NY Intermediate Appellate Court Reverses Dismissal of HSBC RMBS Suit Against Deutsche Bank

 

HSBC, the trustee of two securitizations at issue, successfully appealed the 2018 dismissal of its complaint alleging that DB Structured Products Inc. (DBSP), the sponsor of the two securitizations at issue, breached Mortgage Loan Purchase Agreements and Pooling and Servicing Agreements by securitizing loans in breach of representations and warranties and subsequently failing to disclose its discovery of those breaches. The trial court granted a motion to dismiss without leave to amend because it interpreted the contract language as providing that DBSP had no obligation to inform HSBC when it discovered loan-level breaches due to language in the governing agreements that DBSP notify itself of breaches. A split panel of the New York Appellate Division, First Department, reversed the trial court decision, finding that the contract was ambiguous because of the nonsensical nature of the notice provision, which required DBSP to provide notice to itself and granted HSBC leave to amend its complaint.

EBA Publishes Consultation Paper on RTS on Standardized Approach for Counterparty Credit Risk

 

On May 2, the European Banking Authority (EBA) published a consultation paper on four draft regulatory technical standards (RTS) on the standardized approach for counterparty credit risk under Article 277(5) and Article 279a(3) of the proposed Regulation mending the Capital Requirements Regulation (575/2013) (CRR II). These proposals build on the proposals included in the discussion paper published in December 2017 (which can be found here) and include specifying methods for the mapping of derivative transactions to risk categories, a formula for the calculation of the supervisory delta of options mapped to the interest rate risk category and a method for determining whether derivative transactions are long or short in their risk drivers.

A three-pronged approach is proposed for the assignment of a derivative transaction to a risk category:

  • Qualitative approach identifies derivative transactions that clearly have only one material risk driver.
  • Qualitative and quantitative approach requires a more detailed assessment of, and is applicable to, derivative transactions for which the mapping cannot immediately be done on the basis of the first approach.
  • Third approach identifyies all possible risk drivers of a transaction as material and allocating the transaction to all relevant risk-categories.

Comments can be made on the consultation paper until August 2. There will be a public hearing on June 17. The RTS are subject to change, as they are based on the proposed legislative text for CRR II and so will change to the extent the draft legislative text changes.

EIOPA Publishes Report on Thematic Review on Big Data Analytics

 

On May 8, the European Insurance and Occupational Pensions Authority (EIOPA) published a report setting out the findings of its EU-wide thematic review on the use of Big Data Analytics (BDA) in motor and health insurance. The aim of the review was to gather empirical evidence on the benefits and risks arising from BDA, including artificial intelligence, machine learning and cloud computing services.

The report found that there was a strong tendency towards increasingly data-driven business models throughout the insurance value train and that a majority of firms were either using, or contemplating using, BDA tools.

The report notes that there are still risks to be addressed, including ethical issues around the fairness of the use of BDA, as well as regarding the accuracy, transparency and auditability of BDA tools. It highlighted the biases inherent in data that being used could be reinforced through machine learning algorithms if firms do not have adequate governance arrangements in place. The EIOPA is going to undertake further work throughout 2019 in relation to these identified risks.

The report also sets out details of future BDA initiatives, including: the supervision of artificial intelligence and machine learning, ethics and fairness, outsourcing of cloud computing services by insurers and cyber insurance and cyber security.

Rating Agency Developments

 

On May 8, DBRS published its rating methodology for Public Universities. Methodology.

On May 7, Moody’s published its rating methodology for certain Nonprofit Organizations. Release.

On May 6, DBRS published its methodology for Master Canadian Structured Finance Surveillance. Release.

On May 6, Fitch published its rating criteria for Money Market Funds. Release.

On May 3, Moody’s published its rating methodology for Local Currency Country Risk Ceiling for Bonds and Other Local Currency Obligations. Release.

On May 2, Fitch published its Short-Term Ratings Criteria. Release.

On May 2, Fitch published its rating criteria for Global Structured Finance. Release.

 

White House and HUD Publish Opportunity Zone Implementation Plan

 

On April 17, the White House Opportunity and Revitalization Council (Council) published its Implementation Plan, a detailed work plan for how the Council chaired by U.S. Department of Housing and Urban Development (HUD) Secretary Ben Carson will accomplish the goals specified in Executive Order 13583 of December 12, 2018. The Implementation Plan explains the various subcommittees of the Council, as well as describes the strategy to implement administrative reforms and initiatives that will target, streamline, coordinate and optimize federal resources in economically distressed communities, including Opportunity Zones. Release.

CFTC Approves a Final Rule Revising Privacy Notice Requirements

 

On April 19, the Commodity Futures Trading Commission (CFTC) approved a final rule to revise an existing CFTC regulation that currently requires certain merchants and dealers, among other persons, to provide annual privacy notices to customers. The new rule will remove this requirement to provide annual privacy notices when certain conditions are met. Release.

CFPB Changes Policy Regarding Civil Investigative Demands

 

On April 23, the Consumer Financial Protection Bureau (CFPB) announced changes to its current policies regarding Civil Investigative Demands (CIDs). These changes will require CIDs to provide more information about the alleged wrongful conduct under investigation. The new policy aligns with recent court decisions about notifications of purpose and is consistent with prior reports from the CFPB.

European Commission Consults on Effectiveness of DMD

 

The European Commission has launched a consultation relating to its evaluation of the Distance Marketing of Financial Services Directive (2002/65/EC) (DMD).

The DMD provides details on the information that a consumer should receive about a financial service and the financial services provider before concluding a distance contract. Among other things, it also gives consumers a 14-day withdrawal period for certain financial services contracts, and bans services and communications from suppliers that a consumer has not solicited or consented to.

The European Commission published a new webpage announcing a consultation relating to its evaluation of the Distance Marketing of Financial Services Directive (2002/65/EC) (DMD). The Commission explains that, since the DMD came into force, the retail financial sector has gone increasingly digital, with new products and actors available on the market, and new sales channels being used. Also, several EU laws relating to financial services have been adopted or updated. As a result, the Commission has launched an evaluation of the DMD to assess whether it is still fit for purpose.

The aim of the consultation is to ensure that all relevant stakeholders have the opportunity to express their views on the relevance, effectiveness, pertinence and coherence of the DMD. The Commission particularly wants to hear from consumers, retail financial services providers and authorities responsible for supervising and enforcing compliance with the DMD’s provisions.

Responses to the consultation can be made by completing an online questionnaire, which is linked to from the consultation webpage. Comments can be made on the consultation until 2 July 2019. The Commission expects to publish the conclusions of the evaluation exercise by the end of 2019.