FSB published a discussion paper that sets out considerations related to the solvent wind-down of the derivatives and trading book portfolio of a global systemically important bank (G-SIB). The considerations set out in this discussion paper include consideration of firms’ general capabilities to conduct a wind-down of derivative and trading book activities, the capital and liquidity resources needed to manage the wind-down, and the implications of a wind-down on the viability of the rest of the group. These considerations may be relevant for authorities and firms for both recovery and resolution planning. Responses to the discussion paper are requested by August 02, 2019.
The paper discusses the concept of "solvent wind-down" and "wind-down planning," the relevant capabilities of firms, the evaluation or verification of firm capabilities, and coordination among home and host authorities. Solvent wind-down means that all claims are paid in full and all obligations are met in connection with the derivatives and trading book portfolio that is wound-down in a timely and measured manner. Solvent wind-down analysis explores options for how the exit from such positions could be managed as part of a recovery or a resolution. This discussion paper draws on the practices that are emerging in some jurisdictions and describes, subject to eventual specific requests by supervisory and/or resolution authorities, capabilities and arrangements that may need to be put in place to ensure a solvent wind-down plan can be effectively executed.
The paper highlights that solvent wind-down work in some jurisdictions is more advanced than in others (for example, in certain jurisdictions, firms have been requested to develop solvent wind-down plans based on guidance prepared by authorities). The focus of the discussion paper is on the wind-down of G-SIBs’ derivatives and trading book activities as opposed to other activities or assets (for example, loan portfolios). This focus is important because of the unique complexity and cross-border nature of derivatives and trading book activities and the potential financial stability risks that may stem from a disorderly wind-down of these activities. Hence, a clear strategy for winding down portfolios of financial instruments in an orderly and controlled manner may be needed as part of recovery and resolution plans of G-SIBs, then assessed in the context of supervisory reviews and resolvability assessments. This discussion paper should not be viewed as proposed guidance; rather, the responses to the public consultation will be considered to determine whether the development of guidance would be useful.
Comment Due Date: August 02, 2019
Keywords: International, Banking, Securities, Resolution Planning, G-SIB, Solvent Wind-Down, Derivatives, Recovery and Resolution, Trading Book, Systemic Risk, Financial Stability, FSB
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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