FHFA Announces $5.5 Billion Settlement With Royal Bank of Scotland

 

On July 12, 2017, the Federal Housing Finance Agency (“FHFA“), as conservator of Fannie Mae and Freddie Mac, announced it had reached a settlement with Royal Bank of Scotland Group plc, related companies and specifically named individuals (collectively, “RBS“) for $5.5 billion. The settlement resolves all claims in the lawsuit FHFA v. The Royal Bank of Scotland Group plc et al., Case No. 3:11-cv-1383, in the United States District Court for the District of Connecticut. FHFA alleged violations of federal and state securities laws in connection with private-label residential mortgage-backed securities (PLS) trusts purchased by Fannie Mae and Freddie Mac between 2005 and 2007. Under the terms of the agreement, Royal Bank of Scotland will pay approximately $4.525 billion to Freddie Mac and approximately $975 million to Fannie Mae and certain claims against RBS related to the securities involved will be released. Release. Settlement Agreement.

Rating Agency Developments

 

On July 10, 2017, DBRS issued a report entitled Rating Canadian Split Share Companies and Trusts. Report.

On July 7, 2017, DBRS issued a report entitled Derivatives Criteria for Canadian Structured Finance. Report.

On July 7, 2017, DBRS issued a report entitled Legal Criteria for Canadian Structured Finance. Report.

On July 7, 2017, DBRS issued a report entitled Legal Criteria for U.S. Structured Finance. Report.

On July 7, 2017, DBRS issued a report entitled Rating Canadian ABCP and Related Enhancement Features. Report.

On July 7, 2017, Fitch issued a report entitled CLOs and Corporate CDOs Rating Criteria. Report.

On July 7, 2017, Fitch issued a report entitled French Residential Loans EDF Engie Bespoke Rating Criteria. Report.

On July 7, 2017, Fitch issued a report entitled U.S. State Housing Finance Agencies: Mortgage Insurance or Guarantee Fund Program Rating Criteria. Report.

On July 6, 2017, Fitch issued a report entitled Third-Party Partial Credit Guarantees Rating Criteria. Report.

On July 6, 2017, Fitch issued a report entitled U.S. Public Finance Solid Waste Revenue Bond Rating Criteria. Report.

European Union (Withdrawal) Bill Received First Reading in Parliament

 

The European Union (Withdrawal) Bill (the “Repeal Bill”), which will end the supremacy of EU law in the UK by repealing the European Communities Act 1972 and will prepare the UK’s legislative framework after its withdrawal, has received its first reading in Parliament on July 13, 2017.

The Repeal Bill will have four key functions:

  1. The repeal of the ECA 1972 and the end of the supremacy of EU law after exit day.
  2. Conversion of EU law into UK law so that the UK’s legislation retains a functioning statutory framework after Brexit.
  3. Creating powers that, where the government considers it necessary, correct existing legislative provisions and afford the devolved administrations the power to make corrective amendments.
  4. Maintaining the current scope of devolved decision making powers in areas currently governed by EU law.

The Bill was published with Explanatory Notes.

It is anticipated that the Repeal Bill will not receive its second reading until after September 5, 2017, after which parliamentary debate will follow. The UK is scheduled to leave the EU on March 29, 2019.

European Commission Expert Group on Sustainable Finance Issues Interim Report

 

On July 13, 2017, the European Commission published the interim report of its high-level expert group (“HLEG“) on sustainable finance. The HLEG was established in October 2016 as one of the initiatives relating to the Commission’s capital markets union (CMU). The HLEG’s aim is to provide recommendations on how to entrench sustainability into the EU’s regulatory and financial policy framework and to utilize more capital flows towards sustainable investment and lending.

The HLEG report sets out initial recommendations on areas where EU policymakers could further align financial practices with sustainable policy objectives. Its recommendations include:

  • Establishing an EU classification of financial products that captures all acceptable definitions of “sustainable.” The HLEG suggests that this could be finalized before the end of 2018 ahead of the review of the Regulation on key information documents for packaged retail and insurance-based products (PRIIPS Regulation) (Regulation 1286/2014).
  • Establishing a single set of principles for financial intermediaries’ fiduciary duties that incorporates environmental, social and governance (ESG) factors. The HLEG suggests that the Commission should use its forthcoming reviews of financial services sectoral legislation to address this issue.
  • Improving the disclosures made by firms and financial institutions on sustainability issues.
  • Developing a sustainability test to ensure that sustainability is embedded across all future EU financial regulations and policies.
  • Using the ongoing review of the European Supervisory Authorities (“ESAs“) (being ESMA, EIOPA and the EBA) to clarify and enhance the ESAs’ roles on ESG issues.

The HLEG also sets out policy areas relating to sustainable finance that it considers require further discussion. These include potential reforms relating to firms’ governance, credit rating agencies’ (CRAs) methodologies, financial reporting, benchmarks and the prudential requirements for banks and insurers.

The HLEG intends to undertake public consultations on its recommendations with “key participants in the investment and lending chain.” It will use feedback received on the initial report in its work in developing further recommendations for inclusion in its final report, which it intends to publish in December 2017.

FIA Reports on MiFID II/MiFIR Compliance for US FCMs

 

On July 7, 2017, the Futures Industry Association (“FIA“) published a compliance brief on the impact of the revised European Markets in Financial Instruments Directive (“MiFID II“) and Markets in Financial Instruments Regulation (“MiFIR“) on U.S. Futures Commission Merchants (“FCMs“). Both regulations are scheduled to take effect on January 3, 2018.

MiFID II and MiFIR form a framework of EU legislation that provides for the regulation of investment firms and the trading of financial instruments in the EU markets. MiFID II/MiFIR revise the EU’s original Markets in Financial Instruments Directive (MiFID).

The FIA brief addresses the compliance obligations of U.S. FCMs and their non-EU clients (third-country firms) once MiFID II/MiFIR take effect. The brief covers:

  • Direct impact of MiFID II/MiFIR rules that require FCMs to either be authorized as an investment firm under MiFID II/MiFIR or to discontinue the activity that is triggering the authorization requirement.
  • Direct impact of MiFID II/MiFIR rules that require ongoing compliance from U.S. FCMs without necessitating authorization as investment firms.
  • Indirect impacts of MiFID II/MiFIR rules that may require certain compliance measures under certain circumstances.

MiFID II and MiFIR apply generally to certain financial entities, primarily those defined under the regulations as “investment firms.” Third-country firms, or firms that would be an investment firm or credit institution under MiFID II/MiFIR if its head or registered office was located within the EU, are not within the territorial scope of MiFID II/MiFIR. Third-country firms cannot be authorized as investment firms under MiFID II/MiFIR unless they retain a registered or head office in an EU member state. Similar restrictions prevent third-country firms from being authorized as:

  • Financial counterparties.
  • Non-financial counterparties above the EMIR clearing threshold (NFC+).
  • Credit institutions under MiFID II/MiFIR.

MiFIR does provide for a “third-country passport” for certain third-country firms in the event that an equivalence determination is made regarding the prudential and business conduct rules between the EU and the relevant third-country jurisdiction. Currently, no such equivalence determinations have been made.

Though third-country firms are not within the territorial scope of MiFID II/MiFIR, they still may be directly or indirectly impacted by the regulations and may incur resulting compliance obligations. The FIA brief also includes sample due diligence questions that FCMs might consider when determining potential compliance obligations under MiFID II/MiFIR.

Indirect Impact

The brief further outlines that MiFID II/MiFIR may also have an indirect impact on U.S. FCMs in the following ways:

  • General clearing-member obligations. A third-country firm is not directly subject to general clearing-member obligations under MiFID II/MiFIR, but it may be affected by these obligations if it accesses an EU CCP through an investment firm that is a clearing member.
  • Algorithmic trading. A third-country firm is not directly subject to the new rules on algorithmic trading, but it may be required to comply with the rules in the following situations:
    • when an FCM is a member of an EU trading venue, that FCM will be required to comply with the EU trading venue’s rules relating to algorithmic trading; and
    • when a third-country firm engages in algorithmic trading through an investment firm that is subject to MiFID II/MiFIR, the third-country firm may be expected to cooperate with the investment firm in meeting the investment firm’s MiFID II/MiFIR compliance obligations.
  • Transaction reporting. Third-country firms are generally not directly subject to the expanded transaction reporting regime established under MiFIR, but they may be required to provide an increased amount of information to investment firms and credit institutions that are subject to the new MiFID II/MiFIR regime. Importantly, EU branches of third-country firms will be directly subject to these new rules, and full compliance under MiFID II/MiFIR will be required.
  • Clock synchronization. An FCM that is a member of or participant in an EU trading venue may be required to utilize Coordinated Universal Time (UTC) for the recording of reportable events in accordance with new MiFID II data reporting rules.

Rating Agency Developments

 

On July 7, 2017, Kroll published its Research Recap for Q2 2017. Here are several articles of interest:

On June 29, 2017, DBRS published an update to its rating methodology for U.S. equipment lease and loan securitizations. Report.

On June 29, 2017, Fitch published an update to its rating criteria for insurance-linked securities. Release.

On June 28, 2017, Fitch published a report entitled U.S. State Housing Finance Agencies: Single-Family Mortgage Program Rating Criteria. Report.

On June 28, 2017, Fitch published a report entitled U.S. RMBS Surveillance and Re-REMIC Rating Criteria. Report.

On June 23, 2017, Moody’s published a report entitled Regulated Electric and Gas Utilities. Report.

On June 23, 2017, S&P issued a report entitled RMBS: Methodology And Assumptions: Assessing Pools Of Residential Loans In Austria, Denmark, Germany, And Sweden. Report.

On June 22, 2017, S&P issued a report entitled ABS: Global Methodology And Assumptions For Corporate Securitizations. Report.

On June 22, 2017, Fitch published a report entitled U.S. RMBS Rating Criteria. Report.

On June 22, 2017, Fitch published a report entitled EMEA CMBS and CRE Loan Rating Criteria. Report.

EBA Launches Supplementary Data Collection on Revision of Investment Firm Prudential Framework

 

On July 6, 2017, the European Banking Authority (“EBA“) published a press release announcing the launch of a supplementary data collection relating to its proposals for a revised prudential framework for investment firms. It also published a template for investment firms authorized under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID) with instructions.

This exercise follows up on the first data collection launched on July 15, 2016, and the discussion paper published by the EBA on November 4, 2016, in which the EBA consulted on its proposals for developing a new prudential framework.

The EBA notes that, following feedback to the discussion paper, it has improved its initiation proposals concerning primarily the calculation of capital requirements based on risk proxies (known as “K-factors“) under the following three types of risk: (i) risk to customers (RtC), risk to market (RtM) and risk to firm (RtF). It has decided to undertake a supplementary data collection to allow for a complete calibration of all the relevant aspects of the new prudential regime and a final impact assessment of its proposal on regulatory capital requirements. The data collection has been designed to reduce that burden by limiting the number of variables requested to the minimum necessary to accomplish the intended purpose.

The deadline for firms to submit completed templates to the relevant national competent authorities is August 3, 2017.

Federal Reserve and FDIC Post Resolution Plans for Eight Major Financial Firms

 

On July 5, 2017, the Federal Reserve Board (the “Board“) and the Federal Deposit Insurance Corporation (“FDIC“) posted the public portions of the annual resolution plans, commonly known as living wills, for eight of the largest financial firms in the US. Although the eight firms this—is Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corporation and Wells Fargo & Company—were required to submit their plans on July 1, 2017, the Board and FDIC also announced that they were extending the deadline for American International Group, Inc. (AIG) and Prudential Financial, Inc. to submit their next resolution plans from December 17, 2017 to December 18, 2017. Report. Press Release.

European Commission Adopts Implementing Regulation on Its Own Supervisory Reporting to Reflect IFRS 9 Changes to FINREP

 

On July 5, 2017, the European Banking Authority (“EBA“) published a press release announcing that the European Commission (EC) adopted an Implementing Regulation on June 29, 2017, which amends the Implementing Regulation on supervisory reporting of institutions (Regulation 680/2014) under the Capital Requirements Regulation (Regulation 575/2013) (CRR). The text of the Implementing Regulation and its Annexes has been published by the Commission.

The changes relate to the provisions in Regulation 680/2014, which concern financial reporting (“FINREP“) and are intended to align these provisions with International Financial Reporting Standard 9 (IFRS 9). Regulation 680/2014 includes FINREP requirements that are founded on international accounting standards and must be updated in line with any updates made to the relevant accounting standards.

It is now time for the Implementing Regulation to be published in the Official Journal of the EU (OJ). It will apply from March 1, 2018.

European Commission Guidelines on Application of PRIIPS Regulation

 

On July 4, 2017, the European Commission adopted a communication containing guidelines on the application of the Regulation on key information documents (“KIDs“) for packaged retail and insurance-based products (“PRIIPS“) (Regulation 1286/2014) (PRIIPS Regulation).

The PRIIPS Regulation lays down rules on the content and format of the KID to be drawn up by PRIIP manufacturers and on the provision of the KID to retail investors and those selling or advising on the products. By smoothing out potential interpretative divergences throughout the EU, the guidelines hope to help providers and distributors of investment products, funds and investment insurance policies design their KIDS. Along with several others, the guidelines address the following issues:

  1. products covered by the PRIIPS Regulation;
  2. products made available to retail investors against no consideration;
  3. multi-option PRIIPS;
  4. insurance-based investment products with PRIIPS and non-PRIIPS as underlying investment options;
  5. territorial application;
  6. use of KIDs by UCITS;
  7. PRIIPS only sold by intermediaries;
  8. distribution of a PRIIP without a KID; and
  9. a non-PRIIP product offered alongside a PRIIP.

The communication was published in the Official Journal of the EU (OJ) on July 7, 2017, as 2017/C 218/02. Firms must comply with the Regulation from January 1, 2018.