Financial Industry Developments
Changes Proposed to CAS and STACR Programs
On May 8, 2017, Fannie Mae and Freddie Mac announced that they are considering certain changes to the structure of their CAS and STACR note programs in order to widen the investor base for the notes through which they transfer credit risk to the private sector. The proposed changes to CAS and STACR will also require certain changes to the tax structure of Fannie and Freddie MBS issuances. The intention is, despite the changes to the MBS tax structure, to preserve TBA eligibility of the MBS.
As proposed, a REMIC tax election will be made on mortgage loans purchased by Fannie and Freddie and put into their MBS. As a result, the MBS would, for tax purposes, represent ownership interests in REMIC regular interests rather than in mortgage loans. The CAS/STACR notes would also represent ownership of REMIC regular interests issued by new CAS/STACR trusts, which will make the CAS and STACR notes more attractive to REITs and foreign investors. The new structure would also eliminate Fannie and Freddie counterparty risk in the credit risk transfer programs.
Fact Sheets and FAQs are linked to the Press Releases. Press Release (Fannie). Press Release (Freddie).
Rating Agency Developments
On May 10, 2017, DBRS published its general corporate rating methodology. Report.
On May 10, 2017, DBRS published its methodology for rating companies in the capital goods dealership industry. Report.
On May 10, 2017, DBRS published its criteria for evaluating corporate governance. Report.
On May 10, 2017, Moody's published its ratings methodology for assessing companies in the independent exploration and production industry. Report.
On May 9, 2017, DBRS published an update to its master surveillance methodology for reviewing its ratings of Canadian structured finance and covered bond transactions. Report.
On May 9, 2017, Moody's published its ratings methodology for assessing companies in the global surface transportation and logistics industry. Report.
On May 9, 2017, Moody's published an update to its ratings methodology regarding its approach to pre-refunded and escrow-backed bonds. Report.
On May 8, 2017, DBRS published its methodology for rating Canadian public pension funds and related exclusive asset managers. Report.
On May 5, 2017, DBRS published its methodology for rating credit funds. Report.
On May 5, 2017, Moody's published its ratings methodology for assessing companies in the global oilfield services industry. Report.
European Financial Industry Developments
EBA Publishes Final Guidelines on Credit Insitutions' Credit Risk Management Practices and Accounting for Expected Credit Losses
On May 12, 2017, the EBA published its final guidelines on credit institutions' credit risk management practices and accounting for expected credit losses. The aim of the guidelines is to ensure sound credit risk management practices associated with the implementation and ongoing application of the accounting for expected credit losses. They are part of the EBA's work on the implementation of IFRS 9 and its interaction with prudential requirements, and they build on the guidance published by the Basel Committee on the same matter.
Several credit institutions in the EU apply the IFRS standards, which require the measurement of impairment loss provisions to be based on an expected credit loss accounting model (IFRS 9) rather than on an incurred loss accounting model (IAS 39). The EBA welcomes this approach on credit loss provisioning, as it should also contribute to addressing the G20's concerns about the issue of the 'too little, too late' recognition of credit losses, and improve the accounting recognition of credit losses by incorporating a broader range of credit information.
The guidelines set out strong credit risk management practices for credit institutions associated with the implementation and on-going application of the accounting for expected credit losses. They note that high-quality and consistent application of the accounting standards is the foundation for the effective and consistent application of the regulatory capital standards.
EBA Final Guidelines on ICT Risk Assessment Under Supervisory Review and Evaluation Process
On May 11, 2017, the EBA published a report (EBA/GL/2017/05) containing its final guidelines on information and communication technology ("ICT") risk assessment under the supervisory review and evaluation process ("SREP") required under the CRD IV Directive (2013/36/EU).
The guidelines are addressed to competent authorities and aim at promoting common procedures and methodologies for the assessment of ICT risk. They should be read in conjunction with the EBA SREP Guidelines, which continue to remain applicable as appropriate.
The guidelines are contained in section 3 of the report and are structured around three main parts:
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the general provisions for applying the guidelines (Title 1);
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the assessment of the institution's ICT governance and strategy (Title II); and
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the assessment of ICT risk and the controls in place in the context of risks to capital (Title III), which reflects the same structure as the EBA SREP Guidelines on the assessment of operational risk.
Competent authorities should consider the principle of proportionality when applying the guidelines. The depth and detail of the ICT risk assessment should be proportionate to the size, structure and operational environment of the institution, together with the nature, scale and complexity of its activities.
The guidelines are to be translated into the official EU languages and published on the EBA website. They will be in effect on January 1, 2018.
BBA Brexit Quick Brief on UK WTO Profile and FTAS
On May 10, 2017, the British Bankers' Association (BBA) published a Brexit quick brief: "External trade policy and a UK exit from the EU – the UK's WTO profile and beyond".
The UK's decision to leave the EU means that the UK will cease to make trade policy collectively with the EU and will need to reestablish a trade policy within the context of the World Trade Organization ("WTO"). The quick brief considers issues relating to the UK's profile at the WTO and free trade agreements ("FTAs") arising from Brexit and, as applicable, the potential impact on financial services.
It considers issues such as the confirmation of content in the UK's schedule of commitments under the General Agreement on Trade in Services (GATS). It also notes that the UK will need to consider the implications of losing the preferential access granted to UK-based exporters through the FTAs agreed on its behalf by the EU; it is uncertain whether these agreements can simply be translated to the UK. Further, the UK currently has framework arrangements in place with non-EEA countries that are embedded in EU legislation, including arrangements relating to financial market infrastructures and data protection. The quick brief comments on the fact that the UK will need to reestablish those arrangements in order to reflect its status outside the EU. It also notes that the UK will be able to enter into new FTAs with non-EU markets.
