About a-team Marketing Services
The knowledge platform for the financial technology industry
The knowledge platform for the financial technology industry

A-Team Insight Blogs

UK FSA’s Living Wills Deadline Creeps Closer, Data Challenges Incoming

Subscribe to our newsletter

Six of the UK’s largest banks will be required to submit their preliminary draft recovery and resolution plans to the UK Financial Services Authority (FSA) next month as part of the regulator’s living wills pilot programme. In order to be able to submit these drafts by the end of October, HSBC, Barclays, Royal Bank of Scotland (RBS), Standard Chartered, Lloyds Banking Group and Santander are engaged in projects to define their counterparty exposures and subsidiary entity linkages, among other things.

The living wills pilot programme follows the discussion on the subject as part of the Turner Review, which culminated in its publication of a discussion paper on the subject in October last year, and the resulting inclusion of the requirements in the Financial Services Act 2010, which was passed on 8 April this year. Thomas Huertas, director of the banking sector for the FSA and vice chairman of the Committee of European Banking Supervisors (CEBS), has also long been a champion of the idea and has spoken on the subject at a range of international forums, although it was Daniel Tarullo, member of the board of governors of the US Federal Reserve System, who initially led the charge with regards to the data considerations last year.

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. Recovery plans also call for the assessment of the systemic risk posed by individual financial institutions to the rest of the market in order for firms to be able to get out of a sticky situation without damaging the financial markets at large.

While recovery plans will most certainly have a dramatic impact on capital planning and liquidity, both recovery and resolution planning will also require significant investment in data architecture. The capital and liquidity planning required for mandatory resolution plans will entail firms keeping a tight rein on where their liquidity is located and therefore the organisation of counterparty and instrument data will become paramount in a business sense. Unlike boom times, financial institutions now cannot afford to throw away opportunities due to bad data and may be severely penalised for such failures, but recovery plans take this one stage further: failure of the firm itself may be a result.

At last resort, banks will need to know to which counterparties they can turn in order to raise capital or liquidity in a crisis and this necessarily involves having a complete picture of exposures to those entities. This data will need to be readily at hand in order to take action swiftly and effectively, hence an investment in a data infrastructure to store this vital information is needed to replace the heavily siloed infrastructures that are currently endemic across the industry.

Resolution plans, on the other hand, are for regulators to implement but require banks to establish sufficiently detailed wills for the purposes of winding down. The FSA and other regulators will be checking therefore that banks could in fact generate the details of such information, including granular detail such as counterparty exposures on a position level, on short notice. Really short notice, according to Huertas: “The longest period of time that the authorities are likely to have to make a decision is the roughly 36 to 48 hours between the close of business on a Friday in Europe and North America and the opening of markets in Asia when it is still Sunday evening in North America.”

No wonder then, that the six UK banks engaged in getting their draft plans ready for the FSA are working closely with their chosen consultancy firms (Deloitte, KPMG, and Ernst & Young have all been mentioned) to determine what information should be included. The firms are, however, keeping fairly quiet about what stage they are at with regards to implementation and it will be interesting to see the FSA’s feedback once it has received the drafts next month.

Back in November last year, the Fed’s Tarullo indicated that in order to meet living wills requirements firms will need sufficiently robust data management systems in place to track data quality and provide audit trails for regulators. He therefore noted that a “very significant upgrade of management information systems (MIS) may be the only way for the firm to satisfy living will requirements”.

All of this work is ahead of the G20 talks in South Korea on 11 and 12 November, during which living wills is bound to arise as a key discussion topic. The FSA is one of the first regulators to launch a pilot for recovery and resolution plan monitoring and will likely act as a proving ground and benchmark for the rest of the world.

The implementation of this legislation is to avoid the data debacle that ensued following the collapse of Lehman and was highlighted by the release of the examiner report earlier this year. The examiner was faced with 350 billion pages of electronically stored data to process in order to begin the unwinding process and was further hampered by the storage of this data on “arcane, outdated or non-standard” systems.

Subscribe to our newsletter

Related content

WEBINAR

Upcoming Webinar: Transforming Data Experiences in Quantitative Research and Trading

Date: 14 March 2023 Time: 10:00am ET / 3:00pm London / 4:00pm CET Duration: 50 minutes For quantitative researchers and quant trading teams at banking and capital markets firms, the ability to access, integrate, and share data is critical. Data and how teams collaborate with data underpins the ability to generate alpha, perform execution analyses,...

BLOG

Challenges and Opportunities of Internal Self-Service Data Solutions

The concept of internal self-service data solutions is gaining traction as financial institutions and corporations see value in the data sets they generate through their business activities. That said, harnessing the data to provide valuable insights for internal business teams can be a challenge. One approach is to adopt a self-service data delivery model that...

EVENT

Data Management Summit New York City

Now in its 12th year, the Data Management Summit (DMS) in New York brings together the North American, capital markets enterprise data management community, to explore the evolution of data strategy and how to leverage data to drive compliance and business insight.

GUIDE

Entity Data Management Handbook – Seventh Edition

Sourcing entity data and ensuring efficient and effective entity data management is a challenge for many financial institutions as volumes of data rise, more regulations require entity data in reporting, and the fight again financial crime is escalated by bad actors using increasingly sophisticated techniques to attack processes and systems. That said, based on best...