Orrick's Financial Industry Week In Review - October 1, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments

Treasury Pushes for Money Market Fund Reforms

On September 27, Treasury sent a letter to the Financial Stability Oversight Council calling for structural reforms to the regulation of money market funds.  The letter, which relates to last month’s announcement by the SEC that it would not proceed with public comment on MMF reforms, requested that the FSOC solicit comments on certain MMF reforms and provide a recommendation to the SEC to adopt such standards.  Treasury Letter.

Agencies Reopen Comment Period on Swap Margin and Capital Proposed Rulemaking

On September 26, the Fed, Farm Credit Administration, FDIC, FHFA, and OCC reopened the comment period on a proposed rule to establish margin and capital requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants.  The comment period has been extended to November 26 from July 11.  Joint Release.  Rule Extension.   

CFTC Time Extension for Pre-Trade Screening Requirements

On September 26, the CFTC announced an extension of time for compliance for market participants to coordinate on the communication of limits for give-ups and bunched orders for futures and swaps.  The extension is intended to provide sufficient time to transition to fully compliant pre-trade screening no later than June 1, 2013.  CFTC Release.   

Agencies Release Regulatory Capital Estimation Tool

On September 24, the Fed, FDIC, and OCC released a regulatory capital estimation tool to help community banking organizations and other interested parties evaluate recently published regulatory capital proposals.  The tool will assist these organizations in estimating the potential effects on their capital ratios of the agencies’ Basel III Notice of Proposed Rulemaking and Standardized Approach Notice of Proposed Rulemaking.  FDIC Release.  Tool.

SEC Extension of Temporary Registration of Municipal Advisors

On September 21, the SEC amended interim final temporary Rule 15BA2-6T, which provides for the temporary registration of municipal advisors under the Exchange Act of 1934, as amended by the Dodd-Frank Act, to extend the date on which the rule will sunset from September 30, 2012 to September 30, 2013.  All temporary registrations submitted pursuant to the rule will also expire no later than September 30, 2013.  SEC Extension.

Rating Agency Developments

On September 27, Fitch updated its global rating criteria for trade receivables securitizations.  Fitch Report. 

On September 26, S&P requested comment on collateral coverage and issue notching rules for "1+" and "1" recovery ratings on senior bonds secured by utility real property.  S&P Report.     

On September 21, Fitch updated its criteria for analyzing large loans in U.S. CMBS.  Fitch Report. 

Note: Free registration is required for rating agency releases and reports.

Recent Orrick Alerts

Derivatives In Review

Derivatives in Review highlights the important legal, regulatory and other newsworthy developments in the area of derivatives. To read our September Edition, please click here.

Tax Law Update: IRS Issues Final Treasury Regulations Expanding Definition of "Traded on an Established Securities Market" and Liberalizing Rules for Reopenings

On September 12, the IRS issued Final Treasury Regulations that clarify the circumstances that cause property to be treated as “traded on an established market” for purposes of determining the issue price of a debt instrument that is issued for property.  The Final Regulations broadly define the term “traded on an established market.”  These new rules could create adverse U.S. federal income tax issues for borrowers and certain lenders in connection with certain restructurings, recapitalizations, debt-for-debt exchanges and amendments or modifications to credit agreements and other debt instruments.  Click here to read more.

China 20/20: Legal & 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.

RMBS Litigation

Federal Court Rules that Insurer May Prevail on its Representation and Warranty Claims Without Proving that the Breaches Caused Loans to Default

On September 25, Judge Jed S. Rakoff of the Southern District of New York issued a written opinion denying summary judgment in Assured Guaranty Municipal Corp.’s contract dispute with Flagstar Bank FSB over its insurance policies on nearly $1 billion in mortgage-backed securities backed by home equity loans.  Assured initiated this action in April 2011, alleging that Flagstar breached representations and warranties concerning the underwriting guidelines used to originate the mortgages, the credit characteristics of the loans, and the absence of negligence or fraud in the origination process.  Assured alleges that many of the loans have defaulted, resulting in $82.4 million in claims paid to date.  In denying Flagstar’s summary judgment motion, Judge Rakoff found that Assured need not demonstrate loss causation – that is, that the representation and warranty breach caused the loan to default and caused Assured to suffer damages – but rather that Assured could prevail if it proves that the representation and warranty breach materially increased the risk of loss to Assured.  Trial in this matter is scheduled for October 9.  Judge Rakoff’s ruling is similar to that of Judge Paul Crotty in Syncora Guarantee Inc. v. EMC Mortgage Corp., a decision covered in the June 25 issue of the Week in Review.  Order.

FHFA Sues HSBC Entities For RMBS Representation and Warranty Breaches

On September 26, the Federal Housing Finance Agency (FHFA) brought an action against HSBC Finance Corp. in New York State court.  FHFA’s summons with notice alleges that HSBC, as successor-in-interest to Decision One Mortgage Co., failed to repurchase residential mortgage loans underlying a Morgan Stanley ABS Capital I Inc. Trust.  FHFA brings this action on behalf of the Federal Home Loan Mortgage Corporation (Freddie Mac), which purchased RMBS issued by the trust in September 2006.  FHFA alleges that one or more of the underlying loans breached certain contractual representations and warranties made by Decision One concerning the underwriting and appraisal of the mortgage loans.  FHFA seeks specific performance of HSBC’s repurchase obligation, damages, indemnification, and declaratory relief.  Summons.

European Financial Industry Developments

ESMA Publishes Draft Technical Standards on the Implementation of EMIR

On September 27 ESMA published its final draft regulatory technical standards (RTS) which detail how the requirements of EMIR are to be implemented. The draft RTS have been developed through a consultation process which began in February 2012 with the publication of ESMA’s discussion paper and continued in June 2012 with the publication of ESMA’s consultation paper. The final draft RTS incorporate several changes to the initial version, and set out:

    • the details of derivative transactions that need to be reported to trade repositories, including confirming that:

      • that the reporting of collateral can be done on a portfolio basis; 
      • the reporting of mark to market values is only applicable to those counterparties under the obligation to calculate those on a daily basis;
    • clarification on how clearing thresholds will operate, including that employee’s benefits and acquisitions would be covered by the hedging definition;
    • the risk mitigation techniques for OTC derivatives that are not centrally cleared (including timely confirmation, portfolio compression and reconciliation); and
    • a set of organisational, conduct of business and prudential requirements for CCPs to ensure sound and resilient counterparties.

The final draft RTS have been submitted to the European Commission who have until December 31 to decide whether to endorse them. The RTS, once endorsed, will be directly applicable across the European Union. 

EBA Publishes Draft Technical Standards on Capital Requirements for CCPs

On September 26 the EBA published its final draft regulatory technical standards (RTS) which specify the capital requirements for central counterparties (CCPs) under the EMIR Regulation.

The draft RTS provide that a CCP should hold capital, including retained earnings and reserves, that is at all times at least able to cover:

    • overall operational and legal risks;
    • otherwise uncovered credit, counterparty credit and market risks; and
    • business risk (based on a CCP’s own estimate and subject to the approval of the body that regulates the CCP).

A CCP should also hold an additional amount of capital that is able to cover the CCP’s gross operational expenses during an appropriate time span for winding down or restructuring its activities.

The draft RTS will now be sent to the European Commission who have until December 31 to decide whether to endorse them. The RTS, once endorsed, will be directly applicable across the European Union.     

FSA Guidance on Proportionality in Relation to its Remuneration Code

On September 25 the FSA published Finalised Guidance 12/19: General guidance on Proportionality: The Remuneration Code (SYSC 19A) & Pillar 3 disclosures on remuneration (BIPRU 11) (FG12/19).

The Remuneration Code (the “Code”) regulates the way in which financial services firms remunerate their staff. Firms are required to apply the Code in a way that is proportionate to their size, internal organisation and the nature, scope and complexity of their activities. The FSA provides guidance which sets out a framework of what it considers to be a proportionate application of the Code to different sized firms. Prior to the publication of FG 12/19, the FSA’s guidance placed each firm into one of four proportionality tiers, determined by its capital resources.  

FG 12/19 replaces the old four-tiered proportionality structure with a new framework. In the new framework each firm will be placed into one of three proportionality levels, determined by its total assets.  

Tribunal Upholds FSA Decision to Ban and Fine Swiss Fund Manager and Two Former Cantor Fitzgerald Traders for Market Abuse

The Upper Tribunal (Tax and Chancery Chamber) (the “Tribunal”) has directed the FSA to fine Stefan Chaligné, a Swiss-based hedge fund manager £900,000, (plus disgorgement of the financial benefit he obtained of €362,950) and Patrick Sejean, a former senior salesman on Cantor Fitzgerald Europe’s (CFE) London-based French desk £650,000. Chaligné, Sejean and a third trader, Tidiane Diallo, have in addition been banned by the FSA from performing any role in regulated financial services, at the direction of the Tribunal.

Chaligné recruited the assistance of Sejean and Diallo in manipulating the share price of securities in the hedge fund he was managing, thus increasing the value of the hedge fund on portfolio evaluation dates. This practice, known as “window dressing the close”, was achieved by Chaligné placing orders through CFE, effected and executed by Sejean and Diallo, which were designed to increase the closing price of nine securities traded on European and North American exchanges. The practical effect of his market abuse was to increase the performance and management fees paid to him by the beneficiaries of the hedge fund.

The Tribunal described this as “as serious a case of market abuse of its kind as one might conceive”.



The JOBS Act in the IPO Market

On October 11, Orrick will host a breakfast briefing that will include a recap of the JOBS Act, a real-time update on the JOBS Act and its impact on the IPO market and early-stage venture capital, and a legal review of the latest SEC guidance and proposed rule-making related to the Act. Keynote Speakers will include Orrick partners Bruce Czachor and Edward Eisert, as well as John Truzzolino, Managing Director at RR Donnelly and Scott Livingston, Officer at Livingston Securities. For additional information and to RSVP, please click here


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Orrick, Herrington & Sutcliffe LLP

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