U.S. Financial Industry Developments

SEC Statement on Potentially Unlawful Online Platforms for Trading Digital Assets

On March 7, 2018, the Divisions of Enforcement and Trading and Markets of the Securities and Exchange Commission released a "Statement on Potentially Unlawful Online Platforms for Trading Digital Assets."

The Statement noted that: "Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings …."  The Statement then strongly warned that: "A number of these platforms provide a mechanism for trading assets that meet the definition of a "security" under the federal securities laws. If a platform offers trading of digital assets that are securities and operates as an "exchange," as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration." On this basis, the Statement set out a list of some questions investors should ask before they decide to trade digital assets on an online trading platform.

FRB Requests Comments on Amendments to Simplify Regulation J and Make It Conform More Closely with Regulation CC

On March 6, 2018, the Federal Reserve Board ("FRB") announced it was seeking comments on amendments to Regulation J, relating to checks and funds transfers, in order for it to improve its relationship with Regulation CC. Release.

FHFA Issues Proposed Rule Amending Federal Home Loan Banks' Affordable Housing Program Regulation

On March 6, 2018, the Federal Housing Finance Agency ("FHFA") requested comments on amendments it proposed that relate to regulations that apply to the Federal Home Loan Banks' Affordable Housing Program.  The changes were designed to permit "the [Federal Home Loan Banks] more flexibility to align their [Affordable Housing Program] funds with the distinct affordable housing needs in their districts." Release.

FHA Extends Foreclosure Moratorium for Hurricane Maria Victims

On March 1, 2018, the Federal Housing Administration (the "FHA") "extend[ed] its 180-day foreclosure moratorium for FHA-insured homeowners for an additional 60 days[.]"  The coverage was extended "…until May 18, 2018." Release.

CFPB Issues Request for Information On Rulemaking Processes

On March 1, 2018, the Consumer Financial Protection Bureau ("CFPB") announced a request for information seeking the public's input about the "efficiency and effectiveness of its rulemaking processes." Release.

European Financial Industry Developments

IBOR Global Benchmark Transition Roadmap Launched

The International Swaps and Derivatives Association ("ISDA") published an interbank offered rate ("IBOR") global benchmark transition roadmap, which it has produced alongside a number of other trade associations on March 2, 2018.

The roadmap aggregates and summarises existing information issued by regulators and various risk-free rate ("RFR") working groups on work carried out to date on transitioning financial products and practices from certain IBORs to selected RFRs.

The roadmap covers the London Interbank Offered Rate (LIBOR) and certain other IBORs denominated in euro, sterling, Swiss franc, US dollar and yen.

In the accompanying press release, ISDA stated that the roadmap is the first part of a comprehensive analysis of the issues and possible solutions relating to transitioning from IBORs for a wide range of financial instruments. The trade associations (which also include the Association for Financial Markets in Europe ("AFME"), the Securities Industry and Financial Markets Association ("SIFMA") and the International Capital Market Association ("ICMA")) will also be conducting a global survey of buy- and sell-side firms and infrastructure providers that will feed into a report aiming to support interest rate benchmark transition planning efforts.

ISDA announced its intention to develop a global benchmark transition roadmap in November 2017.

ECB Consults on Draft Guides on ICAAP and ILAAP

The European Central Bank ("ECB") published two consultation papers on March 2, 2018 on the draft principles underlying its expectations for banks' internal capital adequacy assessment processes ("ICAAPs") and internal liquidity adequacy assessment processes ("ILAAPs").

A set of FAQs accompany the draft ECB guide to ICAAP and the draft ECB guide to ILAAP. The FAQs explain what the ICAAP and ILAAP are, and the purpose and legal nature of the guides.

The consultation closes on May 4, 2018 and the ECB will hold a public hearing on April 24, 2018 by telephone conference. It will publish the comments it receives, together with a feedback statement.

The ECB wrote to a number of significant institutions under the Single Supervisory Mechanism ("SSM") about the development of the guides in February 2017.

European Parliament Adopts Resolution on Bilateral Agreement on Insurance and Reinsurance Prudential Measures

The European Parliament published a provisional version of the resolution it has adopted on the agreement between the EU and the US on prudential measures regarding insurance and reinsurance on March 1, 2018.

The final text of the agreement was published in the OJ on October 6, 2017, following the announcement of signing the agreement on September 22, 2017.

EC Publishes Communication on Funding Sustainable Growth Action Plan

The European Commission ("EC") published a communication on its action plan for financing sustainable growth, available here. FAQs were also published alongside the communication, available here.

Sustainable finance generally refers to the process of taking due account of environmental and social considerations in investment decision-making, leading to more investments in longer-term and sustainable activities.

The action plan aims to shift capital flows towards sustainable investment to achieve sustainable and inclusive growth. This addresses the fact that currently there is insufficient investment to support an environmentally and socially sustainable economic system. It will also manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues, and encourage transparency and long-term thinking in financial and economic activity. In particular, actions relating to matters including the following are identified in the plan:

• Establish an EU classification system for sustainable activities
• Create standards and labels for green financial products
• Incorporate sustainability when providing financial advice
• Develop sustainability benchmarks
• Foster better integration of sustainability in ratings and market research
• Clarify institutional investors' and asset managers' duties
• Incorporate sustainability in prudential requirements

The Commission will report on the implementation of the action plan in 2019. An accompanying press release states that the Commission is organizing a conference to discuss the action plan on March 22, 2018.

EC Publishes Communication on FinTech Action Plan

On March 8, 2018, the European Commission ("EC") published a communication (COM(2018) 109 final) setting out its FinTech action plan, which includes measures to create a more competitive and innovative European financial sector. A set of FAQs and a factsheet have been published alongside the action plan.

The Commission decided that there was no need at this stage for sweeping legislative or regulatory changes at EU level but it is aware that no intervention at all may threaten the prosperity of EU financial services providers.

The FinTech action plan initiatives are set out in a workplan, available here, annexed to the communication, many of which invite the European Supervisory Authorities ("ESAs") to carry out specific work. They include:

• Blockchain and distributed ledger technology ("DLT")
• Cyber resilience
• Crowdfunding
• Outsourcing to the cloud
• Regulatory framework
• Regulatory soundboxes

EC Speech Outlines Goals of FinTech Action Plan

The European Commission ("EC") published a speech on February 27, 2018 given by Vice President Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union ("CMU"), which includes an outline of the goals of its Financial Technology ("FinTech") action plan.

Mr. Dombrovskis explained that the action plan will propose over 20 new measures intended to create a more innovative and competitive EU financial sector. He outlines some of these measures in his speech, which fall under the following three main goals:

Supporting innovative business models. The Commission will propose an EU label for the crowdfunding sector, to allow platforms to operate across the EU under a single authorization. The Commission will also invite the European Supervisory Authorities ("ESAs") (that is, the EBA, ESMA and EIOPA) to identify best practices for innovation hubs and sandboxes by the end of 2018. Based on their work, it will present a plan with recommendations for regulatory sandboxes.

Increasing cybersecurity and the integrity of the financial system. The Commission supports the work of the European Central Bank ("ECB") and supervisors to develop an EU-wide cyber-resilience testing framework, to consolidate the testing obligations for companies that operate in different countries. Later in 2018, the Commission will organise a public-private workshop to identify and address obstacles to information-sharing among market participants relating to cybersecurity threats.

Encouraging the uptake of new technologies. Informed and skilled supervision of FinTech activities will be a core theme of the action plan. The Commission will invite the ESAs to consider issuing guidelines to facilitate the use of cloud services. Mr. Dombrovskis explains that the EU blockchain observatory and forum, which it launched on February 1, 2018, will help monitor developments and inform its policy thinking on blockchain and other applications of distributed ledger technology ("DLT"). The Commission will also establish an EU FinTech Lab for supervisors to engage with technology solution providers, to increase the knowledge and understanding of new technologies.

Mr. Dombrovskis explains that the content of the action plan has been informed by the responses received to the Commission's March 2017 consultation paper on developing a policy approach to FinTech.

ESMA Speech on Measured Approach to FinTech

The European Securities and Markets Authority ("ESMA") published a speech by ESMA Chair Steven Maijoor on taking a measured approach to Financial Technology ("FinTech") on February 27, 2018.

Mr. Maijoor explained that there are two strands to ESMA's measured approach to FinTech. The first strand involves monitoring innovations diligently and intelligently. The second strand is to take action in a measured way (that is, to carefully consider how best to act, weighing risks and benefits in an objective fashion). He goes on to address the following three key areas of FinTech:

Monitoring FinTech by looking at economic function. As ESMA monitors and assesses FinTech developments, it finds it helpful to keep in mind radical changes brought by FinTech and other information technology. ESMA recognises the potential for FinTech to reshape the financial sector. It has already devised a financial innovation scoreboard, with which it performs an initial assessment of financial innovations according to the risks and benefits arising from the functions they perform.

Structural features of FinTech. Understanding how the process of innovation works and taking into account its structural features enables regulators to take a coherent view of FinTech. Mr. Maijoor states that one of the overarching features across different FinTech innovations is the reliance on information technology, and that one innovation often leads to another. In some cases, successful technologies, products or services may emerge from failed innovations. This process of development is known as the "innovation spiral". Distributed ledger technology is an example of the innovation spiral. Mr. Maijoor also refers to the notion of a "regulatory dialectic". This is where market participants take into account existing rules and regulations when they innovate. In response, authorities may seek to amend the regulatory framework, which may then prompt further innovation and so on.

Challenges and opportunities for regulators. FinTech is a priority for financial market regulators. Mr. Maijoor refers to the European Commission's work in this area. Following the Commission's consultation on FinTech, it published a summary of responses in September 2017. Under the Commission's proposals, specific new tasks for the European Supervisory Authorities ("ESAs") (that is the EBA, EIOPA and ESMA) relating to FinTech would include four areas. These relate to pursuing convergence on licensing requirements for FinTech companies, clarifying and updating the supervisory outsourcing frameworks, co-ordinating national technological innovation hubs and work relating to cybersecurity. Mr. Maijoor states that if the Commission's proposals are adopted, it will provide the ESAs with a clear roadmap to meet the challenges and opportunities arising from FinTech.

EBA Reports on Basel III Monitoring Exercise as of June 30, 2017

The European Banking Authority ("EBA") published a report, available here, summarizing the results of the latest EU Basel III monitoring exercise, using data as of June 30, 2017. The report was accompanied by a press release.

The report contains analysis relating to matters such as:

• Capital ratios
• Capital shortfalls
• Impact of phase-in arrangements
• Composition of capital and risk-weighted assets ("RWAs")
• Composition of the leverage ratio exposure measure
• Liquidity coverage ratio ("LCR")
• Net stable funding ratio ("NSFR")

The report highlights an improved capital position for EU banks, with a total average common equity tier 1 ("CET1") ratio of 13.8%, an improvement from the 13.4% ratio as on December 31, 2016. Average LCR was 143.1% as of December 31, 2016, as opposed to 139.5% as of December 2016, and the overall average NSFR ratio was 112.3%, up from 112.0% as of December 2016.

The impact of Basel III is monitored semi-annually by the Basel Committee on Banking Supervision ("BCBS") at a global level and by the EBA at EU level.

Impact Finance

EC Releases Action Plan on Sustainable Finance

On March 8, 2018, the European Commission ("EC") released an Action Plan on sustainable finance. The goal of the Action Plan is to provide a strategy on sustainable finance for the EU, and in particular to reorient capital toward sustainable investment, manage financial risks stemming from climate change, natural disasters, environmental degradation and social issues; and foster transparency and long-termism in financial and economic activity. The Action Plan builds on the priorities identified in the final report published in 2018 by the EU High-Level Expert Group on Sustainable Finance.

The key actions proposed in the Action Plan are: creating a unified classification system for sustainability, identified as the most important action of the Action Plan; creating standards and labels for green financial projects; clarifying duties of investment managers such as pension funds, insurance companies and asset managers to ensure they consider environmental, social and governance issues in investment decisions; incorporating sustainability in capital requirements for banks and insurance companies; and strengthening issuers' sustainability disclosure and improving accounting rule-making to ensure accounting rules do not discourage sustainable investment. The Action Plan includes a timetable for all actions to be taken by the second quarter of 2019, and the first identified action is the tabling by the Commission of a legislative proposal in the second quarter of 2018 that will include tools allowing for the establishment of a sustainability classification system.

The European Commission's press release announcing the publication of the Action Plan is available here and includes links to the full Action Plan, an FAQ document and a summary memo.

Rating Agency Developments

On March 1, 2018, Fitch issued a report entitled: U.S. Auto Loan ABS Rating Criteria. Release.

On March 2, 2018, Fitch issued a report entitled: Covered Bonds Rating Criteria. Release.

On March 2, 2018, Fitch issued a report entitled: U.S. Auto Lease ABS Rating Criteria. Release.

On March 7, 2018, Fitch issued a report entitled: Exposure Draft: U.S. RMBS Loan Loss Model Criteria. Release.

On March 7, 2018, Fitch issued a report entitled: Exposure Draft: U.S. RMBS Seasoned, Re-Performing and Non-Performing Loan Rating Criteria. Release.

RMBS and Other Securities Litigation

Court Partially Grants Motion to Dismiss in RMBS Certificateholder Suit

On March 2, 2018, Judge Louis L. Stanton of the United States District Court for the Southern District of New York granted in part and denied in part a motion by RMBS issuers and underwriters to dismiss five new claims asserted in a second amended complaint filed by the Federal Deposit Insurance Corporation ("FDIC") as receiver for Colonial Bank. As previously covered, the FDIC's initial and first amended complaints asserted claims for violations of Sections 11 and 15 of the Securities Act of 1933 (the "1933 Act"), alleging that defendants made, or controlled entities that made, untrue or misleading statements in registration statements relating to certain RMBS. The court dismissed the claims as time-barred, but the United States Court of Appeals for the Second Circuit reversed. After remand, the second amended complaint added five new claims under the Alabama Securities Act, Nevada Uniform Securities Act, and Section 12(a)(2) of the 1933 Act. Judge Stanton granted the defendants' motion to dismiss as to the FDIC's claims under the Nevada Uniform Securities Act and Section 12(a)(2) of the 1933 Act, on the ground that those claims were barred by applicable statutes of repose. Judge Stanton also granted the motion to dismiss as to the FDIC's Alabama Securities Act claims against the defendant banks that served as depositors on certain RMBS certificates because FDIC did not allege that those defendants acted as sellers of the certificates, as required by law. The remainder of the claims survived defendants' motion to dismiss. Order. Second Amended Complaint.

RBS Settles New York AG RMBS Claims for $500M

On March 6, 2018, New York Attorney General Eric T. Schneiderman announced that the State of New York has reached a settlement with RBS Financial Products Inc. f/k/a Greenwich Capital Financial Products, Inc. ("RBS") to resolve potential claims against RBS under New York's Martin Act and Executive Law arising from the structuring, underwriting, issuance, and sale of 44 RMBS Trusts and related Certificates by RBS and its affiliates between 2006 and 2007. The $500M settlement includes a $100M payment to the State of New York, an additional $400M paid in the form of consumer relief, and an agreement by RBS to acknowledge certain facts relating to its alleged misconduct between 2006 and 2007. Press Release. Settlement Agreement.

Court Denies Dismissal of RMBS Trustee's Claim for Failure to Notify

On March 7, 2018, New York Supreme Court Justice Marcy S. Friedman denied a motion by Morgan Stanley ABS Capital I Inc. ("Morgan Stanley") to dismiss a claim by RMBS Trustee Deutsche Bank National Trust Company (the "Trustee") for failure to notify the Trustee of alleged breaches of representations and warranties regarding the mortgage loans in an RMBS trust. As a matter of first impression, Justice Friedman ruled that a claim for failure to notify does not accrue until the defendant discovers a breach of representations and warranties and fails to promptly notify the Trustee. She rejected Defendants' argument that failure to notify claims accrue on the closing date, at the same time as the underlying claim for breach of representation and warranty. The court further held, however, that the Trustee was not harmed by any failure to notify occurring after the contractual repurchase period has ended; in other words, after six years from closing. Justice Friedman also reaffirmed that a Trustee bringing a failure to notify claim ultimately would bear the burden to prove that the failure to notify caused it some form of compensable harm.  [Order]   

S.D.N.Y. Denies Plaintiffs' Request to Use Sampling in RMBS Action Against Trustee

On February 23, 2018, Judge Lorna G. Schofield of the United States District Court for the Southern District of New York rejected Plaintiffs' objection to U.S. Magistrate Judge Sarah Netburn's opinion and order denying Plaintiffs' request to re-underwrite a sample of loans in RMBS trusts in order to establish liability and damages in their suits against HSBC Bank as RMBS trustee. Judge Schofield found no clear error in Judge Netburn's opinion, which held that sampling cannot establish either damages or liability because the contract requires Plaintiffs to prove that HSBC breached its contractual obligations as trustee on a loan-by-loan basis. The opinion held that "a sampling is just that, and by definition cannot provide loan specific information as to any loan outside the sample." [Sampling Order]