Financial Industry Developments

Prohibition on Dealing or Investing in Industrial or Commercial Metals

On January 3, 2017, the Office of the Comptroller of the Currency (the "OCC") finalized a rule that prohibits national banks and federal savings associations from dealing or investing in industrial or commercial metals. An "industrial or commercial metal" is "a metal (or alloy), including copper, in a form primarily suited to industrial or commercial use." Examples of metals and alloys considered to be "industrial or commercial metals" include copper cathodes, aluminum T-bars and gold jewelry. The rule becomes effective on April 1, 2017, and includes a divestiture period requiring national banks and federal savings associations to dispose of industrial or commercial metals acquired through dealing or investing activities "as soon as practicable, but not later than one year from the effective date of the regulation." However, the OCC may grant up to four separate one-year extensions of this period for national banks or federal savings associations making a good faith effort to divest of the industrial or commercial metals and where the banks' or savings associations' retention of these metals is not inconsistent with their safe and sound operation. Press Release. Rule.

Annual Asset-Size Threshold Adjustments for Small and Intermediate Small Banks

On December 29, 2016, the Office of the Comptroller of the Currency, the Federal Reserve System and the Federal Deposit Insurance Corporation amended their Community Reinvestment Act (CRA) regulations to adjust the asset-size thresholds used to define "small bank" or "small savings association" and "intermediate small bank" or "intermediate small savings association." The adjustment is based on an annual percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers. As a result of the 0.84 percent increase for the period ending in November 2016, "small bank" or "small savings association" means "an institution that, as of December 31, 2016, of either of the prior two calendar years, had assets of less than $1.226 billion," and "intermediate small bank" or "intermediate small savings association" means "a small institution with assets of at least $307 million as of December 31 of both of the prior two calendar years and less than $1.226 billion as of December 31, 2016, of either of the prior two calendar years." Press Release. Rule.

New York Department of Financial Services Issues Updated Proposed Cybersecurity Regulation

On December 28, 2016, the New York State Department of Financial Services ("DFS") announced that it has updated its proposed first‑in‑the‑nation cybersecurity regulation. The proposed regulation, which will be effective March 1, 2017, will require banks, insurance companies and other financial services institutions regulated by DFS to adopt a cybersecurity program by assessing its specific risk profile and designing a program to address these risks accordingly.

According to the DFS, "This updated proposal allows an appropriate period of time for regulated entities to review the rule before it becomes final and make certain that their systems can effectively and efficiently meet the risks associated with cyber threats."

Among the changes made, the definition of "Exemptions" has been expanded to provide:

• that "Covered Entities" that have less than the specified number of employees, gross annual revenue or year‑end total assets shall be exempt from the requirements of enumerated sections;
• an exemption for an employee, agent, representative or designee of a Covered Entity, who is itself a Covered Entity;
• an exemption from enumerated sections for a Covered Entity that does not directly or indirectly operate, maintain, utilize or control any "Information Systems" and that does not, and is not required to, directly or indirectly control, own, access, generate, receive or possess "Nonpublic Information";
• a requirement that Covered Entities that qualify for an exemption file a "Notice of Exemption"; and that a Covered Entity that ceases to qualify for an exemption must comply with all applicable requirements of the proposed rule.

The updated proposed regulation will be finalized following a 30-day notice and public comment period. Press Release. DFS Assessment of Public Comments. DFS Summary. Proposed Regulation (As Revised).

Rating Agency Developments

On January 4, 2017, KBRA updated its methodology for rating Single-Family Rental (SFR) securitizations. Report.

On January 4, 2017, KBRA updated its methodology for rating U.S. CMBS multi-borrower securitizations. Report.

On December 30, 2016, DBRS updated its Canadian surveillance methodology for CDOs of large corporate credit. Report.

On December 29, 2016, Fitch updated its rating criteria for U.S. equipment lease and loan ABS. Report.

RMBS and Other Securities Litigation

First Department Affirms Partial Dismissal of RMBS Repurchase Claims

On December 29, 2016, the New York Supreme Court, Appellate Division, First Department, in a 4‑1 decision, affirmed a 2015 New York Supreme Court order dismissing certain claims in an RMBS action brought by Trustee U.S. Bank National Association, solely in its capacity as Trustee of the J.P. Morgan Alternative Loan Trust 2007-A2 (the "Trustee") against originator Greenpoint Mortgage Funding ("Greenpoint"). On May 31, 2013, the last day before the statute of limitations expired, the Trustee filed suit alleging that Greenpoint had breached certain representations and warranties with respect to mortgage loans that it originated. The Trustee, however, did not send out any breach notices until after it filed its action, and none of the breach notices provided for a 60‑day cure period, as required under the applicable Mortgage Loan Sale Agreement. The First Department affirmed the Supreme Court's order dismissing the Trustee's claims that Greenpoint was notified of breaching mortgages, but failed to cure. The panel held that the breach notices and the 60‑day cure period were conditions precedent to filing the lawsuit, and the breach notices could not "relate back because the inherent nature of a condition precedent to bringing suit is that it actually precedes the action." The First Department, however, also affirmed the Supreme Court's denial of Greenpoint's motion to dismiss to the extent that the Trustee's breach of contract claims were predicated on allegations of Greenpoint's independent discovery of breaches. The First Department held that such allegations do not require breach notices to be sent before an action is commenced. The panel also held that allegations that Greenpoint created and had full access to the loan files, and therefore knew or should have known of the breaches, were sufficient to withstand a motion to dismiss. Order.

Deutsche Bank Settles DOJ RMBS Claims for $7.2 Billion

On December 23, 2016, Deutsche Bank AG ("Deutsche Bank") announced that it had reached a settlement in principle with the United States Department of Justice ("DOJ") to resolve possible civil claims arising from Deutsche Bank's issuance and underwriting of RMBS in the years leading up to the financial crisis. The $7.2 billion settlement includes a $3.1 billion civil penalty, with an additional $4.1 billion paid in the form of consumer relief (including loan modifications and other types of borrower assistance).

European Financial Industry Developments

ESMA Publishes New Methodology for Mandatory Peer Reviews of CCPS Authorization and Supervision Under EMIR

On January 5, 2017, the European Securities and Markets Authority ("ESMA") published its methodology (ESMA71-1154262120-155) for mandatory peer reviews relating to the authorization and supervision of central counterparties ("CCPs") under the European Market Infrastructure Regulation ("EMIR") (the Regulation on OTC derivative transactions, CCPs and trade repositories (Regulation 648/2012)).

The scope of peer reviews under EMIR is defined, and ESMA has a specific role to further supervisory cooperation. Based on the experience of the first peer review undertaken in 2016 in the context of EMIR, ESMA's Board of Supervisors decided that a methodology for the new type of peer reviews should build on the existing methodology. Further reviews will be conducted on, at least, a yearly basis.

The methodology sets out information relating to the legal basis and scope of the review, the topics covered, the assessment specifications and the approach taken to the questionnaire and report.

The application of the methodology will be restricted to peer reviews undertaken in the application of Article 26 of EMIR. This scope may be reconsidered by ESMA at a later date, when the mandatory peer reviews relating to other EU legislation need to be launched (for example, in relation to the Alternative Investment Fund Managers Directive (2011/61/EU) and the Regulation on improving securities settlement and regulating central securities depositories (Regulation 909/2014)).

EBA Requests European Commission to Revise Deadlines for the Submission of Certain Draft Technical Standards Under the CRD IV and the CRR

On January 3, 2017, the EBA published a letter (dated December 23, 2016) that was sent to the Director-General Financial Stability, Financial Services and Capital Markets Union ("FISMA"), by Andrea Enria, EBA Chairman, requesting the revision of deadlines for the submission of certain draft technical standards required under the CRD IV and the CRR.

In the letter, the EBA states that it cannot deliver on all the mandates required under the CRD IV and the CRR due to a "significant workload" and "considerable resources constraints" and goes on to request submission within new time limits for the following mandates, which were due to be delivered by the end of December 2016:

• Regulatory technical standards ("RTS") and implementing technical standards (ITS) on the authorization of credit institutions. The EBA currently expects to be able to accomplish these mandates during 2017, most likely around mid-2017.
• RTS on consolidation methods under Article 382(5) of the CRR. The EBA currently expects to deliver on this mandate by the end of 2017, subject to developments relating to revisions of the CRR.
• RTS on the exclusion of transactions with non-financial counterparties established in third countries under Article 382(5) of the CRR. The EBA expects to submit the RTS during Q1 2017.
• RTS on disclosure of encumbered and unencumbered assets under Article 443 of the CRR. The EBA intends to deliver these during Q1 2017.

The letter goes on to address some of the remaining mandates given to the EBA under the CRD IV and the CRR, which, in the light of EU and international developments, were assessed as less meaningful by the supervisory community. Mr. Enria notes that these are continuously re‑prioritized due to scarce EBA resources. He highlights the following:

• With regard to the credit risk mitigation ("CRM") framework, in particular the RTS on immaterial portfolios for the internal ratings approach, RTS on conditional guarantees and RTS on eligible collateral within the CRM framework.
• With regard to the operational risk area, in particular the RTS on the combined use of different approaches.

ECB Consults on Changes to the Regulation on Oversight Requirements for Systemically Important Payment Systems

On January 3, 2017, the ECB published a consultation paper on the revision of the Regulation on oversight requirements for SIPS ("SIPS Regulation").

There are four payment systems that fall under the SIPS Regulation, which are TARGET2, EURO1, STEP2-T and CORE(FR). The SIPS Regulation aims to ensure the efficient management and smooth operation of SIPS in the euro area.

A press release published with the consultation paper states that, under the SIPS Regulation, the general application of the SIPS Regulation must be reviewed every two years and amended if needed. Among other things, the revised version sets clearer requirements on liquidity risk mitigation and new requirements on cyber resilience, and assigns additional powers to the competent authorities.

As part of the revision, the ECB has also published a consultation paper on its decision relating to the methodology used to calculate sanctions that can be imposed in cases of non‑compliance with the SIPS Regulation.

The consultation closes on February 20, 2017.