On February 10, the Securities and Exchange Commission (the “SEC”) adopted rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act to regulate both U.S. and foreign dealers who engage in security-based swap dealing activities in the U.S. The rules require non-U.S. companies to include certain transactions in their determinations of whether such companies are subject to registration as security-based swap dealers. The final rules will take effect 60 days after publication in the Federal Register, but compliance is not required until 1 year after the publication or the SBS Entity Counting Date, whichever comes later. Press release.
SueAnn Yue, a Partner in the Los Angeles office, is a member of the Structured Finance Group.
SueAnn represents issuers, sponsors, placement agents, servicers, underwriters, and other market participants in connection with both public offerings and private placements, asset acquisitions and sales and the negotiation of lending facilities.
Her practice encompasses a variety of asset-backed securities, including credit and charge card receivables, residential mortgage-backed securities (RMBS), agency and government sponsored mortgage loans, and tax lien-backed securities.
SueAnn advises clients on the implications of financial markets regulation, including the implementation of the Dodd-Frank Act. SueAnn is also an editor of Orrick's Financial Industry Week in Review.
Posts by: SueAnn Yue
Rating Agency Developments
On February 9, DBRS published its methodology for rating Canadian government STRIP bonds. Report.
On February 9, DBRS published its methodology for guarantees and other forms of support. Report.
On February 9, DBRS published its methodology for rating CLOs and CDOs of large corporate credit. Report.
On February 9, DBRS published its methodology outlining cash flow assumptions DBRS applies to rating corporate credit securitizations. Report.
U.S. Commodity Futures Trading Commission Division of Clearing and Risk Issues No-Action Relief from Swap Clearing Requirements
On January 8, 2016, the U.S. Commodity Futures Trading Commission’s (the “CFTC”) Division of Clearing and Risk issued no-action relief to certain entities from the swap clearing requirements so long as certain conditions (outlined in the respective letters) are complied with. The covered entities include (1) small bank holding companies and savings and loan holding companies with consolidated assets of less than $10 billion and (2) Community Development Financial Institutions that have been certified by the U.S. Department of the Treasury. Press Release. No-Action letter. No-Action Letter.
The Federal Housing Finance Agency Releases Final Rule on Federal Home Loan Bank Membership
On January 12, 2016, the Federal Housing Finance Agency (“FHFA”) issued a final rule establishing new requirements for membership in the Federal Home Loan Banks (“FHLBanks”). The FHLBanks are 11 U.S. government-sponsored banks that provide liquidity to their members to support housing finance and community investment. Membership is governed by the Federal Home Loan Bank Act (the “Act”), which states that insurance companies, among others, are eligible for membership. 12 U.S.C. § 1424(a)(1). The new rule, issued under that Act, establishes new requirements for becoming a member and maintaining membership of an FHLBank. Most notably, the final rule excludes captive insurance companies from membership.
In its 2014 proposed rule, FHFA first proposed excluding captive insurance companies from the scope of the definition of “insurance company” in the Act. Captive insurance companies are insurance companies established by a parent specifically to cover risks to which the parent is exposed; they do not insure non-affiliated third parties. Despite receiving 400 comments on this aspect of the rule, almost all of which expressed opposition to the proposal, FHFA’s final rules retains the proposal essentially as it was proposed.
Under the rule, FHLBanks may not accept any captive insurance companies as new members. For captive insurance companies that became members since the rule was proposed in 2014, membership must be terminated within one year, and no additional advances may be made. Captive insurance companies that were members of a FHLBank prior to the issuance of the proposed rule may remain members of their current FHLBanks for five years, but the amount of advances they can receive are capped, and the FHLBanks may not make new advances or renew existing advances with a maturity date beyond the five-year period.
The rule’s exclusion of captive insurance companies is vulnerable to challenge in court. Chiefly, it is unclear that FHFA has authority to exclude captive insurance companies from the purview of the Act. Congress directed that “any” insurance company shall be eligible for membership, potentially ousting FHFA’s discretion to pick and choose among insurance companies, especially where the definition of “insurance company” has traditionally been left to the States. In the same vein, it is unclear that FHFA may add additional statutory criteria (here, that an insurance company must primarily underwrite insurance for nonaffiliated persons or entities) not included by Congress. In addition, FHFA’s evaluation of its purported reason for excluding captive insurance companies—that such companies may be passing advances through to their parents, who are not eligible for FHLBank membership—is not thoroughly analyzed. It appears that rather than investigating whether captive insurance companies are actually being used as conduits to ineligible entities, FHFA relies primarily on industry publications encouraging companies to set up captives in order to do so. Moreover, it is unclear that FHFA’s proffered solution would solve any purported problem given that other entities that remain eligible under FHFA’s new rule can also pass through advances to their ineligible parent companies.
Under the 2014 proposal, FHFA also proposed imposing ongoing minimum investment requirements on FHLBank members in order to maintain membership. Specifically, FHFA proposed that institutions would have had to maintain a certain percentage of residential mortgage assets. The threshold for small banks and credit unions with assets less than $1 billion was at least 1%. In its final rule, FHFA removed these requirements from the final regulations, concluding that the burdens of imposing such standards would outweigh the benefits.
The new regulation will go into effect 30 days after publication in the Federal Register. The rule has been strongly opposed by industry participants, who view it as a detriment to the liquidity of the residential housing market, and is expected to garner further discussion and likely a court challenge. Press Release. Final Rule.
Please feel free to contact any of the authors of this Client Alert or other Orrick attorneys with whom you work to discuss any questions you may have with regard to the foregoing.
Rating Agency Developments
On January 8, 2016, Fitch updated its criteria for rating investment holding companies. Report.
On January 7, 2016, Moody’s updated and replaced its existing methodology for rating banks. Report.
On January 7, 2016, Moody’s published its methodology for rating central counterparty clearing houses (CCPs). Report.
The Federal Housing Administration Announces New Loan Limits for 2016
On December 9, 2015, the Federal Housing Administration (“FHA”) announced its schedule of loan limits for the 2016 calendar year. The new schedule, effective January 1, 2016, raises loan limits in 188 counties and are a result of changes in housing prices in the respective areas. These loan limits are effective for case numbers assigned on or after January 1, 2016, and will remain in effect until 2017. FHA’s Loan Limits Page. Press Release.
U.S. Commodity Futures Trading Commission Divisions Issue Time-Limited No-Action Letter Extending Relief from Certain Recordkeeping Requirements Under Commission Regulations
On December 8, 2015, the U.S. Commodity Futures Trading Commission’s (the “CFTC”) Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight issued a time-limited no-action letter extending the relief provided in CFTC Letter No. 14-147. The relief would otherwise expire on December 31, 2015 and applies to commodity trading advisors (“CTAs”) that are registered with the CFTC and are members of designated contract markets (“DCMs”) or swap execution facilities (“SEFs”). The extension grants no-action relief to these entities from the requirement to record oral communications, and also to covered market participants from the requirement to link records of oral and written communication that lead to the execution of a transaction in a commodity interest and related cash or forward transactions. Such relief will expire on the effective date of any final CFTC action with respect to the CFTC’s proposal to amend Regulation 1.35(a). Press Release. No-Action Letter.
The Federal Reserve Board Issues Final Rule Adopting Amendments to the Board’s Regulatory Capital Rules for Non-Traditional Stock Corporations
On December 4, 2015, the Board of Governors of the Federal Reserve System (the “Board”) issued a final rule adopting amendments to the Board’s regulatory capital framework (“Regulation Q”) that was issued in June 2013. The final rule provides examples of how to apply the framework to depository institution holding companies that are not organized as traditional stock corporations and how instruments issued by such firms may qualify as regulatory capital. The final rule also issued a temporary exclusion from Regulation Q for savings and loan holding companies that are trusts and depository institution holding companies that are employee stock ownership plans – until the Board can propose appropriate rules for such entities. In addition, the Board extended the applicable compliance date with the revised capital framework to July 1, 2016. The final rule will take effect on January 1, 2016. Press Release. Final Rule.
Final Rule Issued to Establish Minimum Margin Requirements for Non-Cleared Swaps and Non-Cleared Security-Based Swaps
On December 3, 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively, “Agencies”) issued a final rule establishing capital requirements, as well as minimum requirements for the exchange of initial and variation margin, for covered swap entities with respect to non-cleared swaps and non-cleared security-based swaps. The purpose of the requirements is to offset the greater risk to such entities, and thus, the amount of margin required will vary based on relative risk. The final rule implements sections 731 and 764 of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 and will take effect on April 1, 2016 – however, the minimum margin requirements will not phase-in until September 1, 2016. All swap counterparties must comply with the variation margin requirements by March 1, 2017, while swap counterparties with more than $3 trillion in outstanding swap activity must comply with both the initial and variation margin requirements by September 1, 2016. Press Release. Final Rule.
The Office of the Comptroller Provides Updated Guidance for Risk Assessment System
On December 3, 2015, the Office of the Comptroller of the Currency (“OCC”) provided updated guidance for its risk assessment system (“RAS”). The guidance (i) clarifies the relationship between RAS and the Uniform Financial Institutions Rating System (“CAMELS”), (ii) revises the definition of banking risk, (iii) expands the “quality of risk management” assessment, and (iv) expands strategic and reputation risk assessments. These updates affect the following booklets of the Comptroller’s Handbook: “Bank Supervision Process,” “Community Bank Supervision,” “Federal Branches and Agencies Supervision,” and “Large Bank Supervision.” Press Release.