EMMI Report on Outcome of EURIBOR Pre-Live Verification Program

 

On May 5, 2017, the European Money Markets Institute (“EMMI“) published a report on the outcome of the Euro Interbank Offered Rate (“EURIBOR“) pre-live verification (“PLV“) program.

The PLV program has given EMMI an in-depth view of the market underpinning EURIBOR. It confirmed that market activity has changed as a result of current regulatory requirements, other sources of liquidity available to market participants, and other external factors. In this context, EMMI concluded that:

  • The rate and volatility levels under both methodologies (that is, current quote-based vs. fully transaction-based) are insufficiently similar for a seamless transition to be feasible under current market conditions.
  • The decreased level of daily market activity under current market conditions does not allow for a methodology that is fully based on transactions, as this would not yield a sufficiently sound and robust benchmark.

In its FAQs published alongside the report, EMMI stressed that there will be no immediate changes to the EURIBOR methodology and that the current quote-based EURIBOR will continue for the period necessary to develop an alternative methodology. EMMI stated that it remains committed to align the EURIBOR benchmark with the EU Benchmarks Regulation ((EU) 2016/1011). Accordingly, it will work on a hybrid methodology (that is, a model that is supported by transactions whenever available and relies on other pricing sources when necessary).

EBA Amends ITS on Benchmarking of Internal Approaches for 2018 Benchmarking Exercise

 

On May 4, 2017, the European Banking Authority (“EBA“) published an amended version of its implementing technical standards (“ITS“) on benchmarking of internal approaches under Article 78(8) of the CRD IV Directive (2013/36/EU) (EBA ITS 2017 02).

The final draft ITS are contained in a zip file that has been added to the EBA’s dedicated webpage on regulatory technical standards (RTS) and ITS on benchmarking portfolios. They are intended for use by the EBA and competent authorities in their 2018 assessment of internal approaches for credit and market risk. The ITS have been amended to reflect updates to the Single Rulebook. They also reflect updates to the benchmarking portfolios that were necessary to facilitate the 2018 benchmarking exercise for both credit and market risk so that they remain relevant for supervisors.

The amendments are expected to apply to the submission of initial market valuation data in November 2017 and of other market and credit risk data in April 2018. The EBA has submitted the updated ITS to the European Commission, but the Commission has not yet adopted them.

The EBA aims to annually update the ITS to ensure future benchmarking exercises are relevant and successful.

CFTC Proposes to Amend Rules Governing Chief Compliance Officer Duties and Annual Reports for Certain Registrants

 

On May 3, 2017, the U.S. Commodity Futures Trading Commission (CFTC) announced that it will publish in the Federal Register proposed amendments to Part 3 of its regulations. The proposed amendments would (1) define “senior officer” in Regulation 3.1; (2) clarify the duties of a Chief Compliance Officer (“CCO“) of a futures commission merchant, swap dealer, or major swap participant; and (3) modify the CCO annual report’s content and submission requirements. The comment period ends 60 days after the proposal’s publication in the Federal Register. Press Release. Proposal.

Brexit – European Council Adopts EU Negotiating Guidelines

 

On April 29, 2017, a Special European Council, meeting as 27 member states, adopted the Article 50 guidelines to formally define the EU’s position for the Brexit negotiations with the UK.

The guidelines are set out under six headings that cover core principles, a phased approach to the negotiations, an agreement on arrangements for an orderly withdrawal, preliminary and preparatory discussions on a framework for the EU-UK future relationship, the principle of sincere cooperation, and the procedural arrangements for negotiations under Article 50.

On May 22, 2017, the General Affairs Council is expected to authorize the opening of the negotiations, nominate the European Commission as the EU negotiator, and adopt the negotiating directives. The guidelines and the negotiating directives may be updated in the course of the negotiations as necessary.

Rating Agency Developments

 

On May 3, 2017, DBRS issued a report entitled Rating Canadian Public Hospitals. Report.

On May 3, 2017, Fitch issued a report entitled Global Structured Finance Rating Criteria. Report.

On May 3, 2017, Moody’s proposed limited updates to its approach for rating US and Canadian conduit/fusion CMBS. Report.

On May 3, 2017, Moody’s proposed changes to its approach to rating asset-backed commercial paper. Report.

On April 28, 2017, DBRS issued a report entitled Operational Risk Assessments for Canadian Structured Finance. Report.

On April 27, 2017, Fitch issued a report entitled Non-Financial Corporates Hybrids Treatment and Notching Criteria. Report.

On April 27, 2017, Fitch issued a report entitled Global Money Market Fund Rating Criteria. Report.

NCUA Enters $445 Million Settlement with UBS in Lawsuit Alleging Untrue Statements in Connection with Sale of RMBS

 

On April 25, 2017, the National Credit Union Administration (“NCUA“), as liquidating agent for U.S. Central Federal Credit Union and Western Corporate Federal Credit Union, voluntarily dismissed its complaint against UBS Securities, LLC (“UBS“) and Mortgage Asset Securitization, Inc., in the United States District Court for the District of Kansas following a settlement between the parties. Under the terms of the settlement, UBS agreed to pay $445 million to end the NCUA’s five-year old lawsuit (the filing of the lawsuit was covered here). The NCUA’s suit involved claims for losses suffered by the two failed credit unions from allegedly untrue statements and omissions of fact by UBS regarding RMBS that it underwrote and sold. This settlement is in addition to the $79.3 million the NCUA also recovered from UBS in April 2016 for RMBS losses suffered by two other defunct credit unions. Voluntary Dismissal.

CFPB Finalizes Effective Date Extension for Prepaid Accounts Rule

 

On April 20, 2017, the Bureau of Consumer Financial Protection (CFPB) issued a final rule to delay the October 1, 2017 effective date of the rule governing Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) by six months, to April 1, 2018. Report. Rule.

Ratings Agency Developments

 

On April 26, 2017, Fitch issued a report entitled U.S. Public Finance College and University Rating Criteria. Report.

On April 26, 2017, Fitch published an update to its methodology for rating insurance companies. Release.

On April 24, 2017, DBRS issued a report entitled Representations and Warranties Criteria for U.S. RMBS Transactions. Report.

On April 24, 2017, DBRS issued a report entitled Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda. Report.

On April 24, 2017, DBRS issued a report entitled European RMBS Insight: Dutch Addendum. Report.

On April 21, 2017, DBRS issued a report entitled DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments — Non-Financial Companies. Report.

On April 21, 2017, DBRS issued a report entitled Rating Entities in the Real Estate Industry. Report.

On April 21, 2017, DBRS issued a report entitled Rating Canadian Covered Bonds. Report.

On April 21, 2017, S&P issued a report entitled Foreign Exchange Risk In Structured Finance–Methodology And Assumptions. Report.

On April 20, 2017, DBRS issued a report entitled Rating Canadian Structured Finance Transactions. Report.

ESRB Reports on Revision of EMIR

 

On April 21, 2017, the European Systemic Risk Board (“ESRB“) published a report on the revision of the European Market Infrastructure Regulation (the “EMIR“).

The report welcomes the European Commission’s November 2016 report on the outcome of its EMIR review, which the Commission carried out under Article 85(1) of EMIR. The ESRB supports the Commission’s plan to revise EMIR to include an emergency mechanism for quickly suspending the clearing obligation and to increase the transparency and predictability of margin requirements.

The ESRB agrees with the Commission that no fundamental change to EMIR is currently required, although it does recognize that some aspects of EMIR could be improved, such as improving the trade data reporting framework and transparency by obliging central counterparties (“CCPs“) to publish qualitative and quantitative information consistent with the Committee on Payments and Market Infrastructures – Board of International Organization of Securities Commissions disclosure framework.

In addition, the report suggests that enhancing tools in EMIR that restrict procyclicality would reduce risks to financial stability and could simplify EMIR requirements and make them more efficient.

Although the ESRB recognizes the difficulties faced by some counterparties in meeting the clearing obligation, it supports a broad application of the obligation, including for pension scheme arrangements and large nonfinancial counterparties that are active in the derivatives market.

A comprehensive review of EMIR will be needed in the future. This comprehensive review should address issues such as the potential use of margins and haircuts to meet macroprudential objectives when the analysis needed to develop these tools has progressed.

The ESRB restates its previous proposals, including revising the determination mechanism of dedicated resources and interoperability arrangements. The ESRB reported on CCP interoperability arrangements in January 2016, and published two earlier reports on EMIR to assist the Commission with its Article 85 review of the Regulation in July 2015.

The ESAs Published a Joint Committee Report on Cross-Sector Risks Facing EU Financial System

 

On April 20, 2017, the Joint Committee of the European Supervisory Authorities (the “ESAs“) published its April 2017 report on risks and vulnerabilities in the EU financial system.

The ESA highlights the following main risks to the financial system:

The banking sector is being affected by high levels of non-performing loans (“NPLs“), high litigation costs, overcapacity and lack of focus in strategies to return to sustained profitability. Addressing low profitability challenges includes increasing supervisory action, making progress in structural reforms and improving the efficiency of secondary markets. Insurers face substantial challenges arising from prolonged low interest rates, and the fund industry’s rates of returns are subdued and remain mostly negative.

Increased asset price volatility and liquidity concerns have heightened risks relating to adequate valuation of asset prices. This has been exacerbated by political uncertainties.

Interconnectedness adds to financial sector risks. This includes concentration risk caused by highly correlated equity price movements for insurers and banks and high exposures of EU insurers to EU banks. Interconnectedness with the wider financial system is also increasing.

Cyber risk appears as a major risk and is on the rise. Currently, denial-of-service attacks, data theft or manipulation, malicious software, misinformation and false identification are the most relevant forms. Operational risks related to ICT risks also appear to be on the rise across the financial sector. The ESAs are responding to cyber and IT-related risks by, for example, drafting guidelines on ICT risk assessment for supervisors, assessing cybersecurity capabilities of central counterparties and assessing the potential accumulation of risk for insurers deriving from newly developed cybersecurity coverages.