European Systemic Risk Board (ESRB) Publishes Country-Specific Warning on Vulnerabilities in the Residential Real Estate Sector

 

On November 28, 2016, the European Systemic Risk Board (“ESRB“) published a report on vulnerabilities in the EU residential real estate sector, together with eight country-specific warnings and a Q&As document.

The warnings on medium-term vulnerabilities in the residential real estate sector are addressed to the relevant ministers in eight Member States: Austria, Belgium, Denmark, Finland, Luxembourg, the Netherlands, Sweden and the UK. The ESRB decided to issue the warnings following a forward-looking EU-wide assessment of vulnerabilities relating to residential real estate. These vulnerabilities may be a source of systemic risk to financial stability in the medium term. As a result, on September 22, 2016, the ESRB adopted warnings addressed to the eight member states and decided to make the warnings public. The member states were given a period of time to respond.

For the remaining member states, the ESRB has either not identified a build-up of any material vulnerabilities relating to the residential real estate sector, or such vulnerabilities have been identified but the current policy stance is sufficient to address them. The ESRB advises that the latter is the case for Estonia and Slovakia. It also advises that, for the UK, it has not assessed whether policies in place are appropriate and sufficient given the uncertain impact of the vote to leave the EU on the medium-term outlook for the UK housing market.

The ESRB has also published a recommendation on closing real estate data gaps (Recommendation ESRB/2016/14), which it adopted on October 31, 2016. The recommendation, which covers both the residential and commercial real estate sectors, aims to establish a more harmonized framework for monitoring developments in EU real estate markets. It provides a common set of indicators that national authorities are recommended to monitor in assessing risks originating from the real estate sector, along with working definitions of these indicators. The deadline for implementing the recommendation is the end of 2020. ESMA will monitor compliance with the recommendation via an “act of explain” mechanism. As follow-up work to the recommendation, the ESRB believes that a regular data collection on these indicators should take place at the EU level, and considers that the European Central Bank (ECB) is well placed to play a leading role in this.

European Commission Adopts Delegated Regulation Amending List of High-Risk Third Countries Under the Fourth Money Laundering Directive

 

On November 28, 2016, the Council of the EU published a Commission Delegated Regulation (C(2016) 7495 final) amending Commission Delegated Regulation (EU) 2016/1675 supplementing the Fourth Money Laundering Directive ((EU) 2015/849) (“MLD4“) by identifying high-risk third countries with strategic deficiencies.

The Commission adopted Delegated Regulation (EU) 2016/1675 in July 2016. The Delegated Regulation, for the first time, identified high-risk third countries with strategic anti-money laundering (“AML“) and counter-terrorist financing (“CTF“) deficiencies. The Commission advised at the time that it had taken into account the most recent Financial Action Task Force (“FATF“) public statements and that it would review the list, where appropriate.

The explanatory memorandum to the new Delegated Regulation explains that, as stressed in recital 28 to MLD4, the Commission will adapt its assessment to changes made to information sources from international organizations and standard setters, such as those issued by the FATF. As a consequence, the Commission aims to update the list to reflect the progress, or the lack of progress, made by high-risk third countries in removing the strategic deficiencies.

According to this latest information available to the Commission, it was found that Guyana has made significant progress on AML and CTF matters. On the basis of the progress made, with Guyana substantially completing all the action plan items agreed upon with the FATF, the FATF decided to conduct an on-site visit to Guyana to confirm that implementation had begun and that there is political commitment to continue to strengthen the AML and CTF regime. The FATF on‑site visit concluded that Guyana has a legal and institutional framework in place that addresses the strategic deficiencies of its AML and CTF regime. As a result, the FATF has removed Guyana from its document Improving global AML/CTF compliance: ongoing process.

The Commission’s analysis has similarly concluded that Guyana should no longer be considered to be a third country with strategic AML and CTF deficiencies. As a result, it is removing Guyana from the list of high-risk third countries under MLD4.

The Commission adopted the Delegated Regulation on November 24, 2016. The new Delegated Regulation states that it will enter into force the day after it is published in the Official Journal of the EU (OJ).

European Parliament Adopts Resolution on Finalization of Basel III

 

On November 23, 2016, the European Parliament published a provisional version of the text of the resolution it has adopted on finalization of Basel III.

Among other things, in the resolution, the Parliament:

  • Underlines the importance of sound global standards and principles for the prudential regulation of banks and welcomes the post-crisis work of the Basel Committee on Banking Supervision (“BCBS“) in this area. The Parliament notes the BCBS’ ongoing work to finalize the Basel III framework and underlines the need for greater transparency and accountability to enhance the legitimacy and ownership of the BCBS’ deliberations.
  • Stresses that the current revision should respect the principle of not significantly increasing overall capital requirements, while at the same time strengthening the overall financial position of EU banks. The Parliament also underlines the equally important principle to be respected of promoting the level playing field at the global level, by mitigating rather than exacerbating the differences between jurisdictions and banking models, and by not unduly penalizing the EU banking model.
  • Is concerned that early analysis of recent BCBS drafts indicates that the reform package at its current stage might not comply with the principles mentioned above. As a result, the Parliament calls on the BCBS to revise its proposals accordingly, and calls on the European Central Bank (“ECB“) and the Single Supervisory Mechanism (SSM) to ensure respect of the principles in finalizing and monitoring the new standard. The Parliament underlines that this approach would be instrumental in ensuring consistent implementation of the new standard by the Parliament as co-legislator.
  • Calls for dialogue and an exchange of best practices among regulators concerning the application of the principle of proportionality to be established at EU and international levels.
  • Calls on the European Commission to prioritize work on a “small banking box” for the least risky banking models. The Parliament also calls on the Commission to extend this work to an assessment of the feasibility of a future regulatory framework consisting of less complex and more appropriate and proportional prudential rules specifically adapted to different types of banking models.
  • Stresses the importance of the role of the Commission, the ECB and the EBA in engaging in the BCBS’ work, and in providing transparent and comprehensive updates on developments in the BCBS’ discussions. The Parliament calls for this role to be given stronger visibility during meetings of the European Economic and Financial Affairs Council (ECOFIN), and for enhanced accountability to its Economic and Monetary Affairs Committee (ECON).

The Parliament has instructed its President to forward the resolution to the Commission.

FHFA Announces Increase in Maximum Conforming Loan Limits for Fannie Mae and Freddie Mac in 2017

 

On November 23, 2016, the Federal Housing Finance Agency (FHFA) announced an increase in the maximum conforming loan limits for mortgages acquired by Freddie Mac and Fannie Mae. The maximum loan limit for one-unit properties in 2017 will increase from $417,000 to $424,100 for most of the United States. In certain higher-cost areas, there will be a higher loan limit. Release. A list of the 2017 maximum conforming loan limits for all counties and county‑equivalent areas in the country can be found here.

CFTC Unanimously Approves Final Rule Amendments to Its Regulations Regarding CPO Financial Reports

 

On November 21, 2016, the U.S. Commodity Futures Trading Commission (“CFTC“) announced that it had approved amendments to its regulations applicable to commodity pool operators and the financial reports they are required to provide on their pools’ operations. The amendments are meant to incorporate into CFTC regulations certain exemptive relief previously provided through no-action or exemptive letters. Release.

Rating Agency Developments

 

On November 23, 2016, Moody’s published its updated methodology for Special Assessment/Special Property Tax (Non-Ad Valorem) Debt. Release.

On November 17, 2016, Fitch published its updated criteria for Analysis of Commercial Real Estate Loans Securing Covered Bonds. Release.

On November 17, 2016, Fitch published its updated rating criteria for Commercial Mortgage-Backed Securities and Loans in EMEA. Release.

European Court of Auditors Special Report on Single Supervisory Mechanism

 

On November 18, 2016, the European Court of Auditors published a report on the Single Supervisory Mechanism (“SSM“) (No 29/2016). The SSM was set up by the European Central Bank (“ECB“) to ensure the consistent application of prudential rules across the euro-zone countries. The report examines the setup and workings of the SSM and concludes that the complexity of the new system is a challenge, especially because it relies too heavily on the resources of national supervisors. This means that despite the ECB’s overall responsibility, the ECB has insufficient control over some important aspects of banking supervision.

The full report can be found here, but, in brief, specific concerns identified in the report relate to:

  • Under resourcing of internal audit for its work on the SSM, which is given less attention than other audit tasks.
  • Efforts to ensure transparency and accountability for the SSM towards the European Parliament and the general public are potentially weakened by the lack of a proper process for assessing and then reporting on supervisory effectiveness.
  • The independence of the ECB’s work relating to monetary policy and supervision functions.
  • Insufficient staffing levels and overdependence on staff appointed by national authorities leading to the ECB having insufficient control over the composition and skills of supervision and inspection teams.
  • Insufficient allocation of resources to joint off-site supervisory teams.
  • Inspection teams for on-site supervision include insufficient ECB staff. There are also concerns over missing guidance on prioritization for inspection requests, IT shortcomings and the qualifications of national competent authority on-site inspectors.

The report sets out a number of recommendations on how the SSM could be improved in relation to issues outlined above and explains that the ECB was not willing to share a number of documents needed for the audit to be completed. As a result, the report only reflects a partial assessment of whether the ECB is managing the SSM efficiently in the areas of governance, off-site supervision and on‑site inspections.

Council of the EU Announces Political Agreement on MMF Regulation

 

On November 16, 2016, the Council of the EU published a press release announcing that its presidency has reached a provisional agreement with representatives of the European Parliament on the proposed Regulation on Money Market Funds (“MMF Regulation“). The press release can be read in full here.

The agreement reached at the final meeting of political negotiators covers the core issues concerning the regulation of MMFs, such as liquidity and diversification requirements, assets in which MMFs can invest (including the role of government debt) and transparency. It also provides for the European Commission to produce a report on the functioning of the MMF Regulation.

Although an overall agreement has been reached at the political level, a number of technical issues relating to the MMF Regulation are yet to be finalized. Once these are resolved, the agreement will then be submitted to the Council’s Permanent Representatives Committee (COREPER) for endorsement on behalf of the Council. The Parliament and the Council will then be called on to adopt the MMF Regulation at first reading.

The MMF Regulation is designed to ensure the smooth operation of the short-term funding market. It follows efforts by the G20 and the Financial Stability Board (FSB) to strengthen the oversight and regulation of the shadow banking system.

Rating Agency Developments

 

On November 16, 2016, Fitch issued a report entitled: Fitch Updates Recovery Ratings and Notching Criteria for Equity REITs. Release.

On November 16, 2016, Fitch issued a report entitled: Fitch Updates Rating Criteria for U.S. Military Housing. Release.

On November 15, 2016, Fitch issued a report entitled: Fitch Updates U.S. RMBS Surveillance and Re‑REMIC Criteria. Release.

On November 11, 2016, Fitch issued a report entitled: Fitch Updates U.S. and Canadian Multiborrower CMBS Surveillance Criteria. Release.

On November 11, 2016, Moody’s updated its Index of Rating Methodologies. Report.

On November 11, 2016, Moody’s updated its index entitled: Outdated Credit Rating Methodologies. Report.

On November 10, 2016, Fitch issued a report entitled: Fitch Updates Surveillance Criteria for U.S. CREL CDOs. Release.

On November 10, 2016, Fitch issued a report entitled: Fitch Clarifies Criteria for Rating U.S. FFELP Student Loan ABS. Release.

On November 10, 2016, Moody’s issued a report entitled: U.S. Housing Finance Agency Single Family Programs. Report.

On November 10, 2016, Moody’s issued a report entitled: U.S. Housing Finance Agency Multifamily Methodology. Report.

On November 10, 2016, Moody’s issued a report entitled: U.S. Public Housing Authority Capital Fund Bonds. Report.

On November 10, 2016, Moody’s issued a report entitled: U.S. Housing Finance Agency Issuer Rating Methodology. Report.

On November 10, 2016, Moody’s issued a report entitled: Refining and Marketing Industry. Report.

CFTC Division of Market Oversight Reminds Market Participants of the Upcoming Expiration of Certain No Action Relief From the Ownership and Control Final Rule

 

On November 16, 2016, the U.S. Commodity Futures Trading Commission (the “CFTC“) issued a reminder that previously specified no‑action relief will shortly be expiring. On November 18, 2016, at 12:00 a.m. Eastern time, revised electronic submission requirements for Forms 40/40S and 71 were put in effect. Release.