Orrick's Financial Industry Week In Review

Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments

Federal Reserve and FDIC Extend Deadline for Nineteen Foreign Banks and Two Domestic Bank Holding Companies to File Living Wills

On August 8, 2017, the Federal Reserve Board and Federal Deposit Insurance Corp. extended the deadline for 19 foreign banks and two domestic bank holding companies to file their next round of "living wills" detailing how they can be speedily and safely wound down in the event of a crisis.

The new deadline for these firms to file their updated resolution plans is December 31, 2018, giving them an additional year "to address any supervisory guidance in their next plan submissions," the regulators said in a statement. HSBC Holdings plc, the Toronto-Dominion Bank and Banco Santander SA are among the foreign banks receiving the extension, while the domestic group comprises CIT Group Inc. and Citizens Financial Group Inc.

The resolution plans, also known as living wills, outline how the banks could be taken apart safely through the bankruptcy process if they are hit with a financial shock. The public portions of the plans provide an overview; more details about the banks' structure and funding, as well as plans for failure, are kept confidential at the Fed and the FDIC. The other foreign banks covered by the extension are Banco Bilbao Vizcaya Argentaria SA, Bank of China Ltd., Bank of Montreal, BNP Paribas, BPCE, Coöperatieve Rabobank UA, Crédit Agricole SA, Industrial and Commercial Bank of China Ltd., Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc., Royal Bank of Canada, Société Générale, Standard Chartered PLC, Sumitomo Mitsui Financial Group Inc., the Bank of Nova Scotia and the Norinchukin Bank.

The Fed and FDIC also said that two additional smaller foreign firms, Canara Bank and Mercantil Servicios Financieros CA, will be allowed to file reduced-content resolution plans going forward. These firms already submitted previous plans that have filled in regulators on the essentials of their limited U.S. operations, regulators said.

Tuesday's extension comes after the Fed and FDIC granted a living will extension last month to American International Group Inc. and Prudential Financial Inc., two nonbank companies that have been designated systemically important financial institutions by the Financial Stability Oversight Council and are subject to extra oversight. They were originally required to submit their plans by the end of December 2017, but now have until December 31, 2018, the Fed and the FDIC said. 



Rating Agency Developments

On August 7, 2017, Fitch released a report entitled: Corporate Rating Criteria. Report.

On August 4, 2017, Fitch released a report entitled: U.S. Private Student Loan ABS Rating Criteria. Report.

On August 4, 2017, Fitch released a report entitled: CMBS Large Loan Rating Criteria. Report.

On August 3, 2017, Fitch released a report entitled: Toll Roads, Bridges and Tunnels Rating Criteria. Report.



RMBS and Other Securities Litigation

Connecticut District Court Denies WMC Mortgage's Motion for Partial Summary Judgment

On August 8, 2017, Judge Charles S. Haight Jr. of the U.S. District Court for the District of Connecticut denied defendant's motion for partial summary judgment in Law Debenture Trust Co. of New York v. WMC Mortgage.  The court held that plaintiff may continue to pursue its failure-to-notify claim on loans other than the loans for which plaintiff had specifically notified WMC of alleged breaches.  Judge Haight also declined to prohibit Plaintiff from using statistical sampling to prove liability and damages, although he did not find that such sampling would ultimately be sufficient to prove the plaintiff's claim, and refused to grant defendant's motion for summary judgment on the meaning of a "material and adverse" breach. Read the summary judgment order here.

Court Enters Verdict for Bank of New York Mellon in Ohio RMBS Trustee Litigation

On August 4, 2017, Judge Steven E. Martin of the Ohio Court of Common Pleas rendered a full verdict in favor of Defendant-Trustee The Bank of New York Mellon ("BNYM") in Western and Southern Life Insurance Company, et al. v. The Bank of New York Mellon following a three-week bench trial. 

Judge Martin held that plaintiffs failed to prove that BNYM's conduct caused losses on the RMBS at issue, instead finding that any losses on the RMBS were caused by the fallout of the financial crisis itself, or by "potentially other entities" besides BNYM.  The court also determined that plaintiffs' methodology for establishing its alleged damages—by sampling a fraction of the loans at issue and extrapolating conclusions therefrom—was inappropriate given the applicable contracts.  Echoing recent decisions in New York State and Federal Courts, Judge Martin found that "countless" provisions in the pooling and servicing agreements require plaintiffs to prove their claims loan-by-loan, rather than through sampling. Read the opinion letter here.

Proposed Class Accuses Deutsche Bank of Improperly Using Funds for Legal Defense

On August 4, 2017, Royal Park Investments SA/NV filed a proposed class action against Deutsche Bank National Trust Co. ("DBNTC") in the U.S. District Court for the Southern District of New York, claiming that DBNTC—in its capacity as RMBS Trustee for ten trusts—is improperly using trust proceeds to finance its defense against separate litigation, brought by the same Plaintiff, alleging that DBNTC breached its duties as RMBS Trustee.  Plaintiff's complaint acknowledges that the relevant governing agreements contain language entitling DBNTC to indemnification under certain circumstances but argues that, nonetheless, New York law prohibits such indemnification where the indemnified costs are incurred in a lawsuit between the indemnifying parties.  The complaint seeks an injunction barring DBNTC from further use of the trust's assets to fund its litigation defense and asks the court to order an accounting of legal expenses recouped to date. Read the complaint here.



European Financial Industry Developments

ESMA Publishes Responses to June 2017 Consultation on RTS Trading Obligations for Derivatives under MiFIR

On August 10, 2017, the European Securities and Markets Authority ("ESMA"), published responses to its June 2017 consultation on trading obligations for derivatives under the Markets in Financial Instruments Regulation (Regulation 600/2014) ("MiFIR"), viewable here.

Under Article 32(1) of MiFIR, ESMA is required to develop regulatory technical standards (RTS) specifying the derivatives that should be subject to the trading obligation. ESMA intends to use the feedback to finalize the draft RTS and submit them to the European Commission for endorsement.

Respondents include:

  • Investment Association (IA).
  • Alternative Investment Management Association (AIMA).
  • Building Societies' Association (BSA).
  • European Savings and Retail Banking Group (ESRBG).
  • European Banking Federation (EBF).
  • Managed Funds Association (MFA).
  • Wholesale Markets Brokers' Association (WMBA).
  • International Swaps and Derivatives Association (ISDA).

European Parliament Committee Publishes Study on the Legal Implications of Brexit

On August 9, 2017, a policy department of the European Parliament ("EP") published a Study requested by the EP's Committee on Internal Market and Consumer Protection ("IMCP") on the "Legal Implications of Brexit: Customs Union, Internal Market Acquis for Goods and Services, Consumer Protection Law, Public Procurement".

The Study categorizes the EU legal framework for the different stages of the withdrawal of a member state from the EU, namely:

  • Substantive legal obligations arising from Article 50 of the Treaty on the European Union concerning withdrawal from the EU resulting in a withdrawal agreement.
  • The legal nature and scope of the UK's future relationship with the EU.
  • Possible transitional arrangements.
  • Implications of that future relationship for EU Internal Market law, particularly those policy areas covered by the IMCO Committee.

The Study emphasizes that there are significant limitations to its analysis owing to the fact there are still many major policy choices left to be made by the EU and the UK even before they start being negotiated. The main purpose of the study, therefore, is to provide an analytical framework for assessing the legal impact of different Brexit scenarios.

Scenarios for the Future EU-UK Relationship: The Study analyzes different scenarios of the UK withdrawing from the EU in relation to the EU Customs Union, the Internal Market law for Goods and Services, and on Consumer Protection law.

It takes fully-fledged EU membership as the baseline scenario and compares it to three other scenarios and assesses the legal implications of each scenario:

  • UK membership of European Economic Area ("EEA").
  • A tailor-made free trade arrangement between the UK and EU.
  • WTO law governing relations between the UK and EU (the fall-back scenario).

Impact of a Scenario on EU Policy Areas: The Study also develops an analytical framework for identifying the legal impact of different Brexit scenarios on IMCO Committee policy fields, including proposing a two-step test.

Finally, it applies that test to the various Brexit scenarios on key EU laws in IMCO Committee policy areas and reaches some tentative conclusions on the likely impact, particularly for:

  • Consumer protection: relatively limited impact.
  • Policy areas involving standards, such as product safety: significant impact.
  • Goods: significant impact.

The Study is available here.

European Commission Requests Feedback on a Roadmap for Widening Access to Centralized Bank and Payment Account Registries

On August 9, 2017, the European Commission published an inception impact assessment (Ares (2017)3971182) (also called a roadmap) on access to centralized bank account registries.

In the roadmap, the Commission explains that the proposed Fifth Money Laundering Directive ("MLD5") includes provisions that would require member states to establish automated centralized mechanisms, such as central registries or central electronic data retrieval systems, of bank and payment accounts. Member states would be required to grant access to these registries to financial intelligence units (FIUs) and national competent authorities (NCAs) to prevent money laundering and terrorist financing. The registries are intelligence tools, not data warehouses. They do not contain any information on the balance of the account or transaction details. The minimum data that would be contained in the registries would include information on the identification of the account holder, of any person acting on their behalf, of the beneficial owners, the IBAN account number (which would also identify the bank), the account opening date and, where applicable, the closing date.

The Commission advises that the inter-institutional negotiations on MLD5 are well advanced. The Council of the EU adopted its general approach in December 2016, in which no substantial changes were made to Article 32a of MLD5, which establishes the registries. The European Parliament has not presented substantive amendments on Article 32a either. As a result, the Commission believes that the provisions establishing centralized registers are likely to be included in the final text of MLD5, to be adopted by the co-legislators later in 2017.

However, the Commission explains that the scope of MLD5 is limited to the prevention of money laundering and terrorist financing. As a result, under MLD5, access to the registries can only be granted to FIUs and NCAs, but not to other law enforcement agencies. In some member states, a broader range of law enforcement agencies will be able to consult the registries. This means there will be differences among member states, which could be exploited by criminals and organized crime groups.

Under the Commission's February 2016 terrorist financing action plan, it announced that it would explore the possibility of a self-standing legislative instrument to allow for broader access to the registries for other law enforcement investigations and by other authorities (such as tax authorities, asset recovery offices (AROs) and anti-corruption authorities (ACAs)). The Commission believes that this would contribute to the prevention of organized crime, and other serious offenses, by enabling public authorities to get timely access to information on the identity of holders of bank and payment accounts in their member state. This would facilitate criminal investigations, as well as the confiscation and recovery of criminal assets. The Commission also considers that banks are likely to benefit from the initiative, as they should experience a reduction in the administrative costs of regularly having to reply to authorities' requests for information.

In June 2016, the Commission carried out a targeted consultation that involved sending a questionnaire on the issue of access to the registries to AROs and ACAs. 90% of all authorities who replied (representing 26 member states) consider that access would facilitate their tasks substantially. It is planning to launch a twelve-week public consultation in the third quarter of 2017 and, simultaneously, to carry out targeted consultations of key stakeholders (including banks) in the third and fourth quarter of 2017.

A related Commission webpage explains that comments can be made on the roadmap until September 6, 2017. The roadmap refers to an indicative planning date of the first quarter of 2018.

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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