ESMA Publishes Clearing Obligation CP for Additional IRS Classes

On May 11, ESMA published a consultation paper (CP) on the clearing obligation for additional classes of interest rate derivatives, including fixed-to-floating interest rate swaps denominated in Czech Republic koruna (CZK), Danish krone (DKK), Hungarian forint (HUF), Norwegian krone (NOK), Swedish krona (SEK) and Polish zloty (PLN), as well as forward rate agreements (FRAs) denominated in NOK, SEK and PLN.

The CP follows the publication of clearing obligation CPs for interest rate derivatives classes, credit derivatives classes and foreign-exchange non-deliverable forward (NDF) classes, the publication of a final report on the clearing obligation for certain interest rate derivatives classes, and a feedback statement on NDF classes.

The draft RTS includes the following classes of derivatives:

  • fixed-to-floating CZK, DKK, HUF, NOK PLN swaps with maturities of up to five years;
  • fixed-to-floating SEK swaps with maturities of up to 15 years;
  • NOK and PLN-denominated FRAs with maturities of up to one year;
  • SEK-denominated FRAs with maturities of up to two years.

The CP does not address the issue of third-country entity intragroup transactions. ESMA states in paragraph 184 of the CP that, at the time of publication, it is not yet known how a provision related to the application of intragroup transactions concluded with third-country entities will be treated in the first RTS on the clearing obligation (for G-4 currencies). This aspect is therefore not addressed in the current CP/draft RTS.

Joint Committee Report on Securitization

On May 12, 2015, the Joint Committee of the three European Supervisory Authorities (ESAs) published a report detailing its findings and recommendations regarding the disclosure requirements and obligations relating to due diligence, supervisory reporting and retention rules in existing EU law on Structured Finance Instruments (SFIs). The ESAs comprise the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.

The report states that its recommendations constitute the Joint Committee’s response to the European Commission’s recent consultation on securitization and should be considered in the light of further work on the transparency requirements for SFIs.

The report focuses on the interplay between investor due diligence requirements and the disclosure requirements that apply to issuers, originators and sponsors. It aims to establish whether investors are effectively protected and whether the supervision framework is appropriate to support the redevelopment of the EU securitization markets. It includes recommendations to:

  • harmonize due diligence requirements across the EU.
  • standardize investor reports and have them stored in a centralized, public space.
  • ensure investors receive loan-by-loan level data.
  • review the use of different definitions and key terms across EU legislative texts.
  • complement a harmonized due diligence and disclosure framework with a comprehensive regime for supervision and enforcement.

JP Morgan and Others Voluntarily Dismissed from FHLB Boston’s RMBS Suit

On May 8, 2015, the Federal Home Loan Bank of Boston filed a stipulation of voluntary dismissal with prejudice of claims it levied against JP Morgan Chase & Co., the Bear Stearns Companies Inc., EMC Mortgage Corporation and other entities.  FHLB Boston had filed suits seeking rescission and other damages under Massachusetts law, alleging that the defendant banks made material misstatements and omissions about the riskiness of the mortgage pools underlying the securities.  There was no mention in the stipulation of whether a settlement had been reached.  Stipulation.

Nomura Found Liable in RMBS Trial

On May 11, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York found Nomura Holdings Inc. liable for inaccurately characterizing the mortgage loan collateral backing seven RMBS certificates it sold to Fannie Mae and Freddie Mac between 2005 and 2007.  The suit against Nomura is the last that remains of sixteen lawsuits originally filed against by FHFA against RMBS issuers and sellers alleging violations of Sections 12(a)(2) and 15 of the 1933 Securities Act and state securities laws.  Judge Cote’s decision followed a nearly 4-week bench trial that concluded on April 9, 2015.

In a 361-page decision, Judge Cote found, among other things, that 45% to 59% of the sample loans were materially defective insofar as they deviated from relevant underwriting guidelines, and that 27% of the sample loans were subject to inflated appraisals.  Judge Cote treated this as strong circumstantial evidence that the appraisers did not believe in the credibility of their appraisals at the time that they were made.  Additionally, Judge Cote found that inadequacies in credit ratings of the offered certificates were due to inaccurate loan tapes Nomura provided to the rating agencies.  Finally, Judge Cote found that Nomura’s due diligence practices were insufficient, and rejected Nomura’s argument that market conditions, and not the misrepresentations, caused the losses alleged.  Judge Cote did not specify the amount of damages and asked the parties to submit a proposed judgment by May 15, 2015.  Opinion and Order.

Delinquencies, Foreclosures and Bankruptcies Improve as Household Debt Stays Flat

On May 12, The Federal Reserve Bank of New York’s Household Debt and Credit Report revealed that aggregate household debt balances were largely flat in the first quarter of 2015.  At of the end of March, total household indebtedness was $11.85 trillion, a $24 billion, or a 0.2 percent, increase during the first quarter of this year.  The slowdown in growth can be attributed to negligible uptick in mortgage balances, which are the largest component of household debt.  Release.

SEC and FINRA to Hold National Compliance Outreach Program for Broker-Dealers

On May 12, the SEC and FINRA announced the opening of registration for their 2015 National Compliance Outreach Program for Broker-Dealers.  The program is intended to provide an open forum for regulators and industry professionals to discuss compliance practices and exchange ideas on compliance structures.  Release.

ESMA Updates Q&A on Application of AIFMD

On May 12, 2015, the European Securities and Markets Authority (ESMA) published an updated version of its Q&A paper on the application of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) (2015/ESMA/850). The Q&A includes new questions and answers on reporting and calculation of leverage. The aim of the Q&A is to promote common supervisory approaches and practices in the application of the AIFMD and its implementing measures.

EBA Consults on Draft RTS on Specialized Lending Exposures

On May 11, 2015, the European Banking Authority (EBA) published a consultation paper (EBA/CP/2015/09) on draft regulatory technical standards (RTS) on assigning risk weights to specialized lending exposures under Article 153(9) of the Capital Requirements Regulation (Regulation 575/2013).

Specialized lending is a type of exposure towards an entity specifically created to finance or operate physical assets, where the primary source of income and repayment of the obligation lies directly with the assets being financed.

The proposed RTS define four classes of specialized lending:

  • project finance;
  • real estate;
  • object finance; and
  • commodities finance.

For each of these classes, the draft RTS specify a list of factors that institutions shall take into account and propose two options on how these factors should be combined to determine the risk weight assigned to the specialized lending exposure. The EBA has invited responses to the consultation before August 11, 2015, and will hold a public hearing for discussion on July 6, 2015.