees).

II-Annex 2 – Resolution of Insurers

(vi) the quality of management information systems and the capacity of the

insurer to deliver detailed, accurate and timely information on the relevant

data and information needed for the purposes of orderly resolution (see

paragraph 10.1);

(vii) availability of human resources and key personnel (for example, staff may be

employed by a different group entity);

(viiii) the extent to which a sale, transfer, run-off or orderly wind down of different

business activities can be accomplished (for example, whether the activities

are sufficiently separable to be sold or transferred);

(ix) the extent to which corporate capital structures would permit a bail-in within

resolution in accordance with KAs 3.5 and 3.6;

(x) the legal, operational and financial separateness of traditional insurance

business from non-traditional insurance and non-insurance business;

(xi) the extent to which service agreements or outsourcing agreements that are

necessary to ensure continuity of essential services and functions (for

example, claims servicing), including services provided by entities in another

jurisdiction, can be maintained in resolution;

(xii) the extent to which any interconnections or interdependencies between group

entities through intra-group transactions (for example, reinsurance

transactions, loans or letters of credit, collateral upgrades or other liquidity

support provided to banking entities, guarantees or letters of support, cost

sharing or profit and loss-sharing agreements among affiliates) and any

interconnections or interdependencies with third parties affect the

implementation of the resolution strategy;

(xiii) how contractual termination events (including cross-default) in financial

contracts of the insurer are defined (for example, whether rating down-grades,

restructuring or (solvent or insolvent) run-off if occurring in a single entity

within the insurer (insurance group), could trigger early termination of

contracts of other entities in the group; and

(xvi) the ability to fund the continued operations of critical functions and services,

for example, ability to meet potentially increased demands to post collateral.

8.4 When assessing the credibility and overall impact of implementing the resolution

strategy, consideration should be given to its effects on third parties and on financial

stability in affected jurisdictions, including whether the resolution of the insurer

would cause:

(i) a material adverse impact on economic activity as a result of any disruption to

continuity of insurance cover and payment, which is likely to be greatest when

insurance is a pre-requisite to day-to-day economic activity (for example,

employers’ liability, trade credit and transport liability insurance), where a

disruption in insurance claims and benefit payments is likely to cause

significant and widespread financial hardship to households and businesses, or

where the insurer has a significant share of the market;

II-Annex 2 – Resolution of Insurers

(ii) a lack of confidence in other insurers triggering a policyholder run, particularly

where the insurers provide insurance that resembles on-demand savings

products;

(iii) an adverse impact on the resolvability of insurance or other financial

operations undertaken elsewhere in the group;

(iv) large investment losses for other financial institutions that could affect the

insurer’s capital resources;

(v) the termination of securities lending and reverse repo operations that could

affect funding and liquidity for other parts of the financial system; and

(vi) an amplification of financial market disruption owing to the termination of

financial guarantees or credit default swaps.

9. Recovery and resolution planning

9.1 All insurers that could be systemically significant or critical upon failure, and at a

minimum all G-SIIs, should be subject to a requirement for an ongoing process of

recovery and resolution planning.

9.2 Recovery and resolution plans (RRPs) need to be tailored to the specific risks and

systemic implications that each insurer may be exposed to or create and take into

account factors such as the types of business the insurer engages in, its derivatives

transactions, intercompany guarantees, inter-affiliate support arrangements, risk

pooling, shared services, risk management model and the nature of its assets and

liabilities.

9.3 A key component of RRPs is a strategic analysis that identifies the insurer’s critical

functions and sets out the key steps to maintaining them in both recovery and

resolution scenarios. Elements of such analysis should include identification of

essential and systemically important functions, mapped to the legal entities in which

they are conducted.

Recovery plans

9.4 Recovery plans should be developed on the basis of severe stress scenarios that

combine adverse systemic and idiosyncratic conditions. They need to take into

account insurance specificities such as the longer pay-out duration and the liquidity

profile of insurers.

9.5 The insurer’s supervisory authority should review the insurer’s recovery plan and

cooperate with the policyholder protection scheme and relevant resolution

authorities, as appropriate.

9.6 In the case of G-SIIs, the review of the recovery plan should be carried out within the

insurer’s CMG.

II-Annex 2 – Resolution of Insurers

9.7 Insurers should identify possible recovery measures and the necessary steps and time

needed to implement such measures and assess the associated risks of

implementation. The range of possible recovery measures could include:

(i) actions to strengthen the capital situation, for example, recapitalisations after

extraordinary losses, capital conservation measures such as suspension of

dividends and payments of variable remuneration;

(ii) triggering of contingent capital instruments;

(iii) possible sales of subsidiaries, portfolios of insurance contracts, or spin-off of

business units;

(iv) changes to the reinsurance programme;

(v) changes to the investment strategy and hedging programme;

(vi) changes to business mix, sales volumes and product designs, including

options to close books of business to new sales or business;

(vii) changes to underwriting and claims handling practices; and

(viii) modifications to contract terms and conditions, the level of charges, fees and

surrender payments, the amount and timing of any discretionary benefits and

the operation of discretionary incentives to renew contracts (such as ‘no-

claims discounts’ or contract renewals without new underwriting).

9.8 An insurer in solvent run-off should be required to have a scheme of operations plan

that sets out how all liabilities to policyholders will be met in full as they fall due and

should include, for example, details on how expenses can be reduced as business

volumes fall.

Resolution strategies and plans

9.9 In the case of G-SIIs, the resolution strategies and plans should be developed within

the insurer’s CMG.

9.10 Resolution plans for insurers should contain the essential elements set out in I-Annex

4, as appropriate to insurers in general and to the type of insurer, and include in

particular the following:

(i) identification of policyholders that are protected by a policyholder protection

scheme and policyholders that are not eligible for benefits from such

schemes;

(ii) the actuarial assumptions used for calculating insurance liabilities and an

independent actuarial valuation of the technical provisions (policyholder

liabilities);

(iii) review of asset quality and concentration issues;

(iv) preparation of insurance portfolio transfers to the best extent possible,

including a determination of the acceptability of assets to be transferred to

any insurer assuming liabilities in a portfolio transfer;

II-Annex 2 – Resolution of Insurers

(v) sources of funding;

(vi) provision for continuity or an orderly winding down of any derivatives

portfolio;

(vii) details on a transfer of reinsurance, if any, and impact on coverage;

(viii) operational and practical arrangements for ensuring continuity of coverage and

payment under insurance policies, and, where appropriate, a restructuring or

termination of insurance policies;

(ix) identification of major counterparties and their interconnectedness with the

insurer, and the impact that the failure of a major counterparty would likely

have on the insurer;

(x) a communications and coordination strategy with insurance policy holder

protection schemes and other authorities with a role in the resolution of an

insurer, and

(xi) participation in financial market infrastructures.

10. Access to information and information sharing

10.1 Insurers that could be systemically significant or critical upon failure, including all

G-SIIs, should be required to maintain information systems and controls that can

promptly produce, both in business as usual and as the firm approaches resolution,

the relevant data and information needed to establish and maintain a resolution

strategy and operational resolution plan and to implement resolution measures in a

timely manner. The following information, in particular, should be readily available:

(i) the number and type of insurance policies, the benefits due to each

policyholder and the reinsurance in place;

(ii) details of eligibility for protection under policyholder protection schemes and

the scope of protection for eligible policyholders;

(iii) insurance and financial products that could be prone to runs;

(iv) information on assets, especially assets backing the insurance liabilities, the

fungibility of any surplus assets between jurisdictions in stressed conditions,

and custodians of assets; and

(v) information about service agreements or outsourcing agreements that are

necessary to ensure continuity of essential services and functions of the

insurer.

II-Annex 3 – Client Asset Protection in Resolution

II-Annex 3:

Client Asset Protection in Resolution

This Annex provides guidance on the interpretation and implementation of the Key Attributes

of Effective Resolution Regimes for Financial Institutions (the ‘Key Attributes’, KAs) relating

to elements in resolution regimes that are necessary to resolve a financial firm with holdings

of client assets (hereafter “firm”). The Key Attributes state that the legal framework governing

the segregation of client assets should be clear, transparent and enforceable during a crisis or

resolution of firms and should not hamper the effective implementation of resolution

measures (KA 4.1). Effective resolution regimes should allow for the rapid return of

segregated client assets or the transfer to a performing third party or bridge institution of the

client asset holdings.

This Annex supplements, and should be read in conjunction with, the Key Attributes in

relation to any financial firm that directly or indirectly holds client assets and that could be

systemically critical or important in the event of failure.

National regimes for client asset protection vary significantly in the methods by which client

assets are protected because such protection depends on the particularities of the laws defining

property rights and resolution and insolvency regimes in each jurisdiction. Client asset

protection regimes fall into a number of broad categories which have been classified by

IOSCO as ‘custodial regimes’, ‘trust regimes’ and ‘agency regimes,

based on the legal

nature of the relationship between the firm and its clients with respect to client assets. Those

differences are likely to affect the legal nature of the client’s rights to its assets, the way in

which those rights are protected by the regime and the treatment in insolvency. Moreover, the

definition of a ‘client asset’ that is subject to a particular form of protection and rights for the

client varies across jurisdictions.

Client assets are held by different types of firms in the course of different financial activities

and services, including safeguarding, administration and custody, investment services and

brokerage, prime brokerage and collateral taking in connection with other financial

transactions. The regulatory classification of those different types of firms varies across

jurisdictions.

The legal and contractual arrangements by which client assets are held and the permissible

use, if any, of those assets by the firm or third parties may also differ depending on the type of

firm holding the assets and the activities in question. For example, in some jurisdictions prime

brokers have and exercise contractual rights to re-hypothecate and use some of the client

assets that they hold. By contrast, custodians generally hold, administer and safeguard

securities on behalf of clients.

Where components of this Annex have been deemed important for purposes of assessing compliance with the

Key Attributes, those components are explicitly reflected in the Key Attributes Assessment Methodology.

Introduction to the Final Report of the IOSCO Technical Committee on Survey of Regimes for the

Protection, Distribution and/or Transfer of Client Assets (March 2011).

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD351.pdf

II-Annex 3 – Client Asset Protection in Resolution

The Technical Committee and, later, the Board of IOSCO have issued a number of reports

pertaining to client asset protection: namely the Report on Client Asset Protection (August

1996);

the Final Report on Survey of Regimes for the Protection, Distribution and/or

Transfer of Client Assets (March 2011);

and the Final Report on Recommendations

Regarding the Protection of Client Assets (January 2014).

The recommendations and

principles regarding standards of client asset protection, including those relating to

safeguarding, administration, management, and the deposit of client assets in a foreign

jurisdiction, waivers of client asset protection, rights of use and disclosure to clients are

relevant to and support the guidance set out in this draft Annex. This draft Annex relies upon

those IOSCO standards to specify in further detail how the principles in the Annex relating to

the safeguarding and identification of client assets, use of assets and transparency to clients

should be met.

Given the significant variations in national regimes for client asset protection, the draft

guidance is intended to specify outcomes rather than prescribe methods or mandatory rules by

which those outcomes should be achieved. Whatever national arrangements apply, client

assets should be shielded - in a manner appropriate to those arrangements - from the failure of

the firm and, to the extent possible, of any third party custodian.

The legal status of client

assets and the clients’ entitlement to them should not be affected by entry into resolution of

the firm.

1. Scope

1.1 This Annex applies to resolution regimes for firms within the scope of KA 1.1 that

are holding client assets.

2. Objectives (Preamble and KA 2.3)

2.1 The resolution authority or an administrator in charge of the resolution of a firm with

holdings of client assets should, in the exercise of its resolution powers, be guided by

the following specific objectives related to the protection of those assets (in addition

to the general objectives set out in KA 2.3):

(i) ensuring prompt access for the firm’s clients to their assets through the

continued functioning of the firm following stabilisation in resolution, the rapid

return to the client of identifiable and segregated client assets or the transfer of

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD57.pdf

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD351.pdf

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD436.pdf

Although it is generally possible to ensure that client assets placed with a third party are shielded from the

failure of the third party, this is not always the case: for example, client money deposited in a bank could be

affected by the failure of that bank.

In some jurisdictions, the fact that assets are held through and in the name of a financial intermediary does

not alter the client’s ownership interest.

II-Annex 3 – Client Asset Protection in Resolution

the client asset holdings of that firm to a performing third party or bridge

institution; and

(ii) avoiding adverse impacts that might arise from lack of access for clients to

their assets.

2.2 The objectives related to protection of client assets should be reflected in the

mandate and objectives of the resolution authority or of the administrator in charge

of the resolution of the firm. They should be balanced with other objectives of the

resolution authority or administrator, as appropriate in the circumstances of the

specific case.

3. Definition of client assets

3.1 For the purposes of this guidance, client assets should be interpreted broadly to

include all assets that are treated as client assets and subject to protection as such

under applicable national law or regulation. Typically, they are assets held by a firm

(whether or not through a custodian) for or on behalf of a client in the course of or in

connection with services provided by the firm to the client. Client assets typically

include assets to which the client (or clients collectively) has (or have) a proprietary

or similar right to the return of those assets,

subject to any right of the firm to those

assets as collateral (for example, security interests, netting or set-off, as applicable).

Client assets typically include:

(i) money held on behalf of or owed to a client by a firm that is classified as

“client money” under applicable national law;

(ii) financial instruments or other assets held for or on behalf of a client;

(iii) client collateral, that is, assets received from a client and held by a firm for or

on behalf of the client to secure an obligation of the client (other than under a

title transfer transaction, see paragraph 3.2 (iii)); and

(iv) assets and other (contractual) rights arising from transactions entered into by a

firm on behalf of a client (for example, mark-to-market accruals arising from

the change in value of futures and options positions).

3.2 For the purposes of this Annex client assets are not considered to include:

Where the assets are held on dematerialised basis, the right might be to a quantity of a particular security

referred to for example by its CUSIP (Committee on Uniform Security Identification Procedures) number or

ISIN (International Securities Identification Number).

The classification and treatment of money held on behalf of, or owed to, a client varies between jurisdictions.

In some jurisdictions, clients may have a direct ownership interest in segregated cash balances, and in this

case the money is treated as “client money”, and may be subject to specific forms of protection. In others,

cash balances qualify as mere claims against a firm and as such would not be covered by this Annex.

II-Annex 3 – Client Asset Protection in Resolution

(i) deposits held by banks (as ‘deposits’ are defined for the purposes of the

regulation of the activity of taking deposits under applicable law), unless the

deposits held by a firm with a bank constitute customer funds under the

applicable legal framework and are labelled as such;

(ii) assets held by an insurer or policyholder claims and rights in connection with

insurance business; and

(iii) assets delivered in a full title transfer transaction, such as securities lending

transactions, repurchase or reverse repurchase agreements, where neither the

client nor clients collectively retain proprietary or similar rights to the

assets.

3.3 The legal framework should include clear and transparent rules on how:

(i) client assets are defined, including the classification of securities held for or on

behalf of a client and (where applicable) client money; and

(ii) client assets are treated in the event of failure of the firm that holds the client

assets either directly or indirectly (through one or more intermediaries or

custodians).

4. Transfer powers in relation to client assets (KA 3.2(vi) and (vii) and

KA 3.3)

4.1 The powers set out in KA 3.2 (vi) and (vii) and KA 3.3 (“transfer powers”) should

extend to the transfer of client assets.

(i) In the case of client assets held by the firm in resolution, the resolution

authority or an appointed administrator should have the power to transfer the

assets and corresponding client contracts to a sound financial institution or

bridge institution that, in either case, is capable of providing similar services (a

‘qualified transferee’), as an alternative to returning the assets to the clients.

(ii) In the case of client assets held by a domestic affiliate of the firm in resolution,

a similar approach should be possible if the viability of the group or domestic

sub-group is affected.

This does not preclude jurisdictions from applying forms of client asset protection to such assets or client

claims under national law. However, this Annex does not specifically address considerations relevant to the

treatment of such assets or claims in resolution.

42 The use of transfer powers may vary according to whether the assets are held by the firm in resolution or by

an unaffiliated third party custodian. In the former case, transfer from the firm in resolution (or rapid return

of the assets to clients) is likely to be the most appropriate action. However, where the client asset holdings

of a firm in resolution are held by a third party custodian, transfer of the assets is not likely to be necessary.

The resolution authority may instead transfer the contractual rights and obligations between the firm in

resolution and its clients to the successor firm or bridge institution. Separate considerations may apply if the

assets are held by a firm that is affiliated to the firm in resolution, if the viability of the group is affected.

II-Annex 3 – Client Asset Protection in Resolution

(iii) In the case of client assets held by a third party custodian, the resolution

authority should have the power to transfer the contractual rights and

obligations between the custodian, the firm in resolution and its clients to the

qualified transferee.

4.2 Transfer powers should enable the resolution authority to transfer entire business

lines and related client assets to a qualified transferee and should not require the

consent of affected clients.

4.3 The exercise of transfer powers should be subject to the relevant safeguards set out in

KA 5.

4.4 The exercise of powers to transfer or achieve a rapid return of client assets should be

supported, to the extent consistent with the national legal framework, by:

(i) expedited court approvals, where these are necessary (consistent with KA 5.4

and 5.5);

(ii) protection in law for resolution authorities, their employees or appointed

administrators against liability for actions taken and omissions made while

acting within their legal powers and discharging their duties in good faith;

(iii) the availability of investor protection or similar industry backstop funds to

support transfers of client assets or to make advance payments of client funds

and delivery of securities;

(iv) mechanisms for later adjustments to deal with disputed claims in relation to

assets that have been transferred; and

(v) the ability of the resolution authority or appointed administrator to adopt

pragmatic approaches to the transfer or return of client assets (for example,

advance distributions, piecemeal returns, returning substitute assets).

5. Identification, safeguarding and segregation of client assets (KA 4.1)

5.1 Firms should be required to maintain effective arrangements, such as segregation, for

the identification and safeguarding of client assets so that resolution authorities or

administrators are able to identify quickly which assets are client assets and to

ascertain the nature of claims and entitlements of individual clients to those assets,

including with respect to client assets held in a holding chain.

5.2 Clients should be adequately informed about the way their assets are held, including

the type of segregation and the existence of any holding chain, and the applicable

client asset protections. That information should include in particular the effects of

pooling of client assets in omnibus client accounts in the event of the insolvency of

the firm or any custodian, how any shortfall in pooled assets will be allocated; and,

where relevant, the fact that the regime for client asset segregation and protection

may be different under foreign law, and that the client may not receive the same level

of protection available under domestic law.

II-Annex 3 – Client Asset Protection in Resolution

6. Securities financing transactions, re-hypothecation or use of client

assets (KA 4.1)

6.1 Jurisdictions that permit securities lending by firms as agents for clients or re-

hypothecation and use of client securities by the firm or third parties as principal

should adopt clear frameworks governing those arrangements.

(i) Where a firm lends client securities as agent, it should keep adequate records of

outstanding transactions, including counterparties, contract terms, legal

documentation, collateral details and location of collateral. Those records

should be sufficient to enable clients to unwind outstanding transactions to

which they are principal or, in the event of resolution, to enable outstanding

transactions to be transferred to a qualified transferee. Particular consideration

should be given to ensuring that the firm holds adequate records of collateral

allocation where securities collateral is held for multiple clients on a pooled

basis and where cash collateral is reinvested on a pooled basis.

(ii) Where a firm re-hypothecates or otherwise uses client assets as principal, it

should keep clear records of which client assets have been re-hypothecated or

used. In particular, in order to facilitate resolution, it should be clear how the

exercise of the right of use is recorded

and what quantity of assets can be re-

hypothecated or used.

6.2 Where the legal framework permits securities lending, rights of use, re-hypothecation

or similar arrangements in respect of client assets, it should require adequate

disclosure to clients of the effects of such transactions on the protection of their

assets and the nature of their legal claims in resolution.

7. Shortfalls in client assets and use of protection funds (KA 6)

7.1 Jurisdictions should have in place clear rules on how losses are shared between

clients in the event of shortfalls in a pool of client assets. Their application should

not unduly delay or prejudice the objective of a rapid return or transfer of client

assets.

7.2 There should be clarity as regards the role of investor protection schemes and other

guarantee schemes or funds supporting the transfer of client assets and addressing

shortfalls.

7.3 When an investor protection scheme may also be used in connection with resolution

measures, there should be safeguards to avoid an excessive depletion of the

protection scheme for the financing of resolution measures not directly aimed at the

protection of client assets.

For example, by debiting the account of the client and crediting the account of the collateral taker, or by a

form of notification on the client account.

II-Annex 3 – Client Asset Protection in Resolution

8. Cross-border issues (KA 7)

8.1 Home and host resolution authorities should provide each other with the relevant

information on:

(i) the operation of their domestic client asset protection regimes;

(ii) the resolution measures and other actions that can be taken at national level in

the event of a firm’s failure and their impact on the ownership status and the

clients’ rights in relation to the assets; and

(iii) available mechanisms to achieve a rapid return or transfer of client assets.

8.2 Jurisdictions should develop:

(i) cooperation arrangements that complement effective resolution strategies and

plans and that facilitate a rapid return of clients assets held in their jurisdiction,

including procedures for timely recognition of the appointment of an

administrator to a foreign firm with holdings of client assets in their

jurisdiction; and

(ii) expedited mechanisms to give effect to transfers by a foreign resolution

authority (acting directly or through a special administrator, receiver,

conservator or other official) of client assets held in their jurisdiction, which

may consist of the recognition of foreign transfers or the exercise of transfer

powers by the local resolution authority or administrator to transfer such client

assets or the contract between the foreign firm in resolution and a domestic

intermediary that holds client assets on behalf of the foreign firm in resolution.

9. Resolution planning and actions to promote resolvability (KA 10

and KA 11)

9.1 Resolution planning for a firm holding client assets should consider the following:

(i) arrangements in place within or involving the firm that ensure that the identity

of clients and their assets can be established rapidly;

(ii) the legal or procedural requirements for the transfer of client assets or of the

contracts governing the holding of, or custody arrangements for, client assets;

(iii) the type of segregation and its impact on rapid return or transfer of client

assets;

(iv) any re-hypothecation arrangements and rights of use that may be exercisable,

and the impact of the exercise of such rights on the ability to transfer or recover

and return assets;

II-Annex 3 – Client Asset Protection in Resolution

(v) the scale of lending of client assets by the firm as agent, including the

following features:

− the maturity structure of the book and how quickly it could be

unwound,

− the liquidity of any cash collateral reinvestment and whether that could

impede a rapid unwinding of the book,

− how any cash collateral is reinvested (for example, whether on a pooled

or segregated basis),

− how any securities collateral is held (for example, whether on a pooled

or segregated basis),

− the quality of the firm’s records of outstanding securities lending

transactions, particularly where collateral is held on a pooled basis, and

− what information is provided to clients and how frequently;

(vi) the effect of correlated failures on the resolvability of the firm, where a

custodian, sub-custodian or other intermediary in the holding chain is an

affiliate of the firm and is itself in resolution or insolvency;

(vii) where client assets are held in another jurisdiction, the effect of foreign law on

the nature of the protection of client assets and their treatment in insolvency, to

the extent necessary for resolution;

(viii) how shortfalls in client assets and resultant client claims are treated in the

resolution and how losses to clients will be allocated;

(ix) the role of investor protection schemes or other guarantee schemes or funds to

support transfers of client assets or to make advance payments of client funds

and delivery of securities; and

(x) cooperation and information sharing arrangements with relevant foreign

authorities to support the rapid return or transfer of client assets where those

assets are held in a foreign jurisdiction.

9.2 To support the effective exercise of transfer powers, resolution authorities should

have the power to require changes to a firm’s business practices, information

management systems and contractual arrangements relating to the holding and

protection of client assets.

10. Information requirements and record keeping (KA 12.2)

10.1 In order to facilitate the rapid transfer or return of client assets, firms should be

required to maintain information systems and controls that can promptly produce,

both in normal times and during resolution, and in a format understandable by an

II-Annex 3 – Client Asset Protection in Resolution

external party such as a resolution authority or an administrator, information on the

following:

(i) the amount, nature and ownership status of client assets held directly or

indirectly by the firm;

(ii) the identity of the clients;

(iii) the location of the client assets, how the assets are held (that is, by the firm, an

affiliate or third party custodian or sub-custodian) and the identity of all

relevant depositories;

(iv) the terms and conditions on which the client assets are held, including

contractual arrangements between the firm and the client and any third party

holding the client assets;

(v) the type of segregation (“omnibus” or “individual”), if applicable, at all levels

of a holding chain and the effects of the segregation on the clients’ ownership

rights;

(vi) the applicable client asset protections, in particular where client assets are held

in a foreign jurisdiction and will be subject to the client asset protection and

resolution or insolvency regime of that foreign jurisdiction, and any waiver,

modification or opting out by the client of the client asset protection regime

(where permitted by the applicable regime);

(vii) the ownership rights of the clients and any potential limitations to those rights,

including the existence of liens or other encumbrances that may affect the

return of such assets or their value to clients, and the firm’s obligations with

respect to the client assets;

(viii) the existence and exercise of any rehypothecation or rights of use by the firm,

including details of the assets that have been re-hypothecated or used and the

legal consequences of the exercise of those rights on the clients’ rights over

those assets; and

(ix) outstanding loans of client securities arranged by the firm as agent, including

details of counterparties, contract terms and collateral received on behalf of the

clients.

Record keeping requirements should be guided by the IOSCO Recommendations Regarding the Protection of

Client Assets: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD401.pdf

In some jurisdictions, segregation of client assets from the firm’s proprietary assets may directly affect the

clients’ rights to the assets. In others, segregation does not affect those rights, but facilitates identification and

recovery of client assets.

II-Annex 3 – Client Asset Protection in Resolution

11. Impediments to orderly resolution

11.1 Resolution authorities should inform the relevant supervisory authorities if their

resolvability assessments indicate that that client asset protection regime could

impede orderly resolution and the rapid return or transfer of client assets. Supervisors

should consider appropriate modifications to that regime or other actions to address

the reported impediments.