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FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks

A regulator is designing a single-point-of-entry (SPOE) resolution for a dealer bank holding company. Which description best reflects how SPOE is intended to work?

In single-point-of-entry resolution, only the holding company is put into resolution, and its equity and long-term debt absorb the losses. Operating subsidiaries stay open and keep honoring obligations, which limits runs and disorderly terminations of their contracts.

  1. AEach operating subsidiary is placed into separate bankruptcy proceedings at the same time
  2. BThe holding company is resolved, with its losses absorbed by its equity and long-term debt, while operating subsidiaries continue to operate and meet obligationsCorrect
  3. CThe central bank purchases all repo collateral of the dealer at par
  4. DDerivatives counterparties are stayed while repo lenders are paid first

Explanation

Under SPOE only the top-tier parent enters resolution. Its equity and long-term unsecured debt absorb losses, and recapitalized operating subsidiaries keep trading, avoiding runs on them. Option A describes multiple-point-of-entry style fragmentation, which is the opposite.

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