Orrick's Financial Industry Week in Review - July 29,2013


Financial Industry Developments

FHFA Statement on Freddie Mac Risk-Sharing Transaction

On July 24, the FHFA announced that Freddie Mac is nearing completion of its first risk-sharing transaction, a direct debt issuance, that will assist Freddie Mac in transferring credit risk to the private sector on recently-acquired, single-family loans.  FHFA Release.   

SIGTARP Quarterly Report

On July 24, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released its quarterly report to Congress, which, among other things: (i) summarized various SIGTARP investigations and (ii) discussed the rising redefaults of mortgages modified pursuant to HAMPSIGTARP Report

Rating Agency Developments

On July 26, Fitch released its criteria for rating servicing continuity risk in structured finance transactions.  Fitch Report.  

On July 25, Fitch released its criteria for rating state house financing agencies' single-family mortgage programs.  Fitch Report

On July 22, S&P released its criteria for rating CMBS credit-tenant lease transactions.  S&P Report

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

RMBS and Other Securities Litigation

UBS Reaches Settlement with the FHFA

On July 25, the FHFA announced that it had settled its claims against UBS AG concerning mortgage-backed securities that UBS sold to Fannie Mae and Freddie Mac between 2004 and 2007.  UBS agreed to pay a total of $885 million.  The settlement covers federal and state securities claims concerning 33 separate RMBS securitizations that FHFA asserted against UBS in four separate lawsuits filed in 2011.  The settlement also provides that the FHFA will not bring putback claims in connection with certain other securities covered by the agreement.  UBS did not admit any liability in connection with the settlement.  Release and Agreement

Securities Claim Against UBS Based on RMBS Credit Ratings Allegations Revived

On July 22, Judge Denise Casper of the United States District Court for the District of Massachusetts permitted plaintiff Capital Ventures International to pursue Massachusetts Uniform Securities Act claims against UBS Securities, LLC alleging that UBS made misrepresentations concerning credit ratings in connection with over $109 million in RMBS.  The court had previously dismissed these claims, but permitted Capital Ventures to amend them, and UBS again moved to dismiss.  Despite its conclusion that credit ratings are statements of opinion, the court held that Capital Ventures could pursue MUSA claims relating to those ratings because the complaint adequately alleged that UBS did not subjectively believe the opinions reflected by the credit ratings when it included them in the offering documents at issue.  Specifically, Capital Ventures alleged that UBS knew the data regarding the loans on which the ratings allegedly were premised was faulty, and therefore could not have believed the ratings that were issued.  Order

European Financial Industry Developments

AIFMD Comes Into Force in the UK

On July 22, the UK law implementing the Alternative Investment Fund Managers Directive (AIFMD) came into force.  The scope of the AIFMD is broad (with a few exceptions), creating a tighter regulatory framework for alternative investment fund managers (AIFMs), including managers of investment trusts, hedge funds and private equity firms.

On July 23, the Financial Conduct Authority (FCA) published a new webpage to record permissions and passports granted under the AIFMD.  The FCA is updating the Financial Services Register to make the necessary changes, and in the meantime, the FCA will publish the details of firms who have been granted the new AIFMD permissions and any associated management passports.  Webpage.  

The FCA Fines RBS £5.6 Million for Serious Transaction Reporting Failings

On July 24, the FCA published the final notice that it issued to The Royal Bank of Scotland plc and The Royal Bank of Scotland N.V. (together, RBS) on July 16.  Many of the problems at RBS detailed in the Notice arose as a result of significant system challenges posed by the takeover of ABN Amro Bank N.V. by The Royal Bank of Scotland plc. 

RBS agreed to settle with the FCA at an early stage in their investigation and so qualified for a 30% reduction in the financial penalty imposed on them, from £8,029,100 to £5,620,300.  The FCA found that:

    • Between November 5, 2007 and February 1, 2013 (the Relevant Period), RBS failed to accurately report approximately 44.8 million transactions; and
    • Between November 5, 2007 and February 1, 2012, RBS failed entirely to report approximately 804,000 transactions that it executed.

This represents a failure in relation to 37% of transactions reportable by RBS during the Relevant Period.  The FCA regarded these failures by RBS to be particularly serious because (i) the FCA has provided significant guidance to firms on how to report and check those reports; and (ii) during the Relevant Period the FCA published a number of enforcement actions taken in relation to similar failings by other firms.  Final NoticePress Release.    

European Commission Updates MiFID Q&A Website

On July 22, the European Commission answered the question on whether a rolling spot Foreign Exchange on margin takes the form of a derivative contract or a contract for difference to be considered a financial instrument under the Markets in Financial Instruments Directive (MiFID).

The European Commission confirmed in its answer that a rolling spot FX contract can be indefinitely renewed, and no currency is actually delivered until a party affirmatively closes out its position, which exposes both parties to fluctuations in the underlying currencies.  Hence, rolling spot foreign exchange contracts are a type of derivative contract relating to currencies and are considered financial instruments as defined under MiFID.  Answer.  

FCA and SEC Publish a MoU on Investment Fund Supervision

The FCA and the SEC published a memorandum of understanding (MoU) on July 19 on the supervision of the asset management industry, which came into force on July 22.

The accompanying press release states that the MoUs were concluded with 25 European Union (EU) and 3 European Economic Area (EEA) member-state regulators.  They provide a framework for supervisory cooperation and exchange of information between the SEC and the EU/EEA member state national regulators in the asset management industry, as part of a long-term strategy to improve the oversight of entities in the industry that operate across national borders.

In May 2013, the European Securities and Markets Authority (ESMA) announced that it had approved cooperation agreements between EU regulators with responsibility for supervising Alternative Investment Funds (AIFs) and 34 of their global counterparts, including the SEC.  These agreements are key in allowing the national regulators to monitor the way non-EU AIFMs comply with the AIFMD.  Memorandum of UnderstandingPress Release.


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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