It was a busy summer for four of America's biggest banks. In September 2024, Bank of America, Citigroup, Goldman Sachs, and JPMorgan Chase had to submit an action plan to regulators to close the gaps in their resolution plans.

What is a resolution plan?

A resolution plan is a detailed strategy developed by financial institutions and overseen by regulators to manage the orderly resolution (or winding down) of the bank in the event of financial distress or failure, without triggering a financial crisis or requiring a government bailout.

This regulation was introduced in the wake of the 2008 financial crisis, with the main aim of ensuring that bankruptcy could be resolved without the need for taxpayer intervention and without significantly disrupting the financial system. It applies in every major jurisdiction.

These plans include a number of components, including the Trading Wind-Down. 

What is Trading Wind-Down (TWD)?

When a resolution plan is launched, one of the bank's first objectives is to reduce its exposure to trading activities as quickly and efficiently as possible, in terms of both market and counterparty risks. The Trading Wind-Down (TWD) exercise requires the financial institution to very precisely formalize the scenarios for reducing activity and estimate the associated costs, consequences for its financial ratios, and impact on financial markets.

The UK Prudential Regulation Authority (PRA) detailed what needs to be formalized in its Supervisory Statement SS1/22:

1. Division of the trading activities portfolio into sub-portfolios or segments, each of which will be subject to a specific exit strategy;
2. Close-out or termination of positions prior to maturity (subject to stays that may be in effect in resolution in the relevant jurisdiction);
3. Contractual run-off (allowing contracts to run to maturity without being replaced or renewed);
4. Auction or transfer of positions to a third party, or novation (the termination of a contract and its replacement with a new economically equivalent contract with a different party) of such positions;
5. Actions taken to reduce risk via hedging; and
6. Actions taken to manage the liquidity of the balance sheet.

The PRA provides templates as part of its expectations for firms' wind-down planning, which helps ensure that firms can exit the market in a controlled and efficient manner, minimizing the impact on the broader financial system. The information to be included in Trading Wind-Down templates is many and varied from identification of critical trading activities, timeframe for the wind down, and impact analysis.

Starting next year, financial institutions to which TWD applies will be required to produce and maintain sufficiently detailed data consistent with these templates and at a frequency of at least monthly.

For these templates, all of this data has to be available to make the calculations:

• Static data that has to be available:
  • Products segmentation rules
  • Hedging strategy rules
  • Spreads referential
  • Exit cost calibrations
  • Client and product hierarchies

• Orchestration engines allowing:
  • Segmentation of trades
  • Calculations of:
    • Hedging costs
    • Variation/forecast of market sensitivities, capital, and liquidity metrics  

The ability to produce and understand the templates from the aggregate level to the most granular is critical in the entire TWD framework and governance.

Why Opensee for Trading Wind-Down?

Regulators require these indicators to be available almost automatically on demand, with the ability to access the most granular view of each transaction. The required frequencies and operational risks involved make manual collection and calculation processes impossible.

Financial institutions need to be able to bring together a range of data scattered across different information systems in a single dataset, add missing data such as the parameters used to define “wind-down” costs by type of instrument and family of counterparties, and then use this data to perform a number of calculations to arrive at estimates of costs and residual exposures.

To do this, they need an extremely powerful and scalable data management and analytics solution.

Opensee's advantages in this use case include:

• Implementation of a specific data model enabling the collection of various internal and external datasets in a format dedicated to TWD's needs
• Complete scalability in terms of storage, enabling:
  •  Access to the most granular data on both deals and counterparties  
  •  Unlimited historical data
• Python calculators (User Defined Function) to produce the required metrics from different datasets
• Ability to perform adjustments and simulations while keeping all necessary audit trails
• Artificial Intelligence tools for data quality diagnostics and results analysis

Bank resolution plans and Trading Wind-Down are essential tools for ensuring the resilience and stability of the financial system. By enabling the orderly management of bank failures and reducing the risks associated with trading activities, these mechanisms play a crucial role in preventing financial crises. 

While the main regulators (PRA, ECB, FED) all aim for a compliance horizon for Trading Wind-Down by 2024-2025, with expectations varying according to jurisdiction and financial institution size, the recent example of the Bank of London, which had to provide a detailed Trading Wind-Down plan in view of its sudden need for capital, shows that the subject is very real.

The ability of financial institutions to meet this timetable will depend on their ability to implement a solution like Opensee.