A S N A P S H O T O F D O D D - F R A N K : R E C O V E R Y A N D R E S O L U T I O N P L A N N I N G

DODD-FRANKTITLEIANDTITLEII:RECOVERYANDRESOLUTIONPLAN

PRESENTEDBY:LEWISADAMS,MBA,CISA,

CRISC,CGEIT,CISMLADAMS.US@GMAIL.COM

BACKGROUNDOFDODD-FRANKRECOVERYANDRESOLUTIONPLANS…AsaresultoftheGlobalFinancialCrisisof2008,variouslegislaPonwasdevelopedandimplementedaroundtheglobeintheformofregulaPons.Oneofthekeyregulatoryitemspassedbythe111thCongressoftheUnitedStates,andsignedintolawin2010,wasH.R.4173,commonlyreferredtoasthe“Dodd-FrankWallStreetReformandConsumerProtecPonAct”.ThefinalruleintheAct,SecPon165,requiredSystemicallyImportantFinancialInsPtuPons(SIFI)withassetsmeePngacertainthresholdandnonbankfinancialcompaniesdesignatedbytheFinancialStabilityOversightCouncil(FSOC)foroversightbytheFederalReserve,tocreateandsubmitRecoveryPlansandResoluPonPlanstotheFDICandtheFederalReserve.IntheUnitedStates,thethresholdwasestablishedat$50billioninconsolidatedassets.

Ø  ThepreparaPon,content,anddeliveryofRecoveryandResoluPonPlans(RRP),alongwiththeaccompanyingprocessandoversightofG-SIFIandFSOC-designatedBankHoldingCompanies(BHC’s)addresseshowthefirmwillsystemaPcallymanageexecuPveandoperaPonalfuncPonsduringandaferaperiodofdistress.Twospecificareasareintendedtobeaddressedintheplans:

•  Recovery:Whatarethefirm’splanstorecoverfromvariousdistressscenarios.

•  ResoluPon:Whatarethefirm’splansforresoluPon(liquidaPon)shouldthisbecomenecessary,withmaterialfinancialdistressorfailureofthecompany,andincludebothpublicandconfidenPalsecPons.

Ø  TheunderlyingdriverofDodd-FrankandspecificallySecPon165,istomiPgateriskstotheUnitedStatesandtheglobaleconomythatcouldarisefrommaterialfinancialdistressorfailureoflarge,interconnectedfinancialinsPtuPons.

1H.R.–HouseResoluPon–UnitedStatesHouseofRepresentaPves

RECOVERYPLANNING-HIGHLIGHTS…

Createamenuofchoices,atgranularlevels,torespondtoafullofoperaPonalandfinancialstressconPnuum.StresstestsshouldcovertheenPrestressconPnuum.

RecoveryPlanningshouldbecoordinatedwithotherconPngencyplanningandriskmonitoringpracPces(e.g.aroundliquidity,capital,operaPonal,strategy).

RecoveryPlanningshouldfactorbothinternalandexternalstressesandimpacttocounterparPes,creditors,clients,depositors,andoverallmarket.

VerygranulargovernanceisrequiredaroundplanningandexecuPonofeachrecoveryopPon,withinvolvementandaccountabilityofseniormanagementandboardofdirectors.

RECOVERYPLANNINGQUANTITATIVETRIGGERS…

QuanPtaPveTriggers

• RaPngsDowngrades• RevenueReportsorP&L(orderivaPve)• CreditRiskLimits• EquityRaPos• PerCentRenewalofWholesaleFinancing• WithdrawalofDepositsandOtherFunding• IncreasedCollateralRequirements• RiseInPublicDebt• GDPForecasts• 3-MonthLIBOR• SeniorDebtSpreads

RECOVERYPLANNINGSTRESSSCENARIOS…

StressScenarios

• Significantcapitalandliquidityimpacts• Severelossesthrougharoguetrader• RaPngsdowngrades• AEuroorUSdollarcrisis• GDPgrowthrates• Lossofgoodwill• Exodusoftalent• Significantdepositwithdrawalorrunoff• Collapseofglobalfinancialmarkets• Currencyrates• Commodityprocess

RESOLUTIONPLANNING-HIGHLIGHTS…

Createaplan,orlivingwill,todescribethefirm’sstrategyforrapidandorderlyresoluPonintheeventofmaterialfinancialdistressorfailureofthecompany.Thescope,condiPonsforentryintoresoluPonandacPvaPonofthe

operaPonalresoluPonplan,andfundingarrangementsfortheproposedplanmustbedocumentedalso.

ResoluPonPlanningshouldfactorandprovideanalyPcalsupportforassumpPons,scenarios,strategies,andrelatedoperaPonaldetails.

KeyObjecPvesofResoluPonPlanning:Stability,Accountability,andViability

KeyChallenges:Misalignmentoffunding,operaPons,businesslines,andlegalenPPes;Excessiveliquidityrequirements;Financialcontractclose-outandnenngprovisions;MulP-jurisdicPonaloperaPons;Intragroup

financialposiPonsandobligaPons;RapiddissipaPonoffranchisevalue;ExecuPoncomplexiPes

RESOLUTIONPLANNINGTWOBASICAPPROACHES…

Singlepointofentry(SPE)

• ApplicaPonofresoluPonpowersatthetopholdingorparentcompanybyasingleresoluPonauthority.ThisismostlikelytooccurinthejurisdicPonthatisresponsiblefortheglobalconsolidatedsupervisionofagroup.

• AssetsandoperaPonsofsubsidiariesarepreservedasgoingconcerns,therebyavoidingapplicaPonofresoluPonatmoregranularlevelswithinthegroup.

• Mayrequire:intra-grouparrangementstoensurethatlossesincurredbysubsidiariesareassumedbyholdingcompany;sufficientlossabsorbingcapacityavailableatholdingcompanyleveltohelpensurethatsurvivingpartsofgrouparesolventandviable;coordinaPonbetweenhostcountryauthoriPesandhomecountryauthoriPestoallowresourcesgeneratedbyarecapitalizaPonatholdingcompanylevelormadeavailablefromothersourcestobedown-streamedtosubsidiaries;Subsequentclarityasregardsthelegal,regulatory,accounPngandtaximplicaPonsofarrangements.

MulPplepointofentry(MPE)

• ApplicaPonofresoluPonpowersbytwoormoreresoluPonauthoriPes(ideallysimultaneously)tomulPplepartsofthegroup,whichmayincludebreakingupagroupinto2ormoreparts.

• ThegroupmaybesplitonnaPonalorregionalbasis,alongfuncPonallines,orsomecombinaPonthereof.• Mayrequire:thatthegroupbydividedintotwoormoreseparatepartswithoutasignificantcessaPonofcriPcalfuncPons;adegreeoflegal,financial,andoperaPonalseparaPonwithinthegroup,whichmayrequirechangestothewaygroupsarestructured,orrobustservicelevelagreementstoensuretheconPnuityofanycriPcalsharedservicesacrossenPPessubjecttoresoluPonatdifferentpointsofentry.

RESOLUTIONPLANNINGOPERATIONALRESOLUTIONPLAN…

OperaPonalResoluPonPlanspecifiesinmoredetailthosedecisionsrequiredtoimplementthestrategicapproachoutlinedintheresoluPonstrategy.Suchdetailmaycoverthefollowing:

• ProcessesfordecidingonthepreferredresoluPonstrategy• ResoluPonpowerstosupportimplementaPonofthestrategies• CriPcalfuncPonsandcriPcalsharedservices• CondiPonsforacPvaPonofresoluPonplans• Scope–legalenPPessubjecttoresoluPon• PotenPalsourcesofresoluPonfunding• InformaPonrequirements• ValuaPonrequirements• Regulatoryandthirdpartyapprovals• Appointmentofadvisors• Payments,clearing,andseqlement• Moratoriaandstays• Maintenanceofthirdpartycontractsandintra-groupServiceLevelAgreements• CommunicaPonwithhostauthoriPesandotherparPes