Trading Activity Wind Down (TWD)
Valentia Partners evaluates the challenges associated with implementing the Trading Activity Wind Down (TWD) requirements outlined in the PRA’s Supervisory Statement SS1/22 of May 2022, with a focus on meeting the regulation deadline of March 2025. We also explore enhancements for any potential post-implementation Book of Work (BoW); and suggest areas where regulatory forbearance from the PRA could be sought.
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Challenges to Implementation
In a move to improve the resilience of the UK financial sector, the Prudential Regulation Authority (PRA) issued a Supervisory Statement (SS) 1/22 in May 2022. The SS outlines the expectations for all firms designated as ‘other systemically important institutions’ (O-SIIs). These expectations involve building capabilities to effectively wind down the trading book in order to recover from firm-specific and/or market-wide stress. As such, the PRA has required that this regulation should be read in conjunction with Recovery and Resolution policies. TWD comes into effect on 3rd March 2025.
SS/122 sets out requirements for building capabilities that help firms wind down in an orderly fashion whilst ensuring the capabilities remain usable and flexible. Building this flexibility and usability has become a key concern for the majority of O-SIIs affected and so TWD firms are likely to prioritise items which ensure compliance, then use a post-implementation book of work (BoW) to enhance these capabilities.
Potentially the most critical challenge firms face with building TWD capabilities is around the data refresh requirements. Data is often stored across disparate databases and systems which do not always talk to each other presenting a significant hurdle. Developing refresh capabilities to meet the “matter of days/matter of weeks” requirements is difficult whilst ensuring precision, meaning there is a trade-off between speed and accuracy. This is especially pronounced for liquidity which is time consuming to forecast effectively. Furthermore, modelling the balance sheet is complex and, so, there is a preference for simplifying assumptions as well as the use of approximations rather than actual values. It is also difficult to adjust intra-month numbers for Risk Weighted Assets (RWA) and capital so there is a likelihood firms will instead rely on the most recent unadjusted month end values. Finally, modelling sensitivities one-by-one is both time and computationally intensive and while some sensitivities are easily quantifiable, others may require manual qualitative analysis to demonstrate wind-down impacts.
The modelling of operational costs to the granularity required is challenging due to the inter-connected nature of booking practices and global operating models. Modelling the balance sheet is complex so simplifying assumptions are likely to be used at legal entity and group level for effective date compliance. There are associated challenges with how to allocate staff or property costs in wind down, for example if a firm is using a branch model then they may use an interlinked network of support services, whilst if they use a functionalised model then it can be difficult to correctly apportion costs. Headcount costs especially can be difficult to ascertain for a global business model and property is not easy to attribute to activity type. FMI access is often managed at a cross-group level and associated positions or risk ‘back-to-backed’ to the booking entity. It is not always clear the exact nature of services being recharged and whether these relate directly to trading activity.
A common challenge facing firms is ensuring integration with their Recovery Planning and Resolution Plan (RRP) framework. The contributing reasons for this challenge range from tight time scales to ensuring the credibility and actionability of the TWD option in a period of stress. The next recovery plan submission date to the PRA is in 2025 which is very close to the TWD go-live date. This, leaves very little time to perform the level of testing firms would be comfortable with to ensure the option is credible within recovery, nor to perform the E2E firedrill testing required of the TWD playbook. In addition to the above challenge, there are differences between the suggested TWD templates and the metrics required for recovery planning. SS1/22 stipulates that the Banking Book (BB) should be held static, the impacts of which would be necessary in a recovery scenario, and wider group impacts would also be required to ensure trading activity could be wound down without further detriment to retail or commercial bank clients. The PRA has an expectation that TWD capabilities should be built on the basis of a full trading wind down which is most applicable in post-resolution restructuring. The majority of TWD firms are likely to select a partial wind down of the trading book as their recovery option and integrating this effectively within RRP will likely require additional work to ensure the option is usable once full capabilities have been designed, built and implemented.
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