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Home > Prudential Regulation Authority > Ensuring operational continuity in resolution – CP38/15 UPDATE
 

Ensuring operational continuity in resolution – CP38/15 UPDATE

11 December 2015

​Final policy in relation to this consultation is available under related links.

Update: On 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. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP38_15@bankofengland.co.uk.

The PRA plans to publish a policy statement with feedback, finalised rules, and a supervisory statement in the middle of 2016. The PRA intends any eventual rules to apply from 1 January 2019.

Consultation paper

Ensuring operational continuity – Addendum to Consultation Paper CP38/15

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