Financial Industry Developments

Amendments to Fed and OCC Foreclosure Consent Orders

On February 28, the OCC and the Fed released amendments to their consent orders against 13 mortgage servicers for deficient practices in mortgage loan servicing and foreclosure processing.  The amendments memorialize the previously announced agreements with the mortgage servicers and require them to provide $9.3 billion in payments and other assistance (including loan modifications and forgiveness of deficiency judgments) to borrowers.  Joint Release.   

Fed Proposed Rule on Systemically Important Financial Market Utilities

On February 26, the Fed issued a proposed rule that would amend Regulation HH to set out the conditions and requirements for a Federal Reserve Bank to open and maintain accounts for and provide financial services to financial market utilities designated as systemically important by the FSOC.  Comments must be submitted within 60 days of publication in the Federal Register.  Fed Release.  Proposed Rule.

Rating Agency Developments

On February 27, Fitch published updated criteria on U.S. municipal structured finance.  Fitch Report.   

On February 26, Fitch published criteria on U.S. mortgage REITs and similar finance companies.  Fitch Report.  

On February 26, Fitch published criteria on U.S. equity REITs and REOCs.  Fitch Report.

On February 26, S&P published criteria for deriving the common quantitative metrics for rating banks globally.  S&P Methodology.   

Note: Free registration is required for rating agency releases and reports.

RMBS Litigation

S.D.N.Y Denies Motion to Dismiss RMBS Claims Against JPMorgan Chase

On February 26, Judge Jed S. Rakoff of the federal district court for the Southern District of New York issued a memorandum explaining the reasoning for his September 2012 order denying JPMorgan's motion to dismiss a lawsuit against it in connection with the sale of $1.6 billion in RMBS.  The suit, brought by FSA Asset Management and Dexia, alleges claims under New York law for fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation and successor liability.  Plaintiffs claimed that JPMorgan and affiliated entities made fraudulent misrepresentations concerning the riskiness of the securitizations at issue and the underlying loans.  The court found that plaintiffs: (a) pleaded the elements of their fraud and fraudulent inducement claims with sufficient detail, (b) provided enough facts to sustain a claim for aiding and abetting fraud, based on allegations that Bear Stearns Co. and JPMorgan Chase & Co. directed the purported fraudulent activity of subsidiary companies and received profits in return, and (c) stated claims for negligent representation based on allegations that the defendants induced the plaintiffs into a relationship of trust, convinced them to forego their own diligence and provided them with deceptive information.  Decision.

Bank of America Discloses NYAG Investigation and SEC Inquiry into RMBS Practices 

In its February 28, 2013 Form 10-K filed with the SEC, Bank of America disclosed that it is under investigation by the New York Attorney General over its purchase, securitization and underwriting of home loans and RMBS.  According to the filing, Bank of America has received several subpoenas and requests for information, particularly relating to its underwriting and issuance of RMBS and involvement with certain collateralized debt obligation offerings.  Additionally, the filing disclosed that the SEC has issued an inquiry to Bank of America regarding the SEC's investigation of Merrill Lynch's risk control, valuation, structuring, marketing and purchase of CDOs.  Bank of America disclosed that it is providing documents and testimony to the New York Attorney General and the SEC in full cooperation with both investigations.  Form 10-K Excerpt.

European Financial Industry Developments

Germany's Lower House Approves High Frequency Trading Bill

On February 28, the Bundestag (Germany's lower house of parliament) approved a bill aimed to prevent the abuse and associated dangers of high frequency trading.  The bill requires that high frequency traders obtain authorization, which has been unregulated up to now.  It also requires market participants to ensure that they have properly configured trading systems which will not cause market disturbances.  Additionally, a fee will be imposed on traders who make excessive use of high frequency trading systems and limits will be introduced in respect to the ratio between abandoned and executed orders.

Bafin (the German regulator) will have responsibility for supervising high frequency trading and will have information and intervention rights under the proposed legislation.  In particular, it will have the power to request a description of algorithmic trading patterns and trading parameters, and can prohibit the use of certain algorithmic trading strategies if they violate exchange rules or cause disruption in the markets.  Trading strategies which are conducted with the intention of disturbing trading or deceiving the markets will be considered to be market manipulation.  

EU Agrees to Cap Bankers' Bonuses

On February 27, the Council of the EU and the European Parliament announced that they had reached preliminary agreement on the legislative proposals for the CRD IV reforms, including on the key contentious issue of bankers' bonuses.  Bonus payments to bankers are to be capped at twice their annual salary and banks will be subject to a strict transparency regime.  The basic agreement is a 1:1 ratio on salary relative to variable pay, which can rise to 1:2 in the event of shareholder approval consisting of at least 65% of shareholders owning half the shares represented (or 75% of votes in the event that there is no quorum).  As well as the bonus cap, it was also agreed that banks must reveal their taxes and profits on a country-by-country basis from 2015, assuming that this measure is not judged as being an impediment to inward investment by the European Commission.

Member states will be required to transpose the CRD IV Directive by January 1, 2014, and it is expected that the European Parliament will vote on the provisional agreement, once formally endorsed by the Council, in its plenary session from April 15-18.  

FSA Temporary Prohibition on Short-Selling of Certain Italian Shares

On February 27, the FSA published a statement announcing an immediate temporary ban on the short selling of shares in four Italian companies – Banco Popolare, Mediolanum, Intesa and Banca Carige.  The prohibition was announced in light of a similar measure introduced by CONSOB, the Italian regulator, and following significant drops in the share price of the affected companies.  In explaining its decision to impose the ban, the FSA noted that the move was justified in order to prevent disorderly falls in the share price.

Leading up to the prohibition, the price movements in all four companies' shares crossed one of the thresholds set out in the Short Selling Regulation  (Regulation 919/2012), which sets out criteria for determining a significant fall in price.  

EMIR Regulatory Technical Standards: Delegated Regulations Published

On February 23, six delegated regulations containing regulatory technical standards relating to EMIR (Regulation 648/2012) were published in the Official Journal of the European Union.  The regulatory technical standards provide detailed information of requirements relating to OTC derivatives, central counterparties and trade repositories in the following areas:

    • clearing obligation;
    • reporting obligation;
    • risk mitigation requirements; and
    • registration requirements for central counterparties and trade repositories.

The regulatory technical standards will enter into force on March 15, 2013, (being 20 days from their publication in the Official Journal) and trigger the effective date of several key EMIR obligations, such as the requirement for financial and non-financial entities to confirm their non-centrally-cleared OTC derivative transactions on a timely basis.

ESMA has not yet released draft technical standards relating to the margin and capital requirements for non-centrally cleared trades. 

Events

Orrick's Annual Financial Services Roundtable

On March 5, Orrick's Global Employment Law and Litigation Group will host an interactive discussion of critical employment law issues impacting the financial services industry.  The keynote lunch speaker will be EEOC Commissioner Chai Feldblum, who will speak and answer questions about the EEOC's recently announced Strategic Enforcement Plan.  Click here to RSVP.  

Solar Power Finance & Investments Summit 2013

March 18-21, 2013 -- The major gathering place for the solar power industry's decision makers, the summit attracts key dealmakers in the solar development and financial communities to network and conduct business in San Diego, CA.  Orrick is a Platinum Level Sponsor.  On March 18, Howard Altarescu will present Structural & Legal Considerations in Solar Securitizations.  Eric Stephens and Michael Meyers will also moderate panels.  Click here to view the current agenda.