Orrick's Financial Industry Week in Review

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Rating Agency Developments

On January 25, 2016, DBRS updated its methodology for rating Subscription Loans (Capital Call). Report.

On January 21, 2016, Fitch updated its U.S. RMBS Master Rating Criteria. Report

 

Distressed Debt and Restructuring Developments

Debtwire European Distressed Debt Market Outlook 2016

Distressed investors did not witness the anticipated wave of European high yield restructurings in 2015, but with significant stock market declines and a growing sense of economic anxiety, participants in the 12th European Distressed Debt Market Outlook expect a marked increase in restructuring activity in 2016. Despite improved European growth and stronger U.S. economic data, falling commodity prices (particularly oil) and the higher number of high yield bonds trading at distressed levels suggest another year of volatility is in store.

Orrick partner and co-head of Europe Restructuring Stephen Phillips recently joined the Debtwire panel addressing these issues. For more information, please contact Stephen.

To access the full report, click here

 

RMBS and Other Securities Litigation

Ambac and J.P. Morgan Reach $995M RMBS Settlement

On Monday, January 25, 2016, monoline insurer Ambac Assurance Corporation ("Ambac") reached a $995 million settlement with J.P. Morgan, resolving two RMBS actions pending before Justice Ramos in the Supreme Court of the State of New York and Ambac's objections to J.P. Morgan's $4.5 billion global settlement with RMBS trustees.  We previously covered Ambac's actions against J.P. Morgan here, here and here.  In those actions, Ambac brought claims against J.P. Morgan as the successor to EMC Mortgage and Bear Stearns for alleged misrepresentation of the quality the loans underlying eleven RMBS transactions.  The settlement also resolves Ambac's objections to J.P. Morgan's 2014 settlement with RMBS trustees of claims for alleged breaches of representations and warranties and servicing deficiencies. The adequacy of that settlement is currently the subject of an Article 77 proceeding before Justice Friedman of the Supreme Court of the State of New York, which we previously covered herePress Release.  Stipulation of Withdrawal.

Eleven Banks Reach Settlement with Commonwealth of Virginia on RMBS Claims

On Friday, January 22, 2016, eleven banks, including Merrill Lynch, RBS, and Barclays, agreed to settle claims brought by the Commonwealth of Virginia in a 2014 action alleging misrepresentations as to the nature, quality, characteristics, and risk profile of RMBS certificates. The certificates were purchased by the Virginia Retirement System, an agency of the Virginia Commonwealth.  In its complaint, the Commonwealth alleged injury of $383.91 million and demanded treble damages of $1.15 billion, plus a civil penalty of $5,000-$11,000 per violation.  The settlement announced on January 22 is for $63 million.  Press ReleaseComplaint

 

European Financial Industry Developments

EBA to Assess the Potential Impact of IFRS 9 on EU Banks

In a press release dated 27 January 2016, the European Banking Authority (EBA) launched an impact assessment of IFRS 9 (dealing with financial Instruments) which is due to be implemented in the EU in 2018. The impact assessment is designed to assist the EBA to understand the likely impact of IFRS 9 on regulatory own funds, the interaction between IFRS 9 and other prudential requirements, and the way institutions are preparing for the application of IFRS 9. The assessment will be based on a sample of approximately 50 EU institutions. The EBA contemplates that the assessment process will need to be repeated in the run up to the implementation date for IFRS 9 as institutions are still developing their response to IFRS 9.

ESMA and South African and Mexican Authorities to Cooperate Under EMIR on CCPs

On 26 January 2016, ESMA announced that had entered into a memorandum of understanding (MoU) with each of the Mexican Comisión Nacional Bancaria y de Valores (CNBV) and the South African Financial Services Board (FSB) under the European Markets Infrastructure Regulation (EMIR).

EMIR provides for co-operation arrangements to be established by ESMA and non-EU authorities whose legal and supervisory framework for CCPs have been deemed equivalent to EMIR by the European Commission. The memoranda set out the terms on which the two authorities will cooperate and share information with ESMA regarding Central Counterparties (CCPs) which are authorised or recognized in Mexico or South Africa, and which have applied for EU recognition under EMIR. As well as establishing these arrangements, the MoUs provide ESMA with adequate tools to monitor the on-going compliance by the CCPs with the recognition conditions contained in EMIR. The MoU with FSB entered into force on 30 November 2015 and the MoU with the CNBV entered into force on 25 January 2016. Press release. CNBV MoU. FSB MoU.

European Supervisory Authorities Request Response from European Commissioner to Inconsistencies in Cross-Selling Legislation

On 26 January 2016, the Chairpersons of the European Supervisory Authorities (ESAs) (i.e. EBA, EIOPA and ESMA) sent a letter to the European Commissioner for the Directorate General Financial Stability, Financial Services and Capital Markets Union.

The letter flags up that differences in primary legislation currently preclude the ESAs from developing consistent guidelines on cross selling across the investments, insurance and banking sectors in the EU and asks that the Commission look into the differences in financial services legislation and consider the steps required in order to guarantee that the ESAs are fully equipped to regulate these practices, to the benefit of consumers, financial institutions and supervisory authorities. The ESAs suggest that the Commission may have an opportunity to review these matters as part of its follow up to its September 2015 call for evidence on the EU framework for the regulation of financial services and its December 2015 green paper on retail financial services.

ESMA Opinion Highlights Differences with the European Commission on the Main Indices and Recognized Exchanges Under CRR

On 19 December 2014, the European Securities and Markets Authority (ESMA) submitted to the European Commission draft implementing technical standards (ITS), pursuant to the Capital Requirements Regulation 575/2013, specifying a list of main indices and recognized exchanges. On 17 December 2015, the European Commission informed ESMA of its intention to amend the draft ITS by including two additional equity indices (the Russell 3000 Index and the Hang Send Composite Index). In an opinion (ESMA/2016/163), published on 29 January 2016, ESMA made recommendations in response to this intention.

ESMA argues that the Russell 3000 Index and the Hang Send Composite Index should not be included in the ITS on the grounds that these indices do not contain relatively liquid instruments in an EEA economy, given that they are mainly composed of US and Asian Stocks. Instead, ESMA suggests adding four other additional indices (Russell 1000 Index, Shanghai Shenzhen CSI 300, the S&P BSE 100 Index and FTSE Nasdaq Dubai UAE 20 Index), and replacing the Nikkei 225 with the Nikkei 300 and the NZSE 10 with the S&P NZX 15 Index. ESMA's opinion recognizes the value of incorporating a large number of indices as this will cast a wider net of eligible collateral that European banks can use.

Finally, given the frequency with which updates to ITS are needed, ESMA suggests that the Commission reviews the regime to avoid each modification requiring a full legislative cycle.

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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