Orrick's Financial Industry Week in Review - November 18, 2013

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments

CFTC Staff Issues Advisory on Transaction-Level Requirements in Certain Cross-Border Situations

On November 14, CFTC issued advisory on the applicability of Dodd-Frank transaction-level requirements to swaps between non-U.S. swap dealers (SDs) (whether or not an affiliate of a U.S. person) and non-U.S. persons if the swap is arranged, negotiated or executed by a non-U.S. SD located in the U.S.  Advisory.

FDIC Releases 2014 Stress Test Scenarios

On November 12, FDIC released the economic scenarios that will be used by financial institutions with total assets of more than $10 billion for stress tests required under the Dodd-Frank ActPress Release

OCC Publishes Standards on Independent Consultants

On November 12, OCC published standards governing the use of independent consultants in enforcement actions involving significant violations of law.  The standards describe the criteria the OCC will use in determining whether to require a national bank or federal savings association to retain a consultant, as well as the institution's obligations to ensure the consultant has sufficient independence and qualifications.  Among other issues, the standards describe the process for reviewing consultant qualifications and the contractual terms for the engagement, as well as the appropriate performance oversight.  Press Release.  Guidance.

Rating Agency Developments

On November 13, Moody's released its FHA-VA RMBS surveillance methodology.  Moody's Report.

On November 12, Moody's released its approach to assessing swap counterparties in cash flow transactions.  Moody's Report.

On November 12, DBRS released its rating methodology for assessing European residential mortgage portfolios.  DBRS Report.

On November 11, Moody's released its approach to rating Japanese RMBS transactions.  Moody's Report.  

On November 11, S&P released its RMBS methodology for rating condominium investment loan securitizations in Japan.  S&P Report.

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

RMBS and Other Securities Litigation

Liquidators of Bear Stearns Hedge Funds Accuse Rating Agencies of Fraud

On November 12, the liquidators for two Bear Stearns overseas hedge funds filed their complaint against McGraw Hill, Standard & Poor's, Moody's, and Fitch (collectively the rating agencies) in an action in New York Supreme Court alleging that fraudulent ratings led to over $1 billion in losses for the funds' investors.  According to the complaint, the funds invested in a portfolio of high-grade structured finance products, including CDOs and RMBS, where "at least 90% had the highest rating available," and therefore depended heavily on ratings in making investment decisions.  The complaint alleges that the rating agencies knew that the ratings assigned to the securities in which the funds invested were false.  Plaintiffs claim that the rating agencies lacked independence from the issuers of the securities and that their ratings were tainted by a desire to maintain market share in a profitable industry.  The funds also allege that the rating agencies used relaxed standards in their initial ratings and subsequently failed to conduct proper ongoing surveillance of rated securities, leading to delays in downgrading ratings for allegedly faulty securities.  The liquidators initially commenced the action in July through New York's summons with notice procedure.  Complaint.

European Financial Industry Developments

European Parliament and ECB Inter-Institutional Agreement on SSM in Force

On November 7, the European Central Bank (ECB) updated its webpage on building a banking union to reflect the coming into force of the inter-institutional agreement (IIA).  The ECB has agreed with the European Parliament on cooperation on procedures related to the single supervisory mechanism (SSM).  The ECB also published a copy of the IIA, which will also be published in the Official Journal of the EU. 

The UK Prime Minister has stated that the UK will not participate in the SSM.  ECB  webpage.  IIA.

Former Broker Banned by FCA for Encouraging Market Abuse

On November 14, the FCA published the final notice it has issued to Rahul Shah.  The FCA's statement is that Mr. Shah encouraged another person to engage in behavior which, had Mr. Shah engaged in that same behavior, would amount to market abuse (insider dealing) as per section 118(2) of the Financial Services and Markets Act (FSMA).

Mr. Shah has been prohibited by an FCA order from performing any function in relation to any regulated activities carried on by any authorized or exempt persons or exempt professional firm.  In light of his financial position, no financial penalty was imposed on Mr. Shah.

The prohibition on Mr. Shah arises from the fact that he had agreed, while a broker, to be made an insider by a financial advisor acting on behalf of Vyke Communications plc.  Final notice.

The Italy Regulatory Update

The Italy Regulatory Update is a quarterly newsletter which summarizes the main Italian and EC/EU law developments in the area of corporate, banking and financial services. To view the latest edition, please click here.

Events

Conducting Internal Investigations in the Dodd-Frank Era: Legal, Ethical and Investigatory Best Practices

Please join us in our New York office on November 19 for a panel composed of lawyers from Orrick's Whistleblower Task Force and investigation professionals from Kroll.  The event will feature a detailed discussion of the legal and ethical issues to consider regarding the availability of whistleblower protections and the best practices companies should adopt now, among other topics.  For more information and to register for this event, please click here.

 

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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