Orrick's Financial Industry Week In Review - May 21, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


FHFA Releases Draft Strategic Plan

On May 14, the FHFA released its draft “Strategic Plan: Fiscal Years 2013-2017”, which has been updated to incorporate the strategic plan for the conservatorships of Fannie Mae and Freddie Mac.  The draft plan sets four goals for the FHFA: (i) safe and sound housing government-sponsored enterprises; (ii) stability, liquidity, and access in housing finance; (iii) preserve and conserve Fannie Mae and Freddie Mac assets; and (iv) prepare for the future of housing finance in the U.S.  Comments must be submitted by June 13. FHFA Release.  FHFA Plan. 

Large Bank Stress Testing Guidance Finalized

On May 14, the Fed, FDIC, and OCC issued final supervisory guidance for stress testing practices at banking organizations with total consolidated assets of more than $10 billion.  The guidance outlines general principles for a satisfactory stress testing framework and describes various stress testing approaches.  Supervisory Guidance.  

Stress Testing for Community Banks

On May 14, the Fed, FDIC, and OCC issued a statement to clarify expectations that community banks with $10 billion or less in assets are not required to conduct the types of stress testing required of larger organizations.  Joint Release. 

CFTC Rule on Swap Data Recordkeeping and Reporting

On May 18, the CFTC published a final rule on swap data recordkeeping and reporting requirements for counterparties to historical swaps.  Historical swaps are those swaps executed either: (i) prior to the enactment of the Dodd-Frank Act or (ii) between the date of enactment of the Dodd-Frank Act and the applicable compliance date for swap data recordkeeping and reporting.  CFTC Release.  

CFTC Rule on Aggregation for Position Limits for Futures and Swaps

On May 18, the CFTC approved a proposed rule that would modify the aggregation provisions for limits on futures and swaps.  The proposed rule would permit any person with greater than 10% ownership or equity interest in an entity to disaggregate the owned entity’s positions, provided that protections and firewalls are in place to ensure trading decisions are made independently from one another.  CFTC Release.

Rating Agency Developments


On May 17, Fitch issued a release setting forth its view that the final guidance regarding internal stress testing for large banks released by bank regulators is sound and sufficiently flexible to allow for firms to comply.  Fitch Release.

On May 17, Fitch released a report detailing the statistical analysis underlying the revised basis spread stresses for FFELP ABS transactions included in its updated criteria for rating FFELP student loan ABS.  Fitch Release.  Fitch Report.

On May 15, S&P released its short-term/long-term ratings linkage criteria for corporate and sovereign issuers.  S&P Release.

On May 15, Moody’s released its approach to quantifying set-off risk for securitizations and covered bonds originated by U.K. deposit-taking institutions.  Moody’s Report.

On May 14, Moody’s released its approach to rating structured finance CDOs.  Moody’s Report.

On May 14, Fitch updated its criteria for U.S. auto lease ABS.  Fitch Report.

On May 11, S&P issued its methodology for assessing when a guarantor’s failure to honor a payment obligation under a guarantee would be a default and how it would affect the guarantor’s issuer credit rating.  S&P Release. 

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

Recent Orrick Alerts


Financial Industry Alert: FSA Releases Finalised Guidance on Payment for Order Flow Arrangements

On 14 May 2012, the FSA issued its finalised guidance on payment for order flow (“PFOF”) arrangements following its October 2011 guidance consultation. The guidance appears to have been issued on substantially the same basis as the original consultation which stated that “PFOF arrangements create a clear conflict of interest between the clients of the firm and the firm itself.  Therefore it is unlikely to be compatible with our inducements rule and risks compromising compliance with best execution rules”.  Click here to read more.

RMBS Litigation


Assured Guaranty and Deutsche Bank Settle RMBS Claims for $165.6 Million

On May 10, 2012, Assured Guaranty announced that it had reached a $165.6 million settlement with Deutsche Bank resolving claims related to RMBS transactions issued, underwritten or sponsored by Deutsche Bank that were insured by Assured Guaranty under financial guaranty insurance policies.  The settlement also resolved claims related to RMBS exposures in re-securitization transactions on which Assured Guaranty provided credit protection through credit default swaps.  The claims resolved by this settlement were not yet in litigation.  Press Release

IKB Brings Two RMBS Lawsuits Against Bank of America and Related Entities

On May 15, 2012, IKB Deutsche Industriebank AG and an IKB affiliate filed two lawsuits against Bank of America and related entities in the New York Supreme Court.  The first, in which several Countrywide entities are also defendants, arises out of IKB’s alleged investment in 29 RMBS certificates worth $200.3 million issued by Countrywide.  The second, in which several Merrill Lynch entities are also defendants, arises out of IKB’s alleged investment in 13 RMBS certificates worth $56.2 million issued by Bank of America and Merrill Lynch.  The summonses with notice filed in the suits are substantively identical.  In each, IKB alleges that the offering materials for the RMBS in which it invested contained material misrepresentations and omissions regarding the underwriting standards used to originate the underlying mortgage loans, the statistical characteristics of the loans, the securities’ credit ratings, the legal validity of the assignment of the underlying mortgage loans to the issuing trusts, and the entitlement of the trusts to receive principal and interest payments on the loans.  IKB asserts causes of action for common-law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and contract claims.  IKB seeks actual and punitive damages, rescissory damages, and fees and costs. IKB-BofA/Merrill SummonsIKB-BofA/Countrywide Summons.

Assured Guaranty Sues GMAC Entities in Connection with RMBS Insurance

On May 11, 2012, Assured Guaranty filed suit in the United States District Court for the Southern District of New York against several GMAC entities alleging that the defendants induced Assured to issue financial guaranty insurance for certain RMBS by making misrepresentations about the underlying mortgage loans.  Assured’s allegations concern two securitizations, one issued in 2004 and one in 2008, with respect to which Assured has thus far paid out $55.7 million in claims.  Assured alleges that the defendants violated their own underwriting standards and contractual loan-level repurchase obligations.  Assured asserts causes of action for breach of contract, indemnification, and reimbursement, and seeks compensatory damages.  Complaint.

European Financial Industry Developments


FSA Issues Decision Notice Against Former BGC Senior Executive

On 16 May 2012 the FSA published a decision notice which it has issued to Anthony Verrier, a former senior executive at BGC Brokers LP.  The FSA decided to prohibit Mr. Verrier from performing any function relating to any regulated activity. It considered that Mr. Verrier was not a fit and proper person due to concerns over his honesty, integrity and reputation.  Decision Notice. 

FSA Guidance on the Practice of PFOF

On 14 May 2012, the FSA published guidance on payment for order flow ("PFOF") arrangements.  These are arrangements where a broker receives payment from market makers in exchange for sending order flow to them.  Firms should manage conflicts of interests and tell customers about the PFOF arrangements and put relevant procedures in place to make sure that payments led to better service.  Orrick's Client Alert.  Finalised Guidance. 

ECOFIN Reaches Agreement on CRD IV

On 15 May 2012, the Council of the EU announced that the Economic and Financial Affairs Council ("ECOFIN") has reached agreement on the CRD IV proposals.  CRD IV is a package of EU reforms on prudential requirements for credit institutions and investment firms intending address a number of issues arising from the financial crisis.  The existing Capital Requirements Directive will be replaced with the CRD IV Directive and the Capital Requirements Regulation.  The amendments agreed by ECOFIN were published on 17 May 2012 and are available here.  

FSA and BoE Paper on PRA Designation of Investment Firms

On 17 May 2012, the FSA and the Bank of England (BoE) published a short paper on how the Prudential Regulation Authority (PRA) will exercise its powers to designate certain investment firms.   Paper. 



Orrick's Annual Financial Services Roundtable

On May 31 in the New York Office, members of Orrick's Global Employment Law Group and in-house counsel will meet for an interactive discussion of critical employment law issues impacting the financial services industry. Topics to be discussed include:

  • Hot topics in industry employment arbitration, including a discussion of the status of class action waivers
  • Recent developments in wage-and-hour law impacting the financial services industry
  • What every employment lawyer needs to know about whistleblower investigations, the Dodd-Frank whistleblower program and significant interpretation changes in Sarbanes-Oxley whistleblower law
  • Protecting trade secrets and enforcing post-employment restrictions, including developments involving the Computer Fraud and Abuse Act, criminal prosecutions and no-hire agreements between firms
  • Best practices for financial services employers to effectively use social media and minimize risk

To RSVP for this event, 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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