Legal
LEG 1. Support Within the United States
Q. Could the Agencies clarify what further legal analysis would be expected regarding the impact of potential state law and bankruptcy law challenges and mitigants to the planned provision of Support?
A. The firms should address developments from the firm's own analysis of potential legal challenges regarding the Support and should also address any additional potential legal challenges identified by the Agencies on pages 10-11 of the 2018 Guidance. A legal analysis should include a detailed discussion of the relevant facts, legal challenges, and Federal or State law and precedent. The analysis also should evaluate in detail the legal challenges identified in the 2018 Guidance under the heading "Support Within the United States," any other legal challenges identified by the firm, and the efficacy of potential mitigants to those challenges. Firms should identify each factual assumption underlying their legal analyses and discuss how the analyses and mitigants would change if the assumption were not to hold. Moreover, the analysis need not take the form of a legal opinion.
LEG 2. Contractually Binding Mechanisms
The 2018 Guidance states that the legal analysis described under the heading "Support Within the United States" should include mitigants to the potential challenges to the planned Support and that the plan should identify the mitigant(s) to such challenges that the firm considers most effective. The 2018 Guidance does not specifically reference consideration of a contractually binding mechanism. However, the following questions and answers may be useful to a firm that chooses to consider a contractually binding mechanism as a mitigant to the potential challenges to the planned Support.
Q1. Do the Agencies have any preference as to whether capital is down-streamed to key subsidiaries (including an IDI subsidiary) in the form of capital contributions vs. forgiveness of debt?
A1. No. The Agencies do not have a preference as to the form of capital contribution or liquidity support.
Q2. Should a contractually binding mechanism relate to the provision of capital or liquidity? What classes of assets would be deemed to provide capital vs. liquidity?
A2. Contractually binding mechanism is a generic term and includes the down-streaming of capital and/or liquidity as contemplated by the U.S. resolution strategy. Furthermore, it is up to the firm, as informed by any relevant guidance of the Agencies, to identify what assets would satisfy an U.S. affiliate's need for capital and/or liquidity.
Q3. Is there a minimum acceptable duration for a contractually binding mechanism? Would an "evergreen" arrangement, renewable on a periodic basis (and with notice to the Agencies), be acceptable?
A3. To the extent a firm utilizes a contractually binding mechanism, such mechanism, including its duration, should be appropriate for the firm's U.S. resolution strategy, including adequately addressing relevant financial, operational, and legal requirements and challenges.
Q4. Are there any particular related actions or agreements that the Agencies have observed or believe may enhance the effectiveness of a contractually binding mechanism which the firm should consider?
A4. Firms may consider the appropriate tool(s) that best enhances the likelihood of the enforceability and effectiveness of any contractually binding mechanism.
Q5. Have the Agencies developed (or do they intend to develop) a prototype of a contractually binding mechanism that would address their concerns?
A5. No.
Q6. The firm may need to amend its contractually binding mechanism from time to time resulting potentially from changes in relevant law, new or different regulatory expectations, etc. Is a firm able to do this as long as there is no undue risk to the enforceability (e.g., no signs of financial stress sufficient to unduly threaten the agreement's enforceability as a result of fraudulent transfer)?
A6. Yes, however the Agencies should be informed of the proposed duration of the agreement, as well as any terms and conditions on renewal and/or amendment. Any amendments should be identified and discussed as part of the firm's next U.S. resolution plan submission.
Q7. If a firm intends to use a contractually binding mechanism (CBM) to mitigate potential legal challenges to the provision of capital and liquidity to subsidiaries prior to bankruptcy, do the Agencies expect the firm to execute the CBM by July 1, 2018?
A7. No. The Agencies are focused on reviewing firms' analyses of how CBMs would mitigate legal challenges and support the successful recapitalization and funding of U.S. affiliates prior to bankruptcy.
Q8. Should firms include a formal regulatory trigger by which the Agencies can directly trigger a contractually binding mechanism?
A8. No.