Orrick's Financial Industry Week In Review - August 6, 2012


Financial Industry Developments


Extension of Deadline for Independent Foreclosure Review

On August 2, the Fed and the OCC extended the deadline for borrowers seeking a review of their mortgage foreclosures under the federal banking agencies’ Independent Foreclosure Review to December 31.  The new deadline provides additional time for borrowers to request a review if they believe they suffered financial injury as a result of errors in foreclosure actions on their homes in 2009 or 2010 by one of the servicers covered by enforcement actions issued in April 2011.  Fed Release.   

Freddie Mac Amendments for LTV Ratios

On July 31, Freddie Mac announced plans to amend the Relief Refinance Mortgage Program, which includes the Home Affordable Refinance Program, to align requirements for mortgages with LTV ratios equal to or less than 80% with those of mortgages with LTV ratios greater than 80%.  The alignment will eliminate many of the lender's selling representation and warranty responsibilities on the original loans being refinanced, regardless of the borrower's LTV ratio.  Details are scheduled to be announced to lenders by mid-September.  Freddie Mac Release.   

Fed Rule on Risk-Management Standards for FMUs

On July 30, the Fed approved a final rule, Regulation HH, implementing provisions of sections 805(a) and 806(e) of the Dodd-Frank Act.  The final rule establishes risk-management standards related to the payment, clearing, and settlement activities of certain financial market utilities (FMUs) designated as systemically important by the FSOC, and standards for determining when a designated FMU must provide advance notice of proposed changes to its rules, procedures, or operations.  The rule will be effective on September 14.  Fed Release.  Final Rule.  

SEC Issues Recommendations to Improve Municipal Securities Market

On July 31, the SEC issued a report containing recommendations related to the municipal securities market.  The report proposed a number of legislative changes to further regulate the industry.  Specific topics included improving disclosure, structuring the market, and industry best practices. SEC Release.  SEC Report.

Rating Agency Developments


On August 3, Fitch updated its Asia-Pacific RMBS criteria. Fitch Report.

On August 3, Fitch updated its Australian RMBS criteria.  Fitch Report.

On August 3, DBRS updated its Canadian provincial government criteria.  DBRS Report.

On August 3, DBRS updated its Canadian municipal government criteria.  DBRS Report.

On August 2, Fitch updated its criteria for toll roads, bridges, and tunnels.  Fitch Report.

On August 2, Fitch updated its criteria for rating caps in global structured finance transactions.  Fitch Report.

On August 2, Fitch updated its Asia-Pacific consumer ABS criteria.  Fitch Report.  

On July 30, Fitch updated its Italian residential mortgage criteria assumptions.  Fitch Report.

On July 30, Moody’s released its methodology for covered bonds.  Moody’s Report.

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

RMBS Litigation


US$693 Million RMBS Case Against Goldman Sachs Settled for US$26.6 Million

On July 31, the Public Employees' Retirement System of Mississippi moved for approval of a US$26.6 million settlement of an RMBS class action pending before Judge Baer of the Southern District of New York.  Plaintiffs asserted claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 against Goldman Sachs arising out of the purchase of US$693 million in RMBS.  The complaint alleged that the offering documents contained inaccuracies and omissions, and that Goldman failed to conduct adequate due diligence.  In seeking approval of the settlement, plaintiffs argued that they faced litigation risk due to the limited precedent in RMBS class actions at the summary judgment stage and strong affirmative defenses asserted by the defendants.  Motion.  

IndyMac Reaches Partial Settlement of RMBS Claims

Five former IndyMac executives have reached settlements with the plaintiffs in two RMBS class actions.  On  July 31 the lead plaintiff in the consolidated class actions filed a motion for approval of a US$6 million settlement of outstanding claims brought under 1933 Act Sections 11, 12(a)(2) and 15.  In their motion for approval, Plaintiffs argue that the settlement is reasonable, among other reasons, because of concerns that the insurance policies covering the individual defendants will soon be exhausted.  Even if the settlement is approved, the case will continue against various non-settling defendants, including the underwriters for the RMBS transactions at issue.  Motion.   

RMBS Cases Against UBS Dismissed as Time-Barred

On July 31, Judge Cecchi of the District of New Jersey dismissed with prejudice as time-barred claims filed by the Pension Trust Fund for Operating Engineers alleging misstatements and omissions in the offering documents for US$5 million in RMBS.  Judge Cecchi determined that there were adequate storm warnings more than a year prior to the date when plaintiffs filed their claims that the originators of the loans underlying the securities at issue had abandoned their underwriting guidelines.  The court held that this was sufficient to put the plaintiffs on inquiry notice and to trigger the running of the statute of limitations for their 1933 Act claims.  A previous complaint had been dismissed as time barred with leave to amend, but the court determined that a second amended complaint would be futile and dismissed with prejudice.  Order.  

European Financial Industry Developments


Terms of Reference for Wheatley Review of LIBOR Published

On July 30, HM Treasury published a press release setting out the terms of reference for the independent review of LIBOR to be carried out by Martin Wheatley, Chief Executive-designate of the Financial Conduct Authority. Press Release.

Issues to be considered are:

  • Whether participation in the setting of LIBOR should be a regulated activity.
  • The construction of LIBOR, including the feasibility of using actual trade data to set the benchmark.
  • The appropriate governance structure for LIBOR.
  • The potential for alternative rate-setting processes.
  • The financial stability consequences of a move to a new regime and how a transition could be appropriately managed.
  • The adequacy and scope of sanctions for tackling LIBOR abuse. In particular, it will cover the scope of the UK authorities' civil and criminal sanctioning powers with respect to financial misconduct, particularly market abuse and abuse relating to the setting of LIBOR and equivalent rate-setting processes, as well as the FSA's approved persons regime and investigations into market misconduct.

There will be a four-week public consultation starting on August 10 with Mr. Wheatley aiming to publish his conclusions and recommendations by the end of September. The UK government intends to implement the findings of the review in the Financial Services Bill 2012-13. 

SFO Confirms Criminal Offences are Capable of Covering LIBOR Conduct

On July 30, the Serious Fraud Office (“SFO”) published a press release stating that the Director of the Serious Fraud Office, David Green QC, is satisfied that existing criminal offences are capable of covering conduct relating to the alleged manipulation of LIBOR and related interest rates.  Press Release.  

German Legislation to Regulate Algorithmic Traders and Trading Strategies on German Trading Venues

On July 30, the German Ministry of Finance presented new draft legislation in the form of an “Act for the Prevention of Risks and the Abuse of High Frequency Trading” (Entwurf eines Gesetzes zur Vermeidung von Gefahren und Missbräuchen im Hochfrequenzhandel). 

Highlights include:

  • Inclusion of an extended definition of proprietary trading which will trigger a license requirement as a financial services institution under the German Banking Act as well as supervision by the German financial authority (“BaFin”).
  • High Frequency Trading (“HFT”) firms will be subject to the general regulatory framework applicable to investment firms under the German Banking Act and the German Securities Trading Act including a proposed “speed limit” for electronic trading in its regulated markets and multilateral trading facilities.
  • Investment firms, management companies and investment companies that are engaged in algorithmic trading would be subject to specific organisational requirements.
  • Trading participants will be obligated to ensure an adequate ratio between their purchase and sales orders and transactions which are actually executed.
  • Increased Enforcement Powers of Stock Exchange Supervisory Authorities and BaFin.
  • Certain HFT strategies will in the future fall under the revised German market abuse rules.

The new legislation will be adopted after the summer recess and will come into force in Q3/Q4 of 2012.  

Q&As Published on FSA's Transition to the FCA

On July 31, the FSA published a set of questions and answers on the transition to the new Financial Conduct Authority (“FCA”).  Q&As

The Q&As confirmed that:

  • Firms will not need to reapply for authorisation under the new regime.
  • There were be a six month transition period following confirmation of the new disclosure wording concerning firms' regulatory status.
  • There will be little change to existing financial crime oversight and the approach to allocating fees.
  • The FCA will retain the FSA's online notifications and applications and online regulatory reporting systems.

The FSA plans to publish an FCA approach document in October.


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