CFTC No-Action Relief for Securitizations from Commodity Pool Operator Registration

On December 7, the CFTC provided guidance to securitization vehicles on whether they may be excluded from the definition of commodity pool.  The CFTC will not recommend taking enforcement action against the operators of certain securitization vehicles that have not and will not issue new securities on or after October 12, 2012 for failure to register as a commodity pool operator, provided certain criteria are satisfied.  Also, for securitization vehicles that cannot claim relief either under this letter or CFTC Letter No. 12-14, which was issued on October 11, 2012, the CFTC will not recommend enforcement action against operators of securitization vehicles for failure to register as a commodity pool operator until March 31, 2013.  CFTC Release.  No-Action Letter. 

CFTC No-Action Relief for Mortgage REIT Operators from Commodity Pool Operator Registration

On December 7, the CFTC issued a no-action letter to mortgage real estate investment trusts which provides that the Division of Swap Dealer and Intermediary Oversight will not recommend that the CFTC take enforcement action against the operators of mortgage REITs for failure to register as commodity pool operators under the Commodity Exchange Act and the CFTC’s regulations, provided that the mortgage REIT satisfies certain criteria including compliance with a de minimis threshold.  CFTC Release.  No-Action Letter.  

CFTC No-Action Relief from Post-Allocation Swap Timing Requirements

On December 13, the CFTC issued a letter providing relief from the post-allocation swap timing requirement of § 45.3(e)(ii)(A).  The no-action letter permits parties to a swap to fulfill reporting obligations for post-allocation swaps in a timely manner while acknowledging jurisdictional, global time zone, and legal holiday differences.  The relief expires no later than June 30, 2013.  CFTC Release.  No-Action Letter.

CFTC No-Action Relief for Futures Commissions Merchants

On December 11, the CFTC issued a no-action letter that provides certain futures commission merchants (FCMs) with limited relief surrounding the requirement that chief compliance officers of such FCMs prepare and submit an Annual Report, pursuant to Commission Regulation 3.3.  The relief applies to FCMs that: (i) were registered with the CFTC as of June 4, 2012 and (ii) are currently regulated by a U.S. prudential regulator or registered with the SEC.  CFTC Release.  No-Action Letter. 

CFTC No-Action Relief for Reporting Entities and Reporting Counterparties

On December 10, the CFTC issued a letter providing reporting parties under Parts 20, 45 and 46 of the CFTC’s regulations with time-limited no-action relief from requirements to report certain identifying information regarding their non-reporting counterparties.  The no-action letter addresses Legal Entity Identifiers, other identifying swap data fields pursuant to Parts 45 and 46, and large swap trader counterparty identification information pursuant to Part 20.  The relief expires no later than June 30, 2013.  CFTC Release.  No-Action Letter. 

CFTC No-Action Relief for Swap Dealers and Major Swap Participants

On December 7, the CFTC issued limited no-action relief to swap dealers and major swap participants from compliance with the prohibition in Regulation 23.22(b) against permitting a person who is subject to a statutory disqualification to effect or be involved in effecting swaps on behalf of the swap dealer or major swap participant.  CFTC Release.  No-Action Letter.  

On December 13, Moody’s released its methodology for U.S. stand-alone housing bond programs secured by credit enhanced mortgages.  Moody’s Report.  

On December 13, S&P released its methodology for pre-insolvency structural protections in Europe.  S&P Report.

On December 12, Fitch published criteria for rating financial institutions above the sovereign.  Fitch Report.  

On December 11, Fitch updated its criteria for analyzing financing and leasing companies.  Fitch Report.  

On December 11, Moody’s released its U.S. manufactured housing loan ABS surveillance methodology.  Moody’s Report.  

On December 11, Moody’s released its methodology for mortgage insurers.  Moody’s Report.  

On December 10, S&P released its methodology for Mexican trade receivables ABS transactions.  S&P Report.

FINRA Guidance on Suitability Rule

On December 10, FINRA issued Regulatory Notice 12-55, which provides regulatory guidance in the form of a FAQ regarding customer suitability issues under FINRA Rule 2111.  The amendments to the FAQ address the scope of the terms “customer” and “investment strategy.”  FINRA Notice.

China 20/20: Legal and Regulatory Developments

China 20/20 is a monthly Orrick newsletter which covers legal and regulatory developments in China. To view the latest edition, please click here.

Court Dismisses In Part RMBS Suit Against Countrywide, Dismissed In Entirety Against Bank of America

On December 6, Judge Mariana Pfaelzer of the United States District Court for the Central District of California dismissed in part claims brought by several insurance companies, including Minnesota Life Insurance Company, in connection with the purchase of $114 million in RMBS issued by Countrywide.  Although the court denied Countrywide’s motion to dismiss the fraud claim against it, the court dismissed plaintiffs’ negligent misrepresentation claim and claims under various Minnesota consumer protection statutes.  The court granted Bank of America’s motion to dismiss in its entirety, holding that plaintiffs had not sufficiently alleged successor liability against Bank of America.  Decision.

Pension Fund Class Action to Proceed Against Bank of America and U.S. Bancorp

On December 6, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York denied Bank of America and U.S. Bancorp’s motions to dismiss a suit by the Policemen’s Annuity and Benefit Fund of the City of Chicago.  Plaintiff brought claims against Bank of America and U.S. Bancorp for breach of contract, breach of the implied covenant of good faith and fair dealing, and the Trust Indenture of 1939, alleging that defendants failed to protect investors in their role as trustees for RMBS issued by Washington Mutual.  Plaintiff alleges that Bank of America and Bancorp failed to take certain actions required by the pooling and servicing agreements, including taking possession of loan files, reviewing those files to ensure they were complete, or requiring Washington Mutual to repurchase or fix defective loans.  The court limited plaintiff’s ability to pursue claims only to trusts in which it had purchased certificates or on behalf of purchasers of certificates whose certificates are backed by the loan group that back plaintiff’s certificates or whose certificates are cross-collateralized by loan groups that back plaintiff’s certificates.  Decision.

Trustee Brings $640 Million RMBS Suit Against Deutsche Bank

On November 27, HSBC Bank, acting as trustee for a Real Estate Mortgage Investment Conduit Trust, filed suit against DB Structured Products, Inc., a Deutsche Bank affiliate, in the federal district court for the Southern District of New York.  The complaint alleges that DB Structured Products breached its contractual duties by failing to properly review the mortgage loans underlying an RMBS securitization and by failing to buy back allegedly defective loans.  HSBC, which alleges that over 90 percent of the underlying mortgage loans did not comply with underwriting guidelines, seeks rescissory damages or alternatively compensatory damages, and failing the award of damages, specific performance requiring the repurchase of allegedly defected loans.  Complaint.

Resolving Financial Institutions – A Joint Paper by the FDIC and the Bank of England

On December 10, the Bank of England (the Bank) and the Federal Deposit Insurance Corporation (the FDIC) published a joint paper entitled ‘Resolving Globally Active, Systemically Important, Financial Institutions’ (G-SIFIs).  The joint paper sets out the strategies that the Bank and the FDIC have designed to enable large and complex cross-border firms to be resolved without threatening financial stability or putting public funds at risk.  The paper builds on the work of the Financial Stability Board, and focuses on the application of “top-down” resolution strategies whereby a single resolution authority applies its powers at parent company level.

In the UK, this will involve the use of the powers under the Banking Act 2009 and those that are anticipated to be provided by the European Union Recovery and Resolution Directive and the Financial Services Bill, and will involve the bail-in (write-down or conversion) of creditors at the top of the group in order to restore the whole group to solvency.

Formal Request to ESMA for Technical Advice on the Evaluation of the Short Selling Regulation

On December 10, ESMA published a formal request it had received from the European Commission for technical advice on the observable effects of the Short Selling Regulation since its coming into force on November 1, 2012.

Amongst the specific questions ESMA has been asked to answer are:

         1. To what extent any temporary restrictions and bans imposed by competent authorities on short selling have had any positive
             effects;        
         2. To what extent the thresholds set for notification to national regulators and public disclosure are appropriate; and
         3. Whether the exemption for market makers allows for liquidity provision without undue circumvention.

The European Commission is obliged to report on the issues above to the European Parliament and the Council by June 30, 2013.  It has asked ESMA to deliver its technical advice by May 31, 2013.  Market participants can expect ESMA to launch a consultation shortly, with a deadline for responses sometime in the spring of 2013.  

Libor Update

On December 11, the Serious Fraud Office (the SFO) published a press release stating that three men had been arrested and interviewed in relation to its investigation into the manipulation of LIBOR.  Although the three men have not been charged with wrongdoing, the move is being reported as indicative of a shift of focus in the LIBOR investigation away from institutions and onto individuals, as well as a shift of focus away from banks and onto brokers.

Insider Dealing

On December 13, the FSA published a press release announcing that Thomas Ammann, a former investment banker and FSA Approved Person at Mizuho International plc, had been sentenced  to 2 years and 8 months imprisonment for two counts of insider dealing and two counts of encouraging insider dealing.  The press release stated that Mr Ammann received profits of several hundred thousand dollars through insider dealing relating to the acquisition of Océ by Canon, who were being advised by MIP at the time.  The FSA makes no criticism of Mizuho International plc.