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Fed’s Tarullo Highlights Data Management Considerations of Living Wills

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The regulatory community has been abuzz with the notion of living wills, or firm specific resolution plans, for most of this year, but most have not considered the data management responsibilities inherent in the process. Daniel Tarullo, member of the board of governors of the US Federal Reserve System, addressed this issue and highlighted the counterparty data management challenge during a speech to the Institute of International Bankers Conference on Cross-Border Insolvency Issues in New York at the start of November.

The basic idea behind living wills is that financial institutions should be mandated to develop, and potentially to execute, their own resolution plans, should the worst happen. The issue was thrown into the spotlight following the collapse of Lehman Brothers and the ensuing chaos as the market attempted to come to terms with the demise of such a large firm. The Basel Committee on Banking Supervision (BCBS) and the Bank for International Settlements (BIS) have therefore both been working on drawing up plans to define how an orderly winding up process should be conducted.


During his speech, Tarullo highlighted the shortcomings of the approach, such as an inability to predict in advance of a crisis which parts of the firm will be under greatest stress. However, he also provided some recommendations for the regulators to consider in order to broaden the living will requirement and turn it into a “potentially very useful supervisory tool for healthy firms”. These proposals include requirements around counterparty data management.

According to Tarullo, the firm would, in addition to developing a resolution plan, be required to draw up a contingency plan to rescue itself short of failure, identify obstacles to an orderly resolution, and quickly produce the information needed for the supervisor to orchestrate an orderly resolution. “These plans will need to evolve as the organisation’s business and economic conditions evolve and will need to become a regular part of normal supervisory processes,” he explained.

Tarullo reckons a living will of this type could remove some of the uncertainty around a possible resolution as it would force firms and their supervisors to review contingency plans regularly. “As part of their ongoing oversight, supervisors could target the areas where a firm’s planning falls short of best practice. Indeed, by focusing on the legal, contractual, and business relationships among the firm’s subsidiaries, this requirement could yield significant benefits for prudential supervision in normal times, quite apart from its benefits in a stressed environment,” he elaborated.

This is where data management comes in to play. Tarullo contended that central to the success of a living will as a supervisory tool is the quality of information it would make available in a crisis. “Some of the information would be relatively static,” he said. “A firm would have to inventory all its legal entities, along with the legal regimes applicable to each one, and map its business lines into legal entities. A firm also would have to document interaffiliate guarantees, funding, hedging, and provision of information technology and other key services. This information would be needed to deal with any crisis, no matter what its specific form.”

Tarullo conceded that a lot of this data needs to be decided upon during supervisory discussions in order to provide firms with a definitive list of areas to tackle. However, he added: “It can be expected to include matters such as credit exposures, funding, unpledged collateral and available lines of credit, cash flows, earnings, capital, and so forth – all coded by identifiers such as business line, legal entity, counterparty, and legal jurisdiction to allow for the ready retrieval of critical information needed depending on the nature, location, and type of stress. Much of this information can change monthly, daily, or even intraday.”

The fact that this data isn’t static (given the state of the market, very few data items, if any, can be considered static) means that firms will need sufficiently robust data management systems in place to track data quality and provide audit trails for regulators. Tarullo agreed that a “very significant upgrade of management information systems (MIS) may be the only way for the firm to satisfy living will requirements”. He added that these are needed for internal risk management purposes as well as for regulatory reporting: “One of the lessons of the recent crisis is that many firms had inadequate information systems to measure and manage their risks.”

These changes will not be cheap either, given the siloed nature of most firms’ back offices with regards to counterparty (and other reference) data. Tarullo indicated that these improvements will likely involve “considerable expense” but argued that the risk management benefits are worth the effort. Much like the speakers at last week’s FIMA conference in London, Tarullo reckons regulatory compulsion will prove beneficial for data management teams in getting funding and for the organisation as a whole. “Just as a homeowner has an incentive to shed belongings to reduce the expense of moving, so a financial firm may have a powerful incentive to simplify its organisational structure and rationalise relationships among its corporate entities in order to reduce the cost of developing comprehensive MIS that enables an organisation to retrieve information in multiple formats across jurisdictions, business lines, and legal entities,” he said.

“Simpler structures can also be encouraged by re-emphasising existing supervisory guidance requiring banking organisations to measure and manage their risks not only on the global, consolidated level, but also on a legal entity basis. Together, the information requirements of living wills and the need to measure and manage risks at the legal entity level can help create the right incentives for firms to simplify their structures without necessarily requiring a supervisor to delve into the details of a banking group’s structure,” he concluded.

The compulsion for firms to invest in their data management systems is seemingly on its way in one form or another, whether it be due to the incoming liquidity risk reporting regime, Basel framework revisions or these living will requirements. Regulators want financial institutions to get a better handle on their exposures and therefore a better grip on their entity and instrument data. Data managers across the globe may soon be getting the boost they need to kick start long awaited infrastructure projects.

In the meantime, the BCBS’ living wills recommendations are available for industry comment until 31 December.

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