SEC Provides Additional Analysis Related to Proposed Pay Ratio Disclosure Rules

On June 4, the Securities and Exchange Commission provided additional analysis related to its proposed rules for pay ratio disclosure. The staff believes that the analysis will be informative for evaluating the potential effects on the accuracy of the pay ratio calculation of excluding different percentages of certain categories of employees, such as employees in foreign countries, part-time, seasonal, or temporary employees as suggested by commenters. The staff is making the analysis available for public comment – comments may be submitted by July 6. Release. Analysis.

FDIC, Federal Reserve and Office of Comptroller of the Currency Reiterate Annual Public Disclosure Requirements for Medium-Sized Financial Companies Under Dodd-Frank Company-Run Stress Tests

On June 2, the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency reiterated the disclosure requirements for annual stress tests conducted by financial institutions with total consolidated assets between $10 billion and $50 billion pursuant to the Dodd-Frank Act. The medium-sized firms are required to disclose certain information, including: a description of the types of risks included in the stress test; a summary description of the methodologies used in the stress test; estimates of losses, revenue, and net income; post-stress capital ratios; and an explanation of the most significant causes for the changes in regulatory capital ratios. Joint Release.

On June 1, DBRS released its RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology. Report.

On June 1, Fitch released its U.S. RMBS Surveillance and Re-REMIC Criteria. Report.

On June 1, Moody's issued RMBS Rating Methodology Supplement – Israel. Report.

On June 1, S&P issued Revised Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans Incorporated Into LEVELS Version 7.4.3, effective immediately. Report.

On June 1, S&P issued Revised U.S. Residential Mortgage Input File Format, Glossary, And Appendices To The Glossary For LEVELS Version 7.4.3, effective immediately. Report.

On June 2, Fitch released its State Housing Finance Agencies: MBS Pass-Through Bond Rating Criteria. Report.

On June 3, Fitch released its Criteria for Rating U.S. Timeshare Loan ABS. Report.

On June 5, Fitch released its U.S. Nonprofit Institutions Rating Criteria. Report.

On June 5, S&P released its Global Container Lease-Backed ABS Methodology And Assumptions. Report.

Supreme Court Says Underwater Junior Liens Survive Bankruptcy

On March 30, we reported on two cases pending before the U.S. Supreme Court: Bank of America v. Caulkett^[1] and Bank of America v. Toledo-Cardona^[2].  Each involved chapter 7 bankruptcy cases in which the debtors had no equity in their homes because the houses were worth less than the amount outstanding on the senior mortgage loans—that is, the second lien-lenders were "unsecured" or totally "underwater".   

In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts, but the debtor's non-exempt assets are liquidated by a bankruptcy trustee, who then distributes the proceeds to creditors. In Dewsnup v. Timm^[3], the Supreme Court held that Bankruptcy Code § 506 does not permit an individual chapter 7 debtor to reduce (or "strip down") a first-lien mortgage loan to the value of the real property where the amount owed ($119,000) is greater than the property value ($39,000).  Caulkett and its companion case addressed whether the outcome should be different where the debtor seeks to void (or "strip off") a second lien mortgage that is wholly underwater.

On its decision announced on June 1, the Supreme Court found the question effectively controlled by its prior holding in Dewsnup.  Noting that the debtors had not asked it to overrule Dewsnup, the Court held by unanimous decision^[4] that a debtor in a chapter 7 bankruptcy case may not void second mortgage liens under Bankruptcy Code section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral.  The Court rejected respondents' attempts to limit Dewsnup's interpretation to partially underwater mortgages, concluding that there was no principled way to distinguish those from wholly underwater mortgages within the terms of the Bankruptcy Code.  In Dewsnup, the Court defined an "allowed secured claim" under section 506(d) as "claim supported by a security interest in property, regardless of whether the value of that collateral would be sufficient to cover the claim".  Thus, section 506(d) voids underwater liens only where the underlying debt is invalid under applicable law.  Read More.

CFTC Staff Issues No-Action Relief from Introducing Broker and Commodity Trading Advisor Registration to Persons Located Outside the United States Engaged in Activities on behalf of Customers that are International Financial Institutions

On June 4, the Commodity Futures Trading Commission's ("CFTC") Division of Swap Dealer and Intermediary Oversight ("DSIO") issued a No-Action Letter stating that it will not recommend that the CFTC take action for failure to register as an introducing broker or commodity trading advisor against persons located outside the United States that facilitate swap transactions for International Financial Institutions ("IFIs") that have offices in the United States.

The DSIO took the position that the relief is appropriate in light of the unique attributes and status of IFIs, and in consideration of international comity. In addition, the relief granted is consistent with the CFTC's prior treatment of IFIs for purposes of foreign futures and options transactions, the swap dealer definition, and mandatory clearing.

DSIO has defined IFIs, for purposes of the no-action letter, in accordance with prior CFTC policy to be the following institutions and organizations: International Monetary Fund, International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, International Development Association, International Finance Corp., Multilateral Investment Guarantee Agency, African Development Bank, African Development Fund, Asian Development Bank, Inter-American Development Bank, Bank for Economic Cooperation and Development in the Middle East and North Africa, Inter-American Investment Corp., Council of Europe Development Bank, Nordic Investment Bank, Caribbean Development Bank, European Investment Bank and European Investment Fund (International Bank for Reconstruction and Development, International Finance Corp. and Multilateral Investment Guarantee Agency are parts of the World Bank Group).

HSBC Motion to Dismiss Denied in Part in Trustee RMBS Suits by Blackrock, Royal Park Investments, and Phoenix Light

On June 1, 2015, Judge Shira Scheindlin of the United States District Court for the Southern District of New York issued a Decision and Order granting in part and denying in part HSBC Bank USA, National Association's ("HSBC") motion to dismiss three related actions brought by BlackRock, Royal Park Investments SA/NV, and Phoenix Light SF Ltd., claiming $34 billion in damages.  The suits allege that HSBC breached a fiduciary duty to investors as a trustee in 283 residential mortgage backed securities trusts by failing to require lenders and bond issuers to buy back loans that breached representations and warranties. Judge Scheindlin rejected HSBC's argument that the plaintiffs had failed to plead breaches of representations and warranties on a sufficiently granular basis and also held that plaintiffs had sufficiently alleged that the bank had specific knowledge of breaches of the representations and warranties. Judge Scheindlin dismissed claims for negligent misrepresentation and negligence as time-barred.  Judge Scheindlin gave the plaintiffs 30 days to amend their complaint to attempt to cure the deficiencies in their dismissed claim.  Order.

European Commission Extends Transitional Period for Capital Requirements for Banks' Exposures to CCPs

On June 4, 2015, the European Commission published the provisional text of the Implementing Regulation it has adopted to extend the transitional period for capital requirements for EU banking groups' exposures to central counterparties (CCPs) under the Capital Requirements Regulation (Regulation 575/2013) (CRR).

The current transitional period, which was introduced by an earlier Implementing Regulation, expires on June 15, 2015. The new Implementing Regulation will extend the transitional period by six months to December 15, 2015.

In an accompanying press release, the Commission explains that capital charges for exposures to CCPs are higher if the CCP is not authorized or recognized under EMIR (that is, for a CCP not considered as "qualifying"). Since the authorization and recognition processes take time, the CRR provides a transitional period during which the higher capital requirements will not be applied, to ensure a level playing field. As the authorization and recognition processes for existing CCPs serving EU markets will not be fully completed by June 15, 2015, the Commission has extended the transitional phase to December 15, 2015.

EBA Publishes Risk Dashboard of EU Banking Sector for Q1 2015

On June 4, 2015, the European Banking Authority (EBA) published its risk dashboard for the first quarter of 2015, summarizing the main risks and vulnerabilities in the banking sector, together with a press release.

The risk dashboard is based on data from the fourth quarter of 2014 and takes into consideration the evolution of a set of key risk indicators from 55 EU banks. It confirms, among other things, that:

1.  EU banks' capital positions remained strong, with a common equity tier 1 (CET1) ratio of 12.1%. This is an increase of 50 basis points compared to 2013.

2. The quality of banks' loan portfolios remained weak but bottoming out.

3. Profitability showed a mildly positive trend on a year over year comparison, but return on equity remained subdued and materially below banks' average cost of equity.

4. In 2014, at an EU level, deposits increased more than loans. The EU average loan‐to‐deposit ratio therefore decreased further in Q4 2014 to 108.6%, which is the lowest ratio since 2009.

The EBA risk dashboard is part of the regular risk assessment carried out by the EBA and complements the EBA's risk assessment report.

Orrick Breakfast Briefing:  "BitLicense and the Virtual Currency Regulatory Landscape"

What does the BitLicense require and how will the newly finalized New York State BitLicense regulations affect participants in the virtual currency space? Besides BitLicense, what regulatory requirements are being developed or imposed in other jurisdictions?  This program is meant to inform businesses, investors, entrepreneurs, lawyers and prognosticators on the state of virtual currency regulation. New York CLE credit will be offered.

To RSVP for this event, please click here.