Orrick's Financial Industry Week in Review - July 1, 2013

CFPB Proposed Modifications to Mortgage Rules

On June 24, the CFPB issued proposed clarifications and revisions to its January 2013 mortgage rules with respect to ability-to-repay and qualified mortgages.  Among other items, the proposed rule would: (i) outline procedures for obtaining follow-up information on loss-mitigation activities; (ii) facilitate servicers' offerings of short-term forbearance plans; (iii) facilitate lending in rural or underserved areas; (iv) make clarifications regarding the financing of credit insurance premiums; (v) clarify the definition of a loan originator; (vi) clarify the points and fees thresholds for manufactured housing employees; and (vii) revise the effective dates for the "Loan Originator rule" and the ban on financing of credit insurance to January 1, 2014 (instead of January 10, 2014).  Comments on the proposed rules must be submitted by July 22.  CFPB Release.  CFPB Proposed Rule.  CFPB Regulatory Implementation Page.   

CFTC No-Action Relief

From June 26 through June 28, the CFTC released the following no-action letters:

• June 28:  Masking of Certain Identifying Information for Part 45 and Part 46 Reporting Counterparties. 
• June 28:  Portfolio Reconciliation Requirements for Swap Dealers and Major Swap Participants. 
• June 27:  Certain External Business Conduct Standards and Documentation Standards for Swap Dealers and Major Swap Participants. 
• June 27:  Certain Business Conduct Standards for Foreign Exchange Intermediated Prime Brokerage Arrangements.   
• June 27:  Treatment of Swap Transactions for Persons Engaging in Floor Trader Activities.
• June 27:  Relief from Reporting Requirements of Part 45 for CDS clearing-relating swaps. 
• June 27:  Relief concerning Bespoke or Complex Swaps. 
• June 26:  Documentation Standards imposed on Swap Dealers and Major Swap Participants in connection with (i) foreign exchange transactions that are swaps; and (ii) physically-settled foreign exchange forwards and swap agreements. 
• June 26:  Relief from Obligation to Report Valuation Data for Cleared Swaps. 
• June 26:  Duties imposed on Swap Dealers and Major Swap Participants for external business contact and documentation requirements relating to ‘Intended-To-Be-Cleared’ (ITBC) Swaps. 
• June 26:  Annual Compliance Reports for Swap Dealers. 
• June 26:  Terms that are included in Portfolio Reconciliations.   

Basel Proposals for International Leverage Ratio and Disclosure Requirements

On June 26, the Basel Committee on Banking Supervision released for consultation its Revised Basel III Leverage Ratio Framework and Disclosure Requirements.  Comments on the consultative report must be submitted by September 20.  Basel Release.  Basel Consultative Report.   

Fed Proposal on Data Collection Requirements

On June 25, the Fed issued a proposed rule relating to data collection requirements for certain money market instruments.  Comments must be submitted within 60 days of publication of the proposed rule in the federal register.  Fed Release.  Fed Proposed Rule.   

CFPB Procedural Rule on Nonbank Supervision

On June 26, the CFPB, pursuant to the Dodd-Frank Act, issued a final rule that establishes supervisory procedures for nonbanks whose activities it has reasonable cause to determine pose risks to consumers.  CFPB Release.  CFPB Final Rule. 

On June 27, Fitch released its criteria for rating securitizations in emerging markets.  Fitch Report. 

On June 26, S&P released a request for comment on its proposed criteria for rating real estate companies.  Comments must be submitted by September 16.  S&P Report. 

On June 26, S&P released a request for comment on its proposed methodology for measuring and calibrating global industry risk for corporate and public finance enterprises.  Comments must be submitted by September 16.  S&P Report. 

On June 25, S&P released its structured finance counterparty risk framework methodology and assumptions.  S&P Report. 

On June 24, Fitch released its criteria for analyzing representations and warranties in U.S. RMBS transactions.  Fitch Report. 

On June 24, S&P released its global derivative agreement criteria.  S&P Report. 

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

Assured and Flagstar Settle RMBS Litigation for $105 Million

On June 21, Flagstar Bancorp, Inc. announced that it reached a settlement in a lawsuit brought by Assured Guaranty Municipal Corp. arising out of nearly $1 billion in Flagstar-sponsored RMBS that Assured insured.  The settlement comes in the wake of Assured's trial victory in February 2013, which Flagstar had appealed.  Under the terms of the settlement, Flagstar will pay Assured $105 million and will assume responsibility for the assets in the two relevant securitizations, including any future claims associated with the trusts.  Press Release.

SEC Wins Some, Loses Some in Aggressive Insider Trading Case

In a decision rendered from the United States District Court for the Northern District of Illinois, Eastern Division, Judge Ronald Guzmán granted summary judgment on the SEC's insider trading claims as to three defendants but allowed claims as to one defendant to proceed to trial.  The SEC's claims against all of the defendants focused on suspiciously-timed sales and other circumstantial evidence, but failed to identify specific tippers who provided defendants with inside information.  The case highlights the SEC's aggressive strategy in pursuing insider trading claims without direct evidence of tipping.  For more information and to visit our Securities Litigation blog, please click here.

UK Prosecution Authorities Launch Consultation on Deferred Prosecution Agreements (DPAs)

On June 27, the Serious Fraud Office and Director of Public Prosecutions launched a consultation on DPAs, which are being introduced under the Crime and Courts Act 2013 in February 2014.

DPAs are US-style voluntary agreements between prosecutors and companies whereby a company is charged with a criminal offense (e.g. bribery or fraud) but proceedings are automatically suspended provided the company comes to an agreement with the prosecutor, usually involving a financial penalty, payment of compensation and/or co-operation with future prosecutions of individuals.  Consultation Document.

Italian Supreme Court Extends the Scope of Consumer Protection Provisions Under the Italian Financial Law

On June 3, the Joined Chambers of the Italian Supreme Court issued a decision concerning the obligation for banks and financial intermediaries, engaging in "door-to-door" selling of financial instruments, to provide a withdrawal right (jus poenitendi) to be exercised by retail clients within seven days of the signing of the relevant contract.

The decision extends such obligation, originally provided by Section 30, paragraph 6, of the Italian Financial Law (namely, Legislative Decree no. 58 of February 24, 1998, as amended) only in relation to the placement of financial instruments and portfolio management contracts entered into outside the registered office/place of business, also to other types of financial services.

The underlying rationale is to protect retail clients from the risk of being taken by surprise "when their order is the result of a solicitation put in place by the intermediary out of its registered office," regardless of the type of investment service that has led to such an operation.  Judgment (in Italian only).

Council of the EU Announces Political Agreement on the Market Abuse Regulation (MAR)

On June 26, following long running negotiations, the Council of the EU announced a compromise with the European Parliament on the proposed MAR.

The MAR proposal and the European Commission's proposed Directive on criminal sanctions for insider dealing and market manipulation (CSMAD) will together revise and replace the current Market Abuse Directive.  Inter alia, the proposals broaden the scope of the regulatory framework to cover new trading exchanges and over-the-counter trading.  Press Release.

UK Financial Policy Committee (FPC) Issues New Recommendations on Banks

In its latest Financial Stability Report, the FPC (a committee of the Bank of England) set out recommendations for the UK's new regulator - the Prudential Regulation Authority - to improve the stability of the UK banking sector, including:

• using the Basel III liquidity coverage ratio to assess liquidity;
• increasing the consistency and comparability of Pillar 3 disclosures; and
• calculating regulatory capital ratios under end-point Basel III definitions using the standardised approach to credit risk.  Report.