Orrick's Financial Industry Week in Review - October 22, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


OCC Stress Testing Guidance and CRE Stress Test Tool

On October 18, the OCC provided guidance to national banks and federal savings associations with assets of $10 billion or less on using stress testing to assess risk in their loan portfolios.  The guidance indicates that stress tests do not need to involve sophisticated analysis or third-party consultative support.  The OCC is also making available a new portfolio level stress tool for income producing commercial real estate loans.  OCC Release.

SEC Proposed Rule for Security-Based Swap Dealers and Major Security-Based Swap Participants

On October 17, the SEC proposed capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants as required by the Dodd-Frank Act.  The proposal: (i) sets minimum capital requirements; (ii) establishes margin requirements with respect to non-cleared security-based swaps; and (iii) establishes segregation requirements for security-based swap dealers and notification requirements with respect to segregation for security-based swap dealers and major security-based swap participants.  Comments may be submitted for 60 days following publication in the Federal Register.  SEC Release.  SEC Proposed Rule.

CFTC Final Rule to Incorporate Swaps into Existing Regulations

On October 16, the CFTC approved a final rule that amends regulations to implement aspects of the Dodd-Frank Act by changing certain definitions and recordkeeping regulations so that they apply to both futures and swaps.  The final rule will be effective 60 days after publication in the Federal Register. CFTC Release.

CFTC No-Action Letters

On October 12, the CFTC released a number of no-action letters and interpretive guidance addressing:

Rating Agency Developments


On October 19, Moody’s released its approach for evaluating lender’s mortgage insurance in Australian RMBSMoody’s Report.

On October 18, Moody’s released its methodology for tender option bond programs.  Moody’s Report.

On October 18, S&P released a clarification on hybrid capital step-ups, call options, and replacement provisions.  S&P Release.

On October 17, KBRA released a report on evaluating credit risks in solar securitizationsKBRA Report.

On October 16, S&P released its methodology for repackaged securitiesS&P Report.

On October 12, Moody’s released its approach to rating consumer loan ABSMoody’s Report.

On October 12, Moody’s released its methodology for emerging markets CDOsMoody’s Report.

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

European Financial Industry Developments


Journey to the FCA

On October 16, the FSA published a paper that sets out how the UK’s new financial conduct regulator, the Financial Conduct Authority (FCA), will operate, entitled "Journey to the FCA."  The paper was accompanied by a summary of key points.  Amongst other things, the paper sets out:

  • how the FCA intends to use some its new powers, including those that allow it to ban products that pose unacceptable risks to consumers and misleading financial promotions;
  • that the FCA intends to consult in November 2012 on its new Business Model threshold condition, whereby firms will be required to make clear to the FCA how their business model is sustainable, and meets the needs of clients and customers;
  • the supervision model that the FCA intends to adopt;
  • that the FCA will continue the FSA’s policy of credible deterrence; and
  • how the FCA intends to use its new Policy, Risk and Research Division to identify risks in the financial markets.

The paper was accompanied by a speech by Martin Wheatley, Managing Director, FSA, and CEO Designate, FCA, entitled "Launch of the Journey to the FCA."  The FSA invites comments on the paper by December 14.

The PRA’s Approach to Banking Supervision

On October 15, the Bank of England and the FSA published a joint paper on how the UK’s new prudential regulator for deposit takers and investment firms, the Prudential Regulation Authority (the PRA), will operate, entitled "The PRA’s approach to banking supervision."  The paper is designed to provide an overall description of the PRA and the approach it will take in relation to:

  • its objective to promote the safety and soundness of firms primarily by seeking to avoid adverse effects on financial stability (the PRA acknowledges that, while firm failures will happen, it will seek to ensure that they are orderly);
  • the  new statutory threshold requirements for firms to be permitted to carry on regulated activities;
  • judgement based and forward looking supervision; and
  • working closely with both the FCA and the Financial Policy Committee, which will be able to make recommendations and give directions to the PRA.

The paper was accompanied by a speech by Andrew Bailey, Managing Director, Prudential Business Unit of the FSA, entitled "The future of banking regulation in the UK."

Indication of Regulatory Expectations for Banks Currently Making LIBOR Submissions

On October 17, the FSA published a speech by Martin Wheatley (the FSA Managing Director and Chief-Executive Designate of the Financial Conduct Authority), which indicated the regulatory expectations for banks making LIBOR submissions until the new LIBOR regime is put into place.  Mr Wheatley was clear that, in the long term, there will be high-level rules and a code of conduct to govern LIBOR submissions.

LIBOR submitters should have regard to the submission guidelines set out in the Wheatley Report, and use a combination of their judgment and transaction data.

The UK government announced in a written ministerial statement that it has accepted all the recommendations made in the Wheatley Report.

Responses to Consultation on Non-Bank Resolution Regime

On October 17, HM Treasury published a summary of responses in relation to its August consultation on broadening the financial sector resolution regime to systemically important non-banks.  Indicative draft legislation was also published alongside the consultation, to provide a resolution regime for entities such as investment firms, central counterparties and parent undertakings.

The UK government is considering developing the UK’s domestic regime in this area ahead of European legislation being introduced.  Following the consultation, it has amended the draft legislation and is making amendments to the Financial Services Bill 2012 – 2013.  The core changes include:

  • narrowing the definition of investment firms through secondary legislation;
  • extending stabilization powers to group companies to aid the resolution of a failing entity (subject to certain conditions);
  • adding an objective for intervention in a failing central counterparty in order to maintain critical services; and
  • excluding the initial proposal to make the members of a central counterparty liable for losses above and beyond provisions already in place (although such loss allocation rules may become part of the operational requirements that a central counterparty must have in order to operate as a clearing house in the UK).



ABS East 2012: Investor Focused. Investor Driven.

On October 21–23, Orrick will be an Associate level sponsor of this year's IMN's ABS East Conference.  The ABS East 2012 Conference will provide a relevant and timely program that reflects the concerns of the buy side equally along with that of other market participants, thus giving the structured finance investor community a platform to express their views on the market.  On October 22, Orrick Partner Howard Altarescu will moderate a panel on "Private Label RMBS Reform: What is Needed to Restart the Market?"  For more information, 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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