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also Governor of the Bank of England, said that the draft guidance on the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national regimes for client asset protection, the draft guidance is intended to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.