Financial Industry Developments

Texas District Court Rules on Damages Calculations in FDIC’s RMBS Suit Against Goldman Sachs and Deutsche Bank

On September 14, 2017, Judge Sam Sparks of the U.S. District Court for the Western District of Texas granted summary judgment in favor of defendants Goldman Sachs & Co. and Deutsche Bank Securities Inc. on certain aspects of the method and rate that will be used to calculate damages in an RMBS suit brought by the Federal Deposit Insurance Corporation. The FDIC alleges that the Defendants violated the Securities Act of 1933 and the Texas Securities Act ("TSA") by making material misstatements and omissions concerning the mortgages underlying $2.1 billion worth of residential mortgage-back securities.

The Defendants had moved for summary judgment on the method and rate for calculating damages under the TSA’s Article 581-33(D)(3). First, they argued that damages should be calculated using the "declining principal balance method" to account for payments made on the outstanding balance in the interest calculation. The Court agreed, comparing the language of the TSA with that of the Securities Act of 1933, and holding that this method appropriately "compensate[s] a defrauded buyer based on out-of-pocket consideration at any given time," which aligns with the TSA’s purpose to "return defrauded buyers to the status quo."

Defendants also requested that the damages interest rate, which was described as the "legal rate" in the contractual provision, should be the "Coupon Rate" specified in the underlying security certificates. Judge Sparks rejected this argument because "legal rate" was not defined in the contract, and held instead that the interest rate should be six percent per year under general provisions of interest in Chapter 302 of the Texas Finance Code, based on how Texas statues and courts had interpreted "legal rate" in other contexts. Summary Judgment Order

Rating Agency Developments

On September 20, 2017, Moody’s published its ratings methodology for global title insurers. Report.

On September 20, 2017, Fitch updated its ratings criteria for aircraft enhanced equipment trust certificates. Report. 

On September 14, 2017, Moody’s published its ratings methodology for the communications infrastructure industry. Report.

European Financial Industry Developments

Capital Markets Union: Commission proposals to reform European financial supervision regime

European Commission published proposals to reform the EU's supervisory structure, including to extend ESMA's role and powers in respect of prospectuses and market abuse on September 20, 2017. This represents the first concrete step towards the creation of a single European capital markets supervisor.

It is proposed (amongst other things) that the Prospectus Regulation be amended so as to task ESMA, rather than national competent authorities, with approving:

• Prospectuses for certain wholesale non-equity securities.
• Prospectuses relating to asset-backed securities.
• Prospectuses that are drawn up by property companies, mineral companies, scientific research-based companies or shipping companies.
• Prospectuses drawn up by non-EU country issuers.

Where it is responsible for approving a prospectus, ESMA would also control related advertisements.

This proposal is intended to create a level playing field for issuers, to speed up approvals, to enhance supervision in the EU and to prevent forum-shopping.

ESMA would also be given a greater role in coordinating market abuse investigations. This could extend to recommending that competent authorities initiate investigations and to facilitating the exchange of information relevant for those investigations, where ESMA has reasonable grounds to suspect that activity with significant cross-border effects is taking place that threatens the orderly functioning and integrity of financial markets or financial stability in the EU. ESMA would maintain a data storage facility to collect from, and disseminate between, competent authorities, all relevant information.

The Commission invites the European Parliament and the Council to discuss and agree its proposals as a high priority, in order to ensure their entry into force before the end of the current legislative term in 2019.

ISDA Launches SIMM 2.0 for Calculating Uncleared Swaps Initial Margin

On September 7, 2017, ISDA launched a new version of its standard initial margin model (SIMM), ISDA SIMM Version 2.0, which includes a full recalibration of risk factors as well as:

• New risk factors for three product types:
  • equity volatility indices;
  • quanto credit default swaps, which are credit default swaps (CDS) in which the swap payments are in different currencies; and
  • municipal swaps.
• Clarification of certain definitions.
• Enhancements to calculations capturing vega margin and commodity indices.

SIMM provides a methodology for the calculation of initial margin (IM) for uncleared swaps that complies with margin requirements for non-centrally cleared derivatives in the US, European Union (EU), and Japan.

ISDA periodically reassesses and recalibrates SIMM risk factors in order to meet regulatory standards and market conditions. SIMM 2.0 reflects requests from US prudential regulators for these modifications. The changes will be effective on December 4, 2017.