Orrick's Financial Industry Week in Review - June 24, 2013


Financial Industry Developments

OCC Issues Final Rule on Lending Limits

On June 19, the Office of the Comptroller of the Currency (OCC) finalized the rule governing lending limits.  The rule implements Section 610 of the Dodd Frank Wall Street Reform and Consumer Protection Act.  Under the rule, the effective date has been extended to October 1st from July 1st, as proposed previously.  OCC ReleaseFinal Rule.

CFTC Temporary No-Action Relief for Transition to SEF Rules

On June 17, the CFTC Division of Market Oversight issued a no-action letter providing temporary relief to entities that have been operating pre-Dodd-Frank Act trading platforms.  The no-action letter extends relief provided by a letter issued in December 2012 to coincide with the compliance date for the CFTC's Swap Execution Facility final rules, which were published on June 4.  The continued no-action relief will commence on July 1 and expire on October 2.  CFTC ReleaseCFTC No-Action Letter.

FHFA Report to Congress

On June 13, the FHFA released its fifth annual Report to Congress detailing its 2012 examinations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.  The FHFA deemed Fannie and Freddie 'critical concerns' in 2012 but noted that they each generated positive annual income.  FHFA ReleaseFHFA Report to Congress.   

CFTC Temporary No-Action Relief for Small Bank Board Approval Requirements

On June 10, the CFTC Division of Clearing and Risk issued a no-action letter providing temporary relief to banks, savings associations, farm credit system institutions and credit unions having assets of less than $10 billion, and which are issuers of securities, from the board approval requirements of Section 2(j) of the CEA and regulation 50.50, subject to certain conditions.  This no-action relief expires on July 10.  CFTC Release.  CFTC No-Action Letter.  

CFTC Amended Order for Mutual Acceptance of LEIs

On June 10, the CFTC issued an amended order that revises an order issued on July 23, 2012, expanding the list of approved providers of Legal Entity Identifiers (LEIs) that can be used by registered entities and swap counterparties when complying with the CFTC's swap data reporting regulations.  The amended order provides that in addition to LEIs issued by DTCC-SWIFT, the CFTC will recognize LEIs issued by WM Datenservice following recognition by ESMA of DTCC-SWIFT CFTC Interim Compliant Indicators under European reporting regulations.  The amended order also sets forth the conditions for future acceptance of LEIs from additional providers.  CFTC ReleaseCFTC Amended Order.  

Rating Agency Developments

On June 20, Moody's released its methodology for assessing tail risk in Australian RMBS transactionsMoody's Report.   

On June 19, Moody's released its U.S. RMBS surveillance methodology.  Moody's Report

On June 19, KBRA released its financial guaranty rating methodology.  KBRA Report

On June 18, Fitch released its criteria for rating future flow securitizationsFitch Report

On June 18, S&P released an advance notice of proposed criteria change for non-financial corporate issuersS&P Release

On June 17, Fitch released its criteria for rating thermal power projectsFitch Report

On June 14, Fitch released its criteria for rating letter of credit-supported bondsFitch Report

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

Distressed Debt and Restructuring Developments

SDNY Holds Trustee Cannot Evade Section 546(g) Safe Harbor

On June 11, Southern District of New York Judge Jed Rakoff dismissed the complaint of the Trustee for the SemGroup estate seeking to avoid a novation made to Barclays pre-bankruptcy under a swap agreement.  The Court held that the pre-bankruptcy transaction constituted a safe harbored transfer made in connection with a swap agreement and thus could not be avoided by the estate.  This case is one of a number in recent years that treats the safe harbors, and particularly the section 546 safe harbors, as broadly protective of non-debtor transferees in financial transactions.  For more information, please click here

RMBS and Other Securities Litigation

Ambac's RMBS Claims Against EMC and JPMorgan Dismissed in Part

On June 13, Justice Charles E. Ramos of the Supreme Court of the State of New York dismissed in part an action brought by Ambac Assurance Corp. (Ambac) against EMC Mortgage and JPMorgan Chase & Co.  Ambac's case relates to seven securitizations that it wrapped in 2006.  Justice Ramos dismissed Ambac's claims for breach of contract, holding that Ambac did not have standing to enforce the "sole remedy" of loan repurchase provided for by the transaction documents.  Justice Ramos denied defendants' motion to dismiss Ambac's fraud claim, concluding that there are factual issues as to whether Ambac justifiably relied on the alleged misrepresentations.  Decision.

Shareholders Allege Improper Takeover of Fannie and Freddie by the Government

Can shareholders of a government-sponsored enterprise successfully challenge the constitutionality of a government takeover of the entity?  Shareholders of Fannie Mae and Freddie Mac will try to do so in a $41 billion class action filed against the United States in the Court of Federal Claims on June 10.  Plaintiffs allege that even though the Federal Housing Finance Authority's 2008 takeover of the mortgage giants benefited the nation as a whole, it harmed the companies' shareholders and violated their constitutionally protected private ownership rights.  For more information on this suit and to visit our Securities Litigation blog, please click here.

Commentary: Five Lessons from the Municipal Derivatives Litigation Front

Pre-financial crisis, interest rate derivatives were widely recognized as a valuable part of the municipal issuer's financial toolkit.  Post-crisis, they have been a thorn in the side of many issuers, resulting in expensive litigation with failed swap providers – most notably the Lehman and Ambac derivatives trading subsidiaries – and public criticism of municipal issuers said to have fallen prey to more sophisticated providers.  There are several lessons to be learned from the recent spate of litigation, which Orrick covered in an article recently published in The Bond Buyer.

European Financial Industry Developments

UK Parliament Banking Report Proposes Far-Reaching Reforms

On June 19, the Parliamentary Commission on Banking Standards (PCBS) published a final report following its inquiry into professional standards and culture in the UK banking sector.  The report, titled "Changing banking for good," recommends radical reforms designed to improve standards in the sector. 

The recommendations cover several areas including:

  • reforming bank governance;
  • replacing the existing approved persons regime;
  • reinforcing the powers of regulators; and
  • making individuals responsible for misconduct and poor financial performance.

The UK government will formally respond to the PCBS report in July and any implemented recommendations will likely be added to the Financial Services (Banking Reform) Bill 2013-14 currently going through parliament.  Final Report.

Former Financial Trader Charged with Fraud in SFO LIBOR Investigation

As part of the continuing investigation by the UK's Serious Fraud Office (SFO) into the manipulation of LIBOR, the City of London police charged former UBS and Citigroup trader Tom Hayes with eight counts of fraud on June 18.  Mr. Hayes, one of three traders arrested last December in connection with the investigation, was also charged with fraud by US prosecutors in 2012 and threatened with extradition.  The SFO related charges are the first to be made by a UK authority in relation to the LIBOR investigation.  Press Release

BaFin Updates HFT Legislation Guidance

BaFin, the German financial regulator, updated guidance on its website in clarification of several issues concerning the Hochfrequenzhandelsgesetz (High Frequency Trading Act) which came into force on May 15.  The Act introduces authorisation and organisational requirements intended to mitigate the potential risks arising from the speed and complexity of algorithmic high-frequency trading methods which make up some 40 per cent of exchange trades in Germany.

The updated guidance seeks to clarify issues including:

  • licensing requirements;
  • transitioning requirements;
  • definition of HFT; and
  • date of effectiveness.

The BaFin FAQ webpage (in English) is available here.


Impact Finance CLE Panel

Financing that creates significant social change requires a broad range of factors in order to be successful.  In an effort to help those in social sector finance better understand these factors, Orrick has partnered with three leading organizations in this space – ACCION International, Calvert Foundation and the Nonprofit Finance Fund – to offer a special CLE session on June 24 to discuss important considerations related to Impact Finance (also referred to as impact investing).  For more information and to register for this event, please click here.

10th Anniversary REFF Wall Street Renewable Energy Finance Forum

Recent events have highlighted just how important the development of integrated systems and diversified power supplies are for utility companies.  As the market overcomes policy and development barriers and matures as an industry, REFF Wall Street creates the opportunity to hear from those that are defying the existing challenges to create innovative financing solutions and offers the chance to share perspectives throughout the discussion on the direction of the market.  Orrick is a Gold Level Sponsor.  The forum takes place on June 25-26 in New York; please click here for more information. 


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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