Prudential Regulation Authority Rulebook

11.1

In implementing Operational Continuity 2.3, the PRA expects firms to have arrangements in place to ensure, on a forward-looking basis, that they:
(a) can meet payment obligations for critical services, including through recovery, resolution, and related restructuring; and
(b) ensure that intra-group critical service providers would remain financially resilient during recovery, resolution, and related restructuring. Generally, financial resilience is achieved by providers of critical services having the financial resources to be able to absorb losses and by them having adequate liquidity. Firms should also manage the risks associated with the assets and liabilities of critical service providers.

11.2

The PRA expects firms to identify risks to fulfilling the requirement under Operational Continuity 2.3, including the expectations under paragraph 11.1 of this SS, and, wherever possible, take remedial action. The PRA expects that the identification of risks related to the financial resilience of service providers includes the risk of internal frictions that may arise in resolution, whereby financial resources that are available within the firm’s group cannot be accessed by a critical service provider in a sufficiently timely manner. These may arise due to issues such as complex or outdated processes, procedures, or systems.

11.3

The PRA expects firms’ identification of risks under paragraph 11.2 of this SS to be supported by scenario analysis that enables the firm to understand the risks to continuity of critical service provision from severe, but plausible, scenarios that the firm may face during recovery and resolution. The PRA expects firms to consider multiple scenarios that are relevant to their business models and are sufficiently severe to test the operational continuity of critical service providers. Firms should be able to use their scenario analysis to demonstrate to the PRA, on request, that they have fulfilled the requirement under Operational Continuity 2.3, including the expectations under paragraph 11.1 of this SS. Scenarios could include, but are not limited to:

• the impact on a firm’s ability to pay for critical services on time as a result of entering resolution. This may be affected by, but is not necessarily limited to, changes in the price of critical services received, and operational issues experienced by the firm, arising as a result of resolution;
• the impact on continuity of critical service provision of a critical service provider experiencing delayed receipt of a payment due for services provided to the firm;
• the impact on continuity of critical service provision of a critical service provider experiencing an expense-revenue mismatch during resolution, which may arise from reduced demand for services from entities in resolution, but constant fixed overheads for the service provider. This may be caused by financial or operational issues;^[18]
• the impact on continuity of critical service provision of exceptional costs that a critical services provider may be exposed to in a stress scenario or resolution. These may include, but are not limited to, employee costs (including retention and redundancy payments) or the write down of intangible and relationship-specific assets; and
• any other risks to operational continuity identified by the firm.

11.4

The PRA expects firms to monitor and maintain early warning indicators of risks in being able to meet, in recovery, resolution, and related restructuring, the requirement in Operational Continuity 2.3, and the expectations described in paragraph 11.1 of this SS.

11.5

The PRA expects that firms should leverage existing capabilities where possible to fulfil the intended outcome of the expectations described in paragraphs 11.3 and 11.4. This could include, but is not limited to, capabilities developed to fulfil the PRA’s recovery planning policy,^[19] and information available due to firms’ capabilities to fulfil the Bank’s expectations in the SoP ‘Funding in Resolution’.^[20] Where firms can demonstrate that the intended outcome is met through existing capabilities, the PRA does not expect firms to duplicate work.

11.6

Specifically for liquidity, the PRA expects firms to ensure that intra-group critical service providers have access to, at a minimum, liquidity resources equivalent to 1/6^th of annual fixed overheads of the critical services they provide to the firm (OCIR liquidity resources).

11.7

Where the minimum amount of OCIR liquidity resources is insufficient to mitigate risks identified by firms under paragraph 11.2, firms should ensure that intra-group service providers have access to additional liquidity resources to cover these risks. The PRA expects firms to be able to demonstrate to the PRA, upon request, that this minimum amount of OCIR liquidity resources is sufficient to mitigate risks identified by the firm under paragraph 11.2 with respect to intra-group service providers in resolution. Firms may use the scenario analysis described in paragraph 11.3 if appropriate.

11.8

The PRA expects the intra-group critical service provider to calculate its annual fixed overheads for critical service provision to a firm in accordance with the applicable accounting framework. Commission Delegated Regulation EU 2015/488^[21] includes items that may be excluded from the calculation of fixed overheads.

11.9

The PRA expects that OCIR liquidity resources should be maintained at all times, and that the OCIR liquidity resources should be immediately available to the intra-group critical service provider in resolution. These resources should only be used to support the operational continuity of intra-group critical services during resolution. Firms should maintain appropriate governance arrangements, policies, processes, and controls to meet this expectation.

11.10

The outcome set out in paragraph 11.9 can be achieved by the intra-group service provider owning the OCIR liquidity resources. Alternative ownership arrangements can also be used if firms can demonstrate to the PRA’s satisfaction that the arrangements will achieve the outcome set out in paragraph 11.9.

11.11

Firms should also ensure that OCIR liquidity resources are in the most appropriate location to meet the outcome outlined in paragraph 11.9. This may include holding the liquidity resources with a third party. The PRA expects firms to be able to explain how and where such assets are held, as well as the arrangements for access in resolution.

11.12

Firms should also consider how they would monetise OCIR liquidity resources to meet the outcome in paragraph 11.9. This could be achieved by OCIR liquidity resources being the same types of assets that qualify as high-quality liquid assets (HQLA). Firms may use other types of assets as long as those assets would be immediately available to the intra-group critical service provider in resolution. The PRA expects that OCIR liquidity resources and HQLA held for the purpose of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) standards, at either firm- or group-level, are not double-counted.

11.13

An RFB must comply with the PRA’s ring-fencing rules and with ring-fencing legislation when meeting the expectation that its intra-group critical service providers maintain their own OCIR liquidity resources. The ring-fencing regime aims to protect RFBs from the failure of group entities outside of the ring-fence. Accordingly, to meet both ring-fencing requirements and the PRA’s expectations regarding OCIR liquidity resources, the resources maintained by an intra-group critical service provider that is part of a group containing an RFB, where such services are provided to an RFB, may either be held by the service provider itself, with an entity within the RFB sub-group, or on behalf of the service provider with a third party outside of the group. OCIR liquidity resources held on behalf of the service provider, or deposits made by the service provider, with any other entity within the non-ring-fenced part of a group, even after resources are monetised, would be at unacceptable risk.