Prudential Regulation Authority Rulebook

1.1

This Prudential Regulation Authority (PRA) Supervisory Statement (SS) sets out expectations for certain firms engaged in trading activities that may affect the financial stability of the UK.^[1] The PRA expects such firms to have a set of capabilities that will allow them to execute a full or partial wind-down of their trading activities in an orderly fashion (hereinafter referred to as trading activity wind-down, or TWD).^[2]

1.2

The expectations in this SS aim to further the PRA’s general objective to promote firms’ safety and soundness, advanced primarily by minimising the adverse effect firm failure could have on financial stability.

1.3

The expectations aim to enhance firms’ ability to recover from firm-specific and/or market-wide stress, and should be read in conjunction with the Bank of England’s (‘the Bank’s’) approach to assessing resolvability, including the Bank’s Statements of Policy (SoP) published as part of the Resolvability Assessment Framework (the ‘RAF policies’).^[3] These expectations are also relevant in terms of firms meeting two PRA rules: 

• Rule 2.11 in the Recovery Plans Part of the PRA Rulebook, which requires that a firm must be able to demonstrate that the implementation of its recovery plan is reasonably likely to maintain or restore the firm’s viability and financial position, and that the recovery plan is reasonably likely to be implemented quickly and effectively; and
• Rule 8 in the Fundamental Rules Part of the PRA Rulebook, which requires that a firm must prepare for resolution so if the need arises it can be resolved in an orderly manner.

1.4

Firms whose trading activities may affect the financial stability of the UK, and that have been identified by the PRA as ‘other systemically important institutions’ (O-SIIs), are likely to have the full or partial wind-down of their trading activities as a recovery option.

1.5

As set out in SS9/17 ‘Recovery planning’ (paragraphs 2.5-2.9),^[4] firms should have measures available to restore their financial position following a stress, including radical options which might include fundamentally changing the firm’s structure and business model.

1.6

Firms with Bank-led bail-in as their preferred resolution strategy may need to have the wind-down of their trading activities as a post-resolution restructuring option when developing their business reorganisation plan (BRP).^[5]

1.7

The expectations in this SS apply to O-SII firms (identified by the PRA) that have the full or partial wind-down of trading activities as a recovery and post-resolution restructuring option; and have either been notified by the Bank that their preferred resolution strategy is Bank-led bail-in, or have been notified by the Bank that they are a ‘material subsidiary’ of a third-country group for the purposes of setting internal minimum requirements for own funds and eligible liabilities (MREL) in the UK.^[6] Collectively, these firms are referred to as ‘TWD firms’ for the purposes of the expectations set out in this document. The expectations in this SS do not apply to third-country branches. 

1.8

The application of these expectations to TWD firms is set out in more detail in Chapter 2.

1.9

In this SS, the wind-down of trading activities, whether it be full or partial, or whether it would be carried out as a recovery or post-resolution restructuring option, is referred to as ‘the TWD option’. The TWD option is likely to be one option that a firm will develop as part of a recovery plan and BRP, and is likely to be a ‘risk off’ set of actions that TWD firms will put into effect in order to stabilise their capital or liquidity positions, minimise liabilities or limit impacts on financial stability. Other options might include the sale of a business unit or raising capital by market issuance. The PRA’s expectations relating to how TWD firms should develop the TWD option are set out in Chapter 3.

1.10

All firms subject to the PRA’s recovery planning rules are required to have a recovery plan containing a range of executable options. SS9/17 sets out expectations for recovery planning relating to governance, information and reporting requirements, fire drills and playbooks, amongst other areas.^[7]

1.11

As part of the recovery plan, a TWD firm is expected to have planned when it might need to execute the TWD option and mitigate potential barriers that might impede that execution. TWD firms may need to produce a concise implementation guide or ‘playbook’ for implementing their plan, including the TWD option, with detailed analysis, evidence, and testing supporting the credibility of the information.^[8] 

1.12

Developing the TWD option is likely to be more complex compared with other recovery options, as the actions, arrangements, and measures that a firm may take are likely to be highly contingent on prevailing market conditions. A firm’s recovery plan should be sufficiently flexible to anticipate the need to make different decisions and use different actions, arrangements, and measures depending on those market conditions (for example, deciding the time period over which trading activities are wound down).

1.13

The PRA expects firms to use scenario testing to demonstrate the credibility of their recovery plans and the options within them. For firms to be able to demonstrate that their recovery plans are sufficiently flexible to make the TWD option credible, this SS sets expectations that TWD firms should:

• include a baseline set of factors when designing the scenario or scenarios to develop and test the TWD option (hereinafter ‘the TWD scenario’); and
• have additional capabilities to allow senior management and decision-makers to respond to changing real-life circumstances.

1.14

The PRA expects O-SIIs to include analysis of at least four scenarios in their recovery plans, and that the range of scenarios included should be adequate to test the plan.^[9]

1.15

The expectations in this SS set out the capabilities that TWD firms should have, which are additional to the expectations in SS9/17 and other related PRA policies. The PRA emphasises ‘capabilities’ because execution of the TWD option may occur in a variety of real-life circumstances. Firms should have a set of capabilities that can be utilised depending on the real-life circumstances faced by the firm at the time the TWD option is executed.

1.16

This set of capabilities is referred to as ‘TWD capabilities’. These capabilities are explained in the following way:

• Information provision and decision-making capabilities: these capabilities enable a firm to produce information and data, which is of sufficient granularity and quality to support decision-making before, during, and after a firm-specific and/or market-wide stress.
• Refresh capabilities: these capabilities enable a firm to refresh the information supporting the development and execution of the TWD option in a timely manner. Firms should be able to refresh data on their balance sheet (including data on trading book positions at the individual contract, collateral and asset levels), their quantification of wind-down costs, and capital and liquidity projections, within a matter of days (the ‘data refresh’). Firms should be able to refresh the material components of the TWD option, including changes to assumptions and approximations that inform the TWD option, changes to the modelling or methodology firms use as part of their information provision and decision-making capabilities, and changes to the factors that make up the TWD scenario within weeks (the ‘full plan refresh’).^[10]

1.17

Expectations relating to TWD capabilities are set out in more detail in Chapter 4.

1.18

In order to provide firms with a guide to the breadth and granularity of data they should be able to produce, the PRA has set out templates in the appendices. TWD firms can choose to use these templates and are responsible for the development and maintenance of their TWD capabilities. Additional information relating to these TWD templates is set out in Chapter 5 and the appendices.

1.19

Expectations relating to the full or partial wind-down of trading activities for UK subsidiaries of third-country groups are set out in more detail in Chapter 6.

1.20

This SS should be read in conjunction with:

• the PRA’s policies set out in the Trading activity wind-down SoP;
• the Bank’s Approach to Assessing Resolvability SoP;
• the Bank’s SoP on Funding in Resolution;
• the Bank’s SoP on Continuity of Access to Financial Market Infrastructure (FMIs);
• the Bank’s SoP on valuation capabilities to support resolvability;
• the Bank’s SoP on Restructuring Planning; and
• the Bank’s SoP on Management, Governance and Communication.