On 18 March 2024, the Investment Association (IA) published a guide ‘Operational resilience: severe but plausible (SBP) scenarios’.

The guide directly builds upon the IA’s previous member guidance on scenario testing from December 2021 and this new guide represents the IA’s continued contribution to building a common understanding and establishing best practice with regard to severe but plausible scenarios and operational resilience.

The purpose of the guide is to:

  • Address some of the ambiguity surrounding the SBP concept, helping to make operational resilience policy clearer to understand, and potentially, lead to more effective implementation.
  • Identify best practices in calibrating SBP scenarios.
  • Provide baseline information that firms can use as a starting point to calibrate SBP scenarios appropriate for their own businesses, accompanied by supporting guidance and considerations to be thought through.
  • Build a common understanding of the factors and circumstances which are unlikely to be severe enough for effective testing.

The following recommended considerations for firms dealing with SBP scenarios are also set out by the paper, including:

  • At the outset, firms must remember the purpose of testing as a planning tool to better understand the level of disruption they can withstand, and what they cannot.
  • Firms should focus on testing known areas of weakness (more plausible) and exploring new areas (less plausible but potentially more informative).
  • Firms should consider compound scenarios, where multiple incidents occur simultaneously, as a means of increasing severity.
  • Duration can often be the key driver of severity. As such, for firms duration is also a large factor in determining the plausibility of a given scenario.
  • The level of severity a firm concludes is appropriate to calibrate their SBP scenarios is not necessarily the level of severity that the firm will run their tests at.
  • Firms should also consider scenarios that could have a wider impact on other firms, especially as it relates to maintaining or undermining confidence in the firm or the wider financial system, or potentially triggering a disorderly market.
  • Documenting the rationale as to why a particular resource has been selected for the scenario and how it has been calibrated is key.
  • Firms should compile a scenario library covering a range of adverse circumstances of varying nature, severity and duration.