Financial Industry Developments

OCC Discusses Marketplace Lending

On September 13, 2016, Comptroller of the Currency Thomas J. Curry discussed marketplace lending's risks and associated policy questions. He delivered his remarks at the inaugural Marketplace Lending Policy Summit. Remarks.

CFTC Considers Blockchain Technology

The disruptive effects of blockchain technology on the financial system may take several years to materialize. Nevertheless, in preparation, regulators are increasingly focused on understanding potential uses of blockchain technology and considering related legal issues.  Many regulators are already familiar with bitcoin, the popular virtual currency underpinned by blockchain or "distributed ledger" technology ("DLT"). In particular, the Commodity Futures Trading Commission ("CFTC") has begun to consider the implications of DLT with respect to the derivatives markets.  The full article provides an overview of DLT, followed by a summary of certain points, including legal considerations, of a recent meeting of the CFTC Technology Advisory Committee and several speeches by CFTC Commissioner J. Christopher Giancarlo concerning the topic.

To continue reading the full article, click here.

Rating Agency Developments

On September 14, 2016, DBRS published its methodology for rating European structured finance transactions. Report.

On September 14, 2016, DBRS published and is requesting comment on its methodology for rating European sub-sovereign governments. Report.

On September 14, 2016, Fitch updated its rating criteria for future flow securitizations. Report.

On September 14, 2016, Fitch updated its rating criteria for Mexican RMBS. Report.

On September 13, 2016, Moody's published its rating methodology for RMBS using the MILAN framework. Report.

On September 9, 2016, Fitch updated its rating criteria for obligations of closed-end funds (CEFs) and market value structures (MVS). Report.

On September 8, 2016, Moody's published its rating methodology for tobacco settlement revenue securitizations. Report.

Investment Management

Fed Recommends Repeal of Merchant Banking Authority

On September 8, 2016, the Federal Reserve recommended to Congress that it repeal the authority of U.S. and foreign-owned financial holding companies to engage in merchant banking activities, permissible since the enactment of the Gramm-Leach-Bliley Act of 1999.  The Fed reported that, as of year-end 2015, 16 domestic FHCs and 5 foreign-owned FHCs engaged in merchant banking investment activities.  Focusing on the authority of an FHC to routinely manage or operate a portfolio company under the circumstances permitted under its regulation, the Fed expressed a general concern that an FHC could be exposed to "substantial legal and environmental risk" from its merchant banking investment, but it did not identify or quantify specific losses which FHCs have experienced in their merchant banking activities.  In addition, the Fed referred to its continuing consideration of regulatory measures that would limit merchant banking risks, as well as those associated with physical commodity-related activities.

The recommendation was included in a report to Congress and the Financial Stability Oversight Council by the Fed, the OCC and FDIC (the "Report"). Section 620 of the Dodd-Frank Act required the federal banking agencies to conduct the study and report to Congress on the types of activities and investments permissible for banking entities, the associated risks, and how banking entities mitigate those risks, and to include their recommendations regarding, among other considerations, the appropriateness of the conduct of each activity by banking entities.  

The OCC identified in the Report four "potential enhancements to the prudential regulatory scheme and certain precedent that merit reconsideration or clarification," and said it plans, among other things, to issue a proposed rule to prohibit federal banking entities from holding asset-backed securities that hold bank-impermissible assets.  Implementing another of its recommendations in the report, the OCC on the same day issued a proposed rule to prohibit national banks and federal thrifts from dealing and investing in industrial or commercial metals such as copper and aluminum.

European Financial Industry Developments

Deposit Guarantee Scheme Co-Operation Agreement Published by EFDI

On September 15, 2016, the European Forum of Deposit Insurers (EFDI) published its model deposit guarantee scheme co-operation agreement and supporting rulebook.

The recast Deposit Guarantee Scheme Directive (2014/49/EU) requires EU deposit guarantee schemes (DGS) to repay depositors in a cross-border branch through the DGS in the home state country.

The EFDI model co-option agreement covers the cross-border payment framework, mutual lending and the transfer of contributions between DGS. It also contains methodology implementing technical and functional co-operation for cross-border payments together with IT data requirements, funding and crisis communications.

European Parliament Announces Decision to Reject Delegated Resolution of RTS on Key Information Documents for PRIIPs

On September 14, 2016, the European Parliament announced its decision to reject the European Commission's proposed Delegated Regulation supplementing the Regulation on key information documents (KIDs) for packaged retail and insurance based products (PRIIPs) (Regulation 1286/2014) (PRIIPs KID Regulation). The text of the legislative resolution rejecting the proposed Delegated Regulation sets out a number of reasons why the Parliament decided to reject the Delegated Regulation, including:

• The need for detailed guidance on the "comprehension alert" without which there is a risk of inconsistent implementation of this component in the KIDs within the single market;
• The need for clarification surrounding the treatment of multi-option products; and
• The risk that the rules within the Delegated Regulation are contrary to the purpose of the legislation which is to provide retail investors clear, comparable, non-misleading and understandable information on PRIIPs.

As well as calling on the Commission to submit a new delegated regulation, the European Parliament also calls on the Commission to postpone the application date of the PRIIPs KID Regulation, to ensure that the requirements in the Regulation and Delegated Regulation are implemented smoothly and avoid the application of level 1 without RTS being in force.

European Commission Calls to Accelerate the Capital Markets Union Reforms

On September 14, 2016, the European Commission published a communication calling for an acceleration of the capital markets union (CMU) reforms (COM(2016) 601 final) in light of the current political and economic context.

Elements of particular interest to financial services practitioners include:

• The Commission will support the co-legislators in reaching an agreement by the end of 2016 on the modernization of the prospectus rules;
• The Commission calls on both the European Parliament and the European Council to finalize the Regulation amending the European Social Entrepreneurship Funds Regulation (Regulation 346/2013) (EuSEF Regulation) and the European Venture Capital Funds Regulation (Regulation 345/2013) (EuVECA Regulation) also by the end of 2016;
• The prospect of a legislative proposal being tabled in 2017 relating to a simple, efficient and competitive EU personal pension product;
• To reduce capital charges attaching to investments by insurers in infrastructure corporates, the Commission will adopt an amendment to the Solvency II Delegated Regulation (Regulation (EU) 2015/35);
• In the hope of strengthening retail investor participation in capital markets and opening up the EU market for retail financial services, the Commission will present an action plan on retail financial services. 

The Annex to the communication also provides an update on the CMU action plan initiatives.

Implementation Regulation Specifying Main Indices and Recognized Exchanges under CRR Published in OJ

On September 14, 2016, Commission Implementing Regulation (EU) 2016/1646 laying down implementing technical standards with regard to main indices and recognized exchanges in accordance with the Capital Requirements Regulation (Regulation 575/2013), was published in the Official Journal of the EU (OJ). The Implementing Regulation will enter into force on October 4, 2016.