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WDPG App 5.1 Generating wind-down scenarios and identifying relevant management information to monitor

01/01/2022G

To generate wind-down scenarios, a firm may consider the following:

  1. (1)

    which are the critical revenue drivers and business lines for the firm to sustain;

  2. (2)

    which are the business areas subject to the greatest risks, e.g. if a sudden large volatility in the currency market will lead to great losses;

  3. (3)

    the infrastructure, resources or third parties upon which the firm heavily depends;

  4. (4)

    the firm’s agreed (qualitative and quantitative) risk appetite and risk thresholds;

  5. (5)

    internal audit reports; and

  6. (6)

    compliance monitoring processes and reporting.

09/12/2016G

The above thinking will help a firm to find out its ‘risk fault lines’, i.e. those critical areas where failure would severely affect the business.

09/12/2016G

Based on the risk fault lines identified, a firm can decide the plausible scenario(s), i.e. the wind-down scenarios, under which its regulated business will likely no longer be viable. We give some examples in the table under WDPG App 5.1.4G.

01/01/2022G

After outlining the wind-down scenario(s), a firm identifies the key management information that is most directly related to those scenario(s) and the relevant indicators it will want to monitor for danger signs.

EffectiveLess effective

Sample wind-down scenarios (covering those that are fast and slow-moving, firm specific and macro-economic) might include:

• severe economic downturn leading to continual losses with no sign of recovery; and

• loss of critical IT infrastructure (especially if the firm’s business is largely technology-based).

Some management information which a firm could constantly monitor:

• profitability; and

• net current and future cash-flow.

[Note: these are not definitive lists. Firms will need to analyse their business and work out their own scenarios.]

The firm takes the view that the firm is running well and will never fail. Even if it were failing, it believes that it could sell the business to another firm in short order or obtain generous cash infusions from a parent.

[Note: No business can categorically guarantee it will never fail. A failing business is not always able to find an acquirer/investor for the business and the process to effect due diligence and a change in control can be very lengthy.]