Orrick's Financial Industry Week In Review

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Financial Industry Developments

Special Purpose National Bank Charters for FinTech Companies

On December 2, 2016, Comptroller of the Currency, Thomas J. Curry, announced that the Office of the Comptroller of the Currency would move forward with considering applications from Fintech companies to become special purpose national banks. Report.

The Comptroller explained that the proposed action will provide businesses with the option to seek a charter rather than imposing a mandate. The OCC will evaluate applicants to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity. 

The OCC published a paper discussing the issues and conditions that the agency will consider in granting special purpose national bank charters. Report. Comments on the proposal may be submitted through January 15, 2017.

No-Action Relief Allowing Use of Consolidated Risk Disclosure Statement

On November 30, 2016, the U.S. Commodity Futures Trading Commission's Division of Swap Dealer and Intermediary Oversight provided no-action relief to futures commission merchants (FCMs) and introducing brokers (IBs), allowing them to provide non-institutional customers with a single, consolidated risk disclosure statement containing the same material information required in several risk disclosure statements. The intent is to provide greater efficiency and potentially reduce confusion to customers. Release.

 

Rating Agency Developments

On November 30, 2016, Fitch published its U.S. water and sewer revenue bond rating criteria. Report.

On November 29, 2016, Fitch published its rating criteria for RMBS transactions in Europe, Middle East and Africa (EMEA). Report.

On November 29, 2016, Fitch published its rating criteria for GARVEE bonds. Report.

On November 28, 2016, DBRS published an update to its approach to rating U.S. RMBS transactions. Report.

On November 28, 2016, Moody's published its approach to rating Europe, Middle East and Africa (EMEA) CMBS transactions. Report.

 

Distressed Debt and Restructuring Developments

Third Circuit Departs from Momentive and Reinstates EFIH Noteholder Make-Whole Claims Causing Uncertainty over EFH's Ability to Exit Bankruptcy

Recently, the Third Circuit reversed decisions issued by the Delaware Bankruptcy and District Courts and permitted first and second lien noteholders of Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. to receive payment of a make-whole premium. In re Energy Future Holdings Corp., No.16-1351 (3d Cir. Nov. 17, 2016). The decision, which is largely grounded in New York law, departs from recent controversial decisions issued by the Bankruptcy Court and District Court for the Southern District of New York in the Momentive bankruptcy, which we have previously discussed here and here. In Momentive, the courts reached the opposite conclusion on substantially similar facts. In addition to creating a split between the Third Circuit and the Southern District of New York, the ruling creates uncertainty regarding the ability for the debtors in the long-running EFH bankruptcy to confirm their proposed chapter 11 plan. Read more here.

 

European Financial Industry Developments

European Commission Adopts Delegated Regulation on RTS for the Application of Position Limits to Commodity Derivatives

On December 1, 2016, the European Commission adopted a Delegated Regulation supplementing the MiFID II Directive (2014/65/EU) in relation to regulatory standards ("RTS") for the application of position limits to commodity derivatives (2016) 4362 final).

The MiFID II Directive requires that competent authorities, in line with ESMA's methodology, establish and apply position limits on the size of a net position a person can hold in certain commodity derivatives and economically equivalent OTC (EEOTC) contracts. Article 57(3) and (12) of the MiFID II Directive empowers ESMA to develop RTS providing the basis of the methodology for the calculation and application of the position limits.

In September 2015, ESMA submitted the draft RTS to the Commission. The Commission then notified ESMA in April 2016 that it intended to endorse the RTS, provided that a number of changes were made. ESMA submitted revised draft RTS to the Commission in May 2016. The Commission explains that the amended provisions create a more stringent regime for liquid contracts whose underlying product is food for human consumption. Further, it caps the upper position for new and illiquid contracts to 40%, but stipulates that upper position limits of up to 50% can be imposed on a temporary basis. The proposed methodology also highlights how competent authorities are to consider volatility when setting position limits.

The Council of the EU and the European Parliament are now to consider the Delegated Regulation. Should neither of them object, it will enter into force 20 days after its publication in the Official Journal of the EU (OJ).

European Parliament Votes to Delay PRIIPS Regulation Application Date

On December 1, 2016, the European Parliament published a press release announcing that it has voted to delay the Regulation on key information documents ("KIDs") for packaged retail and insurance-based investment products ("PRIIPs") (Regulation 1286/2014) (PRIIPs Regulation).

The press release highlights that MEPs had criticized previous proposed standards requiring providers of PRIIPs to produce a KID as "flawed and misleading." The Parliament has also published the text of the legislative resolution delaying the application date of the PRIIPs Regulation to January 1, 2018. This additional time is to enable those concerned to comply with the new requirements.

In September 2016, the Parliament announced that it had rejected the Delegated Regulation that the European Commission had adopted supplementing the PRIIPS Regulation with regard to regulatory technical standards (RTS) on the presentation, content, review and revision of KIDs. The Commission also proposed to extend the application of the PRIIPS Regulation by one year earlier in November 2016.

European Commission Adopts Delegated Regulation on RTS on Criteria for Establishing When an Activity Is Considered to Be Ancillary to the Main Business

The European Commission adopted, on December 1, 2016, a Delegated Regulation supplementing the MiFID II Directive (2014/65/EU) in relation to regulatory technical standards ("RTS") on the criteria for establishing when an activity is considered to be ancillary to a firm's main business (C(2016) 7643 final).

The MiFID II Directive exempts persons dealing on their own account, or providing investment services to clients, in commodity derivatives and emission allowances, provided that activity is ancillary to their main business and their main business is not the provision of investment services or banking activities. Article 2(4) of the MiFID II Directive gives the Commission power to adopt RTS specifying the criteria for establishing when an activity is to be considered ancillary to the main business of a group.

ESMA submitted draft RTS to the Commission in September 2015. The Commission notified ESMA in April 2016 that it intended to endorse the draft RTS, subject to several amendments being made. In May 2016, ESMA submitted a formal opinion and a revised draft of the RTS to the Commission.

It is now for the Council of the EU and the European Parliament to consider the Delegated Regulation. Should neither of them object, it will enter into force 20 days after its publication in the Official Journal of the EU (OJ) and will apply from January 3, 2018.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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