U.S. Financial Industry Developments
Chairman Giancarlo Statement on Virtual Currencies
On January 4, 2018, the Commodity Futures Trading Commission (CFTC) Chairman, J. Christopher Giancarlo, issued a statement on virtual currencies. "The CFTC's Market Risk Advisory Committee (MRAC), sponsored by CFTC Commissioner Rostin Behnam, has announced that it will hold a meeting on January 31, 2018 to consider the process of self-certification of new products and operational rules by Designated Contract Markets (DCMs) under the Commodity Exchange Act (CEA) and CFTC regulations . . . . The MRAC meeting is scheduled to take place the week after a January 23, 2018 meeting of the CFTC Technology Advisory Committee (TAC), sponsored by CFTC Commissioner Brian Quintenz, which will consider the related challenges, opportunities, and market developments of virtual currencies. Both the MRAC and TAC January meetings are timely and have the support of the full Commission. My fellow Commissioners and I look forward to thorough and thoughtful discussions."
The Statement is of particular significance because on December 1, 2017, the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for bitcoin futures products, and the Cantor Exchange (Cantor) self-certified a new contract for bitcoin binary options. At that time, CFTC Chairman Giancarlo stated that "we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets. The Statement also emphasized that "the Commission will continue to assess whether further changes are required to the contract design and settlement processes . . . These activities include monitoring and analyzing the size and development of the market, positions and changes in positions over time, open interest, initial margin requirements, and variation margin payments, as well as stress testing positions." Press release.
European Financial Industry Developments
ESMA Publishes Report on Short Selling Regulation
A final report was published by ESMA on December 21, 2017, which contained further technical advice on the Short Selling Regulation. In relation to a number of topics which had been flagged as potentially controversial, the report, which was based on feedback received from market participants, proposes a number of amendments with an aim to improve coherency and efficiency. The key areas which are focused on within the report are the exemption for market making activities, bans on short-term short-selling and transparency of short positions which are held by market participants. The full report is available here.
BRRD and CRR Legislation come into Force
Following publication in the Official Journal of the EU on December 27, 2017, Directive (EU) 2017/2399 and Regulation (EU) 2017/2395, amending the Bank Recovery and Resolution Directive ("BRRD") and the Capital Requirements Regulation ("CRR") respectively, came into force on 28 December 2017.
The directive amending the BRRD relates to the ranking of debt following an insolvency whereas the CRR amendment is focused on the necessary transitional arrangements for mitigating the introduction of IFRS 9. The BRRD Directive must be brought into force by the EU Member States by December 29, 2018, whereas the CRR amendment became applicable to EU Member States on January 1, 2018.
ESMA Provides Further Information on Transitional Transparency Calculations
ESMA has recently provided a number of updates to its frequently asked questions as well as a press release in relation to the transitional transparency calculations ("TTCs") which are relevant to MiFid II and MiFIR. The TTCs are required for equity and bond instruments under the aforementioned regulations.
ESMA has referred market participants to these updated FAQs, noting that the updates generally relate to the classification of instruments, whilst also including amendments and updates to some of the data referenced within the FAQs.
Impact Finance
Recent Tax Legislation May Boost Impact Finance
The U.S. Tax Cuts and Jobs Act (the "Act"), signed into law on December 22, 2017, creates a process to designate certain low-income community census tracts as "qualified opportunity zones" and lets investors temporarily defer taxes by investing capital gains in these designated qualified opportunity zones. The provision is designed to encourage investment in these low-income areas. The provision was based on the Investing in Opportunity Act that was introduced in 2016.
For a tract to be designated as a qualified opportunity zone, the state governor nominates the tract for designation within 90 days after the enactment of the Act, and then the U.S. Treasury must approve the designation within 30 days. The designation remains in effect for 10 years. Up to 25 percent of the total number of low-income census tracts in a state can be designated. The Act allows for temporary deferral and some reduction of capital gains that are reinvested in qualified opportunity funds (entities with at least 90 percent of their assets invested in qualified opportunity zone property) and held for five to seven years, and permanent exclusion of capital gains from sale or exchange of investments in qualified opportunity funds that are held for at least 10 years.
The final Act also preserved certain tax credits related to community development and renewable energy that earlier versions had proposed eliminating. The Act retains low-income housing tax credits, as well as private activity bonds, used to finance affordable housing; new markets tax credits; and investment tax credits and production tax credits for renewable energy projects. The Act also preserves the 20 percent historic rehabilitation tax credit but implements a longer claim period and eliminates the 10 percent credit (subject to transition rules).
Rating Agency Developments
On December 27, 2017 DBRS published an updated rating methodology for Operational Risk Assessment for U.S. ABS Originators. Release.
On December 29, 2017 Moody's published a performance review for Global Structured Finance Collateral. Release.
On January 3, 2018 DBRS published an updated rating methodology for Structured Finance Flow-Through Ratings. Release.
