U.S. Financial Industry Developments

Credit Agreements Will Require Important Updates If a Proposed New Delaware Law Is Passed

The Delaware legislature is currently contemplating an amendment to the Delaware Limited Liability Company Act that, if passed, would go into effect on August 1, 2018 and would allow Delaware limited liability companies to divide themselves into two or more LLCs.^[1] Under the proposed changes, the original LLC would have the ability to allocate its assets, liabilities, rights and duties among the newly divided LLCs pursuant to a "plan of division" and then terminate or continue its own existence. Following the division, each LLC would own the assets and be obligated on the liabilities of the original LLC only to the extent they are allocated to it by the plan of division (unless the plan of division constitutes a fraudulent transfer).^[2] The proposed amendment provides that if an LLC formed prior to August 1, 2018 is a party to any agreement entered into prior to that date containing a restriction on mergers, consolidations or transfers of assets by such LLC, then such restriction will be deemed also to apply to any division by such LLC.

Leveraged loan agreements typically restrict mergers, asset sales and similar transactions, but most do not currently contemplate divisions. When entering into new loan agreements or amending existing loan agreements, lenders should consider: (1) changing the definition of "Asset Sale" to incorporate the effective transfer of assets via division, (2) expanding the negative covenant related to mergers and other fundamental changes to include divisions as a type of fundamental change, and (3) modifying the collateral covenants to ensure that future LLCs formed by division will be required to pledge assets and equity to support the obligations owed to such lenders to the same extent as existing entities.

^[1] The Delaware Senate passed the proposed amendment on June 5, 2018 and assigned it to the Judiciary Committee in the Delaware House of Representatives. A committee hearing should take place by the end of June.

^[2] The new law will apply with similar effect to limited partnerships as well.

FHFA Issues Proposed Rule on Enterprise Capital

On June 12, 2018, the Federal Housing Finance Agency ("FHFA") issued a proposed regulation on capital requirements for Fannie Mae and Freddie Mac (the Enterprises). The proposed rule would implement a new framework for risk-based capital requirements and a revised minimum leverage capital requirement for the Enterprises. FHFA suspended regulatory capital requirements after placing the Enterprises into conservatorships in September 2008 and the capital requirements in this rule would also be suspended while the Enterprises remain in conservatorship. Comments on this proposal will be accepted for 60 days after publication in the Federal Register. Press Release. Proposed Rule. Fact Sheet.

Agencies Issue Final Rulemaking to Shorten Settlement Cycle

On June 1, 2018, the Office of the Comptroller of the Currency (the "OCC") and the Federal Deposit Insurance Corporation (the "FDIC") issued a final rule to shorten the standard settlement cycle for securities purchased or sold by OCC-supervised and FDIC-supervised institutions from T+3 to T+2. This change is consistent with the industry's transition to T+2 – banks are already complying with a two business day settlement standard. The effective date of the final rule is October 1, 2018. FDIC Press Release. OCC Press Release (dated June 7). Rule.

European Financial Industry Developments

ECB Revised Assessment Methodology For Payment Systems

The European Central Bank ("ECB") published a revised assessment methodology for payment systems on June 15, 2018.

The principles for financial market infrastructures ("PFMIs") developed by the Committee on Payments and Market Infrastructures ("CPMI") and the Technical Committee of the International Organization of Securities Commissions ("IOSCO") were adopted in June 2013 as a basis for the conduct of Eurosystem oversight in relation to all types of financial market infrastructures ("FMIs"). For payment systems, the PFMIs are implemented through the ECB Regulation on oversight requirements for systemically important payment systems (Regulation 795/2014) (SIPS Regulation) and the revised oversight framework for retail payment systems.

The updated assessment methodology covers the requirements introduced by the Revised SIPS Regulation, which entered into force in December 2017. It also references the Eurosystem's cyber resilience oversight expectations, which are based on the CPMI-IOSCO guidance on cyber resilience for financial market infrastructures published in June 2016.

The ECB previously updated the assessment methodology in February 2016.

New Pre-Application Process for Significant Institutions to Use Before Submitting Formal Internal Model Requests to ECB

The European Central Bank ("ECB") published a letter on June 13, 2018 (dated June 7, 2018) relating to internal model requests by significant institutions.

It appears that the letter has been sent to the boards of significant institutions that the ECB supervises under the single supervisory mechanism ("SSM").

The ECB explains the set of documents and processes that firms are invited to use when communicating any applications for initial internal model approvals, material model changes and extensions, reversions to less sophisticated approaches, and modifications to the scope of assets for which permanent partial use of the standardised approach is permitted. The letter also contains links to the set of documents to be used when communicating any non-material model changes or extensions.

Firms are invited to follow a pre-application process, which aims to increase the efficiency of the assessment of internal model requests. The letter provides detail on the scope, process and timeline for the pre-application process.

The ECB believes that significant institutions that follow the pre-application process will benefit from a more certain and transparent time plan.

Participation in the pre-application process is not a legal requirement, but information that firms provide in the pre-application is key to enabling the ECB to efficiently plan its assessment of internal model requests. If firms do not use this process, the ECB can only carry out its preparation once it has received the formal application. The ECB also points out that the level of information requested after submission of the formal application is at least equivalent to that foreseen in the pre-application process.

Significant institutions are invited to follow the pre-application process for applications from 1 July 2018 onwards, using the forms referred to in the letter. The ECB advises that the pre-application process may be updated and enhanced in the light of post-implementation experience, and changes in the applicable legal framework.

For communicating non-material model changes, institutions are asked to start using the forms referred to as of 1 July 2018.

Separately, the ECB is consulting on a guide to internal models under the SSM.

EBA Opinion and Draft Guidelines on Implementation of Delegated Regulation Setting Out RTS on SCA and CSC Under PSD2

On June 13, 2018, the European Banking Association ("EBA") published a consultation paper (EBA/CP/2018/09) on draft guidelines on the conditions to be met to benefit from an exemption from contingency measures under Article 33(6) of Delegated Regulation (EU) 2018/389, which sets out regulatory technical standards ("RTS") on strong customer authentication ("SCA") and common and secure communication ("CSC") under the revised Payment Services Directive ((EU) 2015/2366) ("PSD2").

Alongside the consultation paper, the EBA has published an opinion (EBA-Op-2018-04) on implementation of the RTS on SCA and CSC. Both the draft guidelines and the opinion are designed to clarify a number of issues identified by market participants relating to the RTS on SCA and CSC, which will apply from 14 September 2019.

The draft guidelines propose a pragmatic and consistent approach to the four conditions that an account servicing payment service provider ("ASPSP") must meet if it wishes to benefit from an exemption from the fallback option envisaged under Article 33(6) of the Delegated Regulation. The EBA considers that the draft guidelines provide clarity for all parties involved (that is, ASPSPs, national competent authorities ("NCAs") and the EBA) on the information to be considered to determine whether an exemption request meets the Article 33(6) conditions. In particular, the guidelines will enable NCAs to carry out a quick assessment of exemption requests, especially during the time when the bulk of these requests are received.

The EBA plans to hold a public hearing to discuss the draft guidelines on 25 July 2018. Comments can be made on the draft guidelines until 13 August 2018.

The opinion focuses on implementation of the RTS. It sets out the EBA's views in "pressing" areas identified by the market and NCAs, including on exemptions to SCA, consent, the scope of data sharing, and requirements for application programming interfaces ("APIs") and dedicated interfaces to take into account. Although the opinion is addressed to NCAs, given the supervisory expectations it is conveying, the EBA advises it should prove useful for PSPs, among others.

In the opinion, the EBA explains that it will provide further clarification on interpretation of the RTS on SCA and CSC through its online interactive single rulebook and Q&A tool. The tool will be extended to PSD2-related queries by the end of June 2018.

FSB Speech on Effective Global Resolution Schemes

The Financial Stability Board ("FSB") published a speech by Dietrich Domanski, FSB Secretary General, on effective global resolution schemes on June 12, 2018.

The speech covers matters including the following:

• Funding in resolution. In November 2017, the FSB consulted on guidance on the development of a plan for funding in resolution. Many respondents welcomed the focus on firm capabilities and the operational aspects of a funding strategy.

With regard to both consultations, the FSB intends to reflect suggestions for changes in the final guidance, which it expects to publish in the coming weeks.

• Bail-in execution. Also in November 2017, the FSB consulted on guidance to assist authorities in making global systemically important bank ("G-SIB") bail-in resolution strategies operational. Generally, respondents expressed support for the guidance and its focus on the operational aspects of a bail-in.
• Monitoring and evaluation. The FSB has started work on a thematic peer review of resolution regimes. A report on the peer review will be published in early 2019. The FSB also plans to evaluate the effects of the reforms aimed at ending "too-big-to-fail". The key objective of the evaluation is to assess whether reforms have accomplished their objective, or whether there are any unintended consequences that may call for adjustments in regulation.
• Open issues in implementation. Although the publication of the above two guidance papers will assist authorities and firms in their work to operationalise resolution plans, they do not consider many of the details that will need to be worked through at a jurisdictional level, taking into account local legal and regulatory frameworks. These details will need to be considered as part of resolution planning to ensure that resolution strategies can be credibly and feasibly implemented.

The FSB is also carrying out work on two other aspects of authorities' resolution planning work. It is comparing approaches in FSB jurisdictions to the public disclosure of information on resolution planning and resolvability. It is also looking at trading book wind-down. The wind-down of trading book activity may form part of a restructuring plan for a firm in resolution. The FSB expects to report its findings later in 2018.

European Parliament Adopts EMIR Refit Regulation

The European Parliament published a press release on June 12, 2018 announcing that it has voted in plenary to adopt the proposed Regulation amending EMIR (the Regulation on OTC derivatives, central counterparties ("CCPs") and trade repositories) (Regulation 648/2012) (EMIR Refit Regulation).

The proposed Regulation will simplify clearing rules for small and non-financial counterparties and provide a temporary exemption for pension scheme arrangements from the mandatory clearing of derivatives.

The Parliament's Committee on Economic and Monetary Affairs published its report on the proposed Regulation on May 25, 2018. It voted to adopt the report on May 16, 2018.

The next step is for the proposed Regulation to be considered by the Council of the EU and the European Commission, which is due to happen in July 2018.

Council of EU Progress Report on Strengthening the Banking Union

The Council of the EU published a report (dated June 12, 2018) on the progress of the European Commission's initiatives to strengthen the banking union, including the proposed Regulation establishing the European deposit insurance scheme ("EDIS") (9819/18).

The report highlights a number of issues under discussion within the Council, including:

• methodology for calculating risk-based contributions and the possible use of alternative measures;
• technical issues linked to different alternatives for the initial model of the EDIS, such as consideration of the re-insurance phase, and mandatory lending as a possible alternative to the re-insurance phase; and
• treatment of euro area and non-euro area member states, and the need to analyse the possible impact of the proposed EDIS Regulation on the functioning of the internal market. The Commission is to perform an analysis of the effects of the proposed EDIS on non-banking union member states and the internal market as soon as possible.

The report also refers to an analysis carried out by the European Central Bank ("ECB") that considered whether the size of a fully-fledged EDIS according to the Commission's proposal was adequate to absorb potential losses stemming from pay-out events and whether there would be cross-subsidisation by country. The conclusion reached by the ECB was that the size of a fully-fledged EDIS would be sufficient to cover pay-out events in a very severe crisis, and there was no evidence of unwarranted systematic cross-country subsidisation within EDIS, including when considering country-specific shocks.

The Presidency of the Council has provided a number of progress reports on the proposed EDIS Regulation in the past, the last one was published in November 2017.

Rating Agency Developments

On June 8, 2018, Moody's published a report entitled: US Public Housing Authority Capital Fund Bonds. Release.

On June 8, 2018, Moody's published a report entitled: Distribution & Supply Chain Services Industry. Release.

On June 8, 2018, Moody's published a report entitled: Regulated Water Utilities. Release.

On June 5, S&P published guidance related to its publication "Foreign Exchange Risk In Structured Finance—Methodology And Assumptions". Release.

On June 6, Moody's updated its rating methodology for Government-Related Issuers. Release.

On June 1, KBRA published its rating methodology for U.S. Property Assessed Clean Energy (PACE) ABS. Release.

On May 31, Fitch published an addendum describing Fitch's approach to analyzing derivative counterparty exposure in structured finance transactions rated on a long-term basis. Release.

RMBS and Other Securities Litigation

Monoline Insurer Sues Trustee Over Settlement Figure in RMBS Repurchase Action

On June 8, 2018, monoline insurer Ambac Assurance Corporation ("Ambac") filed a complaint in the United States District Court for the Southern District of New York against U.S. Bank National Association ("U.S. Bank"), trustee of the Harborview Mortgage Loan Trust 2005-10 (the "Trust"). The complaint alleges that U.S. Bank breached certain contractual and common law duties when it agreed to a proposed $94 million settlement of an ongoing RMBS repurchase action in New York state court against Bank of America, N.A. and certain affiliates, as successors to Countrywide Home Loans, Inc. (the "Countrywide Action"). Among other things, Ambac alleges that U.S. Bank was required to observe heightened duties of care when an Event of Default occurred under the governing PSA, and that U.S. Bank breached those duties when it agreed to settle the Countrywide Action for approximately 28% of the amount that its expert opined it was entitled to recover. Ambac further alleges that U.S. Bank breached the PSA by incorrectly accounting for recoveries received by the Trust. The complaint asserts two claims for declaratory judgments, two claims for breach of contract, and one claim for breach of fiduciary duty.  Complaint.

Merrill Lynch Settles SEC RMBS Fraud Claims for $16M

On June 12, 2018, the United States Securities and Exchange Commission ("SEC") issued an Order instituting administrative proceedings, making findings, and imposing remedial sanctions against Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), a subsidiary of Bank of America Corporation, pursuant to Section 15(b) of the Securities Exchange Act of 1934. The SEC alleged that personnel of Merrill Lynch, acting as broker-dealers engaged in secondary market trading of non-agency RMBS, made false or misleading statements to customers between June 2009 and December 2012 that led customers to accept less or pay more for securities than they otherwise might have accepted or paid.  Merrill Lynch agreed to settle the claims for approximately $16 million without admitting or denying the allegations. Order.