Orrick's Financial Industry Week in Review

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments

SEC Adopts Rules for Enhanced Regulatory Framework for Securities Clearing Agencies

On September 28, 2016 the Securities and Exchange Commission ("SEC") voted to adopt new rules to establish "enhanced standards for the operation and governance of securities clearing agencies that are deemed systematically important or that are involved in complex transactions, such as security-based swaps." In addition, the SEC has proposed to apply these new standards to additional categories of securities clearing agencies, including all SEC-registered central counterparties. The rules will become effective sixty days after their publication in the Federal Register. Press release.

 

Rating Agency Developments

On September 27, 2016, Fitch issued a report entitled Criteria for Rating Non-Financial Corporates. Press release.

On September 26, 2016, Fitch issued a report entitled Criteria for Country Risk in Global Structured Finance and Covered Bonds. Press release.

 

RMBS and Other Securities Litigation

RBS Settles RMBS Suit for $1.1 Billion

On September 27, 2016, the Royal Bank of Scotland ("RBS") announced a $1.1 billion settlement with the National Credit Union Administration ("NCUA") in connection with two federal securities litigations concerning RBS's underwriting and sale of RMBS.  The NCUA, as liquidating agent for Western Corporate Federal Credit Union and U.S. Central Federal Credit Union, claimed that RBS misled the credit unions about the risks of RMBS and made various misrepresentations in the offering documents.  Further details of the settlement are not publicly available.  The litigations are continuing in the U.S. District Court for the Central District of California and U.S. District Court for the District of Kansas against a number of other securitization participants.

U.S. Bank Settles Four RMBS Lawsuits against WMC

On September 22, 2016, RMBS Trustee U.S. Bank National Association ("U.S. Bank") and loan originator WMC Mortgage LLC ("WMC") filed a stipulation of dismissal in four RMBS lawsuits in light of a settlement reached between the parties.  The details of the settlement are not publicly available.  Three of the underlying lawsuits were initiated by U.S. Bank, alleging that WMC misrepresented the quality of loans it sold in 2006 and 2007 RMBS offerings in connection with the MABS 2006-HE3 and MABS 2007-WMC1 deals.  Two of U.S. Bank's lawsuits also include claims against loan originator Equifirst Corporation, but these claims are not part of the settlement.  The fourth lawsuit dismissed was brought by WMC against U.S. Bank in connection with the MABS 2007-WMC1 trust, seeking a declaratory judgment regarding WMC's performance under the governing agreements, as well the parties' rights and obligations under those same agreements. Stipulation of Dismissal.

 

European Financial Industry Developments

ESMA Issues Final Guidelines on Inside Information and Commodity Derivatives under MAR

On September 30, 2016, the European Securities Markets Authority ("ESMA") published final guidelines (ESMA/2016/1412) on information relating to commodity derivatives disclosable under the Market Abuse Regulation (Regulation 596/2014) ("MAR").

Article 7(5) of MAR requires ESMA to issue guidelines to establish a non-exhaustive list of information that is reasonably expected or required to be disclosed in accordance with legal or regulatory provisions in EU or national law, market rules, contract, practice or custom, on the relevant commodity markets or spot markets.

ESMA expects market participants, investors and regulators to take the list of examples provided in the guidelines into account when assessing whether information is "inside" information. It should be noted that other conditions of the definition not covered by the new guidelines should also be taken into account.

ESMA also explains that the guidelines do not create any further information disclosure requirements, as the concept of "required to be disclosed" refers to existing or future disclosure requirements (such as, under national law), independent of the guidelines.

National competent authorities ("NCAs") have two months from the issuance of the different language versions of the guidelines to confirm whether or not they intend to comply with them. If a NCA does not comply or does not intend to comply, it will have to inform ESMA, stating its reasons.

ESMA consulted on the guidelines in March 2016 (ESMA/2016/444).

ESMA Consults on SFT Regulation and Amendments to EMIR RTS

On September 30, 2016, ESMA published a consultation paper (ESMA/2016/1409) on draft regulatory technical standards ("RTS") and draft implementing technical standards ("ITS") implementing the Regulation on reporting and transparency of securities financing transactions ((EU) 2015/2365) (the "SFT Regulation").

The SFT Regulation will require market participants to report details of securities financing transactions ("SFTs") to an approved EU trade repository ("TR"). The main issues addressed are:

  • RTS and ITS procedure and criteria for registration as a TR;
  • RTS and ITS on the use of internationally agreed reporting standards, the reporting logic and main aspects of the structure and content of SFT reports;
  • RTS requirements relating to transparency of data, data collection, aggregation and comparison; and
  • RTS on access levels for different competent authorities.

ESMA also proposes amendments to existing technical standards implementing requirements relating to TRs under the European Markets Infrastructure Regulation ("EMIR"). ESMA states that the amendments are needed to ensure a level playing field for market participants in respect of registration and access rules. ESMA is consulting on the following:

  • consolidated amended text of RTS on registration of TRs under EMIR; and
  • amendments to RTS on access levels under EMIR.

The consultation will close on November 30, 2016. ESMA will use the feedback it receives to finalize its draft technical standards, which are to be submitted to the European Commission for endorsement by the end of Q1 or beginning of Q2 2017. It is expected that the finalized implementing measures will become applicable from 2018.

EBA Provides Final RTS and Guidelines on the Definition of Default under CRR

On September 28, 2016, the European Banking Authority ("EBA") published final reports on the documents relating to the definition of default under Article 178 of the Capital Requirements Regulation (Regulation 575/2013) ("CRR"):

  • Guidelines on the application of the definition of default under Article 178 (EBA/GL/2016/07) – the guidelines clarify all aspects related to the application of the definition of default, which is used for the purpose of both the internal ratings based approach (IRB approach) and for the standardized approach. The guidelines apply from January 1, 2021, although the EBA is encouraging firms to implement relevant changes in their internal procedures and IT systems before that date.
  • Draft regulatory technical standards (RTS) on the materiality threshold for credit obligations past due under Article 178 (EBA/RTS/2016/06) – Article 178 specifies that a default shall be considered to have occurred when an obligor has past more than 90 days on any material credit obligation to the firm, the parent undertaking or any of its subsidiaries. The draft RTS, which were mandated by Article 178(6) of the CRR, specify the conditions according to which a competent authority should set the materiality threshold for credit obligations that are past due.

The EBA has also published a report setting out the results of a qualitative and quantitative impact study ("QIS") that assessed the impact on the regulatory capital requirements of selected policy options to harmonize the definition of default. The EBA states that the results of the QIS are the basis for the impact assessment carried out on the guidelines and the draft RTS.

The EBA consulted on these draft RTS and guidelines in October 2014 and September 2015 respectively (see Legal updates, EBA consults on draft RTS on materiality threshold of credit obligation past due and EBA consults on draft guidelines on application of default definition under CRR). According to an EBA press release, they form part of the EBA's broader regulatory review of the internal ratings based (IRB) approach announced in February 2016.

 

Events

SEC to Hold Forum to Discuss Fintech Innovation in the Financial Services Industry

The Securities and Exchange Commission will host a public forum to discuss financial technology (Fintech) innovation in the financial services industry. The forum is designed to foster greater collaboration and understanding among regulators, entrepreneurs and industry experts into Fintech innovation and evaluate how the current regulatory environment can most effectively address these new technologies.

The Fintech forum will be held at the SEC's Washington D.C. headquarters on November 14, 2016 and will be open to the public and webcast live on the SEC's website. Information on the agenda and participants will be published in the coming weeks.

For additional details, please click here.

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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