Orrick's Financial Industry Week in Review for March 10, 2014

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments

Final Guidance for Medium-Sized Firms on Dodd-Frank Stress Tests

On March 5, the Fed, the FDIC, and the OCC issued final guidance which describes supervisory expectations for stress tests to be conducted by financial companies with between $10 and $50 billion in total assets.  The guidance confirms that these companies are not subject to the Fed's capital plan rule, the Fed's annual Comprehensive Capital Analysis and Review, Dodd-Frank Act supervisory stress tests, or related data collections, which apply to bank holding companies with assets of at least $50 billion.  Joint Release.  Final Supervisory Guidance

Rating Agency Developments

On March 6, Moody's released its updated methodology for rating CDOs backed by structured finance assetsMoody's Report.

On March 5, Fitch released its criteria for granular corporate balance-sheet securitizations (SME CLOs).  Fitch Report.

On March 3, DBRS released its U.S. RMBS securities model and rating methodology.  DBRS Report.

On March 3, DBRS released its methodology for rating U.S. private student loan securitizationsDBRS Report.

On March 3, DBRS released its methodology for rating U.S. federal family education loan program (FFELP) securitizations.  DBRS Report.

  Note: Free registration is required for rating agency releases and reports.
Distressed Debt and Restructuring Developments

Detroit Moves Forward with Swap Settlement, Post-Petition Financing, Plan of Adjustment

Last week, the City of Detroit Chapter 11 bankruptcy case saw a handful of developments.  First, the City filed a motion seeking approval of a further revised proposed settlement with its swap counterparties.  The City now seeks to settle the approximately US$286 million in swap obligations for US$85 million, which amount will be funded on exit from bankruptcy (or as many as 180 days subsequently).  The City had previously tried to settle the swap obligations for as much as US$230 million; Judge Stephen Rhodes has twice rejected the City's efforts to settle.  The Court subsequently scheduled a hearing to approve the settlement on April 3.

Second, the City filed notice of revised post-petition financing with Barclays as the proposed lender.  The City now requests funding of only US$120 million in "Quality of Life" financing and no longer seeks funds to repay the swap settlement with the banks.  With the reduction in principal, the parties modified the collateral, which no longer includes gaming proceeds but is restricted now to sales tax revenues and the revenues of certain asset sales (excluding others such as art held by the Detroit Institute of Arts).  

Finally, the Court slightly modified the hearing on confirmation of the City's plan of adjustment, postponing the hearing until mid-July (rather than June).  

Puerto Rico Tees Up GO Financing

The Commonwealth of Puerto Rico continues its efforts to maintain fiscal and financial stability.  This week, we expect the Commonwealth to move forward with an approximately US$3 billion General Obligation bond financing.  This offering is expected to provide the Commonwealth with sufficient liquidity to enable the Commonwealth to analyze its options in a more methodical fashion.  The Commonwealth agreed to waive sovereign immunity with respect to state and federal courts in Manhattan and the Federal District Court in Puerto Rico (as well as Commonwealth courts).  However, the Commonwealth did not waive sovereign immunity with respect to assets located in Puerto Rico.  Moreover, as general obligation debt, lenders cannot accelerate on a default despite request from investors for a provision permitting that remedy.  Statement.

Asset Management

FINRA Issues Proposed Rule Set for Limited Corporate Financing Brokers

FINRA issued for comment a Proposed Rule Set for Limited Corporate Financing Brokers (LCFBs).  The proposed rule set would provide a lighter regulatory regime for LCFBs, defined as any broker that solely engages in one or more of the following activities:

    • advising an issuer, including a private fund, concerning its securities offerings or other capital raising activities;
    • advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
    • advising a company regarding its selection of an investment banker;
    • assisting in the preparation of offering materials on behalf of an issuer;
    • providing fairness opinions; and
    • qualifying, identifying or soliciting potential institutional investors.
The rule set would not apply to firms that carry or maintain customer accounts, handle customers' funds or securities, accept customers' trading orders or engage in proprietary trading or market-making.  The proposed rule set also is limited in that, among other things, it would not eliminate all exam requirements for principals and representatives that are associated with an LCFB and would not eliminate the net capital requirements. The comment period expires on April 28.  Regulatory Notice.  
 
European Financial Industry Developments

EBA Report on Consumer Trends 2014

On February 28, the European Banking Authority (EBA) published a report on consumer trends in the areas of consumer protection and financial innovation as well as the approaches the EBA will be taking in 2014 to address them.  New trends identified for 2014 include virtual currencies and comparison websites.

As a result of the report, key consumer issues the EBA intends to focus on during 2014 are:

    • household borrowing;
    • bank account switching and fees;
    • traditional payment methods (such as cash, debit and credit cards, checks, and bank transfers) and non-traditional payment methods (such as mobile payments and e-wallets);
    • digital currencies;
    • crowdfunding;
    • misselling of products;
    • comparison websites; and

Council of the EU Presidency Compromise Proposal on MLD4

On March 3, the Council of the EU published a compromise proposal (dated January 28, 2014) on the European Commission's proposed Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (known as the Fourth Money Laundering Directive or MLD4).

MLD4 will amend and replace the Third Money Laundering Directive and is designed to further strengthen the EU's defenses against money laundering and terrorist financing, while also ensuring that the EU framework is aligned with the Financial Action Task Force standards.  Compromise Proposal

Council of the EU Adopts Recast Deposit Guarantee Schemes Directive

On March 3, the Council of the EU published a press release announcing that it has adopted at first reading the proposed Directive recasting the Deposit Guarantee Schemes Directive (94/19/EC).

On February 25, the Council published a revised text of the proposed Directive.

The Council's adoption of the Directive will enable the European Parliament, with which agreement on the Directive was reached in December 2013, to adopt it without amendment at second reading at its plenary session between April 14 – 17, 2014.  Member states will have one year after the Directive's entry into force to transpose it into national law.  Press Release.   Revised Text.   

Overview of the Six Most Important Changes to the Russian Pledge Rules

Please click here to read Orrick's coverage of the six most important changes to the Russian Pledge Rules. 

 

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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