Financial Industry Developments
SEC Adopts T+2 Settlement Cycle for Securities Transactions
On March 22, 2017, the Securities and Exchange Commission (SEC) adopted an amendment to Rule 15c6‑1(a), shortening the standard settlement cycle for most broker-dealer securities transactions by one business day, beginning on September 5, 2017. The amended rules shorten the settlement cycle from three business days (T+3) to two business days (T+2). The purpose of the amended rule is to enhance efficiency, reduce risk and ensure coordinated and expeditious transition by market participants to a shortened standard settlement cycle. Release.
Banking Agencies Issue Joint Report to Congress Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996
On March 21, 2017, the Office of the Comptroller of the Currency (OCC) announced that the Federal Financial Institutions Examination Council ("FFIEC") issued a "EGRPRA Joint Report to Congress," which details a review of rules affecting financial institutions conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which requires federal banking agencies and the FFIEC to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations. The review focused on the effect of regulations on smaller institutions, such as community banks and savings associations. The report describes joint actions planned or taken by the federal financial institutions regulators, including simplifying regulatory capital rules for community banks and savings associations, streamlining reports of condition and income, increasing the appraisal threshold for commercial real estate loans and expanding the number of institutions eligible for less frequent examination cycles. Release. Full Report.
Rating Agency Developments
On March 22, 2017, DBRS issued a report entitled DBRS Criteria: Commercial Paper Liquidity Support for Non‑Bank Issuers. Report.
On March 22, 2017, Fitch issued a report entitled Fitch Updates US RMBS Seasoned, Re-Performing, and Non‑Performing Loan Rating Criteria. Release.
On March 22, 2017, Moody's issued a report entitled Construction Industry. Report.
On March 20, 2017, Fitch issued a report entitled Fitch Updates SF and CvB Counterparty Criteria and Addendum. Release.
On March 16, 2017, DBRS issued a report entitled DBRS Criteria: Support Assessments for Banks and Banking Organisations. Report.
On March 16, 2017, DBRS issued a report entitled General Corporate Methodology. Report.
On March 16, 2017, DBRS issued a report entitled North American Single-Asset/Single-Borrower Methodology. Report.
On March 16, 2017, DBRS issued a report entitled Rating Companies in the Canadian Grain Handling Industry. Report.
On March 16, 2017, Fitch issued a report entitled Fitch Updates Single- and Multi-Name Credit Linked Notes Rating Criteria. Release.
On March 16, 2017, Moody's issued a report entitled Global Alcoholic Beverage Industry. Report.
On March 16, 2017, Moody's issued a report entitled Regulated Electric and Gas Networks. Report.
RMBS and Other Securities Litigation
SDNY Finds Three of Commerzbank AG's RMBS Claims Against The Bank of New York Mellon Timely Under German Three-Year Statute of Limitations
On March 21, 2017, Judge George Daniels of the United States District Court for the Southern District of New York partially granted and partially denied defendant's motion to dismiss in Commerzbank AG v. The Bank of New York Mellon. With respect to the central breach of contract claims, Judge Daniels held that The Bank of New York Mellon ("BNYM") had not carried its burden for dismissal under applicable German law, as it had failed to prove that Commerzbank AG had sufficient knowledge of each element of each of its claims with respect to each Trust, "such that it could have commenced [the] action with an expectation, or some prospect, of success," three years prior to filing. The court also denied the BNYM's motion to dismiss for failure to state a claim with respect to Commerzbank's claims for breach of contract, and negligence for failure to avoid conflicts of interest. It granted BNYM's motion to dismiss Commerzbank AG's claims for the violation of the covenant of good faith, violation of the Streit Act, and breach of fiduciary duty. Memorandum Decision and Order.
SDNY Grants Trustees' Motion to Dismiss Triaxx CDOs' RMBS Claims for Lack of Standing
On March 21, 2017, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York issued a Memorandum and Order granting defendants' motion to dismiss plaintiffs' First Amended Complaint in Triaxx Prime CDO 2006-1, Ltd., et al. v. The Bank of New York Mellon and U.S. Bank, for lack of standing. In dismissing the claims, the court held that the plaintiff CDOs – certificateholders in several RMBS trusts for which the defendants, U.S. Bank and Bank of New York Mellon, serve as RMBS trustees – had ceded any right to initiate litigation on their own behalf when they assigned away "all . . . right, title and interest" in the underlying assets to their respective CDO indenture trustees. Judge Buchwald granted leave to file an amended complaint within thirty days so long as any such amended complaint explains how the plaintiffs' cured the standing issue. Order and Memorandum.
RMBS Trustee Defeats Motion to Certify Class
On March 21, 2017, Judge Alison Nathan of the United States District Court for the Southern District of New York denied plaintiff's Motion to Certify Class without prejudice in Royal Park Investments SA/NV v. Deutsche Bank National Trust Company. In a text-only Order, Judge Nathan wrote that Royal Park failed to carry its burden to show that the proposed class is sufficiently ascertainable. The full Memorandum and Order will remain under seal for ten days while the parties confer as to which portions should be redacted prior to public filing. Order.
European Financial Industry Developments
European Commission Publishes Inception Impact Assessment on New Prudential Framework for Investment Firms
The European Commission has published an inception impact assessment on its review of the appropriate treatment for investment firms.
The impact assessment relates to the Commission's review of the prudential framework for investment firms, as required by Articles 293(2), 498(2), 508(2) and 508(3) of the Capital Requirements Regulation ("CRR") (Regulation 575/2013). In November 2016, the European Banking Authority ("EBA") published a discussion paper on a new prudential framework, with the aim of submitting an opinion and report to the European Commission by June 30, 2017.
The impact assessment provides an overview of the background to the initiative and the European Commission's ongoing work. The European Commission states that, in light of the EBA's consultation on the prudential framework, it does not intend to launch its own public consultation. It is, however, carrying out a consultation with industry stakeholders on the proposal. In particular, it intends to liaise with the industry on aspects of the proposal, such as the calibration and impact of any changes to the regime and foreseeable potential costs.
The European Commission states that the bulk of any new rules will take the form of a Regulation. This will be accompanied by a Directive covering elements that need to take the form of a directive for legal reasons, such as organizational and authorization requirements and corporate governance.
The impact assessment indicates that the European Commission will adopt a legislative proposal in the fourth quarter of 2017.
The European Commission is seeking feedback on the impact assessment. The European Commission's website on impact assessments states that the deadline for comments is April 19, 2017.
European Commission Responds to ECON Concerns About MiFID II Systematic Internalizers Operating Broker Crossing Networks
The European and Monetary Affairs Committee (ECON) has published correspondence between the European Parliament's negotiating team for the Markets in Financial Instruments Directive ("MiFID") II package of measures and Vice-President Valdis Dombrovskis about concerns relating to the potential establishment of networks of systematic internalizers ("SIs") and of other liquidity providers that might circumvent certain MiFID II obligations, in particular concerning the trading of shares.
In a letter dated February 24, 2017, the negotiating team refers to the European Securities and Markets Authority's ("ESMA") letter from February 1 to Olivier Guersent, Director General, Financial Services and Capital Markets Union. The negotiating team and ESMA share the same concern that certain investment firms may be setting up interconnected SIs to cross third-party buying and selling interests via matched principal trading or other types of back-to-back transactions. The negotiating team has asked the European Commission to examine whether these practices comply with the letter and spirit of the MiFID II framework.
Mr. Dombrovskis responded in a letter dated March 16, 2017, setting out the conclusions of an initial investigation into the issue. He explained that a group of exchange operators are concerned about attempts to establish broker crossing networks in which both SIs and high frequency trading (HFT) firms interact in a manner that market operators describe as multilateral. Market operators are concerned that such networks may not be considered a multilateral trading system by all competent authorities, and so some variants of broker crossing networks may not be required to be authorized as multilateral trading facilities ("MTFs"). On the other hand, investment firms argue that the establishment of electronic links between SIs and other liquidity providers would not amount to the creation of an MTF. Market operators have requested that guidance be issued to the effect that such networks involving the rapid exchange of order information between participating SIs is an MTF and should be authorized as such.
The European Commission proposes to engage in a dialogue with ESMA and competent national regulators to determine the jurisdictions that the alleged broker crossing networks could potentially be established in. The European Commission will then engage with the relevant authorities on how to address the establishment of such networks within the MiFID II rules.
European Commission Republishes CMU Report on Addressing National Barriers to Capital Flows
The European Commission has republished a report as part of its Capital Markets Union (CMU) initiative on addressing national barriers to capital flows.
The European Commission originally published the report in February 2017, but later removed it from its website. The European Commission stated that it was made aware of certain inaccuracies, mainly due to incomplete or conflicting information, and so decided to adopt an amended version. The majority of the changes relate to the removal of references to specific member states.
In the report, the European Commission sets out the initial findings of its expert group of representatives of member states on national barriers to cross-border capital flows and the steps that the Commission expects member states to take to address them. The issues highlighted include barriers to the cross-border distribution of investment funds, national approaches to crowdfunding and residence requirements on managers of financial institutions.
