Derivatives

Rating Agency Developments

 

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.

European Commission Adopts Delegated Regulation on RTS on Risk Mitigation Techniques for Uncleared OTC Derivative Contracts under EMIR

 

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.

CFTC Announces Measures to Enhance Protection of Customer Funds

 

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.

European Commission Addendum to Draft RTS on Margin Requirements for Uncleared OTC Derivatives under EMIR

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.

ESMA Updates Q&A on Application of UCITS Directive

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.

Agencies Propose Net Stable Funding Ratio Rule

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.  ReleaseProposed Rule.

ESAs Publish Final Draft Technical Standards on Margin Requirements for Non-Centrally Cleared Derivatives

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.

EBA Publishes Draft RTS in Relation to the BRRD

The EBA has published the following draft RTS in connection with the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD):

  1. Final draft RTS on the valuation of derivatives under Article 49(4);
  2. A document setting out final draft RTS and guidelines on the business reorganization plans to be submitted where a resolution authority decides to apply the bail-in tool under the BRRD; and
  3. Final draft RTS on the information that should be contained in the detailed records of financial contracts required in support of the power to impose a stay on claims by creditors under Article 71. The final draft RTS also specify the circumstances in which the requirement to maintain detailed records will be imposed.

Rating Agency Developments

On September 24, DBRS published a report describing its approach for monitoring European CMBS ratingsMethodology.

On September 25, DBRS published its methodology for rating European RMBS transactions issued in Europe with residential loans originated in Europe.  Methodology.

On September 25, DBRS published its methodology for rating securitizations issued in Canada with collateral originated in Canada.  Methodology.

On September 28, Fitch updated its rating criteria for infrastructure and project financeCriteria.

On September 28, Moody’s published its rating methodology for corporate synthetic collateralized debt obligationsMethodology.

On September 28, Moody’s published its rating methodology for collateralized loan obligationsMethodology.

On September 28, Moody’s updated its methodology for rating securitization transactions backed predominately by loans granted to microenterprises, small- and medium-sized enterprises (SMEs) and self-employed individuals.  Methodology.

On September 29, Fitch updated its rating criteria for toll roads, bridges and tunnelsCriteria.

On September 29, DBRS published its methodology for rating Portuguese electricity tariff securitizationsMethodology.

On September 30, DBRS published a report describing the criteria applied in reviewing derivatives in the context of a European structured finance transactionMethodology.

On September 30, Moody’s published its methodology for assessing credit risk for companies in the restaurant industryMethodology.

Final Rules Implementing the Volcker Rule

On December 10, the Fed, CFTC, FDIC, OCC and SEC issued final rules to implement Section 619 of the Volcker Rule Act (the Volcker Rule), which prohibit insured depository institutions and banking entities from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account.  Banking organizations covered by the rules will be required to fully conform their activities and investments by July 21, 2015.  Joint ReleaseFinal RulesFact Sheet.