Bank 'living wills' should anticipate inter-affiliate derivative trade halt, Fed proposal says

30 June 2018 12:40am
Bank regulators’ proposed guidance on “living wills” calls for derivative traders to prepare for forced termination of inter-affiliate transactions during a crisis.

These resolution plans of JPMorgan Chase, Goldman Sachs and four other derivative-trading banks should include a method for monitoring risk exposures in case all trading with affiliates stops, the US Federal Reserve and Federal Deposit Insurance Corp. said.

The proposal Friday says these banks also should submit plans for transferring prime brokerage clients who rapidly withdraw from the firm to “peer” brokers. Prime brokers handle custody, securities lending, financing, margining and regulatory reporting services.

“A dealer firm should be able to demonstrate the ability to stabilize and de-risk its derivatives and trading activities during resolution without posing a threat to US financial stability,” the plan released Friday says. “Affiliates of a derivatives entity may be forced to discontinue a trading relationship with that derivatives entity during resolution, which poses risks to the orderly resolution of a firm.”