Financial Industry Developments

The Fed Approves New Fee Schedules

On October 31, the Fed announced new fee schedules, effective January 2, 2014, for payment services the Federal Reserve Banks provide to depository institutions (priced services).  The effective fees for the Reserve Banks' Check 21 services are expected to decline 2%.  The effective fees for the Reserve Banks' FedACH® service will decline marginally.  The effective fees will increase about 8% for Fedwire® Funds and National Settlement Services and decrease about 1% for Fedwire® Securities Service.  The Board also approved a modest increase to FedLine® access fees.  Fee schedules for all priced services will be available on the Federal Reserve Banks' financial services website.   Notice.   Proposed Rule.

SEC Published Fee Rate Advisory #2 For Fiscal Year 2014

On October 31, the SEC announced that the fees paid under Section 31 of the Exchange Act will remain at their current rate until 60 days after the enactment of a regular appropriation for the SEC.  The SEC is currently operating under a continuing resolution until January 15, 2014Release.

OCC and FDIC Propose New Rule on Liquidity Risk Management

On October 30, the OCC and FDIC proposed substantively the same liquidity rule as the proposal approved by the Fed on October 24.  That proposal developed by the three agencies applies to: (i) banking organizations with $250 billion consolidated assets; (ii) banking organizations with $10 billion in on-balance sheet foreign exposure; (iii) systemically important, non-bank financial institutions that do not have substantial insurance subsidiaries or substantial insurance operations; and (iv) bank and savings association subsidiaries thereof that have total consolidated assets of $10 billion (covered institutions).  The proposed rule does not apply to community banks

Covered institutions would be required to maintain a specified level of high-quality liquid assets such as central bank reserves, government and Government Sponsored Enterprise securities and corporate debt securities that can be converted easily into cash.  Under the proposal, a covered institution would be required to hold such high-quality liquid assets on each business day in an amount equal to or greater than its projected cash outflows less its projected cash inflows over a 30-day period.  The proposed rule is consistent with the Basel Committee's LCR standard, but is more stringent in terms of the range of assets that will qualify and the assumed rate of outflows of certain types of funding.   Release.  Proposed Rule.

OCC Releases Guidance on Third-Party Relationships

On October 30, the OCC issued updated risk management guidance for national banks and federal savings associations related to third-party relationships.  The banks should:

    • Develop a plan that outlines the bank's strategy, identifies the inherent risks of the activity and details how the bank will select, assess and oversee the third party;
    • Perform proper due diligence to identify risks and select a third-party provider;
    • Negotiate written contracts that clearly outline the rights and responsibilities of all parties;
    • Conduct ongoing monitoring of the third party's activities and performance;
    • Execute a plan to terminate the relationship in a manner that allows the bank to transition the activities to another third party, bring the activities in-house or discontinue the activities;
    • Provide for clear responsibilities for overseeing and managing third-party relationships and the risk management process;
    • Maintain proper documentation and reporting to encourage oversight, accountability, monitoring and risk management; and
    • Independently review the risk management process to enable management to assess that the bank's process aligns with its strategy and effectively manages risks from third-party relationships.

The guidance rescinds OCC Bulletin 2001-47, "Third-Party Relationships: Risk Management Principles," and OCC Advisory Letter 2000-9, "Third-Party Risk."  ReleaseGuidance.

Rating Agency Developments

On October 29, S&P revised U.S. residential mortgage input file format.  Criteria.

On October 28, S&P proposed revisions and is seeking comment on changes to Italy and Spain RMBS methodology and assumptions.  Proposal.

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

RMBS and Other Securities Litigation

JPMorgan Settles FHFA's $33 Billion RMBS Suit

On October 25, the FHFA announced that JPMorgan had agreed to pay it $5.1 billion to settle a number of RMBS-related claims asserted by the FHFA, including in a lawsuit relating to Fannie Mae's and Freddie Mac's alleged purchase of $33 billion of RMBS.  Under the settlement agreement, JPMorgan will pay a total of $2.74 billion to Freddie Mac and $1.26 billion to Fannie Mae to resolve the claims asserted in the lawsuit that JPMorgan made misrepresentations in the offering documents for the RMBS it sold to those mortgage companies.  JPMorgan also will pay $670 million to Fannie Mae and $480 million to Freddie Mac to resolve separate claims related to single-family mortgages purchased by those entities.  The FHFA alleged that JPMorgan breached representations and warranties in the contracts concerning those loan sales.  Settlement Agreement and attachments.

Fortis Bank Successor Files $600M RMBS Suit Against Morgan Stanley

On October 24, Royal Park Investments SA/NV, a successor company to the defunct Belgian bank Fortis Bank NA/SV, sued Morgan Stanley in New York state court in connection with Fortis Bank's alleged purchase of over $600 million of RMBS.  Plaintiff alleged that the offering materials for the RMBS contained material misrepresentations and omissions concerning the characteristics of the securities and the underlying mortgage loans, including the loan originators' compliance with underwriting guidelines, loan-to-value ratios, owner occupancy rates and certificate credit ratings.  Plaintiff further alleged that Morgan Stanley knew these representations were false when made because, among other reasons, at the same time Morgan Stanley was offering the RMBS for sale, it was purchasing large credit default swaps which acted as short hedges against the securities.  Plaintiff asserts claims for fraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation, and seeks compensatory and punitive damages, plus fees and costs.  Complaint.

JPMorgan Settles $5B RMBS Suits Brought By German Banks

On October 23, JP Morgan agreed to pay an undisclosed sum to settle cases brought by three German banks in the Supreme Court of the State of New York concerning the banks' alleged purchase of $5 billion of RMBS.   Sealink Stipulation.  Bayern StipulationLBBW Stipulation

European Financial Industry Developments

EBA Publishes First Risk Dashboard of EU Banking Sector

On October 29, the European Banking Authority (EBA) published its first risk dashboard, summarizing the main risks and vulnerabilities in the EU banking sector.

It is based on data from the second quarter of 2013 and takes into consideration the evolution of a set of key risk indicators from 56 EU banks that the EBA has been collecting, on a quarterly basis, since 2009.

The accompanying press release states that after the past two years of repair, the overall conditions of EU banks have improved.  In particular, data in the EBA dashboard illustrates that capital positions have been significantly strengthened and that funding conditions have recovered.  Risk DashboardPress Release.

Prospectuses: ESMA Questions and Answers Version 20

On October 28, ESMA published version 20 of its "Prospectuses: Questions and Answers."  Three new questions have been incorporated, addressing the following areas:

    • Statement of auditors' agreement where a prospectus includes a profit estimate (question 88);
    • Application of proportionate disclosure regime to a rights issue that is not fully subscribed (question 89); and
    • Proportionate disclosure regime for rights issues and admission to trading (question 90).

The existing questions relating to pro forma financial information (question 51) and level of disclosure concerning price information for share offerings (question 58) have been updated.

Note that as the revised responses to these questions include changes to current market practices, they are subject to a 3 month phase-in period and will not take effect until January 28, 2014.  Prospectuses: Questions and Answers.

FCA Factsheets on EMIR

On October 28, the FCA published the following factsheets relating to EMIR (the Regulation on OTC derivatives, central counterparties and trade repositories) (Regulation 648/2012):

    • A factsheet for financial counterparties (FCs) subject to the EMIR requirements for timely confirmation and bilateral risk mitigation; and
    • A factsheet for non-financial counterparties (NFCs) subject to EMIR to understand how NFCs are defining their hedging activity and monitoring their status against the clearing threshold between June and September 2013.