Resolution Plans under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

1. Resolution Plans under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 AIBA Second Annual Compliance Seminar – June 14, 2012 Charles Gray, Counsel and Assistant Vice President Federal Reserve Bank of New York

2. The views expressed are the views of the author and do not necessarily reflect the views of the Federal Reserve Bank of New York, or any component of the Federal Reserve System.

3. Overview • Background • Financial crisis: Lehman Brothers Holdings, Inc. • Dodd-Frank Act • Financial Stability Board • Overview of the joint Federal Reserve/FDIC final rule • Scope • Covered companies • Timing • Initial submissions staggered • Required content • Strategic analysis component • Informational components • Critical operations, core business lines, and material entities • Special considerations for non-U.S. firms • Review process

4. Background • The financial crisis revealed the problems associated with effectively resolving large complex financial institutions. • E.g., Bear Stearns Companies, Inc., Lehman Brothers Holdings, Inc., and American International Group, Inc. • Lehman Chapter 11 bankruptcy • March 2010 Report of the Examiner • Dodd-Frank aim of ending “too big to fail” • Title II Orderly Liquidation Authority • Financial Stability Board initiative on effective resolution of SIFIs • Key Attributes of Effective Resolution Regimes for Financial Institutions (October 2011)

5. Background • Section 165(d) of the Dodd-Frank Act • Requirement calls for a company’s plan for rapid and orderly resolution in the event of material financial distress or failure • Statute only outlines a few requirements for content • More detailed on process following determination that a plan is deficient • Federal Reserve and FDIC jointly required to implement • No requirement that regulators approve plans • Federal Reserve and FDIC may jointly determine that a plan is not credible or would not facilitate an orderly bankruptcy

6. Overview of the Joint Final Regulation • Joint proposed rule published in the Federal Register on April 22, 2011 • 76 Fed. Reg. 22,648 • 22 comments received • Joint final rule published in the Federal Register on November 1, 2011, and went into effect on November 30, 2011 • 76 Fed. Reg. 67,323 • 12 CFR Parts 243 (Federal Reserve) and 381 (FDIC)

7. Overview of the Joint Final Regulation: Scope • The joint final rule applies to any “covered company” • Defined to include a— • Bank holding company with total consolidated assets of $50 billion or more; • Nonbank financial company designated by the FSOC for supervision by the Federal Reserve; and • Foreign bank or company that is or is treated as a bank holding company, and that has total consolidated assets of $50 billion or more. • Total consolidated assets measure based on the average of a company’s regulatory reports (e.g., FR Y-9C or FR Y-7Q) • Rule applies to roughly 120 companies

8. Overview of the Joint Final Regulation: Timing ofInitial Submissions • Initial submissions by covered companies are staggered over the course of three dates— • July 1, 2012, for covered companies with total U.S. nonbank assets of $250 billion or more; • July 1, 2013, for covered companies with total U.S. nonbank assets of $100 billion or more; • December 31, 2013, for covered companies with total U.S. nonbank assets of less than $100 billion. • Following initial submission, plans are due annually on or before the anniversary of the company’s initial filing date. • Federal Reserve and FDIC may jointly determine to change the initial submission date with 180-days prior notice.

9. Overview of the Joint Final Regulation: Timing of Initial Submissions (cont’d) • When would a company that the FSOC designates for Federal Reserve supervision file its first resolution plan? • July 1 following the date on which the company becomes a “covered company,” provided that date is no earlier than 270 days after the company became a “covered company”

10. Overview of the Joint Final Regulation: Required Content • A resolution plan essentially comprises two core elements • Strategic analysis: Breakdown of the company’s plan that must include details on the assumptions made, strategy for maintaining key operations, impediments to orderly resolution and proposed plans for addressing impediments. • Informational content: Details concerning organizational structure, MIS, interconnections and interdependencies, etc. • Rapid and orderly resolution is defined to mean a reorganization or liquidation of the covered company under the Bankruptcy Code that can be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk that the failure of the covered company would have serious adverse affects on financial stability in the U.S.

11. Overview of the Joint Final Regulation: Required Content (cont’d) • Three defined terms are key to the preparation of the plan: • Critical operations. Those operations of the covered company, including associated services, functions and support, the failure of or discontinuance of which, in the view of the covered company or as jointly directed by the FDIC and the Federal Reserve, would pose a threat to the financial stability of the United States. • Core business lines. Those business lines of the covered company, including associated operations, services, functions and support, that, in the view of the covered company, upon failure would result in the material loss of revenue, profit or franchise value. • Material entity. A subsidiary or foreign office of the covered company that is significant to the activities of a critical operation or core business line.

12. Overview of the Joint Final Regulation: Required Content (cont’d) • Strategic analysis component of a plan must include the— • assumptions underlying the plan; • actions the company plans to take to facilitate its rapid and orderly resolution in bankruptcy; • needs, and resources available, for funding, liquidity, and capital; • strategy in case a critical operation, core line of business, or material entity fails or is otherwise disrupted; • strategy for ensuring that IDI subsidiaries are protected; and • timing for successfully executing the material steps of the plan. • Identifying weaknesses and impediments, and describing proposed actions to address these, is another critical element of the strategic analysis.

13. Overview of the Joint Final Regulation: Required Content (cont’d) • Informational content— • Organizational structure • organizational hierarchy; • mapping of critical operations and core business lines to legal entities; • major counterparties and impact of their failure on the covered company; and • mapping material trading, payment, clearing, and settlement memberships to critical operations, core business lines, and material entities. • Management Information Systems • inventory and mapping of key MIS to critical operations and core business lines; and • description and analysis of MIS capabilities to support information underlying the resolution plan.

14. Overview of the Joint Final Regulation: Required Content (cont’d) • Interconnections and interdependencies • identification and mapping of material relationships among critical operations, core business lines, and material entities; • shared personnel or systems • cross-guarantees • service-level agreements

15. Special Considerations for Non-U.S. Firms U.S. Focus. A foreign-based covered company’s plan should be focused on subsidiaries, branches, agencies and operations that are domiciled or conducted in whole or in material part in the U.S. (though analysis of interconnections and interdependencies with foreign-based affiliates is required). Group-Level Planning. Plan should explain how resolution planning for U.S. entities, critical operations and core business lines is integrated into foreign-based covered company’s overall (home-country) resolution or other contingency planning process. Non-U.S. Requirements. Many covered companies, both U.S. and foreign-based, are also subject to non-U.S. resolution planning requirements. Tailored Plan Option. Available to non-U.S. covered firms with less than $100 billion in total U.S. nonbank assets and whose U.S. IDI, branch and agency operations constitute less than 85 percent of such company’s U.S. total consolidated assets.

16. Overview of the Joint Final Regulation: Review of Resolution Plans • Review for informational completeness. • Federal Reserve and FDIC are required to review a resolution plan within 60 days of submission to determine whether (i) the plan is informationally complete, or (ii) additional information is necessary. • Joint written notice that additional information is required or that the plan is incomplete. • Company has 30 days to provide complete plan or additional information. • Review for deficiencies (i.e., plan is not credible or would not facilitate an orderly bankruptcy). • If the Federal Reserve and FDIC jointly determine that a resolution plan is not credible or would not facilitate an orderly bankruptcy, the Federal Reserve and FDIC must jointly notify the covered company in writing and identify the aspects of the company’s plan determined to be deficient.

17. Overview of the Joint Final Regulation: Resubmission in Response to a Notice of Deficiencies • Company has 90 days to respond to a notice of deficiencies. • Must respond to a notice of deficiencies by submitting a revised resolution plan that— • addresses the identified deficiencies; • details the revisions made to address those deficiencies; • describes any changes the company proposes to make to its operations or structure (including associated timing); and • explains why the company believes the revised plan is credible and would result in an orderly bankruptcy.

18. Overview of the Joint Final Regulation: Failure to Cure Deficiencies • If the company fails to submit a revised resolution plan within the allotted time, or the Federal Reserve and FDIC jointly determine that the revised resolution plan does not adequately remedy the deficiencies, the Federal Reserve and FDIC may— • jointly determine that the company shall be subject to more stringent capital, leverage, or liquidity requirements, or restrictions on growth or activities; or • in consultation with the FSOC, direct the company to divest assets or operations, provided that— • the Federal Reserve and FDIC have determined to impose the above listed requirements or restrictions; • that the company has failed, within the 2-year period following a determination to impose such requirements or restrictions, to submit an adequate revised resolution plan; and • the Federal Reserve and FDIC jointly determine that the divestiture is necessary to facilitate an orderly resolution of the company in bankruptcy.