6.2 Assessment of orderly wind-down of the investment firm

Competent authorities should identify and assess the process to orderly wind-down the investment firm under plausible scenarios reflecting the business model and strategy of the investment firm. The level of details of such assessment including the number of considered scenarios should be determined taking into account the business model, scale and complexity of activities performed by the investment firm. The assessment should include at least the following elements:

• a. identification of wind-down scenarios;
• b. identification of the realistic timeframe to wind-down the investment firms; and
• c. assessment of the impact of a wind-down of an investment firm on its clients, counterparties and markets, and on the investment firm itself.

6.2.1 Identification of wind-down scenarios

There are many scenarios under which an investment firm may wind-down. While performing their analysis, competent authorities should focus on one or more scenarios under which the investment firm becomes unviable and is compelled to wind-down its business. Some typical scenarios that may be considered by competent authorities are:

• a. significant financial losses due to severe market fluctuations; and
• b. loss of critical infrastructure that are impossible to timely replace.

To set up adequate scenarios pursuant to paragraph 159, competent authorities should consider, where relevant, the following information, building on the analysis performed under Title 4 (Business Model Analysis):

• a. legal form of the investment firm and the related applicable insolvency requirements;
• b. business model of the investment firm and related vulnerabilities;
• c. key revenue and costs drivers of the investment firm;
• d. key cash inflows and outflows;
• e. key internal or outsourced operating tools and processes (essential IT systems); and
• f. key business activities, especially ones that may be difficult to wind-down or that are subject to high internal/external interconnectedness.

Where a recovery plan is available, if appropriate, competent authorities should rely on the recovery plan scenarios by further stressing them to reach a wind-down (i.e. situations where recovery options will not be available).

6.2.2 Identification of the adequate time-horizon to wind-down

Competent authorities should determine the adequate time horizon for the investment firm to orderly wind-down. In particular, competent authorities should assess whether a time-horizon longer than three months would be needed to orderly wind-down investment firms’ businesses.

To determine the expected time-horizon of orderly wind-down, competent authorities should take into account the aspects detailed in paragraphs 165 to 167, which can impact the duration of wind-down. Competent authorities may also rely on the average time-horizon of orderly wind-down previously conducted for investment firms with similar characteristics within their jurisdiction.

6.2.3 Assessment of the impact of a wind-down on clients, counterparties, and markets

Competent authorities should determine the various stakeholders that could be impacted by the investment firm’s wind-down, under the analysed scenarios. While performing their impact assessment, competent authorities should consider at least the investment firm’s main clients, other counterparties and markets.

Competent authorities should perform an assessment of the impact of a wind-down on the investment firm’s clients. Such assessment should include at least the following aspects, to the extent the relevant information is available:

• a. the ability of the investment firms to close outstanding transaction and the consequences such closure may have on clients and on the investment firm itself (i.e. whether the investment firm will suffer from termination penalties, or legal fees);
• b. where contracts are non-cancellable, the ability of the investment firm to handover all of them to another financial institutions and at what costs; and
• c. the ability of the investment firm to timely return client money held and assets under the investment firm’s custody, in line with the rules introduced under Directive 2014/65/EU.

Competent authorities should perform an assessment of the impact of a wind-down on the markets on which the investment firm is operating. Competent authorities should particularly focus on the following situations:

• a. where a high share of the investment firm’s business is performed in one or some specific markets; and
• b. where the investment firm is a major business provider in a specific market.

6.2.4 Assessment of the impact of a wind-down on the investment firm

Based on the analysis of the investment firm’s organisational structure and operating model, competent authorities should determine the key risks to the investment firm in case of a wind-down. Competent authorities should consider the following aspects, to the extent they are relevant for the investment firm and the information is available:

• a. the ability of the investment firm to cover its operating costs, including the costs of maintaining its key internal or outsourced process and IT systems, permitting it to continue to function at a level that allows for an orderly wind-down;
• b. the investment firm’s ability to timely dispose of its fixed assets and absorb associated losses;
• c. the investment firm’s ability to manage/dismiss its employees, considering the requirements of the relevant employment legislation, especially in cases where the investment firm has cross-border entities, and the costs it may entail (considering in particular potential severance payments);
• d. the ability of the investment firm to retain key employees to perform the wind-down and the costs it may entail; and
• e. any other operational costs or risks that could arise during the wind-down process.