At Sionic, we are specialists in financial services consulting. Our experts support our clients with deep knowledge and experience to deliver enduring results around complex regulatory change, resolution planning and legal entity change. We bring extensive intellectual property to support clients execute wind-downs, legal entity migrations, and operational closure plans. In this article, we explore Trading Activity Wind-Down (TWD), a high-focus topic for regulatory authorities, that is proving to be a complex and evolving challenge for our clients.
To ensure an appropriate level of resolvability, avoid posing risks to financial stability and prevent contagion to wider financial markets, regulatory authorities have previously established requirements and expectations for the reduction or elimination of trading activities in an ‘orderly manner’.
Between 2014 and 2021, a multi-phase Solvent Wind-Down (SWD) exercise was conducted. SWD was an approach to assess the extent to which large and global systemic financial institutions firms identified as G-SIBs (Global Systemically Important Banks), would be resolvable during times of market volatility and stress.
It required firms to evidence:
- Plans outlining their business segments, associated exit strategies and financial implications, including detailed information pertaining to their balance sheets and medium-to-long-term exposures, where shorter-term terminations were not feasible or achievable.
- Their ability to provide accurate and complete information and data on a timely basis, proven through periodic exercises and simulations.
- Playbooks focused on governance, HR, communications, and systems.
Despite significant effort, the Prudential Regulation Authority (PRA) determined that participant firms remained at an early stage of maturity and that they failed to demonstrate the necessary capabilities to carry out an “orderly wind-down of their trading activities in recovery and post-resolution restructuring”.
PRA requirements for Trading Activity Wind-Down (TWD)
As a result, in May 2022, the PRA published its TWD requirements.
TWD represents a heightened obligation for in-scope firms, requiring them to identify a full or partial wind-down strategy of their trading activities as a recovery and post-resolution restructuring option. The new requirements have a broader and deeper scope than SWD and are more prescriptive around governance, speed of implementation and scenario testing.
Firms need to comply with TWD by March 2025 (extended from January 2025). Implementation will require firms to demonstrate both robustness and flexibility within their plans, as well as fit-for-purpose governance and the timely availability of complete and accurate data.
SWD but by another name?
Whilst there are similarities between the SWD and TWD obligations, there are also marked differences that firms need to factor into their planning and responses.
- TWD is applicable to firms identified as O-SIIs (Other Systemically Important Institutions), with full or partial activity wind-down as an option within their recovery and post-resolution plans.
- TWD has greater complexity, granularity and is more stringent in nature. It includes a heightened focus on effective governance and senior manager responsibility, with an expectation of not only board-level input but also challenge.
- An expectation that options are “reasonably likely to be implemented quickly and effectively” and that firms can .
- The PRA has added a set of baseline factors to the scenario testing requirement (covering both firm-specific and market-wide stresses), in addition to self-identified factors to make testing relevant to the firm’s individual circumstances.
- An expectation from authorities that TWD will be integrated with other regulatory obligations, such as Operational Resilience, to create greater robustness and more closely align with Senior Managers and Certification Regime (SM&CR) expectations.
So, what now?
Responses to PRA queries
Firms can expect queries from the PRA about their readiness for TWD, if not already received. Many firms received such queries in mid-2022 and submitted responses in Q4 2022. They have since received responses in singular or multiple letters, and requests for further information.
Such letters usually require firms to respond within a compressed time period (typically 60-90 days) providing the PRA with detailed supplemental and/or additional information and ultimately, assurance that their compliance efforts are on track.
The next 18-24 months will require a focused effort from in-scope firms. Not only will they need to meet the March 2025 requirements, but they should also plan wherever possible for further evolution and tightening of requirements. Implementation will need to be handled in parallel with interim queries and communications from the PRA.
Key things to get right
When tackling such a large and complex regulatory challenge, our experience tells us that it will be imperative for firms to get the following right:
Responses to PRA queries
- Put in place a robust process to manage PRA queries, to demonstrate timeliness, accuracy, completeness, transparency, and executive ownership in all responses.
- Ensure specific themes, issues or concerns called out by the PRA are identified and that responses are suitably focused.
- Ensure that responses are ratified by accountable executives and across the first, second and third lines.
- Be prepared to explain to the PRA where information cannot be provided, along with an explanation as to why and provide time-bound steps to address this.
- Be prepared to answer follow-up questions from the PRA, through identifying business and executive ownership.
- Start as early as possible. Firms should not underestimate the effort required and will need to factor in sufficient time for content gathering, reviews, governance, potential re-writes and any required infrastructure build-out.
- Establish fit-for-purpose governance to ensure organisational awareness and ownership, e.g., updating/tightening existing forum mandates, and updating SM&CR responsibilities.
- Employ a data-driven approach. By having a validated data model, which stands up to scrutiny both internally and externally, they will be able to gather, consolidate and provide information in a clearer and more concise manner, providing any supporting evidence, as applicable. This will be key to satisfying the PRA’s expectations.
- Demonstrate speed and agility when refreshing data and analysis, especially in rapidly changing stress scenarios, including the ability to adapt plans in real time.
- Ensure the availability of resources. This applies both to the availability of subject matter experts and business owners (or their delegates) – but also to having the right levels of capacity and capability to work directly on plans and responses.
Sionic are a financial services consultancy, who specialise in supporting our clients with complex regulatory implementation and remediation programmes, including legal entity change, migration and wind-down initiatives.
We can help firms interpret the TWD requirements, map them internally, and help respond to regulatory queries. We have extensive experience in prioritising and executing wind-downs of trading portfolios. With the PRA currently writing to organisations, expecting swift and detailed responses, if you are concerned about meeting the looming 2025 deadline and interim response requirements from the PRA, please contact us.