Orrick's Financial Industry Week In Review

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Financial Industry Developments

CFTC Issues Proposed Interpretation on Virtual Currency "Actual Delivery" in Retail Transactions

On December 15, 2017, the Commodity Futures Trading Commission ("CFTC") announced a Proposed Interpretation concerning its authority over retail commodity transactions involving virtual currency, such as bitcoin. Specifically, the Proposed Interpretation sets out the CFTC's view regarding the "actual delivery" exception that may apply to virtual currency transactions. The Proposed Interpretation is open for public comment for 90 days from publication in the Federal Register. To view the full article, click here.

 

New York Regulator's Fintech-Charter Lawsuit Dismissed

On December 12, 2017, a federal judge in Manhattan dismissed a state regulator's lawsuit challenging the Office of the Comptroller of the Currency's ("OCC") federal-fintech-charter effort, finding that legal challenges to the initiative were premature. In an order filed Tuesday, the judge found that the lawsuit filed in May by New York's Superintendent for Financial Services Maria Vullo lacked merit, because the OCC's initiative hasn't been implemented yet. To view the full article, click here.

 

CFTC Staff Issues Interpretive Guidance Clarifying Commodity Trading Advisor Registration Requirements Resulting from the European Union's MiFID II Research Compensation Provisions for Investment Managers

On December 11, 2017, the Commodity Futures Trading Commission's Division of Swap Dealer and Intermediary Oversight issued interpretative guidance providing that a futures commission merchant ("FCM"), swap dealer ("SD"), or introducing broker ("IB") that receives separate compensation for commodity trading advice is not required to register as a commodity trading advisor, provided that the offered advice is "solely incidental" to the conduct of the FCM's or SD's business, or "solely in connection with" the operation of the IB's business. Press Release. CFTC Staff Letter.

 

SEC Chairman Statement on Cryptocurrencies and Initial Coin Offerings

On December 11, SEC Chairman Jay Clayton issued his own statement ("Statement") concerning cryptocurrencies and "initial coin offerings"  ("ICOs").  The Statement provides a thorough review of the primary securities regulatory issues and urges caution on the part of issuers and market participants. To view the full statement, click here.

 

CFTC Approves Exemption from SEF Registration Requirement for Multilateral Trading Facilities and Organized Trading Facilities Authorized Within the EU

On December 8, 2017, the Commodity Futures Trading Commission ("CFTC") announced the issuance of an order exempting certain multilateral trading facilities and organized trading facilities authorized within the European Union from the requirement to register with the CFTC as swap execution facilities. The order will become effective on January 3, 2018. Press Release. Order of Exemption.

 

U.S. Banking Agencies Support Conclusion of Reforms to International Capital Standards

On December 7, 2017, the United States banking agencies announced their support for the conclusion of efforts to reform the international bank capital standards initiated in response to the global financial crisis.  The Group of Central Bank Governors and Heads of Supervision and the Basel Committee on Banking Supervision announced the finalization of the reforms to the "Basel III" agreement on bank capital standards.  With this agreement, the Basel Committee will bring to conclusion the international reforms initiated in response to the global financial crisis.  Press Release.

 

Federal Reserve Board Requests Comment on Package of Proposals that would Increase the Transparency of its Stress Testing Program

On December 7, 2017, the Federal Reserve Board requested comment on a package of proposals that would increase the transparency of its stress testing program.  The proposed enhanced disclosures have three components: (1) enhanced descriptions of supervisory models, including key variables; (2) modeled loss rates on loans grouped by important risk characteristics and summary statistics associated with the loans in each group; and (3) portfolios of hypothetical loans and the estimated loss rates associated with the loans in each portfolio.  Comments on the measures will be accepted through January 22, 2018. Press Release.

 

Rating Agency Developments

On December 13, 2017, DBRS published a report entitled: Canadian Surveillance Methodology for CDOs of Large Corporate Credit. Report.

On December 12, 2017, Fitch published a report entitled: Exposure Draft: Non-Bank Financial Institutions Rating Criteria. Report.

On December 12, 2017, Fitch published a report entitled: Exposure Draft: Bank Rating Criteria. Report.

On December 12, 2017, DBRS published a report entitled: Operational Risk Assessment for U.S. RMBS Servicers. Report.

On December 12, 2017, DBRS published a report entitled: Operational Risk Assessment for U.S. RMBS Originators. Report.

On December 7, 2017, Fitch published a report entitled: Latin America RMBS Rating Criteria. Report.

 

European Financial Industry Developments

ESMA Publishes Two Revised Opinions on Transaction on Third-Country Trading Venues

On December 15, 2017, European Securities and Markets Authority ("ESMA") published two revised opinions on third-country trading venues for post-trade transparency and position limits requirements under MiFID II. The revised opinions are:

These revise the original opinions issued in May 2017. The opinions addressed the treatment of transactions executed by EU investment firms on third-country trading venues as well as the treatment of positions held in contracts traded on those venues for the position limit regime under the MiFID II Directive.

These opinions stated that, provided that third-country trading venues meet a set of criteria, investment firms trading on those trading venues are not required to make transactions public in the EU via an approved publication arrangement (APA). Likewise, commodity derivatives contracts traded on those trading venues are not considered as economically equivalent over-the-counter ("EEOTC") contracts for the purpose of the position limit regime.

When publishing these opinions, in its press release, ESMA explained that after the original publication of its opinions in May 2017, it had received requests to assess over 200 third-country trading venues. ESMA stated that it will not be able to assess all of these trading venues prior to the application of MiFID II (January 3, 2018) and highlighted the importance that all third-country trading venues are treated the same in order to maintain a level playing field.

Consequently, the opinions state that pending an ESMA assessment of these third-country trading venues, transactions on third-country trading venues do not need to be made post-trade transparent and positions held in those third-country venue contracts are not considered to be EEOTC contracts.

 

ESRB Recommendation Amending 2015 Recommendation on EU Macroprudential Policy Framework Published in OJ

On December 15, 2017, the Recommendation of the European Systemic Risk Board ("ESRB") (ESRB/2017/4) (dated October 20, 2017) amending Recommendation ESRB/2015/2 on the assessment of cross-border effects of, and voluntary reciprocity for, macroprudential policy measures was published in the Official Journal of the EU (OJ).

The recommendation states that the framework on the voluntary reciprocity for macroprudential measures set out in the 2015 recommendation should ensure that all exposure-based macroprudential policy measures activated in one member state are reciprocated in the other member states to the greatest extent possible. Relevant authorities in member states may exempt an individual firm with nonmaterial exposure from the application of the reciprocating measures. (the "De Minimis Principle").

The 2015 recommendation provided no guidance on the threshold to be used by relevant authorities to determine the materiality of exposure. Consequently, where a relevant authority has exempted a firm with nonmaterial exposure, the authority has been able to adopt the threshold it considers appropriate, creating potential divergences in the application of the de minimis principle.

As a result, the 2017 recommendation amends the 2015 recommendation by stating that the relevant authority should propose a maximum materiality threshold at the firm level when requesting reciprocation.

 

ECB Consultation on Guide on Assessment Methodology for IMM and A-CVA

On December 14, 2017, the European Central Bank ("ECB") published its first consultation on the draft ECB guide on the assessment methodology (EGAM) for the internal model method ("IMM") and the advanced credit valuation adjustment risk ("A-CVA") charge for counterparty credit risk ("CCR").

The guide relates to the supervisory assessment methodology used by banks to calculate capital requirements for CCR under the Capital Requirements Regulation (Regulation 575/2013) ("CRR").

The ECB developed the guide, as there is no mandate in the CRR for the EBA to produce regulatory technical standards (RTS) for the assessment methodology for the IMM and the A‑CVA models.

The guide is intended to clarify the methodologies that the ECB uses to assess CCR model components within model investigations when determining if institutions meet those requirements.

The deadline for responses is March 31, 2018. The ECB intends to finalize the guide following another call for feedback in 2018.

The draft guide is available 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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