The Financial Stability Board (FSB) has this week produced a consultation paper setting out its proposals for new policy measures to ensure the effective resolution of systemically important financial institutions (SIFIs). The proposals cover new resolution powers and tools for national authorities, cross border arrangements, resolution planning requirements and measures to remove any current obstacles to resolution, such as “fragmented information systems,” reliance on service providers and overly complex structures within firms.
From a data management standpoint, the most important part of the FSB’s proposals lies in the “improving resolvability” section. To this end, the paper highlights a particular area that needs improvement to remove a key obstacle to resolution: “the need for information systems that can provide rapid, comprehensive data on the position of each of the firm’s legal entities when a crisis hits.” This is likely a response to the immense data challenge that the regulatory community faced when dealing with Lehman: 350 billion pages of data to wade through and “arcane systems” in place, as identified by the examiner.
Data managers within firms that may fall under the SIFI criteria can therefore take this requirement as yet another reason to strengthen their internal infrastructure. This regulatory scrutiny from the resolution planning angle can be added to the whole host of other regulatory drivers that are pushing firms towards an improvement of their data quality monitoring processes.
Some of the key assessment criteria, as identified by the FSB (in one of the annexes to the paper), therefore include the adequacy of management information systems (MIS) and the ability to promptly provide the necessary information to the relevant authorities. The paper states: “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/from major counterparties (including central counterparties) on a daily basis? Can the firm ensure the continuity of MIS for both the remaining and resulting 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?”
Apart from the information system barriers to effective resolution, the FSB also highlights its concerns about a reliance on service providers that may “pose obstacles to effective resolution.” This therefore throws the spotlight on the vendors and third party service providers in the market and the resilience of their own operations. On this note, intra-group transactions and global payment operations within SIFIs are also under scrutiny.
The industry has until the 2 September to respond to the proposals and this feedback should be sent to the email@example.com email address. These comments will then be considered by the FSB and the proposals will be revised before they are submitted to the G20 in the first week of November as part of the FSB’s recommendations to address the moral hazard posed by SIFIs.
There has been much debate about the criteria for determining the size of SIFIs over the last few months, but this paper deals instead with the practical implementation of resolution plans and the required legislative changes needed at a national level. To this end, the FSB paper notes that a “resolution authority should have the expertise, resources, capacity and operational independence consistent with their statutory responsibilities to exercise those powers, including for large and complex institutions such as SIFIs.”
The idea is that an independent resolution authority in each jurisdiction would preserve the SIFI’s operations that provide “vital services” to the market and thus avoid systemic risk contagion and loss. A large part of this systemic risk monitoring task will be tracking counterparty data across the market, which will necessarily entail the monitoring of legal entity identifiers (LEIs) and their related hierarchies. The development of industry standard LEIs by the industry and the Office of Financial Research (OFR) will therefore likely play some part in supporting this work.
Once any risks have been dealt with, the resolution tools at hand will be the options for the sale of the whole or various functions of a SIFI to a new owner, or the recapitalisation of the firm via a restructure process. During this process, an interim solution will be required such as a “bridge bank” that would keep the firm’s essential financial functions alive and deal with the resolution process.
Given that most SIFIs are likely to be cross border in their operations, the FSB is proposing to eliminate any significant differences between national jurisdictions for dealing with the resolution process and ensure that there is a structure to which regulator has authority over the SIFI. The drawing up of a legally binding international treaty for this process is therefore being proposed. Data sharing arrangements and coordination will be a key aspect of this: “It should have the legal capacity to cooperate and coordinate effectively with foreign resolution authorities, to exchange information in normal times and in crisis, and to draw up and implement RRPs and cooperation agreements on an institution specific basis.”
In terms of upcoming timelines, the FSB indicates that SIFIs need to have drafted the first draft of their recovery plans by December this year and their resolution plans must be drafted by June 2012. These plans should include “data requirements on the firm’s business operations, structures and systemically important functions.”