On October 18, pursuant to Section 725(c) of the Dodd-Frank Act, the CFTC adopted final rules establishing standards for compliance with certain core principals applicable to derivatives clearing organizations (DCOs). The CFTC also adopted rules requiring DCOs to designate a Chief Compliance Officer, and rules revising the DCO registration application. CFTC Fact Sheet.
Month: October 2011
Fed and FDIC Rule on Resolution Plans
On October 17, the Fed and the FDIC adopted a final rule to implement the resolution plan requirement of Section 165(d)(1) of the Dodd-Frank Act. Companies with $250 billion or more in non-bank assets will be required to submit an initial plan by July 1, 2012; companies with non-bank assets ranging from $100-$250 billion must submit an initial plan by July 1, 2013; and companies subject to the rule with less than $100 billion in non-bank assets must submit an initial plan by December 31, 2013. The rule will be effective on November 30. Joint Release. Final Rule.
House Committee Investigates Cost of Federal Housing Finance Agency RMBS Lawsuits
The House Committee on Oversight and Government Reform, as part of its ongoing monitoring of the Federal Housing Finance Agency (“FHFA”), is investigating the cost to the government of numerous lawsuits against financial institutions brought on behalf of Fannie Mae and Freddie Mac by Quinn Emanuel and Kasowitz Benson. In a September 29, 2011 letter to the Acting Director of the FHFA, Rep. Darrell Issa (R-Cal.), Chairman of the committee, requested detailed information about the FHFA’s decision-making process in selecting counsel, the terms of the representation agreements with each firm, the expected value of the lawsuits, and the expected cost of the representations. Rep. Issa requested an explanation of the FHFA’s decision to use private law firms instead of government lawyers and also requested copies of all RMBS-related communications between the FHFA and the Department of Justice or other government agencies. Rep. Issa asked the FHFA to respond by October 13. Letter.
Loreley Financing Initiates CDO Actions Against Deutsche Bank, Bank of America, Countrywide and Merrill Lynch
On October 5, 2011, Loreley Financing (“Loreley”), a group of special purpose entities based in the Channel Islands, commenced two actions in New York State Supreme Court concerning the sale of CDO’s. In the first action, Loreley filed a complaint against Deutsche Bank in connection with a $440 million investment in six CDOs between 2005 and 2007. Loreley accuses Deutsche Bank of concealing inside knowledge, gathered through its work originating subprime loans and securitizing RMBS, that the loans underlying the CDOs were highly risky and very likely to default. Loreley alleges that Deutsche Bank marketed the CDOs to Loreley while offloading the riskiest RMBS off its own books into the CDOs and contemporaneously advising favored clients to place short bets against the same assets. The complaint alleges common-law claims for fraud, rescission, conspiracy to defraud, aiding and abetting fraud, fraudulent conveyance, and unjust enrichment. Complaint.
The second action, in which Loreley has to date filed only a summons with notice, involves preliminary allegations against Bank of America, Countrywide and Merrill Lynch based on a $92 million investment in two CDOs. Without making any factual allegations, Loreley asserts common-law claims for rescission, fraud, fraudulent inducement, conspiracy to defraud, fraudulent conveyance, aiding and abetting fraud, breach of fiduciary duty, and unjust enrichment. Summons.
Federal Judge Dismisses MBIA Lawsuit Against the FDIC
On October 6, 2011, Judge Amy Jackson of the Federal District Court in the District of Columbia dismissed an action brought by MBIA Insurance Corporation (“MBIA”) against the FDIC, both in its capacity as receiver for IndyMac Bank and in its corporate capacity, arising out of losses MBIA incurred in connection with its agreements to insure investors in certain IndyMac RMBS. MBIA attempted to distinguish itself from other general creditors of IndyMac by arguing that its losses were actually “administrative expenses” of the FDIC, which are entitled to priority distribution. The court granted the FDIC’s motion to dismiss based on lack of subject matter jurisdiction and failure to state a claim, finding that the FDIC had not expressly approved the insuring agreements between MBIA and IndyMac as necessary administrative expenses. It rejected MBIA’s theory that the FDIC had approved the expenses by not specifically repudiating the agreements because “approval by omission” was inconsistent with the applicable statutes and regulations, and potentially could transform all general creditor claims based on unrepudiated obligations of the failed bank into administrative expenses entitled to priority. Opinion.
Derivatives Month in Review
Click here to view highlights regarding important legal, regulatory and other newsworthy developments in the area of derivatives.
Regulation of Investment Advisers to Real Estate Funds in the Wake of the Dodd-Frank Act
Sponsors of private real estate funds may be subject to new federal registration requirements because of recent regulatory changes effected by the Dodd-Frank Act and companion SEC regulations. Click here to read more.
Rating Agency Developments
On October 12, S&P requested comments on proposed changed to the methodologies it uses to rate CDOs backed by structured finance securities. S&P Release.
On October 12, S&P requested comment on proposals to update its methodology for rating CDOs and TOBs backed by pools of municipal debt. S&P Release.
On October 11, DBRS released its U.S. RMBS loss model and rating methodology. DBRS Release.
On October 11, DBRS released a unified interest rate model for U.S. RMBS. DBRS Release.
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FSOC Proposed Rule on Systemic Importance of Nonbank Financial Companies
On October 11, pursuant to Section 113 of the Dodd-Frank Act and in response to comments to a proposed rule issued on January 18, the Financial Stability Oversight Council issued a second notice of proposed rulemaking and proposed interpretive guidance to provide additional details regarding the framework the FSOC intends to use in the process of assessing whether a nonbank financial company could pose a threat to U.S. financial stability. Comments must be submitted within 60 days of publication in the Federal Register. FSOC Proposed Rule.
Fed Proposed Rules for Reserve Banks and Depository Institutions
On October 11, the Fed proposed rules to amend Regulation D (Reserve Requirements of Depository Institutions) and Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire). The proposed rules are intended to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and Reserve Banks. Comments must be submitted within 60 days after publication in the Federal Register. Fed Release. Proposed Amendment to Reg D. Proposed Amendment to Reg J.