Financial Industry Developments
Agencies Publish Study on Banking Activities and Investments under Dodd-Frank
On September 8, 2016, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) released a report detailing activities and investments that banking entities may engage in under state and federal law.
Pursuant to section 620 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which requires the trio of federal banking agencies to conduct the study and report their findings to Congress, the report considers financial, operational, managerial and reputational risks associated with the permissible activities or investments and how banking entities work to mitigate those risks.
Each agency also offers specific recommendations regarding whether an activity or investment could harm the overall safety and soundness of the banking entity or broader financial system and any additional restrictions necessary to curb any such potential risks. Press release. Report.
CFTC Signs Memorandum of Understanding with Two Mexican Authorities to Enhance Supervision of Cross-Border Regulated Entities
On September 6, 2016, the U.S. Commodity Futures Trading Commission announced that it "signed a Memorandum of Understanding (MOU) with the Comisión Nacional Bancaria y de Valores (CNBV) and the Banco de México (BDM) regarding cooperation and the exchange of information in the supervision and oversight of certain regulated entities that operate on a cross-border basis in the United States and in Mexico." Press release.
CFTC Seeks Public Comment on Proposed Whistleblower Rule Amendments
On September 1, 2016, the U.S. Commodity Futures Trading Commission ("CFTC") announced that it is "requesting public comment on proposed amendments to the Whistleblower Rules found in Part 165 of the CFTC's regulations." The amendments would, among other things, "enhance the process for reviewing whistleblower claims and make related changes to clarify staff authority to administer the whistleblower program." Comments are due on or before September 29, 2016. Press release.
CFTC Issues No-Action Letter to Swap Dealers to Extend Collateral Rule Deadline due to Limitations with Custodial Accounts
On September 1, 2016, the U.S. Commodity Futures Trading Commission's ("CFTC") Division of Swap Dealer and Intermediary Oversight announced that it "issued a time-limited, no-action letter stating that it will not recommend an enforcement action against a swap dealer subject to the September 1, 2016 compliance date for the CFTC's uncleared swap margin rules, subject to certain conditions, for failing to fully comply with the custodial arrangement requirements of CFTC regulation 23.157 prior to October 3, 2016." Press release.
Arguing that CashCall was the "True Lender," CFPB Successfully Challenges CashCall's High Interest Loan Program
On August 31, 2016, a federal district court in California ruled in favor of the U.S. Consumer Financial Protection Bureau (CFPB) on the application of "true lender" principles in the context of a tribal lending arrangement. The court found that the defendant, CashCall, Inc., was the de facto lender of so-called "payday loans" originated by a tribal entity called Western Sky Financial. Although the decision's applicability in other contexts remains unclear, it does represent the latest entry in the developing case law on true lender issues, and the case signals increasing scrutiny of consumer lending arrangements by federal regulators. Read more.
Rating Agency Developments
On September 7, 2016, Moody's updated and replaced its approach to assessing credit risk for U.S. charter schools. Report.
On September 7, 2016, S&P published its global framework criteria for rating securitizations of nonperforming loans. Report.
On September 2, 2016, DBRS issued a report titled: Rating Companies in the Communications Industry. Report.
On September 2, 2016, DBRS issued a report titled: Rating Companies in the Merchandising Industry. Report.
On September 2, 2016, DBRS issued a report titled: Rating Companies in the Consumer Products Industry. Report.
On September 2, 2016, DBRS issued a report titled: Rating Companies in the Oil and Gas Industry. Report.
On September 2, 2016, DBRS issued a report titled: Rating Companies in the Oilfield Services Industry. Report.
On September 2, 2016, DBRS issued a report titled: Rating Companies in the Mining Industry. Report.
On September 2, 2016, DBRS issued a report titled: Rating Container Terminal Operators. Report.
On September 1, 2016, Fitch updated its criteria for servicing continuity risk and incorporated it into the broader counterparty criteria for structured finance and covered bonds. Press release.
Distressed Debt and Restructuring Developments
New LSTA Par Confirm Penalizes Buyers for Settlement Delays
In an effort to reduce settlement times, the Loan Syndications and Trading Association (the "LSTA") recently revised its standard par loan trading documents to penalize buyers who take too long to settle. Beginning September 1, 2016, buyers who fail to fulfill their obligations to timely settle par loan trades will forfeit the right to receive interest that accrues prior to the settlement date. The changes do not apply to loans trading on distressed documents.
The LSTA's revisions represent the trade group's most aggressive step to combat settlement delays. The revisions are also the most consequential changes to the LSTA's standard par trading documents in years. Read more.
RMBS and Other Securities Litigation
SDNY Court Appoints Lead Master to Review 9,300 UBS Loans for Material Breach Following UBS Putback Trial
On September 6, 2016, following a 3-week long bench trial in May, U.S. District Judge P. Kevin Castel of the Southern District of New York held that he will appoint a Lead Master to determine whether there are "material breaches" in 9,300 loans at issue in putback litigation against UBS. In its 239-page post-trial decision, after addressing a number of issues and discussing 20 loans, the Court appointed a Lead Master to examine each loan on an individual basis and prepare recommended findings and conclusions on liability.
The Court outlined Plaintiff's burden of proof for breach of underwriting guidelines, holding that the Plaintiff must demonstrate it is more likely than not that the loan was not originated in compliance with the relevant underwriting guidelines, unless an exception was actually exercised, in a reasonable manner, at the time of origination. Plaintiffs will then be required to prove a breach has a "material and adverse" effect at the time UBS's repurchase obligation was triggered. The Court held this can be shown: (1) by proving an increased risk of loss to certificateholders; (2) with evidence that a breach resulted in altered loan terms; or (3) through a showing of layered risk and/or the cumulative effect of multiple breaches. The Court held that discovery of a breach cannot be based on constructive knowledge. Instead, Plaintiffs must show actual knowledge, which may be established by circumstantial evidence, or willful blindness. Memorandum and Court Order.
Court Denies Summary Judgment on Issues of Timeliness in NCUA RMBS Suit
On September 1, 2016, Judge John W. Lungstrum of the U.S. District of Kansas denied cross-motions for summary judgment on the issue of timeliness brought by RBS, Nomura and the NCUA in NCUA v. RBS Securities, et al. NCUA alleges in its 2011 complaint that it suffered losses of $800 million on 2006-2007 vintage RMBS certificates based on misstatements by the defendants. Defendants RBS and Nomura argued on summary judgment that NCUA's claims must be dismissed because they were not brought within one year after discovering the allegedly untrue statement or omission, or after such discovery should have been reasonably made. NCUA argued in opposition that it did not have constructive notice of the facts underlying its claims by the relevant dates and that its claims were timely. The Court found that "a jury could reasonably find in favor" of either party as to what a "reasonably diligent investor would have known and done in 2007 and 2008 on the timeliness issue" and that as a result fact questions remained precluding summary judgment for either side. Memorandum and Court Order.
European Financial Industry Developments
Delegated Regulation on RTS Specifying Criteria for Setting MREL under BRRD published in OJ
On September 3, 2016, the Commission Delegated Regulation ((EU) 2016/1450) supplementing the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) with regulatory technical standards (RTS) highlighting the criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities (MREL) has been published in the Official Journal of the EU (OJ).
Article 45(6) of the BRRD specifies certain criteria that a resolution authority must consider when determining the level of MREL for a BRRD institution. Article 45(2) of the BRRD gave the European Commission the power to adopt a Delegated Regulation containing RTS further specifying the Article 45(6) assessment criteria.
The RTS contain provisions relating to the interpretation of the six assessment criteria set out in Article 45(6). They also permit resolution authorities to provide a transitional period for reaching the final MREL for firms or entities to which resolution tools have been applied.
The Delegated Regulation was adopted by the Commission on May 23, 2016. It shall enter into force 20 days after its publication in the OJ (i.e. September 23, 2016).
ECON Objects to Delegated Regulation on RTS on Key Information Documents for PRIIPs
The European Parliament published a press release on September 1, 2016 announcing that the Economic and Monetary Affairs Committee (ECON) has voted to object to the European Commission's proposed Delegated Regulation supplementing the Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (Regulation 1286/2014) (PRIIPs KID Regulation). This market is worth up to €10 trillion in Europe.
The proposed Delegated Regulation sets the regulatory technical standards (RTS) on the presentation, content, review and revision of the KID, together with the conditions for fulfilling the requirement to provide such documents.
ECON's concerns include the fact that the proposed formulas in the KID for predicting investment performance contain flaws which would make performance look far better than it was likely to be. As such, this would be potentially misleading for investors.
The Commission adopted the Delegated Regulation (C(2016) 3999 final) in June 2016. The resolution will now proceed for consideration by the European Parliament in a plenary session to be held September 12-15, 2016. The PRIIPs KID Regulation is to apply from December 31, 2016. The press release does highlight that the Commission is prepared "as a second best option" to allow the PRIIPs KID Regulation to apply without the RTS in place.
House of Lords EU Committee Launches Inquiry into Brexit and Financial Services
On August 31, 2016, the House of Lords EU Sub-Committee on Financial Affairs published a webpage announcing the launch of an inquiry into Brexit and financial services in the UK. The Sub-Committee will begin its inquiry with two evidence sessions concentrating on the consequences of the referendum result for financial services and potential future arrangements.
The issues to be considered by the inquiry are as follows:
The reaction of financial services firms to the outcome of the EU referendum result
The possibility of the relocation of financial services firms from the UK
Priorities for the UK financial services sector in the withdrawal negotiations and in negotiating a future relationship for the UK with the EU
Equivalence rights to access the EU single market for the UK
Financial regulatory co-operation between the UK and the EU under different models of EU membership
A potential free trade agreement and the UK's financial sector
Potential transitional arrangements
The importance of passporting rights for firms operating in the UK
Risks for retail customers and investors
Considerations for non-EU firms wishing to gain access to the EU through the EU's equivalence regime