Under the Dodd-Frank Act, institutions designated by the Financial Stability Oversight Council (FSOC) in the U.S. as “systemically important” are required to develop and file Recovery & Resolution (R&R) plans with the Federal Reserve and the Federal Deposit Insurance Corporation to help make the financial system more robust and reduce the risk of institutional failure.
R&R plans outline the recovery process to be followed in case of severe distress and, if necessary, to enable an institution to be liquidated in a way that limits the impact on the global financial marketplace. After the financial crisis of 2008, bank holding companies were the first to be designated as Systemically Important Financial Institutions, or “SIFIs.”
The U.S. Securities and Exchange Commission (SEC) has also proposed a rule expected to be finalized by the end of the year requiring registered clearing agencies designated as “systemically important financial market utilities” (SIFMUs) to file an R&R plan. The Depository Trust & Clearing Corporation’s (DTCC) depository and clearing agency subsidiaries, The Depository Trust Company (DTC), National Securities Clearing Corporation (NSCC) and Fixed Income Clearing Corporation (FICC), have all been designated as SIFMUs.
Although not required to have an R&R plan at the time, DTCC began work on a comprehensive set of R&R plans for each of its SIFMU subsidiaries in January 2013. The multi-year program is a collaborative, enterprise-wide effort that includes input from areas such as DTCC Product Management, Enterprise Risk Management and Global Operations, among others. The effort includes engagement with DTCC clients, regulators and other financial market utilities. DTCC met its established goal of completing first drafts of the plans by the end of 2013.
DTCC used the approach taken by banks as the starting point to establish a framework for the development of its R&R plan, according to Stephen Pecchia, DTCC Vice President, Office of Recovery & Resolution Planning. Given the critical role DTCC’s SIFMU subsidiaries play in preserving the soundness of the financial marketplace, these R&R plans are designed to put in place a process that can help minimize the potential impact to the financial system should any one or more of these entities become insolvent.
“Using the banks’ plan as an outline showed us where we needed to and didn’t need to focus our efforts,” Pecchia said. “We used the information available to develop our plan as fully as possible and then we filled in the blanks where we could with guidance from regulators.” Engaging in dialogue with regulators on R&R planning provides an understanding of what they expect to see in such a plan, Pecchia noted. “As Principles for Financial Market Infrastructures (PFMIs) are incorporated into regulations that govern the DTCC SIFMUs, we will have more direction on what we need to have in our R&R plan,” Pecchia said. “As the regulators have proposed standards, we review them and, when appropriate, comment on proposals.”
Pecchia noted the resolution aspect of the plan presents a challenge somewhat unique to the DTCC SIFMUs. “The DTCC clearing agencies are sole providers of their services,” Pecchia said. “A typical bank resolution framework is not appropriate for that type of entity. We have spent a lot of time working with legal advisors to analyze the options for DTCC.
“This is an important process for DTCC and the global financial marketplace,” Pecchia added. “It increases confidence that DTCC’s systemically important services will be provided should another crisis occur.”