The Federal Housing Administration Announces New Loan Limits for 2016

On December 9, 2015, the Federal Housing Administration ("FHA") announced its schedule of loan limits for the 2016 calendar year. The new schedule, effective January 1, 2016, raises loan limits in 188 counties and are a result of changes in housing prices in the respective areas. These loan limits are effective for case numbers assigned on or after January 1, 2016, and will remain in effect until 2017. FHA's Loan Limits Page. Press Release.

U.S. Commodity Futures Trading Commission Divisions Issue Time-Limited No-Action Letter Extending Relief from Certain Recordkeeping Requirements Under Commission Regulations

On December 8, 2015, the U.S. Commodity Futures Trading Commission's (the "CFTC") Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight issued a time-limited no-action letter extending the relief provided in CFTC Letter No. 14-147. The relief would otherwise expire on December 31, 2015 and applies to commodity trading advisors ("CTAs") that are registered with the CFTC and are members of designated contract markets ("DCMs") or swap execution facilities ("SEFs"). The extension grants no-action relief to these entities from the requirement to record oral communications, and also to covered market participants from the requirement to link records of oral and written communication that lead to the execution of a transaction in a commodity interest and related cash or forward transactions. Such relief will expire on the effective date of any final CFTC action with respect to the CFTC's proposal to amend Regulation 1.35(a). Press Release. No-Action Letter.

The Federal Reserve Board Issues Final Rule Adopting Amendments to the Board's Regulatory Capital Rules for Non-Traditional Stock Corporations

On December 4, 2015, the Board of Governors of the Federal Reserve System (the "Board") issued a final rule adopting amendments to the Board's regulatory capital framework ("Regulation Q") that was issued in June 2013. The final rule provides examples of how to apply the framework to depository institution holding companies that are not organized as traditional stock corporations and how instruments issued by such firms may qualify as regulatory capital. The final rule also issued a temporary exclusion from Regulation Q for savings and loan holding companies that are trusts and depository institution holding companies that are employee stock ownership plans – until the Board can propose appropriate rules for such entities. In addition, the Board extended the applicable compliance date with the revised capital framework to July 1, 2016. The final rule will take effect on January 1, 2016. Press Release. Final Rule.

The Office of the Comptroller Provides Updated Guidance for Risk Assessment System

On December 3, 2015, the Office of the Comptroller of the Currency ("OCC") provided updated guidance for its risk assessment system ("RAS"). The guidance (i) clarifies the relationship between RAS and the Uniform Financial Institutions Rating System ("CAMELS"), (ii) revises the definition of banking risk, (iii) expands the "quality of risk management" assessment, and (iv) expands strategic and reputation risk assessments. These updates affect the following booklets of the Comptroller's Handbook: "Bank Supervision Process," "Community Bank Supervision," "Federal Branches and Agencies Supervision," and "Large Bank Supervision." Press Release.

Final Rule Issued to Establish Minimum Margin Requirements for Non-Cleared Swaps and Non-Cleared Security-Based Swaps

On December 3, 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively, "Agencies") issued a final rule establishing capital requirements, as well as minimum requirements for the exchange of initial and variation margin, for covered swap entities with respect to non-cleared swaps and non-cleared security-based swaps. The purpose of the requirements is to offset the greater risk to such entities, and thus, the amount of margin required will vary based on relative risk. The final rule implements sections 731 and 764 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 and will take effect on April 1, 2016 – however, the minimum margin requirements will not phase-in until September 1, 2016. All swap counterparties must comply with the variation margin requirements by March 1, 2017, while swap counterparties with more than $3 trillion in outstanding swap activity must comply with both the initial and variation margin requirements by September 1, 2016. Press Release. Final Rule. 

On December 9, 2015, Moody's published its global methodology for rating securities backed by pools of auto loans and auto leases to individuals. Report.

On December 8, 2015, Moody's published its methodology for rating the temporary investment of cash in structured finance transaction accounts. Report.

On December 7, 2015, Fitch updated its criteria for recovery estimates and recovery ratings and clarified the notching guidance for unsecured debt of issuers rated in the 'BB' category and above. Report.

On December 4, 2015, Fitch updated its criteria for not-for-profit hospitals and health systems outside the U.S. Report.

On December 4, 2015, Moody's updated and replaced its existing methodology for how Moody's Loss Given Default framework is used in making rating distinctions. Report.

On December 3, 2015, Fitch updated its criteria for rating U.S. equipment lease and loan ABS. Report.

On December 3, 2015, Fitch published its Global Consumer ABS Rating Criteria for analyzing credit risk in asset-backed securities backed by consumer receivables globally. Report.

On December 3, 2015, Fitch updated its recovery ratings and notching criteria for equity REITs. Report.

On December 3, 2015, Kroll published its methodology for rating the financial strength of private mortgage insurance companies. Report.

On December 3, 2015, Kroll published its methodology for rating U.S. CMBS single borrower and large loan transactions. Report.

On December 3, 2015, Kroll published its methodology for rating U.S. CMBS multi-borrower transactions. Report.

On December 3, 2015, Kroll published its methodology for rating U.S. distressed commercial real estate liquidating trust securitizations. Report.

On December 3, 2015, Kroll updated its CMBS property evaluation methodology. Report. 

Morgan Stanley Settles RMBS Suits With NCUA

On December 10, 2015, the National Credit Union Administration ("NCUA") announced Morgan Stanley's agreement to pay $225 million to settle litigation brought in New York and Kansas federal courts by NCUA as liquidating agent of U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union (the "Credit Unions"), all of which failed during the financial crisis.  In the settled claims – previously covered here and here – NCUA alleged that Morgan Stanley had materially misrepresented the collateral characteristics of RMBS it sold to the Credit Unions.  Morgan Stanley did not admit fault in the settlement. Press release. 

Report on Impact of IFRS 16 Leases on Financial Covenants in Loan Agreements

On December 9, 2015, the European Financial Reporting Advisory Group (EFRAG) published a feedback report relating to a public survey undertaken by EFRAG and others in July 2015 aiming to understand the effects of the introduction of IFRS 16 Leases on financial covenants in loan agreements.

IFRS 16 Leases is expected to be issued and be effective from early 2016 and requires that all identified leases, including operating leases, be identified on a lessee's balance sheet (with only limited exceptions).

Loan agreements may include financial covenants that require borrowers and other obligors to meet specified ratios based on information from their accounts and financial statements. It is understood that, by recognizing operating lease commitments as lease liabilities, this may adversely affect financial covenants and cause entities to breach those covenants.

However, loan agreements may be drafted to mitigate the impact, for example by using "frozen GAAP" language (restricting the GAAP basis for the underlying accounting data to that which existed at the date of signing) or allowing the renegotiation of covenants when accounting standards change.

The report states that a majority of lender respondents indicated their loans included such mitigating provisions in which case IFRS 16 was not expected to cause a breach of covenants. However, responses from both lenders and non-lenders suggest that the adoption of IFRS 16 will  mean that some lenders and their customers may need to renegotiate financial covenant ratios and either change their approach for future agreements or adjust the level of their ratios after IFRS 16 is introduced.

The report also noted non–lenders' concerns that lenders could use the introduction of IFRS 16 as an opportunity to renegotiate covenants in their favor and the suggestion that a longer period (3 to 5 years) be allowed before the effective date of IFRS 16, to allow sufficient time for "a natural churn of renewing bank facilities", including covenants, on the new basis.

The results of the survey will not have a direct impact on the issue of the new accounting standards but are a useful reminder for lenders, their customers and their advisers to consider the impact of the new standards on the financial covenants in their loan agreements.

ESMA Publishes Further Draft ITS Under MiFID II

On December 11, 2015, the European Securities and Markets Authority (ESMA) submitted to the European Commission its final report (ESMA/2015/1858) on draft implementing technical standards (ITS) under the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR). The Commission has three months in which to decide whether to endorse the draft ITS.

The eight draft ITS relate to the following areas:

1. Standard forms, templates and procedures for cooperation arrangements in respect of a trading venue whose operations are of substantial importance in a host member state.
2. Format and timing of communications relating to the suspension and removal of financial instruments from trading on a regulated market (RM), a multilateral trading facility (MTF) or an organized trading facility (OTF).
3. Standard forms, templates and procedures for the authorization of data reporting services providers.
4. Position reporting.
5. Format and timing of weekly position reports.
6. Standard forms, templates and procedures for competent authorities to cooperate in supervisory activities, on-site verifications, and investigations and for the exchange of information.
7. Standard forms, templates and procedures for the consultation of other competent authorities before granting an authorization.
8. Procedures and forms for submitting information on sanctions and measures.