Industry Developments

EBA Publishes Interim Report on MREL

The European Banking Authority (EBA) has published an interim report on the minimum requirement for own funds and eligible liabilities (MREL). Under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) the EBA is required to submit a report to the European Commission on the implementation of MREL by October 31, 2016.  This report will assist the Commission in its work on a legislative proposal on the harmonized application of MREL as well as a legislative proposal to review MREL and implement the total loss absorbing capacity standard in the EU.

The EBA’s interim report is intended to provide input into the Commission’s deliberations ahead of the preparations of the EBA’s final report and contains a number of provisional recommendations. Preliminary quantitative findings on the financing capacity and needs of EU banking groups are also available in the interim report, although these are subject to several methodological caveats.  In the absence of MREL decisions for institutions to date, and given the limited information related to the resolution authorities’ MREL policy approach, the EBA was required to make assumptions on the likely scope and calibration of MREL.  These assumptions are by definition different from the actual levels of MREL which will ultimately be determined by resolution authorities in relation to each institution and group.

The interim report is available here.

Rating Agency Developments

On July 19, 2016, DBRS published its criteria for rating CLOs backed by loans to European SMEs (small and medium-sized enterprises).  Report.

On July 18, 2016, Fitch published its criteria for assigning new and existing ratings to sovereign issuersReport.

On July 18, 2016, Fitch published an addendum that supplements its counterparty criteria for structured finance and covered bondsReport.

On July 14, 2016, DBRS published an update to its criteria for evaluating servicers in North American CMBS transactions.  Report.

On July 14, 2016, DBRS published its criteria for rating European covered bondsReport.

On July 14, 2016, DBRS published its master European structured finance surveillance methodology.  Report.

SEC Proposes Amendments to Update and Simplify Disclosure Requirements as Part of Overall Disclosure Effectiveness Review

On July 13, 2016, the Securities and Exchange Commission proposed amendments to various disclosure provisions in order to eliminate duplicative provisions and modernize the relevant requirements.   After the proposed amendments are published in the Federal Register, the comment period will be open for 60 days. Release. Proposed Rule.

SEC Proposes Rules to Enhance Order Handling Information Available to Investors

On July 13, 2016, the Securities and Exchange Commission proposed rules that “for the first time would require broker-dealers to disclose the handling of institutional orders to customers … [and] would expand the information included in existing retail order disclosures.” After the proposed rules are published in the Federal Register, the comment period will be open for 60 days. Release. Proposed Rule.

Federal Reserve Board Formalizes Previously Announced One-Year Conformance Period Extension for Certain Volcker Rule Legacy Fund Investments

On July 7, 2016, the Federal Reserve Board approved the final extension – to July 21, 2017 – for bank entities to comply with the Volcker Rule and “to divest ownership in certain legacy investment funds and terminate relationships with funds that are prohibited under the rule.” Release.

NY DFS Adopts Final Anti-Terrorism and Anti-Money Laundering Regulation

On June 30, 2016, the New York Department of Financial Services (“NY DFS”) adopted a final anti-terrorism and anti-money laundering regulation (the “Final Regulation”) that requires institutions subject to regulation by the NY DFS to maintain programs to monitor and filter transactions for potential Bank Secrecy Act (“BSA”) and anti-money laundering (“AML”) violations and prevent transactions with sanctioned entities.

Of particular significance is that under the Final Regulation, which will be effective January 1, 2017, relevant regulated NY DFS institutions are required to review their transaction-monitoring and filtering programs and ensure that they are reasonably designed to comply with risk-based safeguards. These institutions also must adopt (at the institution’s option) an annual board resolution or senior officer compliance finding to certify compliance with the Final Regulation beginning April 15, 2018. The resolution or finding must state that documents, reports, certifications and opinions of officers and other relevant parties have been reviewed by the board of directors or senior official to certify compliance with the Final Regulation.

The proposed version of the Final Regulation, which was issued on December 1, 2015, included a much more draconian requirement that a senior financial executive annually deliver an unqualified certificate to the NY DFS that his or her institution “has sufficient systems in place to detect, weed out, and prevent illicit transactions” and that he or she has reviewed the compliance programs of the regulated Institution, or caused them to be reviewed, and that such programs comply with all of the requirements of the proposed regulation. The provisions of the proposed regulation are discussed in the December 22, 2015 Orrick Alert.

The NY DFS noted in its announcement of the Final Regulation that: “The risk-based rule adopted by DFS today takes into consideration comments that were submitted by the financial services industry and others during the extended comment period for the previously-proposed regulation, which ended March 31, 2016.”

Institutions must maintain supporting data for the certification, for review by NY DFS, for five years.

The key requirements of the Final Regulation include the following:

Annual Board Resolution or Senior Officer Compliance Finding

To ensure compliance with the requirements, each regulated institution shall adopt and submit to the Superintendent a board resolution or senior officer compliance finding by April 15 of each year. Each regulated institution shall maintain for examination by DFS all records, schedules and data supporting adoption of the board resolution or senior officer compliance finding for a period of five years.

Maintain a Transaction Monitoring Program

Each relevant regulated institution shall maintain a reasonably designed program for the purpose of monitoring transactions after their execution for potential BSA/AML violations and Suspicious Activity Reporting. The system, which may be manual or automated.

Maintain a Watch List Filtering Program

Each relevant regulated institution shall maintain a reasonably designed filtering program for the purpose of interdicting transactions that are prohibited by federal economic and trade sanctions.