Orrick's Financial Industry Week in Review - August 20, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


Steps to Expedite Wind Down of Fannie Mae and Freddie Mac

On August 17, Treasury announced modifications to the Preferred Stock Purchase Agreements between Treasury and the FHFA to expedite the wind down of Fannie Mae and Freddie Mac.  The modifications include: (i) the accelerated wind down of the retained mortgage investment portfolios at Fannie Mae and Freddie Mac; (ii) an annual taxpayer protection plan; and (iii) a full income sweep of all future Fannie Mae and Freddie Mac earnings to benefit taxpayers.  Treasury Release.  FHFA Release.   

CFTC Proposed Order on Non-Financial Energy Derivative Transactions

On August 17, the CFTC approved a proposed order that would exempt some non-financial energy derivative transactions between government-owned electric utilities and cooperatively-owned electric utilities from most of the requirements of the Commodity Exchange Act.  Comments are requested within 30 days after publication in the Federal Register.  CFTC Release.    

CFTC Conforming Rule on Registration of Intermediaries

On August 17, the CFTC approved a final rule to conform the CFTC’s existing intermediary registration rules to changes made to the Commodity Exchange Act by the Dodd-Frank Act.  CFTC Release.    

OCC Proposed Annual Stress Test Reporting Requirements for Large Covered Institutions

On August 16, pursuant to Section 165(i)(2) of the Dodd-Frank Act, the OCC issued a notice of a proposed information collection regarding annual stress test reporting for Covered Institutions with total consolidated assets of $50 billion or more.  Comments on the notice must be submitted by October 15.  OCC Release.   FPRA Notice.   

CFTC Proposed Clearing Exemption for Swaps Between Affiliates

On August 16, the CFTC proposed an exemption from clearing requirements under Section 723 of the Dodd-Frank Act for swaps between certain affiliated entities within a corporate group.  The proposed exemption would be limited to swaps between majority-owned affiliates and would require centralized risk management, swap trading relationship documentation, variation margin payments, and satisfaction of certain reporting requirements.  Comments on the proposed rule must be submitted within 30 days of publication in the Federal Register.  CFTC Release.  CFTC Proposed Rule.   

NFA Approves Amendments to Customer Funds Reporting Requirements

On August 16, the National Futures Association (NFA) approved amendments to NFA Financial Requirements that will require a futures commissions merchant (FCM) to provide its Designated SRO with view-only access via the internet to account information for each of the FCM’s customer segregated funds accounts maintained and held at a bank or trust company.  Designated SROs would be able to review this information at any time against an FCM’s daily segregation report.  The amendments have been sent to the CFTC for approval.  NFA Release.   

Agency Proposed Rule on Appraisals for Higher-Risk Mortgages

On August 15, the Fed, CFPB, FDIC, FHFA, NCUA, and OCC issued a proposed rule to establish new appraisal requirements for “higher-risk mortgage loans”.  The proposed rule would implement amendments to the Truth in Lending Act enacted by the Dodd-Frank Act, which classify mortgage loans as higher-risk if they are secured by a consumer's home and have interest rates above a certain threshold.  Comments must be submitted by October 15.  Joint Release.  Proposed Rule.    

CFTC No-Action Letter on Trade Option Exemption

On August 15, the CFTC issued a no-action letter providing that, for a limited time, market participants can rely on the trade option exemption in CFTC regulation 32.3 without complying with specified provisions.  The no-action letter is effective until the earlier of December 31 and the effective date of any final action taken by the CFTC on the trade option exemption interim final rules.  CFTC Release.    

CFTC DSIO Issues FAQ on CPO and CTA Compliance

On August 14, the CFTC Division of Swap Dealer and Intermediary Oversight issued a set of responses to frequently asked questions regarding compliance obligations for commodity pool operators and commodity trading advisers.  The issues addressed include compliance dates, wholly owned subsidiaries, trading limits, and the process for transitioning from an exemption from registration to registering or claiming another exemption.  CFTC Release.  CFTC Proposed Rule.   

CFPB Proposed Mortgage Servicing Guidelines

On August 10, the CFPB announced two notices of proposed rulemaking regarding mortgage servicing.  The proposed rules relate to: (i) monthly mortgage statements; (ii) warnings before interest rate adjustments; (iii) force-placed insurance; (iv) early outreach for delinquent borrowers; (v) prompt crediting of payments; (vi) accurate information management; (vii) error resolution and information requests; (viii) direct and ongoing access to servicer personnel; and (ix) evaluation for alternatives to foreclosure.  Comments must be submitted by October 9.  CFPB Release.    

SEC Extension of Rule on Retail Forex Transactions

On August 10, the SEC amended interim final temporary Rule 15b12-1T under the Securities Exchange Act, which temporarily permits a broker-dealer to engage in a “retail forex business”, to extend its expiry date from July 16, 2012 to July 16, 2013.  Comments on the interim final temporary rule should be received on or before October 31.  SEC Extension.   

Rating Agency Developments


On August 17, S&P updated its outlook assumptions for the U.K. residential mortgage market.  S&P Report.

On August 15, Fitch updated its criteria for securities firms.  Fitch Report.

On August 15, Fitch updated its financial institutions recovery ratings criteria. Fitch Report.

On August 15, Fitch updated its criteria for market value structures.  Fitch Report.

On August 15, Fitch updated its criteria for U.S. closed-end funds.  Fitch Report.

On August 15, Fitch updated its global financial institutions master criteria.  Fitch Report.

On August 14, Fitch updated its tax-supported rating criteria.  Fitch Report.

On August 14, Fitch updated its non-financial corporate recovery ratings and notching criteria.  Fitch Report.

On August 14, Fitch updated its global bond fund rating criteria.  Fitch Report.

On August 13, Moody’s updated its criteria for Mexican RMBS.  Moody’s Report.

On August 13, Fitch updated its sovereign rating criteria.  Fitch Report.

On August 13, Fitch updated is country ceilings criteria.  Fitch Report.

On August 13, DBRS updated its stability ratings for Canadian structured income funds.  DBRS Report.

On August 13, DBRS updated its criteria for Canadian split share companies and trusts.  DBRS Report.

On August 10, Fitch updated is U.S. Re-REMIC criteria.  Fitch Report.

On August 10, Fitch updated is U.S. RMBS surveillance criteria.  Fitch Report.

On August 10, Fitch updated is U.S. RMBS loan loss model criteria.  Fitch Report.

On August 10, Fitch updated its structured finance servicing continuity risk criteria.  Fitch Report.

On August 10, Fitch updated its criteria for analysis of CRE loans securing covered bonds.  Fitch Report.

On August 10, Fitch updated its criteria for financial institution subsidiaries and holding companies.  Fitch Report.  

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

RMBS Litigation


FDIC Files Five Lawsuits Against Bank Entities Over RMBS

On August 10, the FDIC in its capacity as receiver for Colonial Bank filed five lawsuits – three in Alabama state court, one in New York federal court, and one in California federal court – seeking $741 million in damages from a number of investment banks, including Bank of America Corp., JPMorgan Chase & Co., Citigroup, Inc., and others, for making allegedly false and misleading statements that induced Colonial Bank into buying mortgage-backed securities.  The FDIC alleges that the banks made numerous false and misleading statements in the offering documents for the RMBS regarding the credit quality of the mortgage loans underlying the securities.  The three Alabama cases each assert two causes of action under the Alabama Securities Act, as well as causes of action under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (Securities Act).  The New York and California cases each assert causes of action under Sections 11 and 15 of the Securities Act.  

Complaint: Alabama – FDIC v Bank of America, et al. 
Complaint: Alabama – FDIC v Citigroup Mortgage Loan Trust, et al. 
Complaint: Alabama – FDIC v Countrywide Securities Corp, et al. 
Complaint: New York – FDIC v Chase Mortgage Finance Corp., et al. 
Complaint: California – FDIC v Countrywide Securities Corp, et al.


Bank Hapoalim Brings $361M RMBS Lawsuit Against JPMorgan

On August 10, Bank Hapoalim BM, an Israeli bank, filed a summons with notice against JPMorgan Chase & Co. in New York state court in connection with its purchase of $361 million in residential mortgage-backed securitites.  Bank Hapoalim alleges that the purchase offerings were based on fraudulent misrepresentations and omissions regarding the characteristics of the mortgage loans underlying the securities.  Bank Hapoalim asserts that Goldman Sachs either knew the information in the offerings was wrong or was negligent in not knowing.  Bank Hapoalim asserts causes of action for common law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and contract claims, including rescissory damages.  Summons with Notice.  

Sealink Brings $587M RMBS Lawsuit Against Goldman Sachs

On August 13, Sealink Funding Ltd. filed a summons with notice against Goldman Sachs & Co. in New York state court over its purchase of nearly $587 million in residential mortgage-backed securities.  Sealink alleges that the offering documents for the RMBS included fraudulent misrepresentations and omissions regarding the characteristics of the underlying mortgage loans, the underwriting standards used to issue the mortgage loans, the transfer of those mortgage loans to trusts, and the legal validity of the trusts.  Sealink asserts that Goldman Sachs either knew the information in the offerings was wrong or was negligent in not knowing.  Sealink asserts causes of action for common law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and contract claims, including rescission, restitution, and mutual mistake.  Summons with Notice.  

Assured Sues OneWest Bank in Connection with RMBS Insurance

On August 9, Assured Guaranty filed suit in California state court against OneWest Bank FSB, claiming that the company’s loan servicing was to blame for $335 million it has paid in insurance claims related to residential mortgage-backed securities.  Assured alleges that when OneWest acquired IndyMac Bank FSB’s role as servicer in 2009 of the mortgage loans, the loans began to experience significant delinquencies and defaults.  Assured alleges that PricewaterhouseCoopers conducted an independent audit and found that OneWest was materially noncompliant with several loan servicing requirements.  Assured also alleges that the Office of Thrift Supervisions has brought an enforcement action against OneWest for unsafe and unsound practices regarding its handling of servicing and foreclosure proceedings.  Assured asserts claims for breach of contract and for specific performance and declaratory relief seeking to terminate OneWest as servicer.  Complaint.  

European Financial Industry Developments


FSA Approach to Implementation of Aspects of the EU Short Selling Regulation

On August 15, the FSA published a short selling edition of its Market Watch newsletter. Newsletter No. 42, August 2012

Although the EU Short Selling Regulation (the ‘Regulation’) will have direct effect in the UK from November 1, certain aspects of it afford discretion to, or impose obligations on, member states to introduce operational procedures to ensure compliance by market participants.

The newsletter, which does not constitute formal FSA guidance, sets out the FSA's proposed approach to how it will exercise that discretion in six areas of the Regulation including:

  • removing the existing UK rules on short selling by November 1, through amendments to the FSA Handbook;
  • whether it is appropriate to apply the FSA's existing penalties policy to breaches of the short selling regime;
  • a framework for determining whether or not the FSA will exercise its powers to suspend, prohibit or limit trading in financial instruments following a significant fall in price; and
  • developing web-based solutions for the public disclosure of significant short positions.

The FSA will issue a formal consultation on proposed changes to the FSA Handbook shortly.  

Wheatley Review Discussion Paper Outlines Initial Thoughts on LIBOR Reform

On August 10, HM Treasury published a discussion paper outlining initial thinking on the review of the London Interbank Offered Rate (LIBOR) being undertaken by Martin Wheatley, Chief Executive-designate of the Financial Conduct Authority (FCA). Discussion Paper

The Discussion Paper states that the review of LIBOR will consider and consult on two options:

  • Strengthening LIBOR. The issues identified could be tackled through significant reform of the existing system. Preserving the LIBOR system would limit the costs of transferring existing contracts, whilst reforms could address failings in the system.
  • Finding an alternative to LIBOR. If the problems with LIBOR cannot be resolved, new benchmarks could be recommended to replace some or all of LIBOR's role in financial markets.

Comments on the discussion paper are requested by September 7 with Mr. Wheatley aiming to present his findings and recommendations by the end of September. 

Three Convicted for £10 Million Ponzi Scheme

On August 13, the Serious Fraud Office (SFO) published a press release announcing that three people involved in a £10 million ponzi scheme have been convicted at Bradford Crown Court.  Two other defendants were acquitted of charges of money laundering.  Press Release

The three people were trading as Gilher Inc. and targeted UK investors and ex-pats in Majorca.  Mr. John Hirst had pleaded guilty to conspiracy to defraud and two counts of money laundering.  Mr. Richard Pollett was found guilty of conspiracy to defraud, and Ms. Linda Hirst was found guilty of three counts of money laundering and evading a liability by deception.  All individuals (excluding Mr. Pollett) had been charged in 2011.

Sentencing will take place on August 31, with confiscation and compensation proceedings to follow later. 

Letter Published Detailing How OFAC's Iran Sanctions Regulations Apply to Foreign Banks Operating in the U.S.

On August 13, HM Treasury published a letter that it received from the U.S. Department of the Treasury relating to the Office of Foreign Assets Control's (OFAC) Iran sanctions regulations.  Letter

The letter was sent in response to a request by HM Treasury for clarification about the sanctions regulations and how they apply to international payments, specifically the obligations of foreign banks operating in the US before and after 2008 in respect of transactions involving Iranian counterparties.


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Orrick, Herrington & Sutcliffe LLP

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