U.S. Commodity Futures Trading Commission issues time-limited no-action letter extending relief for non-U.S. swap dealers and non-U.S. major swap participants under SDR Reporting Rules

On November 9, the U.S. Commodity Futures Trading Commission's (the "CFTC") Division of Market Oversight issued a time-limited no-action letter extending the relief provided in CFTC Letter No. 14-141. The relief applies to non-U.S. swap dealers ("SD") and non-U.S. major swap participants ("MSP") established in Australia, Canada, the European Union, Japan or Switzerland that are part of an affiliated group in which the ultimate parent entity is a U.S. SD, U.S. MSP, U.S. bank, U.S. financial holding company, or U.S. bank holding company.  The extension grants no-action relief to these entities for failing to comply with the swap data reporting requirements of Part 45 and Part 46 of the CFTC's SDR Reporting Rules with respect to their swaps with non-U.S. counterparties that are not guaranteed affiliates, or conduit affiliates, of a U.S. person. Such relief will expire on the earlier of (i) 30 days after the CFTC issues a comparability determination with respect to the SDR Reporting Rules for the jurisdiction in which the non-U.S. SD or non-U.S. MSP is established or (ii) December 1, 2016.  Press Release.  No-Action Letter.  No-Action Letter.

Case Update: Madden v. Midland Funding

As expected, today, November 10, 2015, Midland Funding filed a petition for a writ of certiorari in the United States Supreme Court, asking the Court to review the Second Circuit's ruling in Madden v. Midland Funding, that the federal preemption provision of the National Bank Act, 12 U.S.C. § 85, could not be invoked by a non-national bank assignee.  A link to the petition is provided here.  The cert petition advances two primary arguments as to why the Supreme Court should grant review.  First, Midland claims the need for resolution of a split between the Second Circuit, on the one hand, and the Eighth and Fifth Circuits, on the other, concerning the impact of the National Bank Act on assigned loans.  Specifically, Petitioner claims the Madden decision - subjecting non-national bank assignees to state usury laws - conflicts with the Eighth Circuit's decision in Krispin v. May Department Stores Co., 218 F.3d 919 (8th Cir. 2000), which holds that the preemption inquiry turns on the status of the originating entity and subsequent assignments are irrelevant, and the Fifth Circuit's decision in FDIC v. Lattimore Land Corp., 656 F.2d 139 (5th Cir. 1981), which also looked to the originator of the debt (albeit in the inverse scenario, where the originator was the non-national bank).

Second, the Petitioner claims the Madden case presents a question of substantial importance, particularly to the financial community.  Midland contends that if left intact, the Second Circuit's decision will allow states to regulate lending terms when a loan created by a national bank is assigned to a non-national bank entity.  Going one step further, Midland asserts the Second Circuit's reasoning is all the more troubling because it is equally applicable to loans originated by savings associations and state-chartered federally insured banks.  In turn, Midland contends the decision has serious implications for the secondary markets, as it could render loans originated by national banks and subsequently transferred worthless.  See Pet. 23 n.8 ("the Second Circuit's decision casts doubt on the viability of online lending marketplaces currently envisioned by the federal government.... The decision "pose[s] an acute risk" to lenders in those marketplaces, because they may be subject to state usury laws based on the vagaries of a particular customer's location.").  Ultimately, Midland claims the perilous state of the financial markets in the wake of the Madden decision and the need for uniform lending practices demand immediate Supreme Court intervention.

As previously explained, with anticipated extensions, we do not expect to hear if the Supreme Court is going to take the case until at least February 22, 2016.  Petition.

On November 11, DBRS published its ratings methodology for Canadian credit cards and personal line of credit securitizations.  Report.

On November 10, Moody's published its methodology for rating single-family rental (SFR) securitizations.  Report.

On November 6, Moody's published its methodology for rating Slovak residential mortgage-backed securities.  Report. 

On November 6, Moody's published its methodology for rating securities backed by fleet leases and related vehicles.  Report. 

On November 6, Moody's published its methodology for rating securities issued through Brazilian Fundo de Investimento em Direitos Creditorios (FIDC).  Report. 

On November 5, Fitch updated its rating criteria for charter schools.  Report.

MiFID II Overhaul of Financial Market Rules to be Delayed

The MiFID II Directive (2014/65/EU) seeks to implement a major overhaul of existing legislation concerning the structures within which financial instruments are traded in the EU. MiFID II was agreed by national governments and the European Parliament in early 2014, and slated for implementation on January 3, 2017. However, on November 10, 2015 Stephen Masjoor, the chair of the European Securities and Markets Authority (ESMA), noted that the timing for stakeholders and regulators to implement the rules and build the necessary IT systems is extremely tight, and there are a few areas where the calendar is already unfeasible. The press has since reported that the likely delay in implementation of MiFID II may be up to a year.

FSB Finalizes Total Loss Absorbing Capacity (TLAC) Standard for G-SIBs

On November 9, 2015, the Financial Stability Board (FSB) published a document containing principles on loss absorbing and recapitalization capacity of global systemically important banks (G-SIBs) and the total loss absorbing capacity (TLAC) term sheet, together with an accompanying press release.

The TLAC standard defines a minimum requirement for the instruments and liabilities that should be readily available for bail-in in the case of a G-SIB subject to a resolution regime. The aim is that failing G-SIBs will have sufficient loss-absorbing and recapitalisation capacity available in resolution for authorities to implement an orderly resolution that minimises impacts on financial stability, maintains the continuity of critical functions and avoids exposing public funds to loss.

From January 1, 2019, G-SIBs will be required to meet a firm specific minimum TLAC requirement at least equal to 16% of the risk-weighted assets (RWAs) of the group companies within the G-SIN subject to resolution, rising to 18% from January 1, 2022. From January 1, 2019, minimum TLAC must also be at least 6% of the Basel III leverage ratio denominator, rising to 6.75% from January 1, 2022.

The FSB has submitted the TLAC principles and term sheet for endorsement by G20 leaders at the Antalya summit on November 15 and 16, 2015. It will undertake a review of the technical implementation of the TLAC standard by the end of 2019.

ESMA Submits Final Draft of Additional RTS on Central Clearing of IRS Under EMIR to European Commission

On November 10, 2015, the European Securities and Markets Authority (ESMA) published a  final report (ESMA/2015/1629) setting out additional draft regulatory technical standards (RTS) on the central clearing of interest rate swaps (IRS),  pursuant to Article 5 of EMIR (the Regulation on OTC derivative transactions, CCPs and Trade Repositories (Regulation 648/2012)). ESMA proposes the mandatory central clearing of both fixed-to-float IRS denominated in Norwegian krone (NOK), Polish zloty (PLN) and Swedish krona (SEK), Danish krona, Czech koruna and Hungarian forints and forward rate agreements, denominated in NOK, PLN and SEK.

Council of EU Agrees Approach to Financial Support for SRF and Reviews Implementation of European Banking Union

The Council of the EU, in its configuration as the Economic and Financial Affairs Council (ECOFIN), has published a  press release on the outcome of its meeting on November 10, 2015 reporting that:

• the Council welcomes the adoption of the European Commission's action plan on building a capital markets union.
• the Council has reviewed implementation of the European banking union. The Council urges member states to speed up the measures necessary for entry into force of the agreed rules, including the recast Deposit Guarantee Schemes Directive (2014/49/EU) and the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD).
• the Council has discussed short-term bridge financing for the single resolution fund (SRF), which is part of the single resolution mechanism aimed at ensuring the orderly resolution of failing banks. Agreement is necessary before the end of the year, as the SRF will become operational on January 1, 2016. Under the envisaged approach, bridge financing will consist of national credit lines from the member states. These will back up their respective national compartments in the SRF until such time as the SRF's resources are fully mutualised.

FSB reports to G20

On November 9, 2015, the Financial Stability Board (FSB) published reports to the G20 on the following subjects:

• the implementation and effects of the financial regulatory reforms;
• actions taken to assess and address the decline in correspondent banking;
• reducing misconduct risk in the financial services industry; and
• its ongoing resolution work, including its progress in removing remaining obstacles to resolvability.

The reports also set out summaries of the actions that the FSB intends to take in connection with the issues discussed in the reports, and proposed timetables for those actions.

Alongside its reports, the FSB also published a proposal to the G20 for the creation of an industry-led disclosure task force on climate-related risks.

Solvency II Regulations Implementing Range of Technical Standards Published

Seven Commission Implementing Regulations laying down implementing technical standards (ITS) required under the Solvency II Directive (2009/138/EC) been published in the Official Journal of the EU (OJ). The Commission adopted these Implementing Regulations on 11 November 2015. The Implementing Regulations will enter into force on December 2, 2015 (that is, 20 days after their publication in the OJ).

• Commission Implementing Regulation (EU) 2015/2011 laying down implementing technical standards with regard to the lists of regional governments and local authorities, exposures to whom are to be treated as exposures to the central government. This relates to Article 109(a)(2)(a) of Solvency II.
• Commission Implementing Regulation (EU) 2015/2012 laying down implementing technical standards with regard to the procedures for decisions to set, calculate and remove capital add-ons. This relates to Article 37(8) of Solvency II.
• Commission Implementing Regulation (EU) 2015/2013 laying down implementing technical standards with regard to standard deviations in relation to health risk equalisation systems. This relates to Article 109a(4) of Solvency II.
• Commission Implementing Regulation (EU) 2015/2014 laying down implementing technical standards with regard to the procedures and templates for the submission of information to the group supervisor and for the exchange of information between supervisory authorities. This relates to Article 249(4) of Solvency II.
• Commission Implementing Regulation (EU) 2015/2015 laying down implementing technical standards on the procedures for assessing external credit assessments. This relates to Article 44 (4a) of Solvency II.
• Commission Implementing Regulation (EU) 2015/2016 laying down the implementing technical standards with regard to the equity index for the symmetric adjustment of the standard equity capital charge. This relates to Article 109a(2)(b) of Solvency II.
• Commission Implementing Regulation (EU) 2015/2017 laying down implementing technical standards with regard to the adjusted factors to calculate the capital requirement for currency risk for currencies pegged to the euro. This relates to Article 109a(2)(c) of Solvency II.