The report follows a discussion paper released in May, and contains proposals in the following key areas:
1.Enabling an orderly resolution – These proposals are designed to ensure that a failed investment firm would be wound down with as little impact as possible on the financial markets. The proposals include:
- Create a board-level “business resolution officer” role with respect to firm resolution actions;
- Require implementation of “investment firm resolution plans” outlining actions the firm should take, both pre- and post-insolvency, to ensure an orderly wind down;
- Require firms to maintain certain records on its operations and structure for use in the event of an insolvency; and
- Require firms to hold maintain adequate operational reserves to pay key staff and service providers post-insolvency and negotiate contracts to ensure continuity of key staff and suppliers.
2.Reconciling and returning client money and assets – These proposals are designed to prevent clients’ money from becoming trapped in the estate of a failed investment firm. The proposals include:
- Mandate warnings in contractual agreement to clearly define the implications of allowing rehypothecation and use of client omnibus accounts at the custodian level;
- Require increased reporting and record-keeping requirements, including daily reconciliation of client positions and exposures;
- Support the establishment of bankruptcy-remote SPVs to safeguard client assets from the insolvency of an investment firm; and
- Prohibit custodians from having a lien or right of retention over client accounts or from seeking to combine, net, or set off the account against the debts or obligations of the firm.
3.Reconciling counterparty positions – These proposals are designed to mitigate the effect of a failed investment firm on market counterparties. The proposals include:
- Enable multilateral trading facilities to deal centrally with a default, without risk of challenge from the insolvency practitioner;
- Establish a market protocol to address absence of default terms for some over-the-counter cash equities trades, with regulatory action underpinning this if necessary;
- Require central counterparties to offer a choice of account structure, enabling members to segregate their business; and
- Require investment firms to offer facilities to segregate client business.