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

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments

CFTC Announces the Start of Mandatory Clearing

On March 11, the CFTC announced that swap dealers, major swap participants, and private funds active in the swaps market are required to begin clearing certain index credit default swaps and interest rate swaps that they entered into on or after March 11.  The clearing requirement applies to newly executed swaps and changes in the ownership of a swap.  CFTC Release.    

CFTC Reminds Market Participants of Swap Data Reporting Requirements

On March 8, the CFTC issued an Advisory reminding market participants that swap dealers were required to begin reporting data regarding equity, foreign exchange, and other commodity swaps, under Parts 43 and 45 of the CFTC's regulations, on February 28.  Swap dealers must be in compliance with their reporting obligations with respect to historical swaps in these three asset classes by March 30.  CFTC Release.   

Rating Agency Developments

On March 12, S&P updated its methodology for second-lien RMBS surveillance and cash flow analysis for pre-2009 originations.  S&P Report.

On March 11, Moody's released its approach to rating RMBS using the MILAN framework.  Moody's Report.   

On March 11, Fitch updated its criteria for state housing finance agencies' general obligations.  Fitch Report.

On March 11, Moody's released its methodology for incorporating sovereign risk to multi-pool financial lease-backed transactions in Italy.  Moody's Report.  

On March 11, Moody's released its methodology for incorporating sovereign risk to its approach to rating CDOs of SMEs in Europe.  Moody's Report.

On March 11, Moody's released its methodology for incorporating sovereign risk to EMEA auto loan methodology.  Moody's Report.  

On March 8, Moody's released its approach to rating transactions backed by intermodal shipping container leases.  Moody's Report.  

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

Asset Management

SEC No Action Relief for Advisory Agreement Amendment Without Shareholder Approval

On February 27, the SEC Division of Investment Management granted no action relief to Emerging Global Advisors, LLC (EGA) and Emerging Global Shares Trust (Trust), allowing EGA to amend its investment advisory agreement with the Trust without obtaining majority shareholder approval as required under Section 15(a) of the Investment Company Act.  This no action relief is preconditioned upon (i) the proposed amendments not reducing or modifying the nature and level of advisory services provided by EGA and (ii) the total advisory fees paid to EGA under the amended advisory agreement would not exceed the advisory fees payable under the current agreement.  SEC No Action Letter.

RMBS Litigation

DC Circuit Affirms Dismissal of MBIA's Claims Against FDIC in IndyMac Litigation

On March 8, the United States Court of Appeals for the District of Columbia Circuit affirmed the district court's dismissal of MBIA Insurance Corp.'s (MBIA) claims against the Federal Deposition Insurance Corp.'s (FDIC) arising out of mortgage-backed securities backed by IndyMac Bank, F.S.B (IndyMac) loans.  The case relates to three securitizations backed by IndyMac loans and supported by MBIA-issued insurance policies.  MBIA argued that the FDIC, as conservator of the successor bank to IndyMac, had "approved" IndyMac's Pooling and Servicing Agreements under FIRREA, and then breached obligations adopted from IndyMac to repurchase loans "put back" from the securitizations.  The Court rejected MBIA's reading of FIRREA, affirming the decision of the district court that approval under the statute required a formal, written acknowledgement.  Decision.

FHFA Files $165 Million Suit Against HSBC and Decision One

On March 8, the Federal Housing Finance Agency (FHFA), acting as conservator for the Federal Home Loan Mortgage Corporation (Freddie Mac) commenced litigation in the Supreme Court of the State of New York against Decision One Mortgage Company, LLC (Decision One), and HSBC Finance Corporation (HSBC) (as an alleged successor in interest).  FHFA's Summons with Notice alleges claims for breach of contract, damages, specific performance, indemnity, and reimbursement arising out of the banks' alleged failure to repurchase loans.  FHFA alleges that Decision One breached contractual warranties as to the quality of the mortgage loans, including that the loans complied with relevant statutes, complied with underwriting guidelines, and were not predatory.  FHFA seeks specific performance of alleged repurchase obligations or equitable damages totaling nearly $165,000,000.  Summons with Notice.

Massachusetts Regulator Fines Deutsche Bank Securities for CDO Conflict of Interest

On March 13, the Massachusetts Securities Division (Division) and Deutsche Bank Securities Inc. (DBSI) entered into a Consent Order following an investigation into the issuance of collateralized debt obligations.  DBSI consented to the Division's characterization of the facts underlying the matter, and did not admit or deny the Division's legal findings.  According to the stipulated facts, DBSI helped design, build, and market a CDO (Carina CDO Ltd.) in 2006 while simultaneously buying protection against losses on similar CDOs.  The Division found that DBSI violated Section 204(a)(2)(G) and (J) of the Massachusetts Uniform Securities Act by failing to disclose its conflict of interests in structuring and selling the Carina CDO while purchasing CDS protection referencing other CDOs with similar expected performance.  DBSI agreed to cease and desist any violations of Massachusetts securities law, accept formal censure by the Division, and pay a $17.5 million civil penalty.  Consent Order.

European Financial Industry Developments

European Parliament Adopts at First Reading Proposed Regulations on European Venture Capital Funds and European Social Entrepreneurship Funds

On March 12, the European Parliament adopted at first reading texts relating to the proposed Regulations on European Venture Capital Funds (EuVECAs) and European Social Entrepreneurship Funds (EuSEFs).

The Regulations are expected to make it easier for venture capitalists to attract more capital for start-up companies across Europe, by establishing a single rule book of requirements which will ensure that venture capitalists are no longer required to meet different standards in each member state.  The Regulations will also lay foundations for "European Social Entrepreneurship Funds"  (ESEFs)  which will allow investors to easily identify funds that are focused on investing in European social businesses.

The European Commission published a press release welcoming the adoption of the texts, stating that the Council is expected to adopt the Regulations on March 21, and that the Regulations will enter into force 20 days after publication in the Official Journal of the EU (OJ), which the Commission expects to be "before the summer". 

EMSA Publishes Guidance on Recognition of Third Country Central Counterparties (TC-CCPs) under EMIR

On March 12, The European Securities and Markets Authority (ESMA) published a guidance on the recognition of TC-CCPs under EMIR (the Regulation on OTC derivatives, CCPs, and trade repositories).

The guidance note reviews ESMA's recognition process and offers practical guidance for applicants.  This includes communication with ESMA prior to an application, the timeframe for submission of an application, the format and content of the application itself, and requests from ESMA for more information.  ESMA's decision on recognition is to be adopted within 180 working days of notification by ESMA that a TC-CCP's application is considered to be complete, and it will take effect on the fifth working day after its adoption. 

Former Futures Trader at JP Morgan Cazenove is Sentenced to 4 Years Imprisonment for Insider Dealing

Following a prosecution brought by the FSA, Richard Joseph was found guilty at Southwark Crown Court of six counts of conspiracy to deal as an insider.  Joseph received inside information from a print room manager at JP Morgan Cazenove and used it to place spread bets.  He made a profit of £591,117 from the deals.

In a press release the FSA stated that "This conviction once again underscores our determination to take the strongest possible action against anyone involved in insider dealing."

The FSA is currently prosecuting six other individuals for insider dealing and has so far secured convictions for 22 others since the start of 2009.

Events

Solar Power Finance & Investments Summit 2013

March 18-21, 2013 -- The major gathering place for the solar power industry's decision makers, the summit attracts key dealmakers in the solar development and financial communities to network and conduct business in San Diego, CA.  Orrick is a Platinum Level Sponsor.  On March 18, Howard Altarescu, Chair of the Solar Securitization Workshops, will present a workshop on Structural & Legal Considerations in Solar Securitizations.  Eric Stephens and Michael Meyers will also moderate panels.  Click here to view the current agenda.

 

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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