Trading activity wind-down (TWD) plans follow the Prudential Regulation Authority's 2014-21 solvent wind-down exercise, where it found that many firms were unable to wind down their trading activities in an orderly way during recovery and post-resolution restructuring. The PRA views this as a market failure and is implementing new requirements for in-scope firms. Working alongside the Resolvability Assessment Framework and existing recovery plans, the changes aim to improve the safety and soundness of the financial system.
TWD plans apply to each individual group entity within an ‘other systemically important institutions’ group that engages in trading activities; it does not apply at the group level. Firms have until 3 March 2025 to have their trading-wind-down plans in place.
Tackling the Resolvability Assessment Framework
Developing the TWD option
In-scope firms must lay out their TWD plans for a scenario of severe macroeconomic and financial stress. The actions, arrangements and measures within the plan would help firms wind down their trading activities during recovery or post-resolution restructuring. Plans should also outline the cost of a trading activity wind-down, and the impact on projected capital and liquidity, which could affect decision-making during a period of stress.
Scenario testing
The PRA expects firms to include three baseline factors to test their TWD scenarios:
- Factors relating to the stage of firm-specific stress – firms need to be ready to enact a trading activity wind-down at any point, potentially at short notice
- Factors relating to market-wide stress – firms need to be able to wind down their trading activities within an environment of market-wide stress
- Factors relating to the full or partial wind-down of trading activities – firms need to demonstrate that they can safely wind down their trading activities partially or in full, as required
Firms also need to include relevant factors relating to their own circumstances and business model. As TWD plans can take months to prepare, effective scenario testing is essential to make sure plans are robust and can be implemented at short notice.
Flexibility of the plan
TWD plans need to be flexible to reflect the challenging real-world conditions in which firms would implement them. Firms need to consider a range of priorities, such as capital or liquidity conservation, and be able to adapt their approach to following the appropriate pathway within a given plan. Plans should indicate a range of activities, with the understanding that firms will put different elements into action depending on the type of stress the firm is under.
Building TWD capabilities
The PRA expects all firms to start with a plan for a full trading activity wind-down for post-resolution restructuring, then work backwards to develop plans for less severe outcomes. This approach makes sure that firms have the most sophisticated capabilities in place to manage an orderly wind-down.
Good use of data
Firms need good-quality, granular data to inform a TWD plan and to effectively implement it. This includes tracking capital and liquidity to reliably trigger a trading activity wind-down and to work out any additional recovery options needed. Good data will also help the PRA and Bank of England in their supervisory remits while helping management make informed decisions and update all stakeholders before, during and after the stress event.
Reliable data is also crucial for modelling purposes. Firms can use modelling data to identify the financial resources needed for a safe trading activity wind-down, assess the likelihood of using the TWD option and gauge the resources needed. Modelling is also essential for valuing exit costs, assessing risk-based losses on trading positions throughout the wind-down, and reviewing alternative key assumptions to those used in scenario testing. The PRA expects firms to be able to undertake a sensitivity analysis to track the impact of market changes during stressed conditions and manage the inherent uncertainty of wind-down, resolution and recovery activities.
Responsiveness
Looking beyond immediate data requirements, firms must be able to refresh their information feeds quickly. The situation can move quickly under stressed conditions, and firms need to be able to refresh their balance sheet, understand the cost of wind-down, and update capital and liquidity projections within days. Data that feeds into material, judgement-based decision-making processes need to be refreshed within days or weeks. Underlying data that underpins the TWD option, such as key assumptions or approximations, must be refreshed within weeks. If firms can’t meet these data requirements, they could base key decisions on out-of-date information, potentially resulting in a disorderly trading activity wind-down.
Responsiveness is perhaps the most important element of TWD planning. The situation can move quickly during stressed conditions or recovery and can be due to a number of factors. The PRA, therefore, wants to see a range of options that have been properly thought through and can be put into practice quickly, based on up-to-date information on capital and liquidity.
Governance
The regulator expects firms to demonstrate board-level (or equivalent) input over TWD plans, including effective challenge over design, implementation, maintenance and testing. It’s essential that firms view TWD plans in real-world terms rather than as a theoretical exercise. Firms also need to integrate TWD planning into wider governance arrangements covering recovery planning, with appropriate oversight, accountability and transparency. As such, ownership of the TWD option is part of the prescribed responsibility for the recovery and resolution pack under the Senior Managers and Certification Regime (SMCR).
Reporting
The PRA recognises that a one-size-fits-all approach wouldn’t be appropriate for TWD planning, so firms can choose to use the regulator’s template or their own. That way firms can give more or less data depending on the scale and complexity of their trading activities.
UK subsidiaries of third-country groups
UK subsidiaries of third-country groups are subject to the PRA’s existing requirements for recovery planning, including the TWD option. Entities should use their group capabilities to broadly meet comparable outcomes as the resolvability assessment framework, including trading activity wind-down plans.
If the group can’t meet those expectations, the individual entity should develop those capabilities and provide appropriate assurance for UK regulators.
Next steps on trading activity wind-down plans
TWD policies apply to other systemically important institutions, with full or partial trading activity wind-down as an option within their recovery and post-resolution plans. Firms should use their existing capabilities wherever possible, including their modelling processes, to effectively develop and maintain TWD plans. Establishing good quality data, which can be refreshed within the appropriate timescales, will be one of the biggest challenges.
For more information on trading activity wind-down planning, contact Paul Young.
