Orrick's Financial Industry Week In Review

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Financial Industry Developments

CFPB Issues Final Rule Temporarily Raising Reporting Threshold for Home Equity Loans Under Home Mortgage Act Rules

On August 24, 2017, the Consumer Financial Protection Bureau (the "CFPB") issued a new rule that amends the 2015 updates to the Home Mortgage Act ("HMDA") rules. Under the HMDA rules that are scheduled to take effect in January 2018, financial institutions would have been required to report home‑equity lines of credit if they made 100 such loans in each of the last two years. The new final rule issued by the CFPB increases the threshold from 100 loans to 500 loans through 2018 and 2019 while the CFPB considers whether to make a permanent adjustment. Read more here.

NY DFS Charges the NY Branch of Habib Bank and Habib Bank Limited for Compliance Failures

On August 24, 2017, the New York State Department of Financial Services ("NY DFS") issued a Notice of Hearing and Statement of Charges to the New York Branch of Habib Bank Limited and Habib Bank Limited, the largest bank in Pakistan, based upon its determination that "compliance failures at the New York Branch are serious, persistent and apparently affect the entire Habib banking enterprise." The NY DFS asserted that the Bank's compliance function is dangerously weak and indicates "a fundamental lack of understanding of the need for a vigorous compliance infrastructure, and the dangerous absence of attention by Habib Bank's senior management for the state of compliance at the New York Branch." The deficiencies cited include the New York Branch's failure to comply with New York and Federal laws and regulations concerning anti-money laundering ("AML") compliance, including the Bank Secrecy Act.

The Superintendent is seeking to impose a civil monetary penalty upon the Respondents in an amount of up to approximately $620 million.

A hearing is scheduled for September 27, 2017, before the NY DFS's Deputy Superintendent for Compliance. The Bank is contesting the NY DFS's allegations and has indicated that it plans to challenge the penalty and surrender its DFS banking license, thus eliminating its only U.S. branch.

On August 24, 2017, the NY DFS also issued two companion orders. One expands the scope of a review of prior transactions for AML and sanctions issues that was already underway under the terms of an earlier consent order; the other outlines the conditions under which the Bank could surrender its NY DFS banking license, including the retention of a consultant selected by NY DFS to ensure the orderly wind down of the Bank's New York Branch. Read more here.

 

Rating Agency Developments

On August 31, 2017, S&P published its methodology for rating U.S. Credit Card Securitizations. Report.

On August 31, 2017, S&P published a Table of Contents to its Structured Finance Criteria. Report.

On August 31, 2017, Moody's published its approach to rating SME Balance Sheet Securitizations. Report.

On August 31, 2017, Moody's published a proposed revised framework to its approach to Mapping Ratings and Scores Provided by Third-Party Entities. Report.

On August 31, 2017, Moody's published its approach to rating Corporate Synthetic Collateralized Loan Obligations. Report.

On August 31, 2017, Moody's published its global approach to rating Collateralized Loan Obligations. Report.

On August 29, 2017, Moody's published its global approach to rating Municipal and Sub-Sovereign CDOs. Report.

On August 24, 2017, DBRS published an update to its rating methodology for Companies in the Mining Industry. Report.

On August 24, 2017, DBRS published an update to its rating methodology for Container Terminal Operators. Report.

On August 24, 2017, Fitch published an update to its rating criteria for Global Rental Fleet ABS. Release.

 

 

European Financial Industry Developments

European Commission Implementing Regulation Amending Implementing Regulation 2016/2070 Published in the OJ

The European Commission Implementing Regulation amending Implementing Regulation 2016/2070 in relation to benchmarking portfolios and reporting instructions under the CRD IV Directive (2013/36/EU) (Regulation 2017/1486) was published in the Official Journal of the EU ("OJ") on August 31, 2017.

The Implementing Regulation 2016/2070 sets out the reporting requirements required from institutions and was published in the OJ in December 2016. The European Banking Authority ("EBA") and other competent authorities use the information reported to assess the quality of the institutions' internal approaches under Article 78 of CRD IV.

Pursuant to Article 78(1) of CRD IV, institutions must submit the calculations of their internal approaches at least once a year. Given that the reporting requirements evolve over time in line with the changing focus of the competent authorities' assessments and EBA Reports, the Commission considered it necessary to amend Annexes I to VI to Implementing Regulation 2016/2070.

The amendments to Implementing Regulation 2016/2070 are limited, and as such, there was no public consultation. The Implementing Regulation will enter into force on September 20, 2017. 

 

Legal Uncertainty Arising Out of the Clause 3 of European Union (Withdrawal) Bill 2017-2019: FMLC Publishes Letter

On August 31, 2017, the Financial Markets Law Committee ("FMLC") published a letter containing comments on clause 3 of the European Union (Withdrawal) Bill 2017-2019 following a request from the UK's Ministry of Justice to discuss the Bill.

The FMLC considers clause 3, in the context of direct EU legislation, which applies section by section and includes the application of implementing technical and regulatory standards. In its letter, the FMLC made a number of recommendations, including that:

  • The UK government should clarify which UK bodies (if any) are to take on the role of the European Supervisory Authorities, how this role will be defined and how this will be resourced as soon as possible;
  • More thought should be given to the operation and mechanics of clause 3. The provisions of direct EU legislation that apply before the day that the UK exits the EU and those which do not must be managed.
  • The UK government should plan for instances where certain technical or regulatory standards are necessary to enable domestic legislation to function effectively. For example, the revised Directive on payment services in the internal market  (EU 2015/2366) will apply from January 13, 2018, yet measures on regulatory standards are not due to come into force before the UK exits the EU and will not be received into UK domestic legislation. Without the regulatory standards, market participants will struggle to implement the Directive effectively.

The FMLC declined to comment further on the Bill, stating that it can most usefully contribute research and analysis once the statutory instruments set out in the Bill are published.

 

Amendment to MiFID II – European Commission Adopts Delegated Regulation Amending Systematic Internaliser Definition

The European Commission published the text of a Delegated Regulation amending Delegated Regulation (EU) 2017/565 in relation to the specification of the definition of systematic internalisers on August 28, 2017.

The Delegated Regulation (EU) 2017/565 supplements the MiFID II Directive (2014/65/EU) in relation to the organizational requirements and operating conditions for investment firms and defined terms.

Following perceived ambiguities in relation to the meaning of "trading on own account when executing client orders," the Commission launched a public consultation on the Delegated Regulation in June 2017. Concerns raised during the consultation have been addressed by the introduction of a new recital and amending article 16a, which clarifies the scope of matching arrangements that are considered dealing on own account.

The Delegated Regulation was adopted on August 28, 2017, and will now need to be considered by the Council of the EU and the European Parliament. Provided neither of the Council or Parliament objects, the Delegated Regulation will be published in the Official Journal of the EU and will enter into force on the day after its publication.

 

BCBS Consults on the Implications of FinTech for Banks and Supervisors

The Basel Committee on Banking Supervision ("BCBS") published a consultative document (BCBS415) on the implications of FinTech for banks and their supervisors.

The BCBS set up a task force to assess how FinTech will affect the banking industry and their supervisors in the near to medium term. The consultative document focuses on future potential scenarios together with the specific risks and opportunities these may bring.

The consultative document also includes case studies on big data, cloud computing and distributed ledger technology as well as case studies on three FinTech business models (neo-banks, payment services and lending platforms).

The BCBS identified key observations and recommendations on supervisory issues to be considered by banks and bank supervisors in the light of the emergence of new FinTech business models and the rapid adoption of enabling technologies. These include the following:

  • The opportunities for supervisors to use innovative technologies;
  • Principal risks for banks resulting from FinTech developments, including cyber, compliance and operational risks;
  • Implications for the increasing use of third parties by banks via outsourcing and/or partnership arrangements; and
  • The need to ensure high compliance standards and safety without limiting innovation in the banking sector.

Comments can be made on the consultative document until October 31, 2017.

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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