Orrick’s Financial Industry Week in Review

Financial Industry Developments

CFTC Issues Interpretive Letter Clarifying Eligibility for End-User Exception to the Clearing Requirement

On May 4, CFTC Division of Clearing and Risk published a letter clarifying that a securitization SPV that is wholly-owned by, and consolidated with, a captive finance company under Section 2(h)(7)(C)(iii) of the Commodity Exchange Act (CEA) is also eligible for the end-user exception to a clearing requirement under Section 2(h)(1)(A) of the CEA. Press Release. Staff Letter.

FHFA Release Results of Fannie Mae and Freddie Mac Dodd-Frank Stress Tests

On April 30, the Federal Housing Finance Agency (FHFA) released a report providing the results of annual stress tests Fannie Mae and Freddie Mac are required to undergo under the Dodd-Frank Act. The report provide updated information on possible ranges of future financial results for Fannie Mae and Freddie Mac under severely adverse economic conditions. Press Release. Report.

Agencies Issue Final Rule Implementing Minimum Requirements for Appraisal Management Companies

On April 30, six federal regulatory agencies jointly issued a final rule establishing minimum requirements for state registration and supervision of appraisal management companies that provide appraisal management services to lenders, underwriters and other principals in the secondary mortgage markets, as required by Section 1473 of the Dodd-Frank Act. Press Release. Final Rule.

Rating Agency Developments

On April 30, DBRS published its methodology for evaluating the mortgage servicers in a Canadian structured finance transaction. Report.

On April 30, DBRS released its updated methodology for rating Canadian structured finance transactions. Report.

Distressed Debt and Restructuring Developments

Momentive:  Case Update

As an update to our prior blog post, on May 4, Vincent Briccetti, United States District Court Judge for the Southern District of New York, issued a decision affirming the Bankruptcy Court’s order confirming Momentive’s cramdown chapter 11 plan. The decision was long awaited with the parties having completed briefing in December 2014.

Judge Briccetti followed the reasoning of the Bankruptcy Court and affirmed the use of the “formula” approach to determine the cramdown interest rate. Under the formula approach, the cramdown interest rate is equal to the sum of a “risk free” base rate (such as the prime rate) plus a risk margin of 1-3%. Judge Briccetti rejected the “efficient market” approach advocated by the first and 1.5 lien noteholders, affirming the view that rates should not include any profit to secured creditors. Under the efficient market approach, the cramdown interest rate is based on the interest rate the market would pay on such a loan.  Read More.

Investment Management

SEC Approves Pilot to Assess Tick Size Impact for Smaller Companies

On May 6, the Securities and Exchange Commission approved a proposal by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) for a two-year pilot program that would widen the minimum quoting and trading increments–or tick sizes–for stocks of some smaller companies. The SEC plans to use the pilot program to assess whether wider tick sizes enhance the market quality of these stocks for the benefit of issuers and investors.

The tick size pilot will begin by May 6, 2016. It will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2.00 for every trading day.

The pilot will consist of a control group of approximately 1,400 securities and three test groups with 400 securities in each selected by a stratified sampling. During the pilot:

  • Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments.
  • Pilot securities in the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted.
  • Pilot securities in the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception.
  • Pilot securities in the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies. In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions that mirror those under Rule 611 of Regulation NMS will apply.

A variety of data generated during the tick size pilot will be released publicly on an aggregated basis to assist in analyzing the impact of wider tick sizes on smaller capitalization stocks. The exchanges and FINRA will submit their initial assessments on the tick size pilot’s impact 18 months after the pilot begins. Order.

European Financial Industry Developments

ESMA Updates Q&A on Application of AIFMD

On May 12, the European Securities and Markets Authority (ESMA) published an updated version of its Q&A paper on the application of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) (2015/ESMA/850). The Q&A includes new questions and answers on reporting and calculation of leverage. The aim of the Q&A is to promote common supervisory approaches and practices in the application of the AIFMD and its implementing measures.

EBA Consults on Draft RTS on Specialized Lending Exposures

On May 11, the European Banking Authority (EBA) published a consultation paper (EBA/CP/2015/09) on draft regulatory technical standards (RTS) on assigning risk weights to specialized lending exposures under Article 153(9) of the Capital Requirements Regulation (Regulation 575/2013).

Specialized lending is a type of exposure towards an entity specifically created to finance or operate physical assets, where the primary source of income and repayment of the obligation lies directly with the assets being financed.

The proposed RTS define four classes of specialized lending:

  • project finance;
  • real estate;
  • object finance; and
  • commodities finance.

For each of these classes, the draft RTS specify a list of factors that institutions shall take into account and propose two options on how these factors should be combined to determine the risk weight assigned to the specialised lending exposure. The EBA has invited responses to the consultation before August 11, 2015, and will hold a public hearing for discussion on July 6, 2015.

ESMA Publishes Consultation Paper on Clearing Obligation Under EMIR

On May 11, the European Securities and Markets Authority (ESMA) published a fourth consultation paper (ESMA/2015/807) on the clearing obligation under EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories (Regulation 648/2012)). The consultation paper provides clarifications on various aspects of the draft regulatory training standards that ESMA is required to draft and submit to the European Commission. Stakeholders are invited to provide comments on the consultation paper before July 15, 2015.

EBA Final Report on Guidelines on Triggers for Use of Early Intervention Measures Under BRRD

On May 8, the European Banking Authority (EBA) published its final report (EBA/GL/2015/03) on guidelines on triggers for the use of early intervention measures under Article 27(4) of the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD). The guidelines identify a set of triggers that are closely linked to the outcomes of the common EU supervisory review and evaluation process conducted by national competent authorities, and elaborate on the circumstances prompting the consideration of whether to apply early intervention measures. The guidelines will apply from January 1, 2016.

ESMA Publishes Guidelines on the Definitions of Commodity Derivatives Under MIFID

On May 6, the European Securities and Markets Authority (ESMA) published guidelines (ESMA/2015/675) on the definitions of commodity derivatives and their classification under C6 and C7 listed in Section C of Annex 1 to the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).

The guidelines will apply to national competent authorities from August 7, 2015 and are intended to apply until the MiFID II Directive comes into force on January 3, 2017. The guidelines will clarify the definitions by specifying, in particular, what is meant by “physically settled” and confirming that forwards traded on a regulated market or multilateral trading facility (MTF) fall within the scope of MiFID.