U.S. Commodity Futures Trading Commission and European Commission Announce Common Approach for Transatlantic CCPs

On February 10, the U.S. Commodity Futures Trading Commission (the “CFTC”) and the European Commission announced a common approach relating to requirements for transatlantic central clearing parties (CCPs). The CFTC and the European Commission will work together to adopt (1) an equivalence decision that will allow US CCPs to continue to provide services in the EU whilst complying with CFTC requirements and (2) a determination of comparability that will allow EU CCPs to provide services to US clearing members whilst complying with EU requirements. These next steps will be put into place as soon as practicable.

The SEC Adopts Cross-Border Security-Based Swap Rules

On February 10, the Securities and Exchange Commission (the “SEC”) adopted rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act to regulate both U.S. and foreign dealers who engage in security-based swap dealing activities in the U.S. The rules require non-U.S. companies to include certain transactions in their determinations of whether such companies are subject to registration as security-based swap dealers. The final rules will take effect 60 days after publication in the Federal Register, but compliance is not required until 1 year after the publication or the SBS Entity Counting Date, whichever comes later. Press release.

Rating Agency Developments

On February 9, DBRS published its methodology for rating Canadian government STRIP bonds. Report.

On February 9, DBRS published its methodology for guarantees and other forms of support. Report.

On February 9, DBRS published its methodology for rating CLOs and CDOs of large corporate credit. Report.

On February 9, DBRS published its methodology outlining cash flow assumptions DBRS applies to rating corporate credit securitizations. Report.

FHFA, Fannie Mae and Freddie Mac Announce Independent Dispute Resolution Program

On February 2, the Federal Housing Finance Agency (the “FHFA”) announced that Fannie Mae and Freddie Mac have implemented an independent dispute resolution process for resolving repurchase disputes.  The process would allow lenders to submit their unresolved loan level disputes to an arbitrator after certain other processes have been exhausted.  Press Release.

SEC Reopens Comment Period for Proposed Amendments to Rule 13n-4 under the Securities Exchange Act of 1934

On January 15, the Securities and Exchange Commission reopened the comment period for proposed amendments to rule 13n-4 through a release entitled “Access to Data Obtained by Security-Based Swap Data Repositories and Exemption from Indemnification Requirement[.]”  The SEC reopened the comment period due to the recent passing of the Surface Transportation Reauthorization and Reform Act of 2015, which contained provisions that affected the language in the prior proposal.  Release.

U.S. Commodity Futures Trading Commission Division of Clearing and Risk Issues No-Action Relief from Swap Clearing Requirements

On January 8, 2016, the U.S. Commodity Futures Trading Commission’s (the “CFTC”) Division of Clearing and Risk issued no-action relief to certain entities from the swap clearing requirements so long as certain conditions (outlined in the respective letters) are complied with. The covered entities include (1) small bank holding companies and savings and loan holding companies with consolidated assets of less than $10 billion and (2) Community Development Financial Institutions that have been certified by the U.S. Department of the Treasury. Press Release. No-Action letter. No-Action Letter.

 

The Federal Housing Finance Agency Releases Final Rule on Federal Home Loan Bank Membership

On January 12, 2016, the Federal Housing Finance Agency (“FHFA”) issued a final rule establishing new requirements for membership in the Federal Home Loan Banks (“FHLBanks”). The FHLBanks are 11 U.S. government-sponsored banks that provide liquidity to their members to support housing finance and community investment.  Membership is governed by the Federal Home Loan Bank Act (the “Act”), which states that insurance companies, among others, are eligible for membership.  12 U.S.C. § 1424(a)(1).  The new rule, issued under that Act, establishes new requirements for becoming a member and maintaining membership of an FHLBank.  Most notably, the final rule excludes captive insurance companies from membership.

In its 2014 proposed rule, FHFA first proposed excluding captive insurance companies from the scope of the definition of “insurance company” in the Act. Captive insurance companies are insurance companies established by a parent specifically to cover risks to which the parent is exposed; they do not insure non-affiliated third parties. Despite receiving 400 comments on this aspect of the rule, almost all of which expressed opposition to the proposal, FHFA’s final rules retains the proposal essentially as it was proposed.

Under the rule, FHLBanks may not accept any captive insurance companies as new members. For captive insurance companies that became members since the rule was proposed in 2014, membership must be terminated within one year, and no additional advances may be made.  Captive insurance companies that were members of a FHLBank prior to the issuance of the proposed rule may remain members of their current FHLBanks for five years, but the amount of advances they can receive are capped, and the FHLBanks may not make new advances or renew existing advances with a maturity date beyond the five-year period.

The rule’s exclusion of captive insurance companies is vulnerable to challenge in court. Chiefly, it is unclear that FHFA has authority to exclude captive insurance companies from the purview of the Act.  Congress directed that “any” insurance company shall be eligible for membership, potentially ousting FHFA’s discretion to pick and choose among insurance companies, especially where the definition of “insurance company” has traditionally been left to the States.  In the same vein, it is unclear that FHFA may add additional statutory criteria (here, that an insurance company must primarily underwrite insurance for nonaffiliated persons or entities) not included by Congress.  In addition, FHFA’s evaluation of its purported reason for excluding captive insurance companies—that such companies may be passing advances through to their parents, who are not eligible for FHLBank membership—is not thoroughly analyzed.  It appears that rather than investigating whether captive insurance companies are actually being used as conduits to ineligible entities, FHFA relies primarily on industry publications encouraging companies to set up captives in order to do so.  Moreover, it is unclear that FHFA’s proffered solution would solve any purported problem given that other entities that remain eligible under FHFA’s new rule can also pass through advances to their ineligible parent companies.

Under the 2014 proposal, FHFA also proposed imposing ongoing minimum investment requirements on FHLBank members in order to maintain membership. Specifically, FHFA proposed that institutions would have had to maintain a certain percentage of residential mortgage assets.  The threshold for small banks and credit unions with assets less than $1 billion was at least 1%.  In its final rule, FHFA removed these requirements from the final regulations, concluding that the burdens of imposing such standards would outweigh the benefits.

The new regulation will go into effect 30 days after publication in the Federal Register. The rule has been strongly opposed by industry participants, who view it as a detriment to the liquidity of the residential housing market, and is expected to garner further discussion and likely a court challenge. Press Release. Final Rule.

Please feel free to contact any of the authors of this Client Alert or other Orrick attorneys with whom you work to discuss any questions you may have with regard to the foregoing.

Rating Agency Developments

On December 16, 2015, Fitch released updated Criteria Assumptions for UK Residential Mortgages. Press release.

On December 16, 2015, Fitch released updated EMEA RMBS Rating Criteria, which had no impact on existing ratings. Press release.

On December 15, 2015, S&P issued Structured Finance Temporary Interest Shortfall Methodology, effective immediately (except where notification or registration is required). Report.

On December 15, 2015, DBRS released a report entitled Global Methodology for Rating Banks and Banking Organisations. Report.

On December 15, 2015, DBRS released a report entitled DBRS Criteria: Support Assessments for Banks and Banking Organisations. Report.

On December 15, 2015, DBRS released a report entitled Master European Structured Finance Surveillance Methodology. Report.

On December 15, 2015, DBRS released a report entitled Operational Risk Assessment for European Structured Finance Originators. Report.

On December 14, 2015, Moody’s published its Global Approach to Rating Collateralized Loan Obligations. Report.

On December 10, 2015, Fitch released updated Criteria for Analysis of Commercial Real Estate Loans Securing Covered Bonds. Press release.