Financial Industry Developments

OFR Issues Report Challenging Standard for Identifying Systematically Important Banks

On October 26, 2017, the Office of Financial Research ("OFR"), an arm of the Treasury Department, issued a Report of its Director that challenges the standard set forth in the Dodd-Frank Act for determining which entities are systemically important and should be subject to the supervision of the Federal Reserve because their failure would pose the greatest risk to financial stability.

A new OFR viewpoint, "Size Alone is Not Sufficient to Identify Systemically Important Banks," argues that a multifactor approach is superior to considering asset size alone to assess a bank's systemic importance.

The Report observes that regulators already use such an approach to identify global systemically important banks ("G-SIBs"). They consider size and four other factors to measure a bank's systemic importance: (1) interconnectedness, (2) substitutability, (3) complexity, and (4) cross-jurisdictional activity. The eight G-SIBs based in the United States face the most stringent standards.

The Report further notes that the OFR's analysis indicates that a multifactor approach could replace the $50 billion asset-size threshold that some U.S. regulations use to identify U.S. banks that are not G-SIBs, but warrant enhanced regulation.

The Report asserts that such an approach could identify a much smaller group of non-G-SIB banks for enhanced prudential standards. Relatively large but less-systemic U.S. institutions might no longer face regulatory costs disproportionate to their importance. Smaller banks that play unique roles in U.S. markets, are more complex, or rely on short-term wholesale funding could continue to face higher standards.

SEC Announces Measures to Facilitate Cross-Border Implementation of the European Union's MiFID II's Research Provisions

On October 26, 2017, the Securities and Exchange Commission ("SEC") announced that, "following consultation with European authorities, and in response to concerns that investors could lose access to valuable research, the staff of the U.S. Securities and Exchange Commission issued three related no-action letters. These letters are designed to provide market participants with greater certainty regarding their U.S. regulated activities as they engage in efforts to comply with the European Union's (EU) Markets in Financial Instruments Directive (MiFID II) in advance of the Jan. 3, 2018, implementation date."

According to the SEC, the no-action relief "provides a path for market participants to comply with the research requirements of MiFID II in a manner that is consistent with the U.S. federal securities laws. More specifically, and subject to various terms and conditions: (1) broker-dealers, on a temporary basis, may receive research payments from money managers in hard dollars or from advisory clients' research payment accounts; (2) money managers may continue to aggregate orders for mutual funds and other clients; and (3) money managers may continue to rely on an existing safe harbor when paying broker-dealers for research and brokerage."

The Press Release announcing these developments can be found here.

Rating Agency Developments

On October 25, 2017, Moody's published an update to its rating methodology for US Stand-Alone Housing Bond Programs Secured by Credit Enhanced Mortgages. Release.

On October 25, 2017, KBRA published its rating methodology for the U.S. Not-for-Profit Healthcare sector. Report.

On October 20, 2017, DBRS published an update to its rating methodology for Companies in the Gaming Industry. Release.

On October 20, 2017, DBRS published an update to its rating methodology for Companies in the Canadian Grain Handling Industry. Release.

On October 20, 2017, DBRS published an update to its rating methodology for Companies in the Automotive Manufacturing and Supplier Industries. Release.

On October 19, 2017, Moody's published an update to its rating methodology for US Municipal Utility Revenue Debt. Release.

On October 19, 2017, Moody's published an update to its rating methodology for Publicly Managed Airports and Related Issuers. Release.

European Financial Industry Developments

European Commission Publishes Guidance on MiFiD II Inducements and Research Reforms

On October 26, 2017, the European Commission issued a list of FAQs in an attempt to clarify the obligations of EU investment firms in relation to brokerage and research services which are located in non-EU jurisdictions.

The FAQs, available here, address how European firms can maintain full compliance with MiFID II obligations when procuring international services. They were published following concerns raised by the FCA that market participants may be unable to access U.S. research without breaching the requirements.

In addition to the guidance published by the European Commission, the SEC also issued a press release, available here, while the FCA welcomed both announcements and issued a statement explaining the implications of the announcements for the UK (available here).

European Parliament to Consider Report on Retail Financial Services

The European Parliament procedure file indicates that the report outlining the European Commission's action plan on retail financial services will be considered in mid-November.

The action plan, published in March 2017, forms part of the European Commission's goal of establishing a capital markets union. It aims to increase consumer trust, empower consumers and reduce legal and regulatory obstacles, whilst supporting innovation in the industry.

Following publication of the action plan, the European Parliament's Committee on Economic and Monetary Affairs published a draft report on the action plan which contained a motion for a Parliament resolution. The draft report is available here; however, the final version, which will be discussed in Parliament, has not yet been published.

European Commission Outlines Work Program for 2018

The European Commission published a communication on October 24, 2017, which outlined its work program for 2018. The communication included numerous annexes and outlined a number of initiatives which are intended to be the focus of the European Commission for the coming year.

The communication goes into further detail in a number of annexes that, for example, set out 10 political priorities, including the completion of the capital markets union and the banking union, as well as create a permanent and accountable European Minister of Economy and Finance.

The annexes also set out priority-pending proposals on which the European Commission wants the European Parliament and Council of the EU to prioritize while also listing a number of proposals which it intends to withdraw and legislation it intends to repeal.

The communication, addressed to the European Parliament, the Council of the EU, the European Economic and Social Committee and the Committee of the Regions, is available here.