In this Weekly Roundup Issue. The Commodity Futures Trading Commission’s (CFTC) Division of Enforcement unveiled two new task forces aimed at tackling derivatives market issues; and the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Federal Reserve) and the National Credit Union Administration (NCUA) issued a policy statement on commercial real estate loan accommodations and workouts. These and other developments are discussed in more detail below.
Regulatory Developments
CFTC Announces Two New Task Forces
On June 29, the CFTC's Division of Enforcement unveiled two new task forces aimed at tackling critical issues in the derivatives market. The first, the Cybersecurity and Emerging Technologies Task Force, will focus on cybersecurity and issues associated with emerging technologies including enforcing adequate cybersecurity controls and safeguards, prosecuting technology-related market manipulation and theft of non-public information, exploring the role of technologies like AI and machine learning in regulatory violations, and ensuring proper supervision of emerging technologies use. The second, the Environmental Fraud Task Force, will tackle fraud and misconduct in regulated derivatives markets and relevant spot markets, including voluntary carbon credit markets and will focus on scrutinizing the claimed environmental benefits of carbon credits and the accuracy of statements regarding ESG products or strategies.
“We must be dynamic and proactive in protecting derivatives markets against evolving threats.”
- Rostin Behnam, Chairman, Commodity Futures Trading Commission
The OCC, FDIC, The Federal Reserve and National Credit Union Approve Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts
On June 29, the OCC, FDIC, the Federal Reserve and NCUA (collectively, Agencies) issued the “Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.” The policy statement supersedes previous guidance on workouts of commercial real estate loans issued in 2009, and is largely the same as a proposed policy statement issued in 2022 for comment by the public.
As the Agencies explained, the final policy statement builds on existing supervisory guidance calling for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress, updates existing interagency supervisory guidance on commercial real estate loan workouts, and adds a new section on short-term loan accommodations (including agreements to defer one or more payments, make partial payments or provide assistance or relief to borrowers facing financial difficulties) that may be appropriate before a loan warrants a longer-term or more complex workout arrangement. The final policy statement addresses supervisory expectations related to workout matters and loan accommodations, including risk management, loan classification, regulatory reporting and accounting considerations and reaffirms that financial institutions that implement prudent commercial real estate loan accommodations and workouts and after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engage in such efforts, even if the arrangements result in modified loans with weaknesses and adverse classification, and that modified loans to borrowers with the ability to repay their debts according to reasonable terms will not be subject to adverse classification solely because they value of the underlying loan collateral has declined below the outstanding loan balance. The final policy statement also reflects changes in GAAP since 2009, including those related to the current expected credit losses methodology.
Bank Regulators Issue Guidance for Third-Party Risk Management
On June 6, the Federal Reserve, the FDIC, and the OCC (collectively, Agencies) issued final joint guidance (the Guidance) for third-party risk management, rescinding and replacing prior guidance issued by each of the Agencies.
The Guidance, consistent with past guidance, reminds banking organizations that a bank is required to operate in a safe and sound manner and in compliance with applicable laws and regulations, and the use of a third party does not change that requirement. In other words, a vendor or partner of a bank is effectively viewed by the Agencies as an extension of the bank.
While the Guidance signals an expectation that banks will tailor their risk management practices commensurate with the banks’ size and complexity and with the risk profile of the third-party relationship, the Guidance also presents regulatory expectations for each stage of the bank/third-party relationship, from planning, due diligence, and contract negotiation to ongoing monitoring and termination. These expectations are couched in language that can be read as giving banks optionality, but partners of banks should read them as minimum requirements, because that is how bank examiners — and therefore banks — will view them.
To read more about this guidance in detail, view a recent client alert on the topic.
Missouri Becomes Second State To Enact Law Regulating Earned Wage Access Services
On July 7, Missouri, following closely behind Nevada, became the second state to enact a law (SB 103) establishing a financial services oversight regime for earned wage access services (also known as on-demand pay services), which allow workers to access earned but unpaid income before payday. Missouri’s law imposes registration and other substantive requirements on providers, and it provides important regulatory certainty for these innovative financial services in the state. Along with Nevada’s law, Missouri’s law may shape similar legislation in other states.
A recent client alert shares insight on this new licensing law for EWA services.
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