New Rules on Venture Capital Funds Adopted by the European Parliament

 

New rules to facilitate innovative and socially beneficial companies accessing capital in the European Union were adopted by the European Parliament on September 14, 2017.

The European Parliament approved changes to Regulation (EU) no. 345/2013 on European venture capital funds (“EuVECA“) and Regulation (EU) no. 346/2013 European social entrepreneurship funds (“EuSEF“), aimed at attracting more investors for start-ups.

The changes are intended to reduce costs and barriers to entry for funds that lend to entrepreneurs and small to mid-sized enterprises. They include widening the range of managers eligible to create and manage EuVECA and EuSEF funds to those with assets under management of more than €500 million. Venture capital funds will also be able to invest in unlisted companies with up to 499 employees, allowing managers to diversify their funds. It is hoped that widening the range of eligible undertakings in which qualifying venture capital funds can invest will make them more appealing for investors and increase the flow of capital for businesses. The European Securities and Markets Authority has been charged with ensuring that funds are consistently registered and supervised across the EU.

The changes to the legislation are designed to make the cross-border marketing of both types of funds easier and less expensive as part of the EU’s efforts to create an integrated capital market, namely the Capital Markets Union.

The revised rules will enter into force 20 days after being published in the Official Journal of the European Union.

Agencies to Propose Amending CRA Regulations to Conform to HMDA Regulation Changes, and Remove References to the Neighborhood Stabilization Program

 

On September 13, 2017, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency jointly released proposed changes to each agency’s Community Reinvestment Act’s regulations relating “Regulation C, which implements the Home Mortgage Disclosure Act[.]” FDIC Release. Federal Reserve Release. OCC Release.

European Commission Publishes Summary of FinTech Consultation

 

In March 2017, the European Commission published a consultation paper on FinTech, seeking input from stakeholders which could assist the European Commission’s policy approach towards technological innovation in the financial sector.

In total, the European Commission received a total of 226 responses, the majority from the finance industry, and a summary of the contributions provided were published on September 12, 2017.

The summary indicates that the main risks which were raised by the industry were that of cybersecurity, the use and control of data, and money laundering. With that being said, FinTech was also seen as a driver of development within the sector which created opportunities as to efficiency, cost-saving, competition, and access to finance.

A full copy of the summary is available here. The significantly longer annex, available here, provides some of the detailed responses received.

Basel III Monitoring Exercise Report Published

 

The European Banking Authority (“EBA“) published a report on September 12, 2017, which outlined the results of a monitoring exercise on Basel III and the impact of the CRD IV Directive and Capital Requirements Regulation.

The report includes analysis of a number of statistics, including capital ratios, liquidity coverage ratios and the impact of phase-in arrangements. Over 200 banks were analyzed in the report.

In general, the EBA found that there was an improvement of capital positions in European banks, evidenced by an increase in total average common equity tier 1 ratio, average liquidity coverage ratio and net stable funding ratio.

The full report is available here.

Rating Agency Developments

 

On September 13, 2017, DBRS issued a report entitled Third-Party Due Diligence Criteria for U.S. RMBS Transactions. Report.

On September 13, 2017, Fitch issued a report entitled Fitch Updates Future Flow Securitisation Criteria; No Rating Impact. Release.

On September 11, 2017, KBRA issued a report entitled Financial Institutions: Global Asset Manager Rating Methodology. Report.

On September 11, 2017, KBRA issued a report entitled Public Finance: U.S. Third Party Liquidity Facility-Supported Variable Rate Demand Obligations and Commercial Paper Rating Methodology. Report.

On September 11, 2017, KBRA issued a report entitled Corporates: General Corporate Rating Methodology. Report.

On September 7, 2017, Fitch issued a report entitled Fitch: LIBOR Transition Creates Uncertainty for SF Market. Release.

S.D.N.Y. Grants in Part and Denies in Part Trustee Bank of New York Mellon’s Motion for Summary Judgment in Suit Brought by Certificateholder Phoenix Light

 

On September 7, 2017, Judge Valerie Caproni in the United States District Court for the Southern District of New York granted the majority of RMBS trustee Bank of New York Mellon’s (“BNYM“) summary judgment motion and denied certificateholder Phoenix Light SF Ltd.’s (“Phoenix Light“) cross motion in its entirety in Phoenix Light SF Ltd. v. Bank of New York Mellon. Judge Caproni’s decision significantly curtailed Phoenix Light’s Complaint, which alleged various breaches of the trustee’s duties in connection with 21 RMBS trusts. For eight of the trusts at issue, Judge Caproni rejected Phoenix Light’s breach-of-contract claims alleging that BNYM failed to notify other parties upon discovery of breaches of representations and warranties due to lack of evidence that BNYM actually discovered any breaches. Judge Caproni also rejected the breach claims in connection with another eight trusts due to Phoenix Light’s failure to support the claims with evidence on a “loan-by-loan and trust-by-trust” basis. Only Phoenix Light’s breach-of-contract claims related to trusts where BNYM had notice of a specific breach or an event of default survived, as did Phoenix Light’s Trust Indenture Act claims for three trusts (because BNYM did not address the claims in its reply brief). The Court also granted BNYM’s motion with respect to Plaintiffs’ negligence, gross negligence, and negligent misrepresentation claims, finding that Plaintiffs’ tort-based arguments were duplicative of their breach-of-contract allegations.

Paper Published by AFME on Brexit

 

The Association for Financial Markets in Europe (“AFME“) published a paper on September 6, 2017, which highlighted the necessity of transitional arrangements in the finance sector following Brexit.

AFME has made clear that it believes transitional arrangements need to be put in place prior to the United Kingdom’s exit from the European Union in order to avoid a number of risks relating to the recognition of central counterparties, cross-border contracts and data transfers, as well as a number of other potential issues.

The paper suggests that transitional measures, such as grandfathering cross-border trades and contracts executed prior to Brexit, regulators adopting a flexible and pragmatic approach to structures and operating models, and regulators and central banks taking steps to maintain a stable market, are essential in order to minimize disruption.

AFME also outlines a number of elements that the design of the transitional arrangements should contain.

The full paper is available here.

Legal Uncertainty Arising Out of the Clause 3 of European Union (Withdrawal) Bill 2017-2019: FMLC Publishes Letter

 

On August 31, 2017, the Financial Markets Law Committee (“FMLC“) published a letter containing comments on clause 3 of the European Union (Withdrawal) Bill 2017-2019 following a request from the UK’s Ministry of Justice to discuss the Bill.

The FMLC considers clause 3, in the context of direct EU legislation, which applies section by section and includes the application of implementing technical and regulatory standards. In its letter, the FMLC made a number of recommendations, including that:

  • The UK government should clarify which UK bodies (if any) are to take on the role of the European Supervisory Authorities, how this role will be defined and how this will be resourced as soon as possible;
  • More thought should be given to the operation and mechanics of clause 3. The provisions of direct EU legislation that apply before the day that the UK exits the EU and those which do not must be managed.
  • The UK government should plan for instances where certain technical or regulatory standards are necessary to enable domestic legislation to function effectively. For example, the revised Directive on payment services in the internal market  (EU 2015/2366) will apply from January 13, 2018, yet measures on regulatory standards are not due to come into force before the UK exits the EU and will not be received into UK domestic legislation. Without the regulatory standards, market participants will struggle to implement the Directive effectively.

The FMLC declined to comment further on the Bill, stating that it can most usefully contribute research and analysis once the statutory instruments set out in the Bill are published.

European Commission Implementing Regulation Amending Implementing Regulation 2016/2070 Published in the OJ

 

The European Commission Implementing Regulation amending Implementing Regulation 2016/2070 in relation to benchmarking portfolios and reporting instructions under the CRD IV Directive (2013/36/EU) (Regulation 2017/1486) was published in the Official Journal of the EU (“OJ“) on August 31, 2017.

The Implementing Regulation 2016/2070 sets out the reporting requirements required from institutions and was published in the OJ in December 2016. The European Banking Authority (“EBA“) and other competent authorities use the information reported to assess the quality of the institutions’ internal approaches under Article 78 of CRD IV.

Pursuant to Article 78(1) of CRD IV, institutions must submit the calculations of their internal approaches at least once a year. Given that the reporting requirements evolve over time in line with the changing focus of the competent authorities’ assessments and EBA Reports, the Commission considered it necessary to amend Annexes I to VI to Implementing Regulation 2016/2070.

The amendments to Implementing Regulation 2016/2070 are limited, and as such, there was no public consultation. The Implementing Regulation will enter into force on September 20, 2017.

BCBS Consults on the Implications of FinTech for Banks and Supervisors

 

The Basel Committee on Banking Supervision (“BCBS“) published a consultative document (BCBS415) on the implications of FinTech for banks and their supervisors.

The BCBS set up a task force to assess how FinTech will affect the banking industry and their supervisors in the near to medium term. The consultative document focuses on future potential scenarios together with the specific risks and opportunities these may bring.

The consultative document also includes case studies on big data, cloud computing and distributed ledger technology as well as case studies on three FinTech business models (neo-banks, payment services and lending platforms).

The BCBS identified key observations and recommendations on supervisory issues to be considered by banks and bank supervisors in the light of the emergence of new FinTech business models and the rapid adoption of enabling technologies. These include the following:

  • The opportunities for supervisors to use innovative technologies;
  • Principal risks for banks resulting from FinTech developments, including cyber, compliance and operational risks;
  • Implications for the increasing use of third parties by banks via outsourcing and/or partnership arrangements; and
  • The need to ensure high compliance standards and safety without limiting innovation in the banking sector.

Comments can be made on the consultative document until October 31, 2017.