Orrick's Financial Industry Week in Review - February 4, 2013

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments
 

SEC Extends Exemptions for Security-Based Swaps

On January 29, the SEC amended the expiration dates in its interim final rules that provide exemptions for security-based swaps that, prior to July 16, 2012, were security-based swap agreements and are defined as “securities” under the Securities Act and the Securities Exchange Act due solely to Article VII of the Dodd-Frank Act.  Under the amendments, the expiration dates will be extended to February 11, 2014.  SEC Rule.

Fed Announces Release Dates for Results of Supervisory Stress Tests and CCAR

On January 28, the Fed announced that results from the supervisory stress tests under the Dodd-Frank Act will be released on March 7, and the related results from the Comprehensive Capital Analysis and Review (CCAR) will be released on March 14.  The Dodd-Frank Act supervisory stress test results will include data such as capital ratios, revenue and loss estimates under a severely adverse scenario and assuming a common set of capital actions that is used in the analysis of all of the firms.  Fed Release.

Rating Agency Developments
 

On February 1, Fitch updated its methodology for analyzing non-performing loan securitizations.  Fitch Report.

On February 1, Fitch updated the public sector liquidity and spread assumption addendum for its covered bonds criteria.  Fitch Report.

On January 30, Fitch published criteria for its asset analysis of European public entities’ covered bonds.  Fitch Report.

On January 29, Fitch updated its private student loan ABS criteria.  Fitch Report.

On January 28, S&P requested comments on its project finance methodology.  S&P Release.


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

RMBS Litigation
 

Trustee Sues Deutsche Bank Over $89 Million in RMBS Securities

On January 28, HSBC Bank USA, acting in its capacity as Trustee for a single home equity loan trust, filed a complaint in the Supreme Court for the State of New York against DB Structured Products Inc., an affiliate of Deutsche Bank AG.  The Trustee alleges that Deutsche Bank breached representations and warranties regarding originator underwriting standards applied to the loans underlying the RMBS, no misrepresentation or fraud in the origination of the loans, and no material defects in the loans.  The Trustee asserts causes of action for breach of contract/specific performance, fundamental breach, and declaratory judgment for reimbursable expenses, and seeks rescissory or compensatory damages of $89 million.  Complaint.

Impac Settles RMBS Suit Brought by Citigroup for $3.1 Million

On January 24, Impac Funding Corp. settled a lawsuit brought by Citigroup Global Markets Inc. alleging violations of Sections 18 and 20 of the Securities Exchange Act and negligent misrepresentation based on alleged misstatements in the Pooling and Servicing Agreement for an RMBS trust.  Judge Mariana R. Pfaelzer of the Federal District Court for the Central District of California approved the settlement, which requires Impac to pay Citigroup $3.1 million in cash or securities of Impac Mortgage Holdings.  Motion for Approval of Settlement.  Order Approving Settlement.

Israeli Bank Sues UBS and Goldman Sachs Seeking a Combined $220 Million

On January 29, Bank Hapoalim B.M., Israel’s largest bank, filed summonses with notice against UBS AG, Goldman Sachs & Co., and their affiliates, in the Supreme Court for the State of New York.  In both actions, Bank Hapoalim alleges that the offering documents for RMBS it purchased contained material misrepresentations and omissions concerning the underwriting standards for the mortgages underlying the securities, the transfer of mortgage loans, the legal validity of the trusts, and the statistical information about the mortgage loans underlying the securities.  Bank Hapoalim asserts causes of action for common-law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and rescission against both UBS and Goldman Sachs, and additional claims for violations of the Securities Act of 1933 against Goldman Sachs.  Bank Hapoalim seeks approximately $116 million in damages from UBS and $106 million in damages from Goldman Sachs, inclusive of punitive damages.  UBS Summons with Notice.  Goldman Sachs Summons with Notice.

European Financial Industry Developments
 

ESMA Questions and Answers on Short Selling

On January 30, the European Securities and Markets Association (ESMApublished the second update to its questions and answers on the implementation of the Short Selling Regulation (the SSR).  The Q&A document addressed questions posed by the general public, market participants and competent authorities with the aim of ensuring that competent supervisory authorities adopt common supervisory approaches and practices in the application of the European short selling regulatory regime.  The Q&A document has been updated in respect of ESMA’s guidance on:

    • Question 1 – The scope of the SSR.
    • Question 3 – Calculating the net short position.
    • Question 4 – Duration adjustment for calculating net short positions in sovereign debt.
    • Question 5 – Net short positions when different entities in a group have long or short positions or for fund management activities.
    • Question 7 – Uncovered short sales.

In addition ESMA has added a new question 8 on uncovered sovereign credit default swaps.

Upper Tribunal Upholds FSA Swift Trade Market Abuse Fine

On January 28, the FSA published a press release regarding the decision of the Upper Tribunal (Tax and Chancery Chamber) to uphold the FSA’s decision to fine Swift Trade Inc £8 million for market abuse, marking the largest fine ever issued against a firm for market manipulation.

The FSA first published its decision notice in August 2011, having identified that Swift Trade had engaged in market abuse prior to its dissolution under Canadian law in December 2010.  In response, Swift Trade referred the matter to the tribunal, and Peter Beck, the President and CEO, made an additional reference on the basis that he had been prejudicially identified in the decision notice.  However, the tribunal concluded that the FSA had provided sufficient proof that Swift Trade had engaged in deliberate, manipulative and deceptive layering activities which together constituted market abuse.  The tribunal also dismissed Mr Beck’s reference.

Interest Rate Hedging Products: Review of Misselling

On January 31, the FSA published a report of its findings from pilot reviews conducted by banks into the misselling of interest rate hedging products to small businesses.  The report confirms the FSA’s initial view that there has been significant misselling of such products in the small business market.

The pilot reviews were undertaken in order to consider proposed methods of reviewing such sales, and have led to the FSA identifying the following areas where changes in the review approach are required:

    • Assessment of compliance with regulatory requirements: consideration of compliance with regulatory requirements and, in the event of non-compliance, redress should be undertaken on a specific case-by-case basis.
    • Redress: all non-compliant sales must be considered for redress.
    • Sophistication test: the review should be focused on small businesses that were likely to have misunderstood interest rate hedging products.

The FSA anticipates that banks should have completed their reviews within 6 months, although acknowledges that it may take longer for those with large volumes of cases to review. 

 

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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