The Financial Stability Board has proposed guidance outlining the key attributes for effective resolution regimes, such as those represented by Title II of the Dodd-Frank Act and the proposed E.U. Recovery and Resolution Directive. The proposed guidance focuses on resolution regimes for hedge funds, securities firms, central counterparties and other non-bank significant financial institutions and financial market infrastructures. The proposed key attributes set out the core elements considered necessary to make feasible the resolution of financial institutions without severe systemic disruption and without exposing the taxpayers to loss. They constitute an umbrella standard that applies for all parts of the financial sector that could cause systemic problems. The FSB also proposed principles governing information sharing for resolution purposes.
FSB Chair Mark Carney, also Governor of the Bank of England, said that the draft guidance on the resolution of non-bank financial institutions represents further significant progress in international efforts to develop the powers and tools that authorities need to manage the failure of any type of systemic institution without taxpayers bearing the costs. He noted that resolution of firms from other financial sectors has lagged behind the progress made in relation to banks. Further, in light of the move towards mandatory clearing of OTC derivatives, the Chair said that robust resolution regimes for central counterparties are particularly important to ensure that greater reliance on central counterparties does not result in a new category of TBTF institution.
In the wake of the global financial crisis, the FSB has been established, and has a mandate from the G-20, to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory policies in the interest of financial stability.
Client assets. A key attribute is that effective resolution regimes should allow for the rapid return of segregated client assets. The legal framework governing the segregation of client assets should be transparent and enforceable during a crisis or resolution of firms and should not hamper the effective implementation of resolution measures Given the significant variations in national regimes for client asset protection, the draft guidance is intended to specify outcomes rather than prescribe methods or mandatory rules by which those outcomes should be achieved.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 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.
Financial market infrastructures. The key attributes are also calibrated to apply to the resolution of components of the financial market infrastructure, which are defined to include payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories. The presumption is that all financial market infrastructures 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, the presumption is rebuttable. Thus, authorities may determine that a financial market infrastructure in its jurisdiction is not systemically important or critical and, therefore, not subject to the key attributes.
Generally, an effective resolution regime for financial market infrastructures should pursue financial stability and allow for the continuity of critical functions without exposing taxpayers to loss. From the point at which a financial market infrastructure enters resolution pending the restoration of its ability to perform those functions as a going concern, their performance by a successor to the financial market infrastructure or their performance through an alternative mechanism, the use of resolution powers should aim to achieve continuity of critical functions, including, continuity and timely completion of critical payment, clearing, settlement and recording functions, as well as the timely settlement of obligations.
The resolution of a financial market infrastructure may be carried out by the resolution authority directly or through a special administrator, conservator, receiver or other official with similar functions. 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 critical functions in resolution and to fulfill the payment and settlement obligations on time.
Information sharing for resolution purposes. The FSB also proposed principles for the design of national legal gateways and confidentiality regimes to allow the sharing of non-public information between domestic and foreign authorities that is necessary for planning and carrying out resolution. The principles also include the provisions on information sharing and confidentiality that should be included in the institution-specific cross-border cooperation agreements that are required for all global systemically important financial institutions by the key attributes.
Paul Tucker, Deputy Governor of the Bank of England and Chair of the FSB Resolution Steering Group, said that the lack of information sharing is one of the key obstacles authorities face when preparing for and dealing with a crisis. Unless authorities are legally permitted and positively willing to share firm-specific non-public information, he noted, both within jurisdictions and across borders, and to protect its confidentiality, they will not be able to cooperate effectively in a crisis, nor will they be able to plan together effectively. In that spirit, the draft guidance aims to ensure that information-sharing and confidentiality regimes are fit for purpose and truly used in practice.
Under the principles, jurisdictions should ensure that their legal framework establishes clear legal gateways authorizing 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. The term 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 or other forms of agreement between the providing and recipient authorities
Jurisdictions should also 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 confidential information, and provides for effective sanctions and penalties for breach of confidentiality requirements.
The 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. More granularly, they 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.
Disclosure under those legal gateways should always 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.
The legal framework should be clear about the conditions under which information received from a foreign authority may be disclosed to another domestic or foreign authority for resolution-related purposes. 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.
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. Legal gateways should not prevent or restrict the reasonable and effective use of information by a recipient authority. Rather, the legal gateways should be sufficient to permit disclosure to authorities for the purposes of the full range of resolution-related purposes with regard to a firm, including the assessment of resolvability; the development of resolution strategies; the development of recovery plans and operational resolution plans; early detection of financial stress; and, more generally, the exercise of resolution powers.