Orrick's Financial Industry Week in Review

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Financial Industry Developments

Agencies Issue Proposal on Method to Adjust Threshold for Exempting Small Loans from Special Appraisal Requirements

On July 22, 2016, the Consumer Financial Protection Bureau, the Federal Reserve Board and the Office of the Comptroller of the Currency issued a proposal with respect to the method for making "annual inflation adjustments to the threshold for exempting small loans from higher priced mortgage loan appraisal requirements". Comments on the proposal will be due thirty days from the date of publication in the Federal Register. Release.

Agencies Issue Proposal on Method to Adjust Thresholds for Exempting Certain Consumer Credit and Lease Transactions

On July 22, 2016, the Federal Reserve Board and the Consumer Financial Protection Bureau issued a proposal with respect to the method that will be used to "adjust the thresholds for exempting certain consumer credit and lease transactions from the Truth in Lending Act and Consumer Leasing Act". Comments on the proposal will be due thirty days from the date of publication in the Federal Register. Release.

Rating Agency Developments

On July 26, 2016, Moody's published its ratings methodology for Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments. Report.

Distressed Debt and Restructuring Developments

Supreme Court to Resolve Circuit Split Over Structured Dismissals

The Supreme Court again will be addressing the powers of bankruptcy courts. At the end of the term, the Court granted certiorari in Czyzewski v. Jevic Holding Corp. to decide whether a bankruptcy court may authorize the distribution of settlement proceeds in a way that violates the statutory priority scheme in the Bankruptcy Code.  No. 15-649, 2016 WL 3496769 (S. Ct. June 28, 2016).  The Supreme Court is expected to address this fundamental bankruptcy issue sometime early next year.

To read the full article, please click here.

RMBS and Other Securities Litigation

New York Court Dismisses Claims against EquiFirst and Barclays as Untimely

On July 25, 2016, Justice Marcy Friedman of the New York Supreme Court dismissed a $619 million suit brought by U.S. Bank in its capacity as Trustee of an RMBS trust against the originator of the loans, Equifirst, Barclays' now-defunct mortgage originator.  The Federal Housing Finance Agency ("FHFA"), as conservator of an RMBS certificateholder, initially filed the summons with notice on February 28, 2013, the six-year anniversary of the securitization's closing date.  U.S. Bank waited another six months before filing the complaint on October 28, 2013.  U.S. Bank brought claims for breach of contract for Equifirst's alleged misrepresentations regarding the quality of the underlying mortgage loans, and breach of the implied covenant of good faith and fair dealing arising from an alleged failure to notify contractual counterparties of Equifirst's alleged breaches.  Relying on a recent intermediate appellate decision and her orders in similar cases, Justice Friedman dismissed those claims holding that FHFA, as a certificateholder, lacked standing to commence the action, and that the Trustee's complaint, which was filed after the passage of the statute of limitations, did not relate back to FHFA's summons with notice.  The court granted U.S. Bank leave to replead its failure to notify claims. Order.

European Financial Industry Developments

EBA Publishes Final Draft RTS on Separation of Payment Card Schemes and Processing Entities under IFR

On July 28, 2016 the EBA published final draft regulatory technical standards (RTS) relating to the separation of payment card schemes and payment processing entities under the Interchange Fee Regulation ((EU) 2015/751) (IFR) (EBA/RTS/2016/05).

The final draft RTS have been developed under Article 7(6) of the IFR. Under this article the EBA must specify the requirements with which payment card schemes and processing entities have to comply in order to guarantee the independence of their accounting, organizational and decision-making processes. The accompanying press release highlights that the aim of the final draft RTS is to facilitate greater competition among processing services providers, which is in line with the general objective of the IFR to create a single market for card payments across the EU.

Under the final draft RTS payment card schemes and processing entities are required to:

  • have accounting processes in place to produce annual information related to separated profit and loss accounts reviewed by an independent and certified auditor;
  • have separate workspaces; and
  • ensure the independence of senior management, management bodies and staff.

The final draft RTS will now be submitted to the European Commission for endorsement.

European Commission Intends to Endorse, with Amendments, Draft RTS on Risk Mitigation Techniques for Uncleared OTC Derivative Contacts under EMIR

On July 28, 2016, The European Commission published a letter to the Joint Committee of the European Supervisory Authorities (ESAs) informing them that it intends to endorse, with amendments, the draft regulatory technical standards (RTS) on risk mitigation techniques for OTC derivative contracts not cleared by a central counterparty (CCP) under Article 11(15) of EMIR. The Commission also published the revised text of the draft RTS, together with the accompanying annexes.

The letter highlights that the Commission intends to make several clarifications and to restructure the legal text of the draft RTS. The changes include:

  • introducing a recital containing reasoning for the delayed phase-in of the requirements for equity options;
  • clarification that EU counterparties wishing to rely on the intragroup exemption may submit their application after the RTS enter into force;
  • clarification that cash initial margin may be held with equivalent third country institutions (as well as with authorised EU credit institutions);
  • clarification that requirements relating to foreign exchange (FX) contracts should start to apply from the date of application of the relevant Delegated Act under the MiFID II framework, as opposed to the date of entry of this Delegated Regulation; and
  • changes to one provision relating to concentration limits for pension scheme arrangements.

The ESAs now have six weeks to amend the draft RTS and resubmit them to the Commission in the form of a formal opinion.

EBA Publishes Final Draft RTS on Criteria for Preferential Treatment in Cross-Border Intra-Group Financial Support under LCR

On July 27, 2016, the EBA published a report containing final draft regulatory technical standards (RTS) on the specification of the additional objective criteria for preferential treatment in cross-border intra-group financial support in the calculation of the liquidity coverage requirement (LCR) under the Capital Requirements Regulation (Regulation 575/2013) (CRR) (EBA/RTS/2016/04).

The CRR permits a preferential treatment in the calculation of the LCR for intra-group liquidity flows. The Commission Delegated Regulation on the LCR ((EU) 2015/61) (LCR Delegated Regulation) specifies additional objective criteria for this preferential treatment for flows in the context of credit and liquidity facilities within a group or an institutional protection scheme (IPS) Articles 422(10) and 425(6) of the CRR mandate the EBA to develop RTS to further specify these additional objective criteria.

Under the final draft RTS:

  • a low liquidity risk profile of the liquidity provider and receiver required in the LCR Delegated Regulation will be determined on the basis of its compliance with the LCR and the Pillar 2 requirements, as well as on the basis of the outcome of the latest supervisory review and evaluation process (SREP);
  • credit institutions' management bodies will be required to submit a written and reasoned legal opinion certifying that the credit or liquidity line in the LCR Delegated Regulation is a committed line legally and practically available at any time. The line is also subject to other requirements such as currency denomination or maturity date, to reinforce its appropriateness for the application of the preferential treatment; and
  • The LCR Delegated Regulation requires that the liquidity risk profile of the liquidity receiver be taken into account in the liquidity risk management plans of the liquidity provider. Under the RTS, the liquidity provider must monitor and oversee the liquidity position of the receiver on a daily basis. The contingency funding plan of the liquidity provider must ensure that, from this monitoring, the liquidity support to the receiver is guaranteed, even in times of stress.

The final draft RTS will now be submitted to the European Commission for endorsement.

 

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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