The Federal Housing Finance Agency Releases Final Rule on Federal Home Loan Bank Membership

On January 12, 2016, the Federal Housing Finance Agency ("FHFA") issued a final rule establishing new requirements for membership in the Federal Home Loan Banks ("FHLBanks").  The FHLBanks are 11 U.S. government-sponsored banks that provide liquidity to their members to support housing finance and community investment.  Membership is governed by the Federal Home Loan Bank Act (the "Act"), which states that insurance companies, among others, are eligible for membership.  12 U.S.C. § 1424(a)(1).  The new rule, issued under that Act, establishes new requirements for becoming a member and maintaining membership of an FHLBank.  Most notably, the final rule excludes captive insurance companies from membership. 

In its 2014 proposed rule, FHFA first proposed excluding captive insurance companies from the scope of the definition of "insurance company" in the Act. Captive insurance companies are insurance companies established by a parent specifically to cover risks to which the parent is exposed; they do not insure non-affiliated third parties.  Despite receiving 400 comments on this aspect of the rule, almost all of which expressed opposition to the proposal, FHFA's final rules retains the proposal essentially as it was proposed. 

Under the rule, FHLBanks may not accept any captive insurance companies as new members.  For captive insurance companies that became members since the rule was proposed in 2014, membership must be terminated within one year, and no additional advances may be made.  Captive insurance companies that were members of a FHLBank prior to the issuance of the proposed rule may remain members of their current FHLBanks for five years, but the amount of advances they can receive are capped, and the FHLBanks may not make new advances or renew existing advances with a maturity date beyond the five-year period.

Under the 2014 proposal, FHFA also proposed imposing ongoing minimum investment requirements on FHLBank members in order to maintain membership.  Specifically, FHFA proposed that institutions would have had to maintain a certain percentage of residential mortgage assets.  The threshold for small banks and credit unions with assets less than $1 billion was at least 1%.  In its final rule, FHFA removed these requirements from the final regulations, concluding that the burdens of imposing such standards would outweigh the benefits.

The new regulation will go into effect 30 days after publication in the Federal Register.  The rule has been strongly opposed by industry participants, who view it as a detriment to the liquidity of the residential housing market, and is expected to garner further discussion and likely a court challenge. Press Release. Final Rule. 

U.S. Commodity Futures Trading Commission Division of Clearing and Risk Issues No-Action Relief from Swap Clearing Requirements

On January 8, 2016, the U.S. Commodity Futures Trading Commission's (the "CFTC") Division of Clearing and Risk issued no-action relief to certain entities from the swap clearing requirements so long as certain conditions (outlined in the respective letters) are complied with. The covered entities include (1) small bank holding companies and savings and loan holding companies with consolidated assets of less than $10 billion and (2) Community Development Financial Institutions that have been certified by the U.S. Department of the Treasury. Press Release. No-Action Letter. No-Action Letter.

On January 8, 2016, Fitch updated its criteria for rating investment holding companies. Report.

On January 7, 2016, Moody's updated and replaced its existing methodology for rating banks. Report.

On January 7, 2016, Moody's published its methodology for rating central counterparty clearing houses (CCPs). Report. 

New York Appellate Court Affirms Motion to Dismiss RMBS Complaint Against Morgan Stanley

EBA publishes final draft technical standards and Guidelines on methodology and disclosure for G-SIIs

The European Banking Authority (EBA) has published final draft technical standards and revised guidelines on the further specification of the indicators of global systemic importance and their disclosure. The guidelines have been developed according to Directive 2013/36/EU (the Capital Requirements Directive, CRD IV) and in line with international standards. CRD IV requires G-SIIs to hold higher capital levels in order to contain the risks they pose to the financial system and the impact that their potential failure may have on sovereign finance and taxpayers (so-called "too big to fall"). The draft revised Guidelines stipulate that not only G-SIIs, but also other large institutions with an overall exposure of more than €200 billion and which are potentially systemically relevant, will be subject to the same disclosure requirement as the G-SIIs.

The revision was prompted by a new data template and some minor changes introduced by the Basel Committee on Banking Supervision (BCBS) in January 2015 for the identification of global systemically important banks (G-SIBs). The list of EU G-SIBs identified by the BCBS and the global systematically important institutions (G-SIIs) identified by Member States' authorities are identical.

The final draft technical standards and revised draft guidelines are set out in three reports (revised technical standards (RTS) report, implementing technical standards (ITS) report, and draft guidelines report). The final RTS and ITS will be presented to the European Commission for endorsement, following which the RTS will be subject to scrutiny by the European Parliament and the Council of the EU before publication in the Official Journal of the EU.

Basel Committee issues revised framework for market risk capital requirements

The Basel Committee on Banking Supervision (BCBS) has issued revised standards for minimum capital requirements for market risk. The purpose of the revised market risk framework is to ensure that the standardised and internal model approaches to market risk deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions. The revisions focus on three key areas: revised boundary between banking book and trading book, revised internal models approach for market risk and revised standardised approach for market risk. The revised framework also includes a shift from value-at-risk to an expected shortfall measure of risk under stress and incorporation of the risk of market illiquidity.

The revised framework produces market risk risk-weighted assets (RWAs) that account for less than 10% of total RWAs, compared to approximately 6% under the current framework. The revised market risk standard would result in a medium (weighted mean) increase of approximately 22% (40%) in total market risk capital requirements as against the current market risk framework.

The revised market risk framework comes into effect on 1 January 2019. A detailed explanatory note of the new standards is available here.

FCA issues consultation paper on proposed changes to the Senior Managers and Certification Regime

The FCA has launched a consultation paper setting out a number of technical rule changes to the Senior Managers and Certification Regime (SM&CR). The changes are being made as a result of HM Treasury's announcement in October 2015 that it would be amending the current SM&CR legislation as it applies to the banking sector. This included the repeal of section 64B(5) of the Financial Services and Markets Act 2000 (FSMA), which required firms to report to the FCA known and suspected breaches of the FCA Rules of Conduct, before the SM&CR regime enters into force on 7 March 2016.

The FCA proposes to remove references to notifications of known and suspected rule breaches in the associated forms, thereby streamlining reporting requirements so that the forms only require firms to inform the FCA of disciplinary action taken against staff as a result of a breach of one or more Rules of Conduct. The pre-existing obligation to report material breaches will, however, remain in place.