Orrick's Financial Industry Week In Review - July 15, 2013

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Financial Industry Developments

Basel III Implementation in the U.S.

On July 2, the Fed finalized a rule to implement Basel III in the U.S.  The Fed has indicated that the rule will help ensure banks maintain strong capital positions that will enable them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns.  Fed ReleaseFederal Register NoticeCommunity Bank Guide

Joint Proposal on Leverage Ratio Standards

On July 9, the Fed, the FDIC and the OCC issued a joint proposed rule to strengthen the leverage ratio standards for large, systemically significant U.S. banking organizations.  Under the proposed rule, bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (covered BHCs) would be required to maintain a tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of 3 percent, for a total of 5 percent.  The proposed rule would be effective on January 1, 2018.  Comments must be submitted within 60 days of publication in the Federal Register.  Joint ReleaseProposed Rule

Appraisal Exemption for Higher-Priced Mortgages

On July 10, the Fed, the CFPB, the FDIC, the FHFA and the OCC issued a joint proposed rule which would create exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans.  The proposed rule would provide exemptions for:  (i) transactions secured by existing manufactured homes and not land; (ii) certain "streamlined" refinancings; and (iii) transactions of $25,000 or less.  Comments must be received on or before September 9.  Joint ReleaseProposed Rule

Extension of FATCA Withholding Start Date and Grandfathering End Date 

On July 12, Treasury and the IRS announced that they intend to amend final Treasury regulations implementing the U.S. Foreign Account Tax Compliance Act (FATCA) to provide for a six-month extension to the start of FATCA withholding and the end of the FATCA grandfathering period, from January 1, 2014 (under current regulations) to July 1, 2014, in order to allow for a more orderly implementation of FATCA.  In addition, the timelines for implementing certain FATCA account due diligence requirements and FATCA registration requirements are to be extended, and Treasury and the IRS will provide a list of jurisdictions that will be treated as having in effect an intergovernmental agreement (IGA) with the U.S.  FATCA withholding is scheduled to apply to payments of U.S. source dividends, interest and other fixed payments beginning July 1, 2014, and to payments from the disposition of property producing such payments beginning January 1, 2017.  IRS Notice 2013-43.

Rating Agency Developments

On July 12, S&P released a request for comment on its methodology and assumptions for rating U.S. small business loan-backed securitizations.  Comments must be submitted by August 15.  S&P Report

On July 10, Fitch released its criteria for rating U.S. tobacco settlement ABSFitch Report

On July 10, Fitch released its criteria for rating trust-preferred CDOsFitch Report

On July 9, Fitch released its EMEA consumer ABS rating criteria, along with the related auto residual value addendum.  Fitch Report (Consumer ABS)Fitch Report (Auto Residual Value Addendum)

On July 3, Fitch released its distressed debt exchange criteria for structured finance.  Fitch Report

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

RMBS and Other Securities Litigation

Bear Stearns Liquidators Brings Fraud Action Against Rating Agencies

On July 9, the joint official liquidators of Bear Stearns & Co. Inc. filed suit against three rating agencies – Standard & Poors, Moody's and Fitch – in New York state court over the agencies' allegedly fraudulent investment ratings of RMBS and CDOs.  The plaintiffs allege that the defendant rating agencies knowingly misrepresented information as to the independence and accuracy of their ratings, while purposefully omitting material information from their credit rating analyses.  Plaintiffs bring a claim for common law fraud and seek over $1 billion in damages as well as punitive damages.  Summons with Notice.  

Investor Funds Bring Lawsuit Against Goldman Sachs

On July 3, Phoenix Light SF Limited, Blue Heron Funding Ltd., Silver Elms CDO II Limited and Kleros Preferred Funding V PLC, filed a complaint against Goldman Sachs in the Supreme Court of the State of New York relating to more than $450 million of RMBS certificates purchased between 2005 and 2007.  Plaintiffs allege that Goldman Sachs disseminated offering documents containing false and misleading information regarding collateral quality and underwriting standards.  Plaintiffs further allege that Goldman failed to disclose that it shorted the same certificates it offered.  The complaint alleges fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation, and seeks compensatory damages, punitive damages, rescission and/or rescissory damages and costs.  Complaint.

Class Action Brought Against S&P and Moody's in Illinois State Court

On July 3, First National Bank and Trust Company of Rochelle, Illinois (FNBR) filed a putative class action lawsuit against McGraw-Hill Companies Inc., Standard and Poor's Rating Services (S&P) and Moody's Corp. in Illinois state court.  FNBR alleges that the rating agencies knowingly or recklessly issued inflated RMBS ratings and failed to amend those ratings when the mortgages underlying the securities began to fail.  Plaintiff seeks to represent a class of all Illinois banks that purchased highly rated RMBS certificates between December 2007 and February 2008.  Plaintiff's claims are for fraud, negligent misrepresentation and violations of the Illinois Consumer Fraud and Deception Business Practices Act and the Illinois Uniform Deceptive Trade Practices Act.  Complaint.

European Financial Industry Developments

European Commission and CFTC Reach Agreement on "Common Path Forward"

On July 11, the European Commission (EC) issued a memorandum announcing its agreement with the United States Commodity Futures Trading Commission (CFTC) relating to their joint understanding on a package of measures for regulating cross-border derivatives.

The agreement acknowledges that as the derivatives market is international, notwithstanding the high degree of similarity between the two jurisdictions' respective requirements, subjecting the global market to "simultaneous application of each other's requirements" could lead to "conflicts of law, inconsistencies and legal uncertainty."

The agreement confirms that the CFTC plans to use non-action relief from certain transaction-based requirements in relation to bilateral uncleared swaps.  If the CFTC's trade execution requirement is triggered before March 15, 2004, then the CFTC has agreed to extend appropriate time-limited transitional relief to some EU multilateral trading facilities.  The CFTC is also considering extending regulatory relief to trading platforms if they are subject to requirements comparable to those imposed on swap execution facilities.

The EC, CFTC and the European Securities and Markets Authority will continue to work together on further issues including harmonised international rules on margins for uncleared swaps and issues relating to reporting to trade repositories (e.g. data fields, blocking and secrecy laws).  CFTC Press ReleaseEuropean Commission Memorandum

European Commission Proposes SRM for Banking Union

On July 10, the European Commission published a press release confirming its proposal for a single resolution mechanism (SRM) for the banking union.

While the provisional text for the proposal is available, the EC's website confirms that "the final text will be available soon."  The SRM will complement the single supervisory mechanism previously proposed by the EC in September 2012, and it is envisioned that it will centralize certain competences and resources for managing the failure of any bank within the European Area and in any Member State participating in the Bank Union.

The Council of the EU aims to reach an agreement on the SRM by the end of 2013 so that the proposal can be adopted by May 2014 (the end of the current parliamentary term).  EC Press Release

Financial Conduct Authority (FCA) Report on Market Cleanliness

As part of its market monitoring activity reported in its Annual Report published on July 10, the FSA analyzed the scale of share price movements in the two days ahead of regulatory takeover announcements and identified movements that are abnormal compared to a stock's normal movement.  The FSA published the statistics annually, and going forward, the FCA remains the only regulator that regularly publishes market cleanliness statistics.

After remaining stable for the four years to 2009, the level of abnormal pre-announcement price movements declined to 21.2% in 2010, 19.8% in 2011 and to 14.9% in 2012. This is the lowest level since 2003.  The fall took place in a year of weak takeover activity and against a backdrop of the FSA's continuing focus on market abuse and enforcement activity in this area.  FCA Report

NYSE Euronext to Become New LIBOR Administrator

On July 9, it was announced that NYSE Euronext Rate Administration Ltd, a new subsidiary of NYSE Euronext, will take over the administration of LIBOR from BBA LIBOR Ltd, a subsidiary of the British Bankers' Association (BBA), subject to authorization from the Financial Conduct Authority and following a period of transition.  BBA LIBOR Ltd is currently the interim administrator of LIBOR.  NYSE Euronext Press Release.