Orrick’s Financial Industry Week in Review

Financial Industry Developments

SEC Proposes to Amend Rules Governing Its Administrative Proceedings

On September 24, the U.S. Securities and Exchange Commission (the “SEC”) proposed to amend rules governing its administrative proceedings.  Key changes to the SEC’s rules of practice include: adjustment of timing of the proceedings; permitting parties to take depositions of witnesses as part of discovery; and requiring parties to submit filings and serve each other electronically.  The SEC will seek public comment for a period that will remain open for 60 days following each proposal’s publication in the Federal Register.  Press Release.

SEC Seeks Public Comment on Regulation S-X

On September 25, the U.S. Securities and Exchange Commission (the “SEC”) announced that it is seeking public comment on the effectiveness of financial disclosure requirements in Regulation S-X.  The request for comments specifically focuses on requirements for the form and content of financial disclosures that companies must file with the SEC regarding acquired businesses, affiliated entities and guarantors and issuers of guaranteed securities.  The comment period will remain open for 60 days following publication of the comment request in the Federal Register.  Press Release.

CFTC’s Division of Market Oversight Provides Additional Time to Comply with Electronic Reporting Requirements in the OCR Final Rule

On September 28, the U.S. Commodity Futures Trading Commission’s (the “Commission”) Division of Market Oversight issued a no-action letter that provides reporting parties additional time to comply with certain reporting requirements of the ownership and control final rule.  The rule requires reporting parties to electronically submit trader identification and market participant data on new and updated forms.  These forms allow for better identification of participants in futures and swaps markets.  Providing reporting parties with additional time is aimed at improving the reliability and consistency of data provided to the Commission.  The no-action letter extends relief to dates ranging from April 27, 2016 to February 13, 2017.  Press Release.

CFTC to Issue Award of Approximately $290,000 to Whistleblowers

On September 29, the U.S. Commodity Futures Trading Commission announced that it would issue an award of approximately $290,000 to whistleblowers for providing valuable information about violations of the Commodity Exchange Act.  The award is provided if reporting leads to an enforcement action that results in more than $1 million in monetary sanctions.  Press Release.

OCC Publishes Update to the Bank Accounting Advisory Series

On September 29, the Office of the Comptroller of the Currency released an update to the Bank Accounting Advisory Series (the “BAAS”).  The goal of the BAAS is to promote consistent application of accounting standards among national banks and federal savings associations.  The update to the BAAS includes answers to frequently asked questions regarding troubled debt restructuring, other real estate owned and pushdown accounting.  Press Release.  BAAS Update.

Rating Agency Developments

On September 24, DBRS published a report describing its approach for monitoring European CMBS ratings.  Methodology.

On September 25, DBRS published its methodology for rating European RMBS transactions issued in Europe with residential loans originated in Europe.  Methodology.

On September 25, DBRS published its methodology for rating securitizations issued in Canada with collateral originated in Canada.  Methodology.

On September 28, Fitch updated its rating criteria for infrastructure and project finance.  Criteria.

On September 28, Moody’s published its rating methodology for corporate synthetic collateralized debt obligations.  Methodology.

On September 28, Moody’s published its rating methodology for collateralized loan obligations.  Methodology.

On September 28, Moody’s updated its methodology for rating securitization transactions backed predominately by loans granted to microenterprises, small- and medium-sized enterprises (SMEs) and self-employed individuals.  Methodology.

On September 29, Fitch updated its rating criteria for toll roads, bridges and tunnels.  Criteria.

On September 29, DBRS published its methodology for rating Portuguese electricity tariff securitizations.  Methodology.

On September 30, DBRS published a report describing the criteria applied in reviewing derivatives in the context of a European structured finance transaction.  Methodology.

On September 30, Moody’s published its methodology for assessing credit risk for companies in the restaurant industry.  Methodology.

Distressed Debt and Restructuring Developments

New York Court Rules (Sort of) on Whether Electricity is a Good or a Service

It seems only fitting that recent decisions by the United States District Court for the Southern District of New York and its bankruptcy court regarding the nature of electricity should have sent, at least initially, a jolt through the energy community. Perhaps the Southern District court would lead the charge for one side or the other in an ongoing debate over whether electricity constitutes goods or services—a controversy that has potentially far-reaching implications (in bankruptcy cases, concerning the priority of claims of electricity providers, and, in ordinary transactions, for the tort liability of electricity providers). In the end, however, the outcome of the litigation was something less than electrifying. Here’s what happened.  Read More.

RMBS and Other Securities Litigation

Court Denies CIFG’s Attempt to Refile CDO Suit Against J.P. Morgan

On September 23, Justice Marcy S. Friedman of the New York Supreme Court for New York County denied CIFG’s motion to amend its complaint against J.P. Morgan in a case the Court previously dismissed in June.  CIFG had originally brought suit claiming two causes of action against J.P. Morgan: 1) that J.P. Morgan had made material misrepresentations to induce CIFG to issue insurance on credit default swaps guaranteeing two collateralized debt obligations, and 2) for common-law fraud.  In its June dismissal order, the Court dismissed the first cause of action but allowed CIFG to attempt to replead its fraud claim.  CIFG’s proposed amended complaint included two causes of action, the first of which the Court held was identical in all material respects to the previously dismissed first cause of action.  As to the proposed second cause of action for common law fraud, the Court noted that while CIFG had added additional allegations to attempt plead the action with particularly, it had failed to address whether a common law fraud claim could be maintained based on alleged misrepresentations made by non-insured Bear Stearns about the collateral underlying the CDOs.  The Court granted CIFG leave to amend to attempt to cure this issue.  Order.

WMC Mortgage and GE Mortgage Holding Settle RMBS Repurchase Case

On September 21, 2015, Judge Denise L. Cote of the United States District Court for the Southern District of New York endorsed Bank of New York Mellon’s (“BNYM”) September 18, 2015 letter reporting that the parties had settled a case in which BNYM sought repurchase of a number of allegedly defective loans as trustee for the GE-WMC Mortgage Securities Trust 2006-1.  The terms of the settlement were not disclosed.  Endorsed Letter.

In a ruling last month, Judge Cote had significantly reduced the potential damages in the case by holding that the trustee’s potential damages were limited to the repurchase price defined in the relevant agreements, which included the stated principal balance of “zero” for all liquidated loans.

$600 Million RMBS Repurchase Suit Against J.P. Morgan Dismissed

On September 18, 2015, Justice Shirley Kornreich of the Supreme Court of the State of New York dismissed a $600 million suit brought by Bank of New York Mellon, as securitization trustee (“BNYM”), against WLM Mortgage, LLC, J.P. Morgan Acquisition Corporation, and J.P. Morgan Chase Bank, N.A.  BNYM brought the action as trustee for the J.P. Morgan Mortgage Acquisition Trust, Series 2006-WMC2, alleging that the defendants breached contractual representations and warranties as to 1,593 or more of the mortgage loans in the trust.  The defendants sought dismissal on the ground that BNYM’s put-back claims were time barred under the New York Court of Appeals’ decision in ACE v. DB Structured Products.  Justice Kornreich held that under ACE, BNYM’s claims were untimely because BNYM did not bring them within six years of the closing date of the transaction.  The court further held that the trustee did not have a separate claim for the defendants’ alleged failure to notify the trustee of breaches of representations and warranties.  Decision & Order.

European Financial Industry Developments

EBA Report on Asset Encumbrance: September 2015

On October 1, 2015, the European Banking Authority (EBA) published its first report analyzing asset encumbrance in EU banks.

The aim of the report is to monitor the extent of and the changes in the levels of asset encumbrance at an EU level and the sources for asset encumbrance. The report is based on data reported in December 2014 and March 2015 in accordance with the implementing technical standards on asset encumbrance reporting contained in European Commission Implementing Regulation 2015/79.

The EBA found there was no indication of a general increase in the level of asset encumbrance across EU banks in recent years, based on a comparison with a similar analysis performed by the European Systemic Risk Board in 2011. In March 2015, the overall weighted average encumbrance ratio was 27%, with a wide dispersion across institutions and countries.

Legislative Proposal for an EU Framework for Simple, Transparent and Standardized Securitization

On September 30, 2015 the European Commission (EC) published a legislative proposal for an EU framework for simple, transparent and standardized securitization. It has also published a legislative proposal for a regulation amending the Capital Requirements Regulation (Regulation 575/2013) (CRR) which deletes certain articles and extensively revises the capital requirements for securitizations.

The proposed Securitization Regulation is based on what has been put in place in the EU to address the risks in complex and risky securitizations but is intended to help differentiate simple, transparent and standardized products and apply a more risk-sensitive prudential framework.

The purpose of the CRR Amendment Regulation is to revise the EU regime relating to capital changes for credit institutions and investment firms originating, sponsoring or investing in securitization instruments, to provide for a more risk-sensitive regulatory treatment for simple, transparent and standardized securitizations.

The proposals are part of the Capital Markets Union action plan adopted by the EC on September 30, 2015.

European Commission Adopts Delegated Regulation Amending Solvency II Delegated Regulation on Treatment of infrastructure and ELTIF Investments

The European Commission has adopted a Delegated Regulation amending the Solvency II Delegated Regulation (EU 2015(35)) concerning the calculation of regulatory capital requirements for several categories of assets held by insurance and reinsurance undertakings, in particular infrastructure investments and investments in European long-term investment funds (ELTIFs).

The aim of the amending Regulation is to remove specific regulatory impediments to the financing of long-term investment projects by insurers. The revisions made to the Solvency II Delegated Regulation relate to issues including:

·    Infrastructure investments. The amending Regulation introduces a specific treatment in the solvency capital requirements for infrastructure investments (being investments in special purpose entities that own, finance, develop or operate infrastructure assets that provide or support essential public services).

·    Investments in ELTIFs. The amending Regulation extends to ELTIFs the provisions in the Solvency II Delegated Regulation concerning the treatment of European venture capital funds and European social entrepreneurship funds.

The amending Regulation also contains provisions concerning the treatment of equities traded on multilateral trading facilities and the scope of the equity transitional measure in Article 173 of the Solvency II Delegated Regulation. The next step will be for the Council of the EU and the European Parliament to consider the amending Regulation. The Commission intends the amendments made by the amending Regulation to be in place as soon as possible.


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