The FSA has fined two firms a total of £250,000 for failing to provide accurate and timely transaction reports to the FSA in respect of reportable transactions carried out. The final notices in respect of Plus500UK Limited and James Sharp and Company were published on October 24 and show that between November 2007 and November 2011 the two firms failed to report a total of 1,403,000 trades accurately and failed to report 160,000 of these trades at all. These failures were caused by the firms having inadequate systems and controls for the reporting of trades.
The FSA has stated that it views accurate transaction reports as a key tool in its efforts to tackle market abuse, and will take action to ensure firms comply with their reporting obligations.
On October 23, the Department for Business, Innovation and Skills published a report entitled ‘The Future of Computer Trading in Financial Markets – An International Perspective’. The report is an analysis of the potential benefits and risks of algorithm driven high-frequency trading, with a discussion of regulatory priorities for the future. The report finds that computer-based trading improves liquidity, reduces transaction costs and ensures that market prices are more efficient. In addition, the report found no direct evidence that high-frequency trading has increased either market volatility or market abuse.
However, the report did find that in specific circumstances, computer-based trading can lead to market instability and periodic illiquidity, and suggested that to address this policy-makers should consider the following priorities:
- Immediate evidence-based regulatory action at the European level to assess and introduce ways to manage the adverse side-effects of computer-based trading and incentivise accident-avoiding practices and behaviour.
- The implementation of accurate, high resolution, synchronised timestamps as a key means for assisting analysis of financial markets.
- The development of software for automated forensic analysis of adverse/extreme market events.
The amendments to the Capital Requirements Directive (CRD) proposed in CRD IV will require credit institutions to introduce a ‘capital conservation buffer’ of 2.5% of risk-weighted assets (in addition to the current 8% requirement). This will be phased in from 2016 to 2019, and there are concerns that it could have a negative impact on the level of bank lending available to SMEs.
On October 22, the European Banking Authority (EBA) published a report on the assessment of two proposals to mitigate these concerns. The proposals analysed were:
- a reduction of the current risk weights (RWs) of SME lending by one third; and
- an increase from EUR 1 million to EUR 5 million on the regulatory thresholds for SMEs.
In its report, the EBA cautions against the proposed altering of the RWs or the threshold for SME retail exposures. However, it does advise that alternative measures to provide the same capital alleviation could be considered, such as the introduction of a supporting discount which would not act on RWs, but would be applied at the end of the process of capital calculation. The EBA considers that these measures should be applied only to SME exposures and not to the whole retail exposure class.
On October 19, Judge Mariana R. Pfaelzer of the Central District of California dismissed with prejudice four cases against Countrywide Financial Corp., and related entities, pursuant to stipulations among the parties. Landesbank Baden-Wurttemberg, Dexia SA, Sealink Funding Ltd., and Thrivent Financial for Lutherans, had each pursued separate but similar claims against Countrywide alleging that Countrywide had concealed underwriting failures and misrepresented the quality of the loans to ratings agencies in order to receive better ratings for its RMBS. The plaintiffs, combined, had sought relief in connection with alleged misrepresentations that affected more than $2 billion RMBS bought between 2005 to 2007. The stipulations did not reveal any terms other than that each party would shoulder its own attorneys fees and costs. Stipulations.
On October 23, Royal Bank of Scotland (RBS) agreed to pay $42.5 million to the State of Nevada in a settlement to end an investigation by the Nevada Attorney General into RBS’s mortgage acquisition and securitization business. The investigation focused particularly on RBS’s acquisition and securitization of subprime and pay-option adjustable rate mortgages originated by Countrywide and Option One. The Nevada Attorney General’s investigation concerned potential misrepresentations made in connection with the origination of those loans as well as RBS’s potential awareness of the originators’ allegedly deceptive practices. In addition to the settlement payment, RBS agreed to certain conditions for its future financing of subprime and pay option mortgages secured by Nevada properties, including a “reasonable review” requirement to ensure that the loans adequately disclose interest rate and payment information and are based on documented borrower income. In entering into the settlement, RBS did not admit to any wrongdoing. Agreement.
On October 18, Judge Mariana R. Pfaelzer of the Central District of California denied Countrywide’s motion to dismiss an action brought by the Federal Housing Finance Authority seeking relief in connection with purchases by Fannie Mae and Freddie Mac of more than $26.6 billion in RMBS. Countrywide argued that the claims were barred by the statute of limitations. Judge Pfaelzer held otherwise, finding that the Housing and Economic Recovery Act of 2008 (HERA) extended the relevant statutes of repose for claims brought by the FHFA beyond the period of repose ordinarily provided by federal, Virginia and Washington, D.C. securities laws. Certain former Countrywide officers and directors also sought dismissal on personal jurisdiction grounds, claiming that they lacked sufficient contacts to Virginia and Washington, D.C. to subject them to those respective securities laws. Judge Pfaelzer found that the act of marketing the RMBS in question to these jurisdictions, along with the fact that the plaintiffs were residents of Virginia and Washington, D.C., was sufficient to create the necessary contacts to convey jurisdiction over the individual defendants. Order.
On October 24, the U.S. Attorney for the Southern District of New York filed suit against Bank of America and Countrywide seeking damages for over $1 billion in alleged losses suffered by Fannie Mae and Freddie Mac. The complaint alleges that Bank of America and Countrywide violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act by selling defective loans originated through a fraudulent origination program called the “High-Speed Swim Lane” (HSSL) or “the Hustle” that was implemented by Countrywide from 2007 to 2009. The Government alleges that the program intentionally was designed to process loans quickly, ignoring or eliminating quality controls, including by replacing underwriters with “loan processors” who are alleged to have been “unqualified and inexperienced clerks.” The suit further alleges that Countrywide, and later Bank of America, concealed the defects from Fannie Mae and Freddie Mac as they continued to sell these defective loans through 2009. The Government seeks civil penalties under FIRREA as well as treble damages under the False Claims Act. In a press release issued the day of the filing, the U.S. Attorney described the lawsuit as a “clear message that reckless lending practices [would] not be tolerated.”
On October 26, the SEC approved amendments to FINRA Rule 4210 related to option spread strategies, maintenance margin requirements for non-margin eligible equity securities, free-riding, “exempt accounts” and stress testing in portfolio margin accounts. The amendments related to option spread strategies become effective on October 26 and all other amendments become effective on January 23, 2013. FINRA Notice. Amended FINRA Rule.
On October 24, Moody’s released implementation guidance for its global short-term ratings. Moody’s Report.
On October 22, S&P clarified its criteria on hybrid capital step-ups, call options, and replacement provisions. S&P Report.
Note: Free registration is required for rating agency releases and reports.
On October 22, the Reserve Bank of Australia introduced new criteria for the eligibility of RMBS in its operations, which will require RMBS issuers to provide detailed information on reporting templates regarding:
(i) the transaction;
(ii) the securities;
(iii) the pool of underlying assets; and
(iv) anonymous loan-level data.
Comments on the reporting templates are due by December 28. RBA Release. Reporting Templates.