Identifying critical vendors and services in order to develop sustainable resolvability contracts

Identifying critical vendors and services in order to develop sustainable resolvability contracts

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By James McPherson, Vice President and Counsel, Regulatory Unit, Credit Agricole.

James, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I serve as in-house counsel, focused on a variety of areas relating to Credit Agricole CIB’s operations in the Americas. Relevant here is that I have worked on the Bank’s Resolution Plan and am a member of the Bank’s Vendor Management Committee, where we focus on determining appropriate criteria and risk categorization of vendors, assessing and approving critical service providers, and reviewing providers that have otherwise been tagged as high-risk.

Can you explain the current areas of concern within critical services and any advice you may have for your peers?

We are a US operation of a foreign bank and as such many of our critical systems are housed at our home office in Europe. This adds complexity in assessing resolution scenarios due to the fact that many third-party services (a) may not be contracted for out of the US, (b) are governed by European laws, and (c) may not have any US-specific provisions or SLAs that the US operation was consulted on or assisted in drafting.

At the Recovery & Resolution USA Congress, you will be speaking on your insight regarding ‘Reviewing ability to identify critical vendors and services in order to develop sustainable resolvability contracts’ Why is this a key concern right now? And what are the essential things to remember?

Many contracts provide a termination provision triggered on the insolvency of one of the parties. Depending on the nature of any particular contact, such a provision may or may not be enforceable. Nevertheless, most vendors will want the option to terminate in the event the client enters insolvency proceedings, particularly if the vendor is concerned about not getting paid or having to wait to get paid. To the extent possible the parties should agree up front that the commencement of an insolvency proceeding will not in and of itself trigger an immediate termination right.

What in your opinion, is the best way for financial institutions to manage fourth party outsourcing?

The ability to negotiate favorable provisions relating to fourth party outsourcing is dependent on both economics and the nature of the particular services being provided. At the minimum, we need to know if fourth parties are involved in providing any part of the services so we can at least perform some level of assessment and due diligence as necessary on such parties. Ideally, we like to limit the circumstances when new fourth parties can be involved, particularly in respect to services involving highly sensitive data.

Can you please give a brief overview of the impact of un-mediated contracts?

If you are referring to contracts that are not initially negotiated to address insolvency and resolution, and have a standard termination provision that defines an insolvency of one of the parties as a breach or termination event, then the solvent party would generally be allowed to terminate the agreement. This could have significant, and potentially expensive, ramifications in respect to critical services that are necessary for the functioning of the insolvent entity while it is in wind-down, which wind-down may take several years depending on the size and nature of the entity’s business.