4.2 Assessment of interconnections

In order to support the requirement referred to in paragraphs 99 to 101 of the EBA resolvability guidelines and to ensure the continuity of the transfer perimeter once separated from the rest of the group as per paragraph 13.b of these guidelines, institutions should be able to explain to resolution authorities the background analysis supporting the identification of the information covered by paragraphs 15, 16 and 44 of the EBA resolvability guidelines and supporting the resolution planning. In particular, subject to proportionality, institutions should be able to:

• - break down core business lines and critical functions into functional processes¹⁰ and map them to organizational units as relevant;
• - assess the role of organizational units and the services they provide;
• - identify the corresponding elements, such as assets, liabilities, staff, resources, systems and applications, involved in the organisational units as relevant.

¹⁰ Functional processes can be defined as the day-to-day activities supporting the business lines.

Institutions should highlight to resolution authorities potential issues in separating elements of the organisational units from the core (first layer) transfer perimeter components (separability conflicts), either because they cannot be easily substituted, because they might entail additional and disproportionate risks, or because their separation would be suboptimal with regards to the resolution objectives. The potential separability conflict identification process should consider the elements laid down in paragraphs 37 to 49 of these guidelines and should leverage as much as possible on recovery planning work. The outcome should feed into the transfer perimeter definition in the resolution plan and the feasibility assessment of the resolution strategy. Depending on the extent of the interconnections and on the variety of resolution scenarios, the assessment of interconnections may be staged over time.

Financial Interconnections

In line with paragraph 100 of the resolvability guidelines, institutions should provide resolution authorities with the identification of the connections safeguarded by Articles 76 to 80 of Directive 2014/59/EU.

In order to (i) avoid unnecessary financial disturbances and to ensure reliability of financial services provided by the transfer perimeter or (ii) limit the funding instabilities of the activities to be continued (including under the AST for the legacy entity), the core transfer perimeter should, when possible and subject to paragraph 41 of these guidelines, be transferred with the connected financial obligations and protections. Therefore, in the resolution planning, institutions with transfer strategies included in their resolution plans should:

• - identify financial linkages between off- and on balance sheet exposures and liabilities and, in particular, guarantees (including, where relevant, references to: scope¹¹ ; duration; early termination rights; change of control or cross-default clauses; or applicable law) given and received distinguishing external guarantees and intra-group guarantees. Intragroup guarantees¹² should be particularly assessed in order to evaluate whether they should be transferred or cancelled without causing unwanted havoc;
• - identify existing hedges not already captured by the safeguards referred to above;
• - identify the organizational units that are responsible for the provision of funding and their contractual interlinkages with other units, taking into account cash in- and outflows and counterbalancing capacity;
• - develop, when necessary, arrangements ensuring the maintenance of existing agreements in and post resolution, the continuity of back-to-back transactions of the separated units, the access to currencies by the separated units.

Legal Interconnections

¹¹ Such as, for instance, letters of comfort.

¹² Intragroup guarantees, in the context of these guidelines, are to be broadly understood as loss transfer mechanisms.

In order to support resolution authorities, institutions should identify legal interconnections between the core transfer perimeter and the rest of the institution including, but not limited to:

• a. At inter-entity level: (i) cross-entity ownership instruments; (ii) tax linkages; (iii) obligations towards the other cooperative members when relevant; (iv) legal relationship between the entities and any solidarity mechanisms or institutional protection schemes (IPS); (v) relevant contracts with exclusion clauses, such as, joint venture or other partnerships, for instance, with insurance companies.
• b. At the level of organisational units: legal interconnections due to existing service obligations under service level agreements or not, employee contracts and collective agreement¹³ , and contractual provisions attached to each unit’s assets and liabilities.

¹³ Pursuant to article 5(1) of Transfers of Undertakings Directive 2001/23/EC (TUPE) and Article 34(4) of Directive 2014/59/EU, the automaticity of the transfer of employee contracts might not apply under a transfer using any of the bridge institution, sale of business, or asset separation tools.

Institutions should identify potential separability conflicts related to the aforementioned elements and deliver to resolution authorities all the needed information in order to clarify the following elements:

• (i) the potential consequences of the transfer perimeter definition on the institution’s ownership structure and on the acquirer independence;
• (ii) whether the second layer of the transfer perimeter could be structured in a way that it does not lead to unnecessary losses due to tax reasons;
• (iii) whether cooperative arrangements should be continued and could benefit the transfer perimeter;
• (iv) whether the membership in IPS, association or similar solidarity arrangements can still be continued for the transfer perimeter and the potential related obligations attached to the transfer perimeter, also assessing, where applicable, whether waivers for the IPS/association (such as those foreseen under Articles 113(7) and 49(3) of Regulation (EU) No 575/2013) are continued or terminated in resolution and what the implications would be;
• (v) whether and to what extent potential litigation risks (including litigation risks stemming from the resolution action itself under the guidance of resolution authorities) weigh on the transfer perimeter.

Resolution authorities should assess to what extent powers under Article 64(1) of Directive 2014/59/EU to amend or cancel contracts could be used in order to better define the second layer of the transfer perimeter and remove unnecessary interconnections.

Operational Interconnections

Additionally to mapping full-time equivalents (FTEs) to the transfer perimeter components (see paragraph 35 of these guidelines), institutions should provide information about the expertise required for the performance of the activities included in the transfer perimeter. Ultimately, it is the understanding of the expertise that will feed into the assessment of staff substitutability and the mitigation of separability conflicts.

Business Interconnections

Institutions should identify business interconnections, such as any cross-organisational unit link wherein a business line is operated through multiple organisational units or whose revenue is driven by the activities exercised by different organisational units, including synergies or cross-activity customers.

Resolution authorities should consider the methodology for the definition of the transfer perimeter in light of business interconnections, so that (i) the perimeter to be transferred to the AMC does not affect negatively the franchise of the business (including critical functions and core business lines) remaining with the institution subject to resolution meant to be continued, (ii) or alternatively that leaving units with the institution subject to resolution is not detrimental to the franchise of the business (including critical functions and core business lines) transferred to potential acquirer(s) or the BI.