First Department Grants Summary Judgment Against RMBS Collateral Manager for Failure to Raise Issue of Fact Regarding Loss Causation

 

On March 2, 2017, the New York Supreme Court, Appellate Division, First Department reversed a decision from the New York Supreme Court and dismissed a complaint filed by two hedge funds against the collateral manager of a $400 million collateralized debt obligation (“CDO“) investment. Plaintiff hedge funds Basis PAC-Rim Opportunity Fund (Master) and Basis Yield Alpha Fund (Master) (together, “Basis“) filed a lawsuit asserting fraud claims against defendant TCW Asset Management Company (“TCW“), which had served as the collateral manager for the Dutch Hill II CDO. Dutch Hill II was created to serve as an investment vehicle for the purpose of taking a net long position on extremely risky RMBS; TCW selected the assets for the Dutch Hill II portfolio and made representations to Basis about the viability of the subprime RMBS market. Basis purchased over $27 million of Dutch Hill II notes in 2007, but the notes were all but valueless following the housing crisis. In moving for summary judgment, TCW submitted expert evidence showing that the housing market crash would have caused Basis’s losses even if the collateral underlying the CDO had not been misrepresented, as Basis alleged. In response, Basis did not submit sufficient evidence rebutting that opinion or showing that any of the particular misrepresentations by TCW caused its losses. The Supreme Court had denied summary judgment, holding that there were issues of fact as to loss causation. The First Department reversed, concluding that by failing to rebut TCW’s evidence, Basis had not raised an issue of fact as to loss causation.  Opinion.

Rating Agency Developments

 

On March 8, 2017, Fitch issued a report entitled U.S. Auto Lease ABS Rating Criteria. Report.

On March 7, 2017, DBRS issued a report entitled Mapping Financial Institution Internal Ratings to DBRS Ratings for Global Structured Credit Transactions. Report.

On March 7, 2017, Fitch issued a report entitled National Scale Ratings Criteria. Report.

On March 7, 2017, Moody’s updated its rating criteria for variable rate instruments supported by conditional liquidity facilities. Report.

On March 6, 2017, Fitch issued a report entitled Criteria for Analyzing Multiborrower U.S. and Canadian Commercial Mortgage Transactions. Report.

On March 6, 2017, Moody’s updated its rating criteria for gas prepayment bonds. Report.

On March 3, 2017, DBRS issued a report entitled Rating Public-Private Partnerships. Report.

On March 3, 2017, Fitch issued a report entitled SME Balance Sheet Securitisation Rating Criteria. Report.

On March 3, 2017, Fitch issued a report entitled North America and Asia-Pacific Multiborrower CMBS Surveillance Criteria. Report.

On March 2, 2017, DBRS issued a report entitled Rating Sports Franchises and Stadium Financings. Report.

SEC Approves Rules to Ease Investor Access to Exhibits in Company Filings

 

On March 1, 2017, the Securities and Exchange Commission (SEC) voted to adopt rule and form amendments that will require issuers to include a hyperlink to each exhibit in a filing’s exhibit index. The intent of the rule and form amendments is “to make it easier for investors and other market participants to find and access exhibits in registration statements and periodic reports that were originally provided in previous filings.” The final rules will take effect on September 1, 2017. Release. Final Rule.

SEC Issues Guidance Update and Investor Bulletin on Robo-Advisers

 

On February 23, 2017, the Securities and Exchange Commission (SEC) published information and guidance on the use of robo-advisers, “which are registered investment advisers that use computer algorithms to provide investment advisory services online with often limited human interaction.” Each of the SEC’s Division of Investment Management and Office of Investor Education and Advocacy published information on the use of robo-advisors. Due to the “unique issues raised by robo-advisers,” the Division of Investment Management issued guidance for investment advisers that contains “suggestions on meeting disclosure, suitability and compliance obligations under the Investment Advisers Act of 1940.” The Investor Bulletin issued by the Office of Investor Education and Advocacy provides information individual investors should consider when using robo-advisors, which includes the level of human interaction important to the investor, the information that the robo-adviser uses in formulating recommendations, the robo-adviser’s approach to investing and the fees and charges involved. Release. Guidance. Investor Bulletin.

Agencies Release Swap Margin Guidance

 

On February 23, 2017, the Federal Reserve Board (Board) and the Office of the Comptroller of the Currency (OCC) issued guidance regarding how supervisors should examine for compliance with the swap margin rule. The swap margin rule “established margin requirements for swaps not cleared through a clearinghouse”, and margin requirements “help ensure the safety and soundness of swap trading and help reduce risk to the financial system associated with non-cleared swaps.” The guidance issued by the Board and the OCC “explains that the Board and the OCC expect swap entities covered by the rule to prioritize their compliance efforts surrounding the March 1, 2017, variation margin deadline according to the size and risk of their counterparties.” Board Release. OCC Release. Board Guidance. OCC Guidance.

Rating Agency Developments

 

On March 1, 2017, DBRS issued a report entitled: Rating U.S. Private Student Loan Securitizations. Report.

On March 1, 2017, DBRS issued a report entitled: Cash Flow Assumptions for Corporate Credit Securitizations. Report.

On March 1, 2017, DBRS issued a report entitled: Rating CLOs and CDOs of Large Corporate Credit. Report.

On March 1, 2017, Fitch issued a report entitled: Renewable Energy Project Rating Criteria.  Report.

On February 28, 2017, Moody’s issued a report entitled: Global Broadcast and Advertising Related Industries. Report.

On February 27, 2017, Fitch issued a report entitled: U.S. Public Finance Structured Finance Rating Criteria. Report.

On February 27, 2017, Fitch issued a report entitled: U.S. Public Finance Letter of Credit-Supported Bonds and Commercial Paper Rating Criteria. Report.

On February 24, 2017, DBRS issued a report entitled: U.S. RMBS Surveillance Methodology. Report.

On February 23, 2017, Fitch issued a report entitled: Criteria for Rating U.S. and Canadian Residential and Small Balance Commercial Mortgage ServicersReport.

On February 23, 2017, Fitch issued a report entitled: Criteria for Rating Loan Servicers. Report.

On February 23, 2017, Fitch issued a report entitled: Criteria for Rating North American Commercial Mortgage Servicers  Report.

European Commission Passes Delegated Regulation on Exempted Entities Under EMIR on Derivatives, Central Counterparties and Trade Repositories

 

On March 2, 2017, the European Commission (the “Commission“) adopted a Delegated Regulation amending the European Market Infrastructure Regulation (“EMIR“) with regard to the list of exempted entities (C(2017) 1324 final).

EU central banks and public bodies tasked with managing and intervening in public debt are exempted from EMIR. As per article 1(6) of EMIR, the Commission is empowered to adopt delegated acts in accordance with Article 82 to amend the list of entities to which EMIR will not apply.

The Commission has accordingly assessed the treatment of central banks and public bodies managing public debt by a number of third countries where the implementation of OTC derivative reforms were sufficiently advanced, or which had specifically requested an assessment. As part of the process, the Commission consulted the six jurisdictions under assessment to gather information on their legal frameworks with respect to OTC derivatives and on the treatment, within those frameworks, of central banks and public bodies charged with or intervening in the management of the public debt. The Commission also consulted the Expert Group of the European Securities Committee, comprising member state representatives.

The Commission has concluded that central banks and public bodies charged with or intervening in the management of the public debt from Australia, Canada, Hong Kong, Mexico, Singapore and Switzerland should be exempt from the clearing and reporting requirements set out in EMIR. Article 1 of the Delegated Regulation therefore amends article 1(4)(c) of EMIR to add the central banks and public bodies of these jurisdictions to the list of exempted entities under EMIR. The Commission has previously exempted from EMIR the central banks and public bodies charged with or intervening in the management of the public debt in Japan and the United States of America

The Delegated Regulation will enter into force 20 days after it has been published in the Official Journal of the EU (OJ).

ESMA Publishes Final Report and Delegated Regulation Containing Final Draft RTS on Package Orders Under MIFID II

 

On February 28, 2017, the European Securities and Markets Authority (“ESMA“) published a final report on final draft Regulatory Technical Standards (“RTS“) on the treatment of package orders under Article 9(6) of the Markets in Financial Instruments Regulation (Regulation 600/2014) (“MiFIR“). Included in the report, ESMA has published a draft Commission Delegated Regulation supplementing MiFIR with regard to package orders. The draft Delegated Regulation is based on ESMA’s final draft RTS.

Article 9(6) of MiFIR requires ESMA to draft RTS to establish a methodology for determining whether there is a liquid market for a package order as a whole, assessing in particular whether packages are standardized and frequently traded.

ESMA consulted on an earlier draft of the RTS between November 2016 and January 2017. The final report presents a revised version of the draft RTS that takes into account the feedback received to the consultation. Annex I to the final report provides a detailed feedback summary.

The majority of respondents supported ESMA’s proposed methodology based on qualitative criteria that are characteristic for packages that are standardized and frequently traded. ESMA has decided to take forward this methodology as it continues to believe it is superior to a methodology relying on quantitative criteria. The chosen approach identifies package orders that are liquid as a whole based on general criteria (that is, criteria that identify standardized and liquid package orders across asset classes) as well as asset-class specific criteria (that is, criteria that reflect specificities of package orders traded in different classes of derivatives).

However, to accommodate respondents’ concerns that the qualitative approach would also consider potentially illiquid strategies within the concept of package orders that have a liquid market, ESMA has further refined the qualitative criteria and, in particular, enriched the approach by further asset-class specific criteria.

ESMA intends to provide guidance in the form of Q&As on the application of the systematic internalizer (“SI“) obligations under article 18 of MiFIR in the context of package orders. In the consultation, ESMA proposed to apply the SI obligations at the package order level where an investment firm is an SI in at least one component instrument of the package order. Around half of respondents agreed with this proposal. The other half of respondents disagreed and considered that the SI obligations should only apply where an investment firm is an SI in all components of the package. ESMA has indicated that it will be guided by the consultation responses received in relation to this issue as it decides on the appropriate approach.

ESMA also received various questions from respondents requesting more guidance on the application of pre- and post-trade transparency for package orders in general (that is, beyond the scope of the RTS on package orders). It intends to clarify these issues through Q&As in the coming months.

ESMA submitted the final report and final draft RTS to the European Commission on February 27, 2017. The Commission has three months to decide whether to endorse the draft RTS.

Council of EU Approves Commission Delegated Regulation to Extend PSA Transition Periods under EMIR

 

On February 23, 2017, the European Parliament updated its procedure file on the proposed Commission Delegated Regulation amending European Market Infrastructure Regulation (“EMIR“) (Regulation 648/2012) as regards the extension of the transitional periods related to pension scheme arrangements (PSAs).

The procedure file states that the Council has raised no objection to the Delegated Regulation.

The Commission adopted the Delegated Regulation in December 2016.

The proposed Commission Delegated Regulation will enter into force unless the European Parliament objects. If the Parliament does not object, the Delegated Regulation will enter into force the day after it is published in the Official Journal of the EU.

ESAs and IOSCO Publish Statements on Variation of Margin Exchange under EMIR

 

On February 23, 2017, the Joint Committee of European Supervisory Authorities (“ESAs“) published a statement on variation margin exchange under the EMIR regulatory technical standards (“RTS“) on risk mitigation techniques for uncleared over-the-counter derivative contracts under Article 11(15) of the European Market Infrastructure Regulation (“EMIR“). The International Organization of Securities and Commissions (“IOSCO“) has also published a related statement.

The statement responds to industry requests relating to operational challenges in meeting the deadline of March 1, 2017, for exchanging variation margin, the effect of which will be experienced particularly by smaller counterparties.

Neither the ESAs nor competent authorities (“CAs“) have the power to disapply directly applicable EU legalization. As a result, any further delays of the application of the EU rules would formally need to be implemented through EU legislation, which the ESAs state is not possible due to the lengthy process for adopting EU legislation.

The ESAs outline their expectations of smaller counterparties as follows:

“The ESAs expect CAs to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation. This approach entails that CAs can take into account the size of the exposure to the counterparty plus its default risk, and that participants must document the steps taken toward full compliance and put in place alternative arrangements to ensure that the risk of non-compliance is contained, such as using existing Credit Support Annexes to exchange variation margins. This approach does not entail a general forbearance, but a case‑by‑case assessment from the CAs on the degree of compliance and progress. In any case, the ESAs and CAs expect that the difficulties will be solved in the coming few months and that transactions concluded on or after March 1, 2017, remain subject to the obligation to exchange variation margin.”

The statement points out that in 2015, the IOSCO had already granted a nine-month delay based on similar arguments from the industry. The ESAs comment that it is unfortunate that the financial industry has not prepared for the implementation. The ESAs had previously expressed concern about the delayed adoption of the then draft RTS.

In its statement, IOSCO explains that some market participants have faced difficulty in completing the necessary credit support documentation and operational processes to settle variation margin in accordance with the requirements. However, IOSCO expects all affected parties to make every effort to fulfill the necessary variation margin requirements by the deadlines. IOSCO adds that it believes that relevant IOSCO members should consider taking appropriate measures available to them to ensure fair and orderly markets during the introduction and application of such variation margin requirements.

The European Commission (EC) adopted Delegated Regulation 648/2012 supplementing EMIR with the RTS in October 2016. The Joint Committee of ESAs submitted the final draft RTS to the Commission in March 2016.