Presentation to the World Bank Financial Sector Advisory Centre (FinSAC)

April 2017

Operational Continuity In Resolution (OCIR)

Outline of presentation

1. What is operational continuity?

2. Considerations for cross-border Groups

3. FSB Guidance

4. UK Scope of application of OCIR rules

5. Example: UK policy timeline

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What is operational continuity?

• Ability to continue critical shared services necessary to maintain the provision (or facilitate the orderly wind down) of a firm’s critical functions in resolution.

Critical functions are activities performed for third parties where failure would lead to the disruption of services that are vital for the functioning of the real economy and for financial stability due to the size or market share of the financial institution or group, its external and internal interconnectedness, complexity and cross-border activities.

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Continuity of critical services

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To ensure continuity of a firm’s critical functions it is necessary to maintain parallel continuity of the services and contracts that underpin them.

Bank

IT and operational services

(third party)

Banking Group

FMIPayments,

clearing and settlement

activity

Trading and wholesale

funding

OTC derivative & securities financing

contracts

IT and operational

services (internal)

•Continuity of critical functions

•Operational continuity •Continuity of

financial contracts

•Continuity of access to FMIs

• Critical shared services are:

“activities, functions or services performed for one or more business units or legal entities of the group, performed by either an internal unit, a separate legal

entity within the group or an external provider, and the failure of which would lead to the collapse of (or present a serious impediment to the performance of)

critical functions”

• Critical shared services can be finance-related (e.g. risk management and valuation functions) or operational (e.g. IT infrastructure, back-office operations etc.)

• Without continuity of critical shared services, the continued provision of critical functions in resolution is unlikely to be possible

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Authorities should undertake a strategic analysis of a firm’s critical functions as part of recovery and resolution planning.

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Critical services supporting a critical economic function:

Considerations for cross-border Groups

• Lack of legal recognition of resolution measures cross-border

• SPE/ MPE considerations:– Separation of sub-groups at resolution– Winding down of sub-groups can impact critical shared

services

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1.Contractual provisions

2.Management information

systems (MIS)

3.Financial resources

4.Robust pricing

structures

5.Operational resilience and

resourcing

6.Governance

7.Rights of use and access

FSB Guidance: Arrangements to Support Operational Continuity in Resolution (published 18 August 2016)

FSB guidance identifies a number of arrangements that can support operational continuity in resolution.

Arrangements are relevant for different service models, but means of application may differ.

Arrangements seek to provide continuity in two stages of resolution:1. Stabilisation2. Wind-down and/or

restructuring

Barriers to operational continuity

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• Interconnectedness and complexity of firms (e.g. lack of clarity on service recipients, charging structures, ownership of assets, location of key staff)

• Lack of clear mapping between legal entities and business lines on critical functions and critical shared services

• Insufficiently detailed contractual arrangements for provision of critical shared services

• Contractual provisions that permit termination of services upon entry into resolution

• Cross-border barriers: service providers in different jurisdictions

Supervisory rules on ‘going concern’ operational continuity (e.g. BCP, outsourcing) unlikely to sufficiently address these risks.

1. Contractual provisions:

Clear and comprehensively documented contractual arrangements and SLAs that remain valid and enforceable in resolution (provided there is no default in payment obligations):

• SLAs should be well documented with clear parameters against which service can be measured

• Terms of service and pricing should not alter solely as a result of entry into resolution of a party to the contract

• SLAs should include explicit provisions that prevent termination or modification solely on grounds of early intervention or resolution (in the absence of a statutory power)

• Resolution authority should be able to maintain the service contract on the same terms and conditions imposed prior to resolution

• SLAs should contemplate the transfer or assignment of services in resolution and allow for continued use of services for a reasonable period of time following a divestment in resolution

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2. Management Information Systems (MIS):

• Clear taxonomy of shared services and mapping of services to business lines, legal entities and critical functions

• MIS should facilitate timely reporting of information at this level

• Examples include: human resource databases, searchable centralised repositories for intra-group and third party service contracts, software application catalogues

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3. Financial resources:

• Intra-group providers of critical shared services should have sufficient financial resources to facilitate continuity in resolution

• For third party services, the service recipient should have sufficient financial resources to ensure that the provider continues to be paid

• Resources should cover the stabilisation phase and be sufficient to facilitate the restructuring period

4. Robust pricing structures:

• Pricing structures should be predictable, transparent and set on an arm’s length basis

• Cost structure should not alter solely as a result of entry into resolution

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5. Operational resilience and resourcing:

• Critical shared services should be operationally resilient and have sufficient capacity (for example, human resources expertise or IT disaster recovery capabilities) to support the restructuring phase following the failure of a group entity or group entities

• Critical shared services should not be unduly affected by the failure or resolution of other group entities

• Firms and authorities should plan for the retention of critical employees

6. Governance:

• Critical shared services should have their own governance structure and clearly defined reporting lines

• Critical shared service providers should have sufficient governance oversight to ensure that services can be provided in resolution without relying on staff from business lines that may be wound-down or sold

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7. Rights of use and access:

• Operational assets may need to be owned or leased by the same entity providing the critical shared services

• Where this is not the case, contractual provisions to ensure rights of access could be considered

UK Scope of application of OCIR rules

• The policy intent is to capture firms which are in scope of resolution stabilisation powers (bail-in, transfer).

• In the UK, OCIR rules apply to firms that have a bail-in/transfer strategy and meet the following conditions over the previous 36 months:

– Average total assets >£10bn;– Average safe custody assets >£10bn; or– Average total amount of ‘sight deposits’ >£350mn

• If a firm meets the OCIR thresholds but has bank insolvency procedure (BIP) as preferred resolution strategy then it can apply for a waiver.

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UK policy timeline

CP1: RFB continuity of services and facilities policy DP1/14: initial OCIR proposals

PS1: near-final RFB continuity of services and facilities policy

CP38/15: OCIR proposalsCP2: level of application of RFB

OCIR policy

Addendum to CP38/15: application threshold

proposals

PS20/16: final RFB continuity rules and supervisory statement SS8/16 PS21/16: final rules and supervisory statement (SS9/16) for OCIR CP25/16: Ring-fencing reporting proposals and residual policy issuesCP28/16: OCIR reporting requirements

PS: final OCIR reportingMREL CP2: RD may include an OCIR financial resilience component of MREL

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Oct 14 May 15 Oct 15 Dec 15 July 16 H1 17

Questions?

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