Derivatives

Rating Agency Developments

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

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 finance.  Criteria.

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

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

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 tunnels.  Criteria.

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

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

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

Final Rules Implementing the Volcker Rule

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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 Release.  Final Rules.  Fact Sheet.

European Commission Imposes EUR 1.71 Billion Fine for Participating in Illegal Cartels

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On December 4, the European Commission announced that it had fined eight international banks a total of more than 1.7 billion for their participation in illegal cartels in markets for financial derivatives covering the European Economic Area.

Using the cartel settlement procedure, the Commission reached two separate decisions; one decision involved seven separate bilateral infringements relating to interest rate derivatives denominated in Japanese yen.  The companies involved were UBS, RBS, Deutsche Bank, JPMorgan, Citigroup and RP Martin.

The other decision was made in relation to a collusion by four banks in relation to interest rate derivatives denominated in euro.  The banks were Barclays, Deutsche Bank, RBS and Société Générale.  Utilizing the Commission’s 2006 Leniency Notice, Barclays and UBS received complete immunity from fines.  Announcement.

Financial Industry Breakfast Briefing: Derivatives Market Update – Where Things Stand

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On September 10, Orrick will host a Financial Industry Breakfast Briefing in our New York office.  The briefing will cover the current state of the derivatives market with specific updates on the implementation of Dodd-Frank and recent litigation involving derivatives.  Speakers include partners Steven Fink, Nikiforos Mathews and Thomas Mitchell.  This course has been approved in accordance with the requirements of the Continuing Legal Education Board for a maximum of 1.0 credit hour.  To register for this event, please click here.

Commentary: Five Lessons from the Municipal Derivatives Litigation Front

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Pre-financial crisis, interest rate derivatives were widely recognized as a valuable part of the municipal issuer’s financial toolkit.  Post-crisis, they have been a thorn in the side of many issuers, resulting in expensive litigation with failed swap providers – most notably the Lehman and Ambac derivatives trading subsidiaries – and public criticism of municipal issuers said to have fallen prey to more sophisticated providers.  There are several lessons to be learned from the recent spate of litigation, which Orrick covered in an article recently published in The Bond Buyer.

SEC Rules for Derivative Regulation

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The SEC, on July 6, and the CFTC, on July 10, approved rules and interpretations for key definitions of certain derivatives products. The SEC rules and interpretations further define the terms “swap” and “security-based swap” and whether a particular instrument is a “swap” regulated by the CFTC or a “security-based swap” regulated by the SEC. The action also addresses “mixed swaps,” which are regulated by both agencies, and “security-based swap agreements,” which are regulated by the CFTC but over which the SEC has antifraud and other authority. The rules will be effective 60 days after publication in the Federal Register. However, solely for the purposes of certain interim relief granted and exemptions adopted under the Securities Act of 1933, the Securities and Exchange Act of 1934, and the Trust Indenture Act of 1939, the compliance date for the final rules further defining the term “security-based swap” will be 180 days after the publication in the Federal Register. SEC Release. CFTC Meeting Notice.

SEC Proposed Sequencing of Derivatives Regulation

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On June 11, the SEC issued a policy statement and request for comment on the anticipated sequencing of compliance dates of final rules to be adopted by the SEC pursuant to certain provisions of Title VII of the Dodd-Frank Act, regarding the regulation of security-based swaps and security-based swap market participants under the Exchange Act. Comments must be submitted on or before 60 days from publication in the Federal Register. SEC Release.  Policy Statement with Request for Comment.

Rating Agency Developments

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On March 1, S&P requested comments by March 30 on rating methodology and assumptions for derivative product companies.  S&P Request for Comment.

On February 28, Fitch updated its U.S. municipal structured finance criteria.  Fitch Report.

On February 27, S&P released FAQs on its revised principal stability fund / money market fund criteria.  S&P FAQs.

On February 27, Fitch published criteria on U.S. mortgage REITs and similar finance companies.  Fitch Report.

On February 27, Fitch published criteria on U.S. equity REITs and REOCs (real estate operating companies). 
Fitch Report.

Note: Free registration is required for Fitch and S&P releases and reports.