U.S. Financial Industry Developments

LIBOR "Transition"

While there is a way to go until the end of 2021 when panel banks will no longer be required to provide LIBOR quotes to the FCA, we expect to see more and more discussion regarding alternative benchmarks that might be used on outstanding and on new financings, the issues raised by the possible alternatives, overnight and term financing considerations, credit spreads and all related issues. Three recent statements and papers distributed by the SFIG LIBOR Task Force late last week begin to discuss these issues.

FSB Statement "Interest Rate Benchmark Reform: Overnight Risk-free Rates and Term Rates"

The Financial Stability Board ("FSB") recently published a statement on reforms to interbank offered rates ("IBORs") and the development of overnight risk-free, or nearly risk-free, rates ("RFRs") and term rates. Release.

"The FSB continues to encourage the development and adoption of these overnight RFRs where appropriate, for example in business where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable. This will enhance financial stability. [...]

An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid market."

Speech by Andrew Bailey, Chief Executive of the FCA, Interest Rate Benchmark Reform: Transition to a World Without LIBOR

Highlights:

• Why firms need to end their reliance on LIBOR by end-2021.
• Why overnight risk-free rates ("RFRs") are the right foundation for interest rate markets.
• The progress made on transition to these overnight risk-free rates and the work that remains to be done.

"I hope it is already clear that the discontinuation of LIBOR should not be considered a remote probability 'black swan' event. Firms should treat it is as something that will happen and which they must be prepared for. Ensuring that the transition from LIBOR to alternative interest rate benchmarks is orderly will contribute to financial stability. Misplaced confidence in LIBOR's survival will do the opposite, by discouraging transition.

There is some good news to report on the important steps taken towards transition. But the pace of that transition is not yet fast enough. There is much further to go." Release.

ISDA Consultation Paper, "IBOR Fallbacks for 2006 ISDA Definitions: Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW"

ISDA has launched a market-wide consultation on technical issues related to new benchmark fallbacks for derivatives contracts that reference certain interbank offered rates ("IBORs"). The consultation sets out options for adjustments that would apply to the fallback rate in the event an IBOR is permanently discontinued.

The ISDA consultation paper is here.

"The consultation sets out four options to account for the move from a term rate to an overnight rate: a spot overnight rate; a convexity adjusted overnight rate; a compounded setting in arrears rate; and a compound setting in advance rate. Three options are also proposed to calculate a spread adjustment: a forward approach; a historical mean/median approach; and a spot-spread approach. In each case, the spread adjustment will be fixed at the point the fallback is triggered."

OCIE Issues Alert Regarding Compliance Issues Related to Best Execution by Investment Advisers

On July 11, 2018, the Office of Compliance Inspections and Examinations ("OCIE") of the Securities and Exchange Commission issued a Risk Alert regarding the most frequent best execution issues cited in adviser exams "to provide investment advisers ("advisers"), investors and other market participants with information concerning many of the most common deficiencies that the staff has cited in recent examinations of advisers' compliance with their best execution obligations under the Investment Advisers Act of 1940."

The following is a summary list of the examples provided by OCIE of the most common deficiencies associated with advisers' best execution obligations.

• Not performing best execution reviews.
• Not considering materially relevant factors during best execution reviews.
• Not seeking comparisons from other broker-dealers.
• Not fully disclosing best execution practices.
• Not disclosing soft dollar arrangements.
• Not properly administering mixed use allocations.
• Inadequate policies and procedures relating to best execution.
• Not following best execution policies and procedures.

According to OCIE, the examinations within the scope of this review resulted in a range of actions, including advisers electing to amend their disclosures regarding best execution or soft dollar arrangements, revising their compliance policies and procedures, or otherwise changing their practices regarding best execution or soft dollar arrangements. To read the full text, click here.

Federal Banking Agencies Issue Statement Regarding the Impact of the Act

On July 6, 2018, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller issued a joint statement describing the rules and related reporting requirements that are affected by the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Act"). The federal banking agencies provide their interim positions on the applicability of the Act until their respective regulations are amended to incorporate the Act's changes. Release.

Bureau Issues Statement on the Implementation of the Act Amendments to the HMDA

On July 5, 2018, the Bureau of Consumer Financial Protection (the "Bureau") issued a statement regarding the impact of the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Act") on the Home Mortgage Disclosure Act (the "HMDA"). The Act provides partial exemptions for some insured depository institutions and insured credit unions from certain HMDA requirements. The Bureau expects to provide further guidance on the applicability of the Act to the HMDA later this summer. Release.

European Financial Industry Developments

EC Adopts Delegated Regulation Clarifying Depositaries' Safe-keeping Obligations under UCITS

On July 12, 2018, the European Commission ("EC") published a Delegated Regulation it has adopted amending Delegated Regulation (EU) 2016/438 as regards safe-keeping duties of depositaries (C(2018) 4379 final).

Delegated Regulation (EU) 2016/438 supplements the UCITS Directive (2009/65/EC) (as amended by the UCITS V Directive (2014/91/EU)). In particular, the Delegated Regulation further specifies depositaries' duties with regard to safe-keeping UCITS clients' assets. Article 22a(3)(c) of the UCITS Directive requires that where a depositary delegates safe-keeping functions to third parties (custodians), the assets also need to be segregated at the level of the delegate. Article 16 of Delegated Regulation (EU) 2016/438 details how this obligation is to be fulfilled.

Experience gained since October 13, 2016 (the application date of Delegated Regulation (EU) 2016/438) has shown that further clarification is needed on the requirements laid down in Article 22a(3)(c). The Commission acknowledges that securities and insolvency laws are not harmonized at the EU level. This should lead to the clear identification of assets belonging to a particular UCITS, and to the protection of these assets in the case of insolvency of the depositary or the custodian.

The provisions of the UCITS Directive and Delegated Regulation (EU) 2016/438 pursue these objectives. However, the Commission considers that diverging applications by national competent authorities ("NCAs") and market participants of depositaries' obligations as regards safe-keeping of UCITS clients' assets risks undermining the objectives. As a result, the new Delegated Regulation amends Delegated Regulation (EU) 2016/438 (Articles 13(1)(c), 13(2), 15, 16, 17(2), 17(3) and 22(3)) to clarify the requirements in this area.

The Commission consulted on a draft of the new Delegated Regulation in May 2018. In response to industry requests, it has decided to defer the application date of the new Delegated Regulation for 18 months. The Commission has also made some amendments that it considers improve the overall clarity of the legal text.

The new Delegated Regulation states that it will enter into force twenty days after publication in the Official Journal of the EU ("OJ"), and will apply from the date 18 months after publication. The next step is for the Delegated Regulation to be considered by the European Parliament and the Council of the EU.

FSB Statement on Reforms to Interest Rate Benchmarks

On July 12, 2018, the Financial Stability Board ("FSB") published a statement on reforms to interbank offered rates ("IBORs") and the development of overnight risk-free rates ("RFRs") and term rates. The FSB's comments include the following.

• Benchmarks that are used extensively must be especially robust to ensure financial stability. The FSB welcomes the progress that has been made by public authorities and the private sector in identifying and developing overnight RFRs that are sufficiently robust.
• Overnight RFRs are robust because they are anchored in active, liquid underlying markets. However, the lack of underlying transactions in the term interbank and wholesale unsecured funding markets could make IBORs susceptible to manipulation. The FSB therefore encourages the development and adoption of overnight RFRs where appropriate, for example in businesses where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable.
• In the markets where IBORs are disappearing, for example, those currently reliant on the London Interbank Offered Rate ("LIBOR"), there needs to be a transition to new reference rates. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, in tandem with their efforts to identify and facilitate the wider use of RFRs.
• An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.

ECON Votes to Adopt Draft Report on Proposed Reforms to ESFS

On July 11, 2018, the European Parliament's Committee on Economic and Monetary Affairs ("ECON") published a press release announcing that it had voted to adopt a draft report relating to the European Commission's legislative proposals to reform to the European System of Financial Supervision ("ESFS").

The press release focuses on equivalence decisions taken on equivalence of EU and third-country rules. ECON calls for transparent procedures to govern the adoption, withdrawal or suspension of decisions as to whether third-country rules are equivalent to the EU's. These decisions are currently taken unilaterally by the Commission, but as they also have a political dimension, ECON believes that they should be subject to appropriate scrutiny by the Parliament and the Council of the EU.

ECON advocates a "structured horizontal framework" for recognising and supervising equivalent third country regimes and empowering European Supervisory Authorities ("ESAs") to advise the Commission and review developments in third countries. It also calls on the Commission to report annually to the European Parliament on all decisions.

In addition, ECON stresses that the UK's withdrawal from the EU could potentially have a significant impact on the regulation and supervision of financial services, given the currently close relations between EU member states in this area.

Rating Agency Developments

On July 6, 2018, Fitch issued the following report: Insurance-Linked Securities Rating Criteria. Release.

On July 5, 2018, Fitch issued the following report: Closed-End Funds and Market Value Structures Rating Criteria. Release.