Orrick's Financial Industry Week in Review - December 3, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


CFTC Final Rule on Clearing of Credit Default Swaps and Interest Rate Swaps

On November 28, the CFTC issued final rules requiring certain credit default swaps and interest rate swaps to be cleared by registered derivatives clearing organizations (DCOs).  Market participants will be required to submit a swap that is identified in the rule for clearing by a DCO as soon as technologically practicable and no later than the end of the day of execution.  The final rules will be effective 60 days after publication in the Federal Register.  CFTC Release.  CFTC Final Rule.

Fed, Treasury Proposed Amendments to Bank Secrecy Act Definitions

On November 29, the Fed and the Financial Crimes Enforcement Network, a bureau of the Treasury, proposed amended definitions of “funds transfer” and “transmittal of funds” under the regulations implementing the Bank Secrecy Act.  The proposed amendments maintain the current scope of funds transfers and transmittals subject to the Bank Secrecy Act following amendments to the Electronic Fund Transfer Act made pursuant to the Dodd-Frank Act.  Comments must be submitted no later than January 25, 2013.  Fed Release.   Fed Proposed Rule.

CFTC No-Action Relief for Swap Clearing by Cooperatives and Affiliates

On November 28, the CFTC Division of Clearing and Risk issued time-limited no-action letters granting relief from required clearing under Section 2(h)(1)(A) of the Commodity Exchange Act and the newly adopted Part 50 regulations for (i) certain swaps entered into by qualifying cooperatives and (ii) certain swaps entered into by qualifying affiliated counterparties.  The no-action relief provided by each letter will remain effective until the earlier of April 1, 2013 or the effective date of final rulemaking regarding the clearing exemptions for cooperatives or affiliated counterparties, respectively.  CFTC Release (Cooperatives).  CFTC Release (Affiliates).  CFTC No Action Letter (Cooperatives).  CFTC No Action Letter (Affiliates).  

CFPB Bulletin on Proposed Changes to Remittance Rule

On November 27, the CFPB issued a bulletin explaining the CFPB’s intent to propose limited adjustments to its rule on international money transfers as well as an extension of the date the rule will become effective until the spring of 2013.  The proposed changes will address what should happen if a consumer provides an incorrect account number for a transfer and how remittance providers must disclose certain third-party fees and foreign taxes.  CFPB Bulletin.

CME Proposed Rule on Cleared Swap Reporting

On November 28, the CFTC requested comment on a request from the Chicago Mercantile Exchange for approval of CME Rule 1001 regarding the reporting of cleared swaps.  Comments must be submitted no later than December 21.  CFTC Release.  

CFTC Amended FAQ on Cleared Swap Reporting

On November 28, the staff of the CFTC amended its “Frequently Asked Questions on Reporting of Cleared Swaps” to remove certain questions.  Matters raised in the withdrawn questions and answers are currently under consideration by the CFTC in connection with a request from the Chicago Mercantile Exchange for approval of CME Rule 1001.  CFTC Release. CFTC FAQ.  

Interagency Statement on Restrictions on Conversions of Troubled Banks

On November 26, the Fed, the FDIC, and the OCC, in conjunction with the Conference of State Bank Supervisions, issued “Interagency Statement on Section 612 of the Dodd-Frank Act: Restrictions on Conversions of Troubled Banks”.  The statement describes the general prohibition on charter conversions by certain insured depository institutions.  Bulletin.  Statement.     

FHA Changes to Loss Mitigation Home Retention Options

On November 20, the FHA announced changes to its loss mitigation program which will allow more distressed borrowers to qualify for FHA loss mitigation interventions and to get greater assistance.  Included among the changes are: (i) streamlining the FHA’s Loss Mitigation Home Retention Option to a 3-tier incentive structure; (ii) redefining “Special Forbearance”; (iii) eliminating some requirements which limited lenders’ ability to provide borrowers with assistance; and (iv) expanding HAMP.  FHFA Release.   

CFTC No-Action Letter on Pay-to-Play Rules for Swap Dealers

On November 20, the CFTC issued a no-action letter on pay-to-play rules for swap dealers who conduct business with governmental special entities.  The rules restrict a swap dealer from engaging in certain activities with a governmental special entity if the swap dealer (or covered associate) made or solicited contributions to an official of that governmental special entity during the preceding two years.  The no-action letter provides relief for certain contributions.  CFTC Release.  No-Action Letter.   

CFTC No-Action Letter on Timeline for Swap Data Reporting Rules

On November 20, the CFTC issued a no-action letter providing swap dealers with time-limited no-action relief from certain requirements of the CFTC’s swap data reporting rules in Parts 43, 45, and 46 of the CFTC’s regulations.  The no-action letter establishes a common monthly date by which all newly registered swap dealers must be in compliance with their reporting obligations under the rules, and extends the deadline for reporting historical swap transaction data, as required under Part 46.  CFTC Release.  No-Action Letter.   

CFPB Extension for Mortgage Disclosure Rules

On November 16, the CFPB amended Regulation Z (Truth in Lending) to delay certain disclosure requirements in the Dodd-Frank Act that would otherwise take effect on January 21, 2013.  The CFPB plans to implement these disclosures as part of the integrated mortgage disclosure forms proposed earlier this year which combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act.  CFPB Release.  CFPB Rule.

Rating Agency Developments


On November 29, S&P released its counterparty risk framework methodology.  S&P Release.

On November 29, S&P released its criteria for stressing foreign currency risk in unhedged or partially hedged structured finance transactions.  S&P Release.

On November 28, DBRS released its methodology for mapping financial institutional internal ratings to DBRS ratings for global structured credit transactions.  DBRS Report.

On November 27, Fitch published a report on rating U.S. municipal short-term debt.  Fitch Report.

On November 27, Fitch released its guidelines for rating cash pools using money market fund criteria.  Fitch Release.

On November 27, DBRS released its operational risk assessment for European structured finance servicers.  DBRS Report.

On November 26, DBRS released its commercial paper liquidity support criteria for corporate non-bank issuers.  DBRS Report.

On November 26, S&P updated its methodology for rating multilateral lending institutions and other nonbank supranational institutions.  S&P Report.

On November 22, DBRS released its criteria for public-private partnerships.  DBRS Report.

On November 21, Moody’s released its approach for securities backed by Brazilian consumer assets.  Moody’s Report.

On November 16, S&P updated its criteria for evaluating geographic concentration in U.S. RMBS mortgage pools.  S&P Report.


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

Asset Management


SEC Rule on ’40 Act Exemption for Business and Industrial Development Companies

On November 19, the SEC adopted rule 6a-5 under the Investment Company Act of 1940 to establish a standard of credit-worthiness in place of a reference to credit ratings in section 6(a)(5) of the ’40 Act for debt securities purchased by entities relying on an exemption for business and industrial development companies.  The rule implements section 939(c) of the Dodd-Frank Act.  The rule will be effective 30 days after publication in the Federal Register.  SEC Rule.   

RMBS Litigation


IKB Files Suit Against Morgan Stanley Over $147M in RMBS

On November 16, German lender IKB Deutsche Industriebank AG sued Morgan Stanley and related entities in the Supreme Court for the State of New York for $147 million in connection with the sale of RMBS.  IKB alleges Morgan Stanley issued offering documents that contained material misrepresentations and omissions regarding the underwriting standards and credit characteristics of the loans underlying the securities, the legal validity of the trusts and the transfer of loans to the trust, and the credit ratings of the securities.  IKB brings causes of action against Morgan Stanley for common-law fraud, fraudulent inducement, fraudulent concealment, negligent misrepresentations, aiding and abetting fraud, declaratory judgment, and contract claims, including rescission, restitution and mutual mistake.  Summons with Notice.

DZ Bank Files Lawsuit Against Morgan Stanley Over $694M in RMBS

On November 21, Deutsche Zentral-Genossenschaftsbank AG (DZ Bank) filed a summons with notice in Supreme Court for the State of New York against Morgan Stanley in connection with the German bank’s alleged purchase of $694 million in RMBS.  DZ Bank alleges that the offering materials for the RMBS contained material misrepresentations and omissions regarding the characteristics of the mortgage loans underlying the securities and the underwriting standards used to issue the mortgage loans.  DZ Bank raises common-law fraud, aiding and abetting fraud, negligent misrepresentation, breach of contract, and declaratory judgment  claims.  It seeks over $694 million in damages or rescission. Summons with Notice.

Two Funds File $28M RMBS Suit Against TCW

On November 21, two private funds based in the Cayman Islands, Basis Pac-Rim Opportunity Fund and Basis Yield Alpha Fund, sued TCW Asset Management Company in the Supreme Court for the State of New York over their alleged purchase of $28 million in RMBS and CDOs through a TCW investment vehicle.  The funds allege that TCW knowingly made material misrepresentations and omissions about the current and expected performance of the investment vehicle’s portfolio, the criteria it used to select the portfolio, and the mortgage-backed bond market.  The funds’ causes of action against TCW include fraudulent concealment, negligence misrepresentation, breach of contract, and unjust enrichment.  The funds seek over $28 million in damages. Complaint.

CIFG Sues Bank of America Over RMBS Insurance Policies

On November 20, CIFG sued Bank of America in Supreme Court for the State of New York concerning five financial guaranty policies issued in connection with two structured transactions backed by 22 RMBS.  CIFG alleges that Bank of America knowingly repackaged securities backed by poor quality mortgage loans into two new securitizations.  CIFG alleges that it was induced to insure the securitizations by misrepresentations about the quality of the underlying mortgage loans.  CIFG alleges fraudulent inducement, misrepresentation in violation of New York Insurance law, negligent misrepresentation, and breach of contract.  CIFG seeks payment of past, current, and future claims or rescissionary damages, reimbursement for its losses, and punitive damages.  Complaint.

Court Dismisses FDIC RMBS Suit as Time-Barred

On November 21, Judge Mariana Pfaelzer of the United States District Court for the Central District of California dismissed as time-barred an RMBS action brought against Countrywide by the FDIC as receiver for Strategic Capital Bank (SCB).  The court held that SCB was on notice of Countrywide’s alleged misrepresentations over a year before the FDIC became its receiver, thus barring the claims under the applicable one year statute of limitations.  Judge Pfaelzer further held that the November 2007 filing of a state court investor class action concerning Countrywide RMBS did not toll the statute of limitations because the plaintiff in that case did not have standing to sue on the tranches SCB allegedly purchased, and because a state court class action does not toll the statute of limitations for claims brought later in federal court.  Decision.

CIFG Sues JP Morgan Over Two Bear Stearns CDO Portfolios

On November 26, CIFG sued JP Morgan in Supreme Court for the State of New York for alleged losses stemming from its insurance of credit default swaps on two Bear Stearns RMBS-backed CDOs.  CIFG alleges that instead of being selected and managed by independent collateral managers, the CDO portfolios were actually selected by Bear Stearns in order to unload its own risk.  CIFG alleges it suffered more than $100 million in losses when the two CDOs defaulted.  The complaint’s causes of action are for material misrepresentation in the inducement of an insurance contract and fraud.  Complaint.  

European Financial Industry Developments


UBS Fined £29.7 Million by the FSA for Failure to Prevent Unauthorised Trading

On November 26, the FSA published a final notice to UBS AG, fining it £29.7 million for having breached Principles 2 and 3 of the FSA's Principles for Business.  The breaches occurred in the Global Synthetic Equities business, conducted from UBS' London branch during the summer of 2011, and became apparent when UBS discovered that Kweku Adoboli, one of its traders, had lost a total of $2.3 billion through his trading. On November 20, Mr. Adoboli was convicted of two counts of fraud and received a seven year prison sentence.

European Banking Federation Requests Delay in Implementation of CRD IV

The European Banking Federation (EBF) published a letter dated November 21 to Michael Barnier, the European Commissioner for Internal Market and Services, formally requesting a year long delay for the introduction of Capital Requirements Directive IV (CRD IV) to implement Basel III.

 The delay has been requested on the grounds that EU banks would be competitively disadvantaged if the rules are introduced in the EU before the US requires compliance with equivalent rules (on 9 November 2012, the U.S. federal banking agencies announced an indefinite delay to the scheduled implementation date of 1 January 2013). The EBF is therefore calling on Mr. Barnier to set a new date of entry for the EU rules contained in CRD IV, in order to coordinate the approach across both the U.S. and EU.

Consultation on Draft Secondary Legislation to Regulate LIBOR

On November 28, HM Treasury published a consultation paper on draft secondary legislation to regulate LIBOR and make its manipulation a criminal offence.

The draft Financial Services and Markets Act (Regulated Activities) (Amendment) Order 2013 proposes two new regulated activities:

  • providing information in relation to a regulated benchmark (currently LIBOR is the only proposed regulated benchmark, although there is provision to add others); and
  • administering a regulated benchmark.

A further draft order, relating to "misleading statements" specifies the investments, activities and benchmarks in relation to three new criminal offences dealing with making misleading statements and conducting misleading practices.  These offences will be created by draft amendments to the Financial Services Bill 2012-2013 and will result in the repeal of section 397 of the Financial Services and Markets Act 2000.

It is intended that the Financial Services Bill will receive royal assent before the end of 2012 and that the draft secondary legislation will be considered by Parliament in early 2013.  Comments on the consultation must be submitted before December 24.



SIFMA's 2013 Securitization Outlook Conference

On December 6 at the SIFMA Conference Center in NYC, Orrick Partner Howard Altarescu will participate in the panel discussions at SIFMA’s 2013 Securitization Outlook Conference.  This will be a timely and informative conference that will bring together a group of academic and industry leaders to discuss: FHFA's strategic plan, single securitization platform and the near-term outlook for the GSEs; the status of eminent domain for mortgage loans; and the regulatory and market outlook for private-label securitization markets.  If you would like to take advantage of the member rate price extended to our clients, please contact Ania Mirek at amirek@orrick.com.  For more information about the program, please click 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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