Rating Agency Developments

On January 4, S&P updated its outlook assumptions for the U.S. residential mortgage market.  S&P Report.  
 
On December 28, 2012, Fitch updated its equipment lease and loan rating criteria.  Fitch Report.  
 
On December 24, 2012, DBRS released methodology for rating income funds.  DBRS Report. 
 
On December 21, 2012, Moody’s updated its methodology for power generation projects.  Moody’s Report.
   
On December 20, 2012, Fitch updated its U.S. utility tariff bond rating criteria.  Fitch Report.  
 
On December 19, 2012, Fitch updated its criteria for pooled multifamily housing bonds.  Fitch Report.  
 
On December 18, 2012, Fitch updated its U.S. public power rating criteria.  Fitch Report. 
 
On December 17, 2012, Fitch updated its criteria for investment managers and alternative funds.  Fitch Report. 

Note: Free Registration is required for rating agency releases and reports.

CFTC No-Action Letters

From December 14 through December 31, 2012, the CFTC released the following no-action letters:

EC Technical Standards for European Markets Infrastructure Regulation

On December 19, 2012, the European Commission adopted nine regulatory and implementing technical standards to complement obligations defined under the European Markets Infrastructure Regulation on OTC derivatives, central counterparties and trade repositories.  The adoption of the technical standards finalizes requirements for the mandatory clearing and reporting of OTC derivatives transactions.  The technical standards will be effective 20 days after publication in the EU Official Journal.  EC Release.  

UBS Fined £160 Million for Significant Failings in Relation to LIBOR and EURIBOR

On December 19, 2012, the FSA announced that it had fined UBS £160 million for misconduct relating to LIBOR and EURIBOR. The FSA’s final notice found that the misconduct was extensive and widespread, occurred in various locations around the world including Japan, Switzerland, the UK and the USA and, between 1 January 2005 and 31 December 2010, included:

  • The adjustment of UBS LIBOR and EURIBOR submissions to benefit UBS traders’ trading positions;
  • Colluding with interdealer brokers  to manipulate the Japanese Yen LIBOR submissions of panel banks to the benefit of UBS traders; and

Adopting LIBOR submissions directives whose primary purpose was to protect UBS’s reputation.  

High Court Case on Mis-selling of Interest Rate Swaps

On December 21, 2012,  the High Court decided an alleged mis-selling of interest rate swaps case in favour of the defendant, RBS. The claimants alleged that the interest rate swap sold to them by RBS in May 2005 as a form of insurance against their existing liabilities of £1.5 million had been mis-sold, on account of the fact that they “fared very badly under the swap” after interest rates fell from October 2008. The claimants argued that RBS was in breach of its common law duty of care and that, had it not been for these breaches of duty, they would never had entered into the swap.

In his judgment Judge Wakeman QC found that “Because of the credit crunch, the ensuing parlous position of RBS, and the taking of the wholly unforeseeable step of increasing margin significantly, it transpired that the protection given by the swap was not complete . . . But none of that means that the swap was an unsuitable product back in May 2005.” However he added that “this is a highly fact-sensitive case” that turned on what was said in meetings between the claimants and the defendant prior to the claimants entering into the swap.   

Basel Committee on Banking Supervision FAQs on Basel III Counterparty Credit Risk and Exposures to Central Counterparties

On December 28, 2012, the Basel Committee on Banking Supervision published an updated version of its frequently asked questions on the Basel III rules relating to counterparty credit risk and exposures to central counterparties. The update includes new questions and answers on the rules text of Basel III relating to: 

  • Advanced credit valuation adjustment capital charge;
  • Eligible hedges; and
  • Treatment of incurred credit valuation adjustment.

In addition, a new section of questions and answers has been added to assist with the interpretation of the rules text on the capitalisation framework for bank exposures to CCPs.   

RBS Wins Dismissal of South Korean Bank Case

On December 27, 2012, Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York dismissed an action brought by Woori Bank against RBS Securities and related entities claiming fraud, negligent misrepresentation, and unjust enrichment.  Woori alleged that defendants knowingly marketed CDOs based on RMBS that had a greater risk than their ratings suggested, and that RBS fraudulently and negligently induced Woori to buy those CDOs.  Further, Woori alleged that RBS concealed or failed to properly disclose their efforts to manipulate LIBOR rates.  The court dismissed the fraud claim because Woori’s allegations did not specifically connect RBS’s alleged knowledge of problems or suspect behavior to the transactions at issue.  Further, the court found that Woori was unable to show with sufficient specificity any facts that demonstrated RBS had created an inherently unfair transaction by failing to disclose information and accordingly dismissed the negligent misrepresentation claim.  Decision.

Ally Financial’s Motions to Dismiss FHFA Claims Granted in Part

On December 19, 2012, Judge Denise Cote of the federal district court for the Southern District of New York decided motions to dismiss FHFA’s action against Ally Financial and underwriters of Residential Capital securities.  The court dismissed claims of owner-occupancy and LTV-ratio fraud, Virginia Securities Act claims for certificates purchased before September 6, 2006, and Virginia Securities Act and Section 12(a)(2) claims with respect to certificates purchased from parties other than defendants.  The court denied the remaining aspects of the motions to dismiss, including defendants’ requests that the court strike the demand for punitive damages, that the claims against Ally Financial Inc. be dismissed based on lack of control of the alleged primary violators, and for dismissal of the allegations against underwriter defendants that are not based on owner-occupancy and LTV fraud.  Decision. 

New York Federal Court Denies BofA’s Motion for Reconsideration in FHFA Case

On December 18, 2012, Judge Denise Cote of the United States District Court for the Southern District of New York denied Bank of America’s motion for reconsideration of the denial of its motion to dismiss claims brought by FHFA.  Bank of America argued that FHFA could not bring claims under Sections 11 and 12(a)(2) with respect to ten certificates issued before a final prospectus was filed.  The court held that under Section 11, FHFA may assert claims based on commitments to purchase that were made before the filing of a final prospectus.  Judge Cote further held that Bank of America’s arguments under Section 12(a)(2) and Rule 159 involve factual issues that cannot be resolved at the motion to dismiss stage.  Decision. 

Trustee Brings Putback Action Against Merrill Lynch

On December 18, 2012, U.S. Bank, acting in its capacity as Trustee for two Merrill Lynch RMBS trusts that issued over $1 billion in RMBS certificates, filed a complaint in New York Supreme Court against Merrill Lynch.  The Trustee alleges that Merrill Lynch breached representations and warranties concerning the borrowers’ income and employment, the borrowers’ debts and debt-to-income ratio at the time the mortgages were originated, property value and loan-to-value ratios, and the owner-occupancy rates of the underlying properties.  The Trustee asserts seven causes of action for breach of contract, anticipatory breach, and declaratory judgment, and seeks to require Merrill Lynch to repurchase the loans.  Complaint.