Orrick's Financial Industry Week in Review

On March 23, Moody's updated its rating methodology for rating securitizations backed by Non-Performing and Re-Performing Loans.  Report. 

Litigation Finance: A Brief History of a Growing Industry

Litigation costs money.

Litigation finance can provide the cash a plaintiff needs to prevail in court. Plaintiffs holding valid—and potentially quite valuable—claims sometimes do not have the resources to initiate a lawsuit or to see one through to a favorable resolution. Rules of professional ethics generally prohibit lawyers from providing clients with financial assistance. A contingency fee arrangement with a lawyer can help reduce a plaintiff's out-of-pocket legal costs, but such arrangements are not always feasible. Even when they are, the lawyer may not have enough cash available to fully fund the costs of litigation.

Litigation financing (also known as professional funding, settlement funding, third-party funding, or legal funding) is the process by which plaintiffs can finance their litigation or other legal costs through a third party. This third party provides a nonrecourse cash advance to the plaintiff in exchange for a percentage share of the judgment or settlement. Litigation finance is used to fund all types of cases, including commercial litigation, intellectual property disputes, personal injury cases, class actions, whistleblower suits, and even high-profile divorce cases. And funders invest in early stage cases, cases pending appeal, and even finished cases.

Many investors, including big banks, participate in this sector. There are also firms dedicated solely to investment in litigations. These firms now invest about $1 billion a year, and the industry seems to be growing. Topping $1 Billion Mark, Big Litigation Funder Gets Bigger, Julie Triedman, The Am Law Daily, January 6, 2016. The industry's largest investor, Chicago-based Gerchen Keller, was formed in 2013 with $100 million in capital and now has more than $1.4 billion in assets under management. In many ways, the firm operates like a typical hedge fund. It maintains several separate funds that invest private capital in portfolios of assets selected by the firms' managers. The major difference between it and more traditional hedge funds is that Gerchen Keller invests only in this new asset class—namely, interests in lawsuits. In addition to investments by big banks and funds, accredited investors with as little as $2,500 to invest can get a piece of the action. Specifically, LexShares, a crowdsourcing website, matches third-party funders meeting certain qualifications with litigants in need of funding.

The foregoing demonstrates that lawsuit investment is a new and burgeoning asset class. In spite of this, there is no uniform regulation. Congress and state legislatures are looking to change this situation. For more information, click here.

EBA Publishes Formula for Calculating MCD Benchmark Rate

The EBA has published its final report setting out the formula that creditors will be required to use when calculating the benchmark rate under Annex II to the Mortgage Credit Directive (2014/17/EU).

Under certain circumstances the Mortgage Credit Directive requires creditors to use a benchmark rate specified by the EBA for the illustrative examples in the European Standardized Information Sheet (ESIS) for variable rate mortgages (specifically, the annual percentage rate of charge (APRC) and the maximum installment amount). This is intended to help consumers compare the characteristics of credit products.

Instead of publishing a specific pan-European rate the EBA has produced a formula for calculating the appropriate rate which takes into account national circumstances. The EBA formula includes an underlying rate specific to each member state (that is, the European Central Bank (ECB) rate for Eurozone countries and the national central bank rate for non-Eurozone countries). This means that each member state will have a bespoke EBA benchmark rate that will remain up to date over time. The EBA rate will only apply where no national rate has been set.

The decision will be translated into the official EU languages, and will be published on the EBA website and in the Official Journal of the European Union (OJ). The EBA formula will apply 20 days after its publication in the OJ, but can be used by creditors before this date.

Council of EU Grants Exemptions for Commodity Dealers under CRR

On March 23, 2016, the Council of the EU published an approved final compromise text of a proposed Regulation extending the Capital Requirements Regulation (Regulation 575/2013) (CRR) to extend certain exemptions for commodity dealers.

Under the CRR commodity dealers are exempt from large exposure and own funds requirements until December 31, 2017, the Council has agreed to extend these exemptions until December 31, 2020. The measure is designed to protect commodity dealers from an unstable regulatory environment in the short term. The Council considered that the application of large exposure and own funds requirements to commodity dealers should come as the result of a thoroughly reasoned decision rather than as a result of a lapsed exemption.

The proposed regulation now requires approval from the European Parliament and adoption by the Council. The Council Presidency confirmed with member states that they will support the extension, which was approved by the Parliament's Committee on Economic and Monetary Affairs (ECON) on March 7, 2016. Press release.

ECB Publishes Regulation and Guidance on Options and Discretions Available in Union Law

On March 24, 2016, Regulation ((EU) 2016/445) of the European Central Bank (ECB) on the exercise of options and discretions (ODs) was published in the Official Journal of the EU (OJ). The ECB has also published a guide on the ODs available under Union law.

The Regulation details the legal obligations of the significant credit institutions within the scope of the single supervisory mechanism (SSM) regarding the prudential treatment of certain "general" ODs available to competent authorities under EU banking law (that is, the CRD IV Directive (2013/36/EU), the Capital Requirements Regulation (Regulation 575/2013) (CRR) and delegated acts).

The guide sets out the ECB's approach concerning the exercise of the ODs. It aims to provide coherence, effectiveness and transparency regarding the supervisory policies that will be applied in supervisory processes within the SSM as far as the significant credit institutions are concerned. In particular, it is designed to assist the joint supervisory teams (JSTs) in the performance of their tasks regarding the principles the ECB intends to follow in supervising significant credit institutions.