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.
Financial Institution Regulatory
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.
Federal Reserve Board Releases a Proposed Rule to Impose Risk-Based Capital Surcharges on GSIB U.S. Bank Holding Companies
On December 9, the Federal Reserve Board (the “Board”) released a proposed rule (the “Proposed Rule”) to establish risk-based capital surcharges for U.S. bank holding companies identified as “global systemically important banking organizations (“GSIBs”). The Proposed Rule is one of several enhanced prudential standards developed by the Board in accordance with Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Also, it is based on the framework adopted by the Basel Committee on Banking Supervision as modified to address risks unique to the U.S. financial system.
Under the methodology described in the Proposed Rule, to determine whether it is a GSIB, each U.S. top-tier bank holding company with total consolidated assets of $50 billion or more that is not a subsidiary of a non-U.S. banking organization would be required to annually calculate a systemic indicator score beginning December 31 of the year it crosses the $50 billion threshold. Such score would be based on five systemic indicators—size, interconnectedness, substitutability, complexity and cross-jurisdictional activity. If it is 130 basis points or greater, then such bank holding company would be designated as a GSIB and be subject to a GSIB surcharge. A GSIB surcharge would be calculated using two methods—(a) method 1 based on the sum of systemic indicator scores reflecting size, interconnectedness, cross-jurisdictional activity, substitutability and complexity and (b) method 2 based on the sum of systemic indicator scores reflecting size, interconnectedness, cross-jurisdictional activity and complexity as well as a measure of use of short-term wholesale funding but excluding the systemic indicator scores reflecting substitutability. The higher of the two surcharges determined under the two methods would be imposed on such bank holding company as a GSIB surcharge.
Currently, eight U.S. bank holding companies would be identified as GSIBs under the Proposed Rule. The Board’s regulatory capital rule would need to be amended to increase a GSIB’s capital conservation buffer by the amount of its GSIB surcharge.
The Proposed Rule would be phased in beginning 2016 at a rate of 25% per year and become fully effective on January 1, 2019.
Public comment is due no later than February 28, 2015. Release. Proposed Rule.
Financial Regulators Release 2014 Bank Secrecy Act/Anti-Money Laundering Examination Manual
On December 2, the Federal Financial Institutions Examination Council (FFIEC) released the revised Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual. The revisions clarify supervisory expectations and incorporate regulatory changes since the manual’s 2010 update. The revisions incorporate feedback from the banking industry and examination staff.
The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and State Liaison Committee revised the manual in collaboration with the Financial Crimes Enforcement Network (FinCEN), the administrator of the BSA, and the Office of Foreign Assets Control (OFAC). FinCEN and OFAC collaborated on the revisions made to the sections that address compliance with the regulations and sanctions programs that FinCEN and OFAC administer and enforce. Manual. Release.
CFTC Provides Relief from the Clearing Requirement for Swaps Entered into by Eligible Treasury Affiliates
On November 26, CFTC issued a no-action letter providing additional relief for eligible treasury affiliates that enter into swaps that are subject to the clearing requirement in section 2(h)(1) of the Commodity Exchange Act (CEA) and part 50 of the CFTC’s regulations. The no-action letter modifies relief that was previously issued for treasury affiliates on June 4, 2013 in CFTC No-Action Letter 13-22. “Eligible treasury affiliates” are entities that are wholly-owned by a non-financial parent company, and are “financial entities” under section 2(h)(7)(C)(i)(VIII) of the CEA because of the activities undertaken on behalf of its non-financial affiliates. Among other changes, the no-action letter modifies the rules placed upon operations between a treasury affiliate and its affiliates and removes restrictions as to the number of financial affiliates that may be within a corporate group. Release. Letter.
Federal Reserve Board Seeks Public Comment on the Application of Enhanced Prudential Standards to General Electric Capital Corporation
On November 25, the Federal Reserve Board (the “Board”) released proposed enhanced prudential standards and reporting requirements to be applied to General Electric Capital Corporation (“GECC”) and requested public comment on the application thereof. GECC is designated by the Financial Stability Oversight Counsel as a non-bank systemically important financial institution that needs to be supervised by the Board and be subject to enhanced prudential standards similar to those applicable to certain bank holding companies. Release.