Published on 7 July 2016
Ensuring operational continuity in resolution – PS21/16
Overview
This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to Consultation Paper (CP) 38/15 ‘Ensuring operational continuity in resolution’ and the addendum to CP38/15 (henceforth CP38/15).
In CP38/15, the PRA consulted on rules and a supervisory statement aimed at ensuring firms’ operational arrangements facilitate continuity of critical services supporting functions critical to the economy in resolution. The appendices to this PS set out final rules and a supervisory statement to implement the proposals consulted on in CP38/15.
This PS is relevant to PRA-authorised banks, building societies and investment firms (hereinafter ‘firms’) which have or receive critical services supporting functions critical to the economy that need to be continued in resolution. The conditions for application of the rules is set out in rule 1.1 of the Operational Continuity Part, in Appendix 2 of this PS. Firms above the thresholds in rule 1.1 are expected to have critical services supporting functions critical to the economy that need to continue in resolution.
The PRA has made a change to the financial resilience expectations set out in the draft supervisory statement. The PRA has removed the capital expectation as set out in the supervisory statement and instead the Bank of England, as resolution authority, will consider whether a loss absorbing capacity should be allocated within groups to ensure operational continuity, as part of the minimum requirement for own funds and eligible liabilities (MREL) regime. Chapter 2 of this PS sets out further detail on the change.
Overall, the PRA does not consider that the responses received to other areas of CP38/15 necessitate significant changes to its proposals. The PRA has however made minor amendments to the proposed rules and supervisory statement consulted on in CP38/15 in light of feedback received, mainly to add further clarity.
Other publications
The PRA has also published the policy statement providing feedback on responses received to CP37/15 ‘The implementation of ring-fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures’. PS21/16 sets out the final rules and supporting policy to implement the proposals consulted on in CP37/15, and the near-final rules and supervisory statements set out in PS10/15.
The PRA has also published a further consultation on the PRA’s proposed ring-fencing policy CP25/16 ‘The implementation of ring-fencing: reporting and residual matters’. CP25/16 sets out the PRA’s proposals in relation to the data it intends to collect in respect of ring-fencing and residual ring-fencing policy matters following publication of CP37/15, including the PRA’s operational continuity policy in respect of access to financial market infrastructures (FMI).
Appendices
PRA RULEBOOK: CRR FIRMS: OPERATIONAL CONTINUITY INSTRUMENT 2016
Ensuring operational continuity in resolution – CP38/15
Update 11 December 2015:
The Prudential Regulation Authority (PRA) published an addendum to Consultation Paper (CP) 38/15 ‘Ensuring operational continuity in resolution’. This addendum clarifies the scope of application of the PRA’s proposals in CP38/15, published in October 2015.
The PRA did not define an exact scope of application in CP38/15 pending an assessment of which firms should ensure continuity of critical economic functions. This assessment was also required for the calibration of the minimum requirement for own funds and eligible liabilities (MREL) by the Bank of England as resolution authority. Consequently, this addendum is being published on the same day as the Bank’s consultation on its approach to setting MREL. While the addendum and the Bank’s consultation are intended to capture broadly the same firms, the exact thresholds proposed differ due to the legal bases of the two proposals. The PRA is proposing rules of general application and has therefore proposed financial metrics, based on data available in regulatory returns, to define the scope of its rules. By contrast, the Bank will be exercising its powers to set MREL, based on a firm-specific judgement of the appropriate resolution strategy, as required under the Bank Recovery and Resolution Directive.
Together this addendum and CP38/15 set out the PRA’s framework for requiring firms to ensure continuity of critical shared services to facilitate recovery actions, orderly resolution and post-resolution restructuring.
Background
CP38/15 sets out the PRA’s proposed framework to require firms to ensure continuity of critical shared services to facilitate recovery action, resolution or post resolution restructuring.
It follows the discussion paper DP1/14 ‘Ensuring operational continuity in resolution’ published in October 2014. It develops the principles set out in DP1/14 and proposes draft rules and a supervisory statement.
It is one of two papers published by the PRA on 15 October 2015, which forms part of the post-crisis reforms to enhance the resilience and resolvability of firms. The proposals support the resilience and resolvability of banks, building societies and PRA-authorised investment firms by seeking to ensure critical shared services are arranged in a way that facilitates continuity in the event of a failure. Restructuring efforts, through ring-fencing of core activities, set out in CP37/15 ‘The implementation of ring-fencing: consultation on prudential requirements, intragroup arrangements and market infrastructure’, will support bank resolvability and increase the resilience of ring-fenced bodies (RFBs) to risks originating in other parts of its group or the global financial system and facilitate restructuring of banking groups before and after resolution.
This CP is relevant to banks, building societies and PRA-authorised investment firms. It is also likely to be of interest to policymakers and practitioners involved in the resolution of failed firms.
The PRA intends the scope of the rules to be limited to those firms that receive critical shared services supporting functions that are critical to the economy. This CP does not define a precise boundary for firms but provides clarity on the proposed policy to enable firms, particularly RFBs, to start planning their approach.
Summary of Proposals
The main areas that are set out in the CP include ensuring the critical shared services provider:
- has arrangements in place that are capable of being continued or replaced in resolution and are well documented;
- has sufficient financial resources and capability to allow the firm to operate in resolution and the service arrangements are capable of being restructured;
- if in a group, has clearly defined reporting lines that are capable of continuing in resolution; and
- if in a group, is structured so that upon failure or resolution, no group entity receives preferential access to critical services over another.
Readers may also wish to refer to CP37/15 ‘The implementation of ring-fencing: consultation on prudential requirements, intragroup arrangements and market infrastructure’ also published on 15 October 2015 and PS10/15 ‘The implementation of ring-fencing: legal structure, governance and the continuity of services and facilities’ published on 27 May 2015. Further information is available on the dedicated ‘Structural reform’ webpage – see Related Links.
Responses
This addendum completes CP38/15 published on 15 October 2015. The consultation period for CP38/15 and this addendum closed on 11 March 2016.
Addendum to Consultation Paper 38/15
Published on 15 October 2015
Background
This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA’s) proposed framework to require firms to ensure continuity of critical shared services to facilitate recovery action, resolution or post resolution restructuring.
It follows the discussion paper DP1/14 ‘Ensuring operational continuity in resolution’ published in October 2014. It develops the principles set out in DP1/14 and proposes draft rules and a supervisory statement.
It is one of two papers published by the PRA on 15 October 2015, which forms part of the post-crisis reforms to enhance the resilience and resolvability of firms. The proposals support the resilience and resolvability of banks, building societies and PRA-authorised investment firms by seeking to ensure critical shared services are arranged in a way that facilitates continuity in the event of a failure. Restructuring efforts, through ring-fencing of core activities, set out in CP37/15 ‘The implementation of ring-fencing: consultation on prudential requirements, intragroup arrangements and market infrastructure’, will support bank resolvability and increase the resilience of ring-fenced bodies (RFBs) to risks originating in other parts of its group or the global financial system and facilitate restructuring of banking groups before and after resolution.
This CP is relevant to banks, building societies and PRA-authorised investment firms.
It is also likely to be of interest to policymakers and practitioners involved in the resolution of failed firms.
The PRA intends the scope of the rules to be limited to those firms that receive critical shared services supporting functions that are critical to the economy. This CP does not define a precise boundary for firms but provides clarity on the proposed policy to enable firms, particularly RFBs, to start planning their approach.
The PRA will issue an addendum to the consultation defining the scope of application in due course.
Summary of Proposals
The main areas that are set out in the CP include ensuring the critical shared services provider:
- has arrangements in place that are capable of being continued or replaced in resolution and are well documented;
- has sufficient financial resources and capability to allow the firm to operate in resolution and the service arrangements are capable of being restructured;
- if in a group, has clearly defined reporting lines that are capable of continuing in resolution; and
- if in a group, is structured so that upon failure or resolution, no group entity receives preferential access to critical services over another.
Readers may also wish to refer to CP37/15 ‘The implementation of ring-fencing: consultation on prudential requirements, intragroup arrangements and market infrastructure’ also published on 15 October 2015 and PS10/15 ‘The implementation of ring-fencing: legal structure, governance and the continuity of services and facilities’ published on 27 May 2015. Further information is available on the dedicated ‘Structural reform’ webpage.
Responses
The PRA invites feedback on the proposals set out in the consultation, but respondents may wish to wait for the publication of the addendum, which will set the application of the rules and closing date for the consultation period.
Ensuring operational continuity in resolution - DP1/14
This discussion paper (DP) sets out the Prudential Regulation Authority’s (PRA’s) preliminary views on the principles that firms’ operational arrangements must satisfy in order to facilitate recovery actions, resolution or post resolution restructuring of firms.
This DP should be read by all PRA-authorised banks, building societies and investment firms to which any eventual proposals may apply. It is also likely to be of interest to policymakers and practitioners involved in the resolution of failed firms, as well as insurance firms for which similar proposals may be extended after a separate consultation at a later stage.
Following the end of the consultation period on this DP, a consultation paper with draft rules may be published in 2015.
Readers may also wish to refer to The implementation of ring-fencing: consultation on legal structure, governance and the continuity of services and facilities 19/14, Depositor protection – CP20/14, and Policyholder protection – CP21/14 also published on Monday 6 October 2014.
Responses