On November 2, the SEC adopted final rule 18f-4 under the Investment Company Act. The new rule intends to update the regulation of funds’ use of derivatives. Under the new framework, funds using derivatives will generally have to adopt a derivatives risk-management program administered by a derivatives risk manager and comply with an outer limit on fund leverage risk based on certain calculations. Final Rule.
On October 20, the federal bank regulatory agencies finalized the net stable funding ratio rule, which requires large banks to maintain a minimum level of stable funding relative to each institution’s assets, derivatives, and commitments over a one-year period. The rule aims to strengthen the resilience of large banks and their ability to lend across economic conditions. Release.
On October 4, 2016, Moody’s published its approach to rating revenue bonds of U.S. municipal Joint Action Agencies (JAA). Report.
On October 3, 2016, DBRS published derivative criteria for European structured finance transactions. Report.
On October 3, 2016, Moody’s published its approach to assessing credit risk for rated issuers in the business and consumer service industry. Report.
On October 3, 2016, Moody’s published its approach to rating credit tenant lease and comparable lease financings. Report.
On October 3, 2016, Moody’s published its rating methodology for companies in the global integrated oil and gas industry. Report.
On September 30, 2016, Moody’s published methodology for rating debt issuance under certified capital company, new markets tax credit and similar programs. Report.
On September 29, 2016, Fitch published its methodology for assigning new and monitoring existing international ratings to aircraft enhanced equipment trust certificates (EETCs). Report.
On October 4, 2016, the European Commission adopted a Delegated Regulation supplementing EMIR (the Regulation on OTC derivatives, CCPs and trade repositories) (Regulation 648/2012) with regulatory technical standards (“RTS”) on risk mitigation techniques for uncleared OTC derivative contracts, together with related Annexes (C(2016) 6329 final).
The Delegate Regulation sets out the levels and types of collateral that OTC derivatives counterparties must exchange bilaterally if the transaction is not cleared through a central counterparty (“CCP”). In the event that one counterparty to the transaction defaults, the margin collected will protect the non-defaulting counterparty against resulting losses.
The Joint Committee of the European Supervisory Authorities (ESAs) submitted the final draft RTS to the Commission in March 2016. In July 2016, the Commission informed the European Banking Authority that it intended to endorse the draft RTS with some amendments, including in relation to the concentration limits for pension scheme arrangements and the timeline for.
The Council of the EU and the European Parliament will now consider the Delegated Regulation. If neither of them objects to it, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU.
On August 8, 2016, the U.S. Commodity Futures Trading Commission (CFTC) announced three separate enhancements relating to the protection of customer funds. The new protections address the exemption of certain Federal Reserve Banks from liability under the Commodity Exchange Act, as well as the use of money market funds by derivatives clearing organizations and futures commission merchants. Press Release.
On August 2, 2016, the European Commission published an addendum to the draft regulatory technical standards (RTS) on margin requirements for uncleared OTC derivatives under Article 11(15) of the European Market Infrastructure Regulation (EMIR). This follows an endorsement by the European Commission on July 28, 2016 of the draft RTS with amendments. The ESAs will have 6 weeks to respond to these amendments before resubmitting them to the Commission in the form of a formal opinion.
In the addendum, the Commission states that there are some clarifications to be made to the revised draft RTS on margins in Articles 34 and 36 on application timing and in Annex III where a formula is missing. The intention of the Commission is to have the first wave of the initial margin requirements applied from the date one month after the date the RTS enter into force. This was the intention of paragraph 1 in Article 36. However, the Commission considers that the reading of the interaction of paragraph 1 with the other paragraphs in Article 36 is not clear and that the revisions set out in the addendum are therefore necessary.
The European Securities and Markets Authority (ESMA) has published an updated version of its Q&A paper on the application of the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (2009/65/EC) as most recently revised by UCITS V (2014/91/EU). The purpose of the Q&A is to promote common supervisory approaches and practices in the application of the UCITS and its implementing measures. The most recent updates reflect a Q&A relating to the valuation of OTC derivatives and are highlighted in yellow in the paper.
The latest version of the Q&A is available here.
On May 3, 2016, the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency proposed a rule, the net stable funding ratio (the “NSFR”), to strengthen banks by requiring them to maintain a minimum level of stable funding relative to the liquidity of their assets, derivatives and commitments over a one-year period. The most stringent of the NSFR’s requirements would apply to, among others, banking organizations with $250 billion or more in total consolidated assets. The NSFR would become effective January 1, 2018. Release. Proposed Rule.
The Joint Committee of the European Supervisory Authorities (EBA, EIOPA, ESMA) (“ESAs“) has published final draft Regulatory Technical Standards (“RTS“) outlining the framework of the European Market Infrastructure Regulation (EMIR). The RTS cover the risk mitigation techniques related to the exchange of collateral to cover exposures arising from non-centrally cleared OTC derivatives. They also specify the criteria concerning intragroup exemptions and the definitions of practical and legal impediments to the prompt transfer of funds between counterparties.
The draft RTS prescribe that, for OTC derivatives not cleared by a Central Counterparty, counterparties have to exchange both initial and variation margins. This will reduce counterparty credit risk, mitigate any potential systemic risk and ensure alignment with international standards. The draft RTS outline the list of eligible collateral for the exchange of margins, the criteria to ensure the collateral is sufficiently diversified and not subject to wrong-way risk, as well as the methods to determine appropriate collateral haircuts. The draft RTS also lay down the operational procedures relating to documentation, legal assessments of the enforceability of the agreements and the timing of the collateral exchange, as well as the procedures for counterparties and competent authorities related to the treatment of intragroup derivative contracts.
The EBA has published the following draft RTS in connection with the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD):
