Basel Committee Final Rules on Capital Composition Disclosure

On June 26, the Basel Committee on Banking Supervision issued its final rules regarding information banks must disclose about the composition of their capital.  National authorities are required to give effect to the new disclosure requirements no later than June 30, 2013.  Release.  Rules.  

SEC Final Rules on Procedures for Reviewing Clearing Submissions

On June 28, in accordance with Section 763(a) of the Dodd-Frank Act, the SEC adopted final rules regarding submissions of security-based swaps for clearing with registered clearing agencies.  The SEC also adopted rules to define and describe when notices of proposed changes to rules, procedures or operations are required to be filed by designated financial market utilities in accordance with Section 806(e) of Title VIII of the Dodd-Frank Act.  Most of the rules will become effective 60 days after publication in the Federal Register.  Release.  Final Rules.  

ESMA Proposed Rules on Derivatives, Central Counterparties and Trade Repositories

On June 25, the European Securities and Markets Authority (ESMA) issued a consultation paper containing draft Regulatory Technical Standards and draft Implementing Technical Standards, which set out specific details of how the Regulation of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories (EMIR) will be implemented.  A public hearing will be held on July 12, and comments on the paper must be submitted by August 5. Press Release.   Consultation Paper.

OCC Final Rules Removing Credit Ratings References

On June 13, the OCC published final rules, which will be effective on January 1, 2013, removing references to credit ratings from its regulations pertaining to investment securities, securities offerings, and foreign bank capital equivalency deposits.  The OCC also revised regulations, which are effective immediately upon publication, regarding financial subsidiaries of national banks to better reflect the language of the underlying statute, as amended by Section 939(d) of the Dodd-Frank Act.  In addition, the OCC published guidance to assist national banks and federal savings associations in their exercise of due diligence to determine whether securities are “investment grade” when assessing credit risk for portfolio investments.  Release.  Final Rules.  Final Guidance.

Fed, FDIC Announce Due Dates for Large Bank Resolution Plans

On June 29, the Fed and the FDIC announced the process for receiving and evaluating initial resolution plans for U.S. bank holding companies with $250 billion or more in total nonbank assets and non-U.S. banking holding companies with $250 billion or more in total U.S. nonbank assets.  Such bank holding companies must submit their initial resolution plans on or before July 2 and the public sections of these resolution plans will be released on July 3. Fed Release.   FDIC Release.    

CFTC Proposed Rules on Identification of Futures and Swaps Participants

On June 28, the CFTC issued proposed rules to enhance its identification of participants in futures and swaps markets regulated by the CFTC.  The proposed rules will also automate the CFTC’s existing position and transaction reporting programs by requiring electronic submission of trader identification and market participant data.  Comments must be submitted within 60 days of publication in the Federal Register.  CFTC Release.    

CFTC Re-Proposed Rules Prohibiting Aggregation of Swap Contract Orders

On June 25, the CFTC re-proposed rules prohibiting the aggregation of orders to satisfy minimum block sizes or cap requirements with respect trades in swap contracts.  In addition, the proposed rules (i) provide that parties to a block trade must individually qualify as eligible contract participants, subject to certain exceptions and (ii) require that persons transacting block trades on behalf of customers must receive prior written instructions or consent from such customers. Comments must be submitted within 30 days of publication in the Federal Register.  CFTC Release.    

MSRB Regulation of Broker’s Brokers

On June 25, the SEC approved (i) MSRB Rule G-43 establishing obligations for municipal securities dealer firms that act as “broker’s brokers” and (ii) interpretative guidance on the duties of dealers that use such firms.  The rule and interpretive guidance will be effective on December 22.  MSRB Release.  MSRB Rule.  MSRB Guidance.

MSRB Proposed Amendment to NRO Designation Rule

On June 28, the MSRB sought approval from the SEC for a proposed amendment to Rule G-34 limiting the use by municipal securities dealers of the designation “not reoffered” or “NRO” without also including price or yield information in written communications about new issues of securities.  The MSRB has requested that the proposed amendment be made effective 28 days after the date of SEC approval.  MSRB Release.   MSRB Proposed Amendment.

On June 29, Fitch updated its U.S. RMBS representations and warranties criteria. Fitch Report.

On June 28, Fitch updated its criteria for existing asset securitization in emerging markets. Fitch Report.   

On June 26, S&P released its methodology for covered bonds.  S&P Report.

On June 26, Fitch released an updated report on rating guidelines for confirming letter of credit-supported bonds.  Fitch Report.

On June 22, Fitch updated its criteria for solid waste revenue bonds.  Fitch Report.

On June 22, Fitch updated its criteria for credit card ABS.  Fitch Report.

Note:  Free registration is required for rating agency releases and reports.

$40 Million Settlement Approved in Lehman Brothers Case

On June 21, 2012, Judge Lewis A. Kaplan of the Southern District of New York approved a $40 million settlement in an RMBS class action brought by Locals 302 and 612 of the International Union of Operating Engineers – Employers Construction Industry Retirement Trust against Lehman Brothers and certain of its former officers and directors.  The settlement resolved claims against the officers and directors only.  In the same order, Judge Kaplan certified a plaintiff class for settlement purposes only.  Order.    

NY Appellate Court Affirms Dismissal of Walnut Place’s Claims Against BofA and Countrywide

On June 28, 2012, the New York Appellate Division, First Department, affirmed the dismissal of Walnut Place’s $1.1 billion RMBS suit against Countrywide and Bank of America.  Walnut Place sued derivatively on behalf of an RMBS trustee seeking to compel repurchase of securitized loans due to alleged breaches of representations and warranties about the loans in the pooling and servicing agreement (“PSA”).  The court held that the “no-action” clause in the PSA precludes the investor plaintiffs from bringing any action related to the PSA other than for an “event of default,” which is defined to include only loan servicing-related claims and does not include the representation and warranty claims plaintiffs attempted to assert.  Order.   

Irish Fund Sues Deutsche Bank Over $960 Million in RMBS

On June 22, 2012, Sealink Funding Limited filed suit in New York State Court in Manhattan against Deutsche Bank and several of its units related to its alleged purchase of $960 million face amount of RMBS in 19 offerings in 2006 and 2007.  Sealink alleges that Deutsche Bank misrepresented the originators’ compliance with underwriting guidelines, the validity of appraised values of the underlying mortgage loans and the LTV ratios based on those values, that all necessary steps had been taken to convey good title to the underlying mortgage loans into the securitization trust, and that the credit ratings assigned to the certificates accurately reflected their credit risk, among other things.  Sealink’s causes of action include fraud, fraudulent inducement, and aiding and abetting fraud.  Sealink seeks compensatory, rescissory, and punitive damages, in addition to costs and fees.  Complaint.   

Deutsche Bank Sues GE Subsidiary Over $650 million in RMBS Losses

On June 25, 2012, Deutsche Bank National Trust Company, trustee for the Morgan Stanley ABS Capital I Inc. Trust 2006 WMC-2, filed suit against WMC Mortgage, LLC and GE Capital in the District of Connecticut.  The trustee asserts claims based on alleged breaches of contractual representations and warranties in the operative Pooling and Service Agreement regarding the quality of the mortgage loans held in the Trust and the underwriting practices used in connection with the issuance of those loans.  The trustee alleges injuries of $650 million.  Complaint.   

SDNY Denies UBS’s Motion to Dismiss FHFA’s Claims as Untimely

On June 26, 2012, Judge Denise L. Cote of the Southern District of New York denied UBS’s motion to dismiss the Federal Housing Finance Agency’s RMBS action against it as untimely.  The FHFA’s suit arises out of Fannie Mae’s and Freddie Mac’s investments in $6.4 billion in UBS residential mortgage backed securities.  Judge Cote held that the repose periods for the claims did not begin to run until the securities were actually marketed for sale.  Order.

FSA Fines Barclays £59.5 Million for Manipulation of LIBOR

On 27 June 2012, the FSA published the final notice issued to Barclays Bank plc, detailing a £59.5 million fine for misconduct relating to its submission of rates that formed part of the London Interbank Offered Rate ("LIBOR") and the Euro Interbank Offered Rate ("EURIBOR").  This is the largest ever fine that the FSA has imposed.    Final Notice.

In particular, Barclays breached the following Principles:

• Principle 5 (market conduct) – Barclays was found to have breach Principle 5 by making US dollar LIBOR and EURIBOR submissions that took into account requests made by interest rate derivatives traders. 
• Principle 3 (management and control) – Barclays did not have adequate risk management systems or effective controls in place relating to its LIBOR and EURIBOR submission process.
• Principle 2 (skill, care and diligence) – Barclays failed to conduct its business with due skill, care and diligence when considering issues raised internally relating to its LIBOR submissions.

In addition to the fine by the FSA, the U.S. Commodity Futures Trading Commission fined Barclays $200 million, and Barclays agreed to pay a penalty of $160 million as part of an agreement with the U.S. Department of Justice. 

The Barclays settlement is the first settlement announced in connection with the LIBOR probe, with regulators investigating more than 20 banks. 

Memoranda of Understanding Between FSCS, PRA and FCA Published

On June 26, the FSA published a draft memorandum of understanding ("MoU") between the Financial Services Compensation Scheme ("FSCS") and the new Prudential Regulation Authority ("PRA") and a second MoU between the FSCS and the new Financial Conduct Authority ("FCA").  MoU between FSCS and PRA.  MoU between FSCS and FCA.  

In particular the MoUs cover:

• The roles of the FSCS, PRA and FCA;
• Information sharing between the FSCS and the new regulators and confidentiality issues;
• Policy making;
• Funding the FSCS;
• Co-ordination between the PRA and FCA on the oversight of the FSCS; and
• Reporting obligations on the FSCS to the new regulators.

FSA Censures Kaupthing for Liquidity Monitoring Failures

On June 26, the FSA reported that it had issued a Final Notice (dated 18 June 2012) against Kaupthing Singer and Friedlander Limited (KSFL), the UK based subsidiary of the Icelandic banking group Kaupthing Bank Hf (KBHf). Final Notice.  

The FSA found that KSFL breached Principle 2 of the FSA's Principles because it failed to consider promptly and properly whether liquidity stresses in KBHf would have a detrimental effect on its own liquidity position. KSFL did not give proper consideration to, or properly monitor, a special financing arrangement with its parent company in Iceland. In addition, when it started to have concerns about this liquidity arrangement, it failed to discuss these concerns with the FSA in a timely manner.

The FSA has published this notice to ensure that other regulated firms understand the importance of complying with the FSA's liquidity guidelines and that where compliance is dependent on liquidity arrangements with a parent company, the ability to exercise these arrangements is rigorously tested rather than assumed.

FSA Issues Final Notice to Former UBS Advisers Following Upper Tribunal Decision

On June 28, the FSA published final notices (dated 27 June 2012) it has issued to Laila Karan and Sachin Surendra Karpe, former UBS client advisers, relating to breaches concerning an unauthorised trading scheme. Final Notice for Laila Karan. Final Notice for Sachin Surendra Karpe.  

The final notices impose a financial penalty of £1,250,000 on Mr. Karpe, and £75,000 on Mrs. Karan. Both individuals have been banned from carrying on any function relating to regulated activities carried on by any authorised or exempt persons, or exempt professional firm. 

FSA Update on Derivatives Reform

On June 26, the FSA published a speech by David Lawton, FSA Acting Director of Markets, on recent progress made on derivatives reform. Speech.  

Mr. Lawton reports that much has been achieved over the past year as regards meeting the G20 commitments to improve counterparty risk management and transparency in the over-the-counter (OTC) derivatives markets. In particular, the international standard setting bodies continue to facilitate the advancement of reforms across jurisdictions and industry has made good progress to increase standardisation of contracts and use of central clearing.

However, four outstanding areas remain:

• rules for bilateral collateralisation of uncleared trades.
• ensuring Regulators have a full range of tools to deal with recovery and resolution of central counterparty clearing houses (CCPs). EU legislation in this area is expected sometime this year.
• getting agreement on how requirements will apply cross-border. The FSA believes that it is desirable to achieve a global system of regulation of OTC derivatives based upon mutual recognition and substituted compliance where possible.
• ensuring the readiness of firms, both financial and non-financial, not currently clearing OTC derivative trades. Firms will need to be ready to comply with EMIR from January 2013.