Financial Industry Developments

SEC Announces the Formation and First Members of Fixed Income Market Structure Advisory Committee

On November 9, 2017, the Securities and Exchange Commission ("SEC") announced the formation and first members of its Fixed Income Market Structure Advisory Committee.

According to the announcement, the committee, whose initial focus will be on the corporate bond and municipal securities markets, will provide advice to the Commission on the efficiency and resiliency of these markets and will identify opportunities for regulation.

The entire announcement can be found here.

Impact Finance

Impact Finance—investment with the intention to generate social and environmental impact alongside a financial return—is a large and growing global market. According to the Global Impact Investing Network's Annual Impact Investor Survey 2017, over $22 billion was invested into nearly 8,000 Impact Finance deals worldwide in 2016, which represented 15 percent growth over 2016, and the market was expected to grow another 17 percent through the end of 2017.

Impact Finance is an important focus area for Orrick, and we will be periodically reporting in our Financial Industry Week in Review on developments in this area.

Rating Agency Developments

On November 8, 2017, Fitch updated its ratings criteria for U.S. Grant Anticipation Revenue Vehicles (GARVEE) bonds. Report

On November 8, 2017, DBRS updated its ratings methodology for Canadian Residential Mortgages, Home Equity Lines of Credit, and Reverse Mortgages. Report

On November 8, 2017, DBRS updated its ratings methodology for Trade Receivables. Report

On November 7, 2017, KBRA updated its Default and Loss Model for rating RMBS. Report

On November 7, 2017, KBRA published its ratings methodology for Equity Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs). Report

On November 3, 2017, Fitch updated its surveillance criteria for Multiborrower CMBS. Report

On November 3, 2017, Fitch updated its surveillance criteria for Legacy U.S. Commercial Real Estate Loan (CREL) Collateralized Debt Obligations (CDOs). Report

On November 3, 2017, DBRS updated its ratings methodology for Canadian Rental Car Fleet Securitizations. Report

European Financial Industry Developments

ECB Opinion on Implementation of TLAC

On November 10, 2017, the European Central Bank ("ECB") published an opinion (dated November 8, 2017) on the European Commission's legislative proposals to implement the Financial Stability Board's (FSB) total loss absorbing capacity ("TLAC") standard.

The opinion relates to the Commission's legislative proposals to amend the following Regulations and Directive in order to implement TLAC in the EU: Bank Recovery and Resolution Directive (2014/59/EU) ("BRRD"), Regulation for Single Resolution Mechanism (Regulation 806/2014) ("SRM Regulation"), CRD IV Directive (2013/36/EU) and Capital Requirements Regulation (Regulation 575/2013) ("CRR"). The Commission published its legislative proposals in November 2016.

The ECB welcomes these proposals but highlights some areas for consideration, including issues relating to:

Implementation of the TLAC standard in the EU;

• Amendments to the minimum requirement for own funds and eligible liabilities ("MREL");
• Transitional arrangements for MREL;
• Early intervention measures; and
• Pre-resolution moratorium tool.

Specific proposals to amend the drafting of the proposed Regulations and Directive, together with some additional proposals to amend the current texts of the BRRD, SMR Regulation, CRR and CRD IV Directive are set out in a technical working document, which is attached to the opinion.

EBA Opinion on Nonbank Financial Intermediaries and Regulatory Perimeter Issues Under CRD IV and CRR

On November 9, 2017, the European Banking Authority ("EBA") published an own-initiative opinion (EBA/Op/2017/13) addressed to the European Parliament, the Council of the EU and the European Commission on nonbank financial intermediaries and regulatory perimeter issues under the Capital Requirements Directive IV (2013/36/EU) ("CRD IV Directive") and the Capital Requirements Regulation (Regulation 575/2013) ("CRR").

Publication of the opinion is part of the EBA's work to regularly monitor credit intermediation activities outside the traditional banking system. This work takes account of other developments, including the emergence of FinTech. The opinion is based on the results of a detailed assessment across the EU of the prudential treatment of "other financial intermediaries" ("OFIs"). (OFIs are entities carrying out credit intermediation activities that are not credit institutions or other specified types of financial entity.) The results of the assessment are set out in a report, which the EBA has published alongside the opinion.

In terms of the overall scope of the CRD IV Directive and the CRR, the EBA observes that Article 2(5) of the CRD IV Directive (which lists entities excluded from the scope) remains valid and requires minor updating. Also, Article 9(2) of the CRD IV Directive (which sets out other exclusions) appears to continue to have relevance in member states, so any amendment should be substantiated by a prior and thorough impact assessment.

The EBA explains that the terms "financial institution" and "ancillary services undertaking" in the CRR are crucial for the purposes of establishing the scope of prudential consolidation. It observes that these terms are prone to inconsistent interpretation across the EU. This leads to potential divergences in the application of the consolidation rules in Article 18 of the CRR. This is highlighted in the EBA's November 2017 consultation paper on draft regulatory technical standards (RTS) on methods of consolidation. The EBA urges the EU institutions to consider further possible amendments to these terms to ensure the consistent treatment of prudential risks and to promote a level playing field.

The EBA observes that Annex I to the CRD IV Directive, which lists the activities subject to mutual recognition, has been largely unchanged for 30 years. It considers that the Annex would benefit from an update to clarify certain terms and align it with recent EU sectoral measures to ensure that the list of services remains fit for purpose.

The EBA observes that a wide range of OFIs perform credit intermediation activities outside an individual prudential framework specified in EU law. The prudential treatment of OFIs varies significantly between member states. Although it has not made any specific recommendations at this stage on the scope of individual prudential regulation under EU law, the EBA notes the need to continue its monitoring work (including its work with the European Systemic Risk Board (ESRB) as part of the annual shadow banking monitoring exercises).

The latest opinion follows up the analysis set out in the EBA's November 2014 opinion and reports on the perimeter of credit institutions.

The EBA advises that its findings are relevant to consideration of the legislative proposals to amend the CRD IV Directive and the CRR (that is, the CRD V Directive and the CRR II Regulation), which the Commission published in November 2016.

ECB Reports on Supervision of Less Significant Institutions in SSM

On November 8, 2017, the European Central Bank ("ECB") published a report on the supervision of less significant institutions ("LSIs") in the single supervisory mechanism ("SSM").

In its role as lead supervisor in the SSM, the ECB directly supervises all credit institutions in the Eurozone that are classified as significant, while national competent authorities ("NCAs") directly supervise other credit institutions, referred to by the ECB as LSIs.

In the report, the ECB sets out an overview of:

• A description of the organization of banking supervision in the SSM, focusing on the supervision of LSIs.
• A description of the LSI sector and the implications for supervision of current challenges for LSIs.
• The main supervisory activities conducted of LSIs by NCAs. The ECB summarizes the NCAs' work relating to off-site and on-site supervisory activities, thematic reviews and the application of supervisory powers under Article 104 of the CRD IV Directive (2013/36/EU).
• The ECB's work to promote the convergence of LSI supervision across the SSM. The ECB states that it and the NCAs have made substantial progress in promoting a common supervisory approach, methodologies and toolkit for LSIs. The ECB notes that further work is needed to address challenges arising from differences in practice relating to accounting systems.

Corrigendum to Delegated Regulation Relating to Passporting Under MiFID II Published in OJ

The Official Journal of the EU (OJ) has published a corrigendum to Commission Delegated Regulation ((EU) 2017/1018) supplementing the MiFID II Directive (2014/65/EU) with regard to regulatory technical standards (RTS) specifying information to be notified by investment firms, market operators and credit institutions.

The corrigendum makes the following minor change to the text of article 5(b) of the version of the Delegated Regulation published in the OJ:

"For: "(b) a short description of the appropriate arrangements to be in place and the date from which these arrangements will be provided in the host Member State;"

read: "(b) a short description of the arrangements and the date from which those arrangements will be provided in the host Member State;"."

The Delegated Regulation was made under article 34(8) of the MiFID II Directive.