CFTC Issues Guidance for Swap Execution Facilities on the Calculation of Projected Operating Costs

On April 23, the CFTC issued guidance regarding the calculation of projected operating costs or expenses for the purpose of meeting the financial resource requirements under SEF Core Principle 13 in Section 5h(13) of the Commodity Exchange Act and Commission Regulation 37.1303.  ReleaseCFTC Letter.

Prudential Settles $2B RMBS Suit with Bank of America and Merrill Lynch & Co.

On April 22, 2015, Bank of America and Merrill Lynch reached an agreement with several Prudential Insurance Co. affiliates to settle two lawsuits brought by Prudential.  Prudential had alleged that Bank of America and Merrill Lynch made false statements about the quality of $2.1 billion worth of residential mortgage backed securities they sold to Prudential.  The parties filed a stipulation of dismissal with prejudice but the settlement terms are otherwise undisclosed.  Stipulation.

Second Circuit Vacates Dismissal of $25M CDO Case Against Citi

On April 22, 2015, the Second Circuit vacated and remanded a district court’s decision dismissing on statute of limitations grounds claims Woori Bank brought against Citigroup Global Markets arising out of Woori’s purchase of $25 million in collateralized debt obligations.  Woori asserted claims for fraud, fraudulent inducement, negligent misrepresentation, and unjust enrichment, alleging that Citi made misrepresentations in connection with its sale of the CDO to Woori.  The district court dismissed the action as time-barred, holding that Woori had knowledge of its claim prior to May 2009, the date after which an action would be time-barred under the applicable South Korean statute of limitations.  The Second Circuit reversed.  It held that the news reports and pitch materials on which the district court had relied to establish Woori’s knowledge were not sufficient to put it on notice of its specific claim against Citi because none of them suggested that Citi acted fraudulently in connection with the CDO at issue.  Summary Order.

Council of EU Mandate to Negotiate Agreement With US on Reinsurance

On April 21, 2015, the Council of the EU published a press release announcing that it has issued a mandate to the European Commission to negotiate an agreement with the US on reinsurance.

The mandate consists of a decision authorizing the opening of talks and directives for the negotiation of the agreement. The Commission will negotiate on behalf of the EU, in consultation with a Council committee. The agreement will be concluded by the Council with the consent of the European Parliament.

Commenting on the announcement, Janis Reirs, Council president, stated that the agreement would enable the US and EU to recognize each other’s prudential rules and help supervisors exchange information.

ESMA Call for Evidence on Investments Using Virtual Currency or Distributed Ledger Technology

On April 22, 2015, the European Securities and Markets Authority (ESMA) published a call for evidence on investments using virtual currency (vc) or distributed ledger technology.

ESMA has been monitoring and analyzing VC investment over the last six months to understand developments in the market, potential benefits or risks for investors, market integrity or financial stability, and to support functioning of the EU single market. ESMA is sharing its analysis to promote wider understanding of innovative market developments. It requests feedback and any additional information on the following:

  1. VC products. For example, collective investment schemes or derivatives such as options and contracts for difference that have VC as an underlying or invest in VC related businesses and infrastructure. Annex II to the paper provides an overview of VC investment products identified by ESMA.
  2. VC based assets and securities and asset transfers. For example, financial assets such as shares and funds that are exclusively traded using VC distributed block chains (also known as block chains).
  3. The application of the distributed ledger technology to securities and investments, whether inside or outside a VC environment.

The consultation closes on July 21, 2015.

ESMA intends to monitor the evolution of investments using VC or distributed ledger technology to ensure that regulators are aware of significant market developments. Subject to assessing the responses received to the call for evidence, it has no immediate plans to take any regulatory action.

Money Laundering: Council Approves Strengthened Rules

On April 20, 2015, the Council of the EU published a press release announcing that it has adopted its position at first reading on new rules aimed at preventing money laundering and terrorist financing.

The directive and regulation will strengthen EU rules against money laundering and ensure consistency with the approach followed at international level. The regulation deals more specifically with information accompanying transfers of funds.

The strengthened rules reflect the need for the EU to adapt its legislation to take account of the development of technology and other means at the disposal of criminals. The main elements are:

  1. Extension of the directive’s scope, introducing requirements for a greater number of traders. This is achieved by reducing from €15 000 to €10 000 the cash payment threshold for the inclusion of traders in goods, and also including providers of gambling services;
  2. Application of a risk-based approach, using evidence-based decision making, to better target risks;
  3. Tighter rules on customer due diligence. Obliged entities such as banks are required to take enhanced measures where the risks are greater, and can take simplified measures where risks are demonstrated to be smaller.

The decision will enable the European Parliament, with which agreement was reached on December 16,  2014, to adopt the package at second reading at a forthcoming plenary session. Member states will have two years to transpose the directive into national law. The regulation will be directly applicable.

CFTC Provides Relief in Connection with Erroneous Swap Trades and Swap Trade Confirmations

On April 22, the CFTC issued two no action letters providing relief intended to support the development of swap execution facilities (SEFs) and the trading of swaps on SEFs and designated contract markets (DCMs).  The first no action letter provides relief to SEFs and DCMs from regulations to allow for the correction of trades voided as a result of clerical or operational errors or errors discovered after a trade has been cleared.  The second no action letter provides relief to SEFs from certain requirements concerning trade confirmations required from SEFs for non-cleared swaps.  ReleaseNo Action Letter #1.   No Action Letter #2.

Federal Reserve Board Releases Additional Information on the LISCC Supervisory Program

On April 17, the Federal Reserve Board published a Supervision and Regulation Letter containing additional information on the operating structure of the Large Institution Supervision Coordinating Committee (LISCC) supervisory program, which was established in 2010 to oversee and supervise certain large and systemically important financial institutions.  ReleaseSupervision and Regulation Letter.

Rating Agency Developments

On April 23, Fitch released its updated criteria for rating operational risk of U.S. servicers of RMBS and small balance commercial securitiesReport.

On April 23, Fitch released its updated criteria for rating operational risk of servicers of various structured finance products, including RMBS, CMBS, and ABS.  Report.

On April 22, Moody’s released its rating methodology for monitoring scheduled amortization UK student loan-backed securities.   Report.

On April 21, Fitch released its updated criteria for analyzing trust-preferred CDOsReport.

On April 17, DBRS released its updated criteria for commercial paper liquidity support for non-bank issuers. Report.

On April 17, DBRS released its criteria for rating market-linked securitiesReport.