Orrick's Financial Industry Week in Review

FHFA Increases 2016 Multifamily Lending Caps

On May 4, 2016, the Federal Housing Finance Agency announced that it increased its 2016 multifamily lending caps for Fannie Mae and Freddie Mac from $31 billion to $35 billion. The increase is based on growing estimates of the overall size of the multifamily finance market. Release.

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. Release. Proposed Rule.

CFTC Amends Swap Portfolio Reconciliation Requirement

On May 2, 2016, the U.S. Commodity Futures Trading Commission approved a final rule to amend the swap portfolio reconciliation requirement. Under CFTC Regulation 23.500(i), swap dealers and major swap participants were required to exchange all terms of swaps with their counterparties as part of the portfolio reconciliation exercise, but were only required to reconcile the material terms of swaps. Amendments to the definitions of "portfolio reconciliation" and "material terms" now make it so that swap dealers and major swap participants need only exchange the material terms of swaps, so that the terms that are required to be exchanged are the same as those terms required to be reconciled. Release.

On May 3, 2016, DBRS published its rating methodology for pooledaircraft lease securitizations. Report.

On May 3, 2016, DBRS published its master U.S. ABS surveillance methodology. Report.

On May 3, 2016, S&P published its rating methodology for counterparty instruments. Report.

On April 29, 2016, Moody's updated its rating methodology for global title insurers. Report.

On April 29, 2016, Moody's updated its rating methodology for global reinsurers. Report.

On April 29, 2016, Moody's updated its rating methodology for financial guarantors. Report.

On April 29, 2016, Moody's updated its rating methodology for global trade credit insurers. Report.

On April 29, 2016, Moody's updated its rating methodology for global life insurers. Report.

On April 29, 2016, Moody's updated its rating methodology for global property and casualty insurers. Report.

On April 29, 2016, Moody's updated its rating methodology for mortgage insurers. Report.

On April 29, 2016, Moody's updated its rating methodology for U.S. health insurance companies. Report.

On April 29, 2016, DBRS published its rating methodology for Canadian structured finance transactions. Report.

Burst Again: Sabine Bankruptcy Court Issues Binding Ruling Finding No Covenants Running with Land

Earlier this year, we covered Judge Shelley Chapman's ruling in the Sabine bankruptcy, permitting the Debtors to reject a handful of gathering and other midstream agreements. Previously, Judge Chapman permitted rejection on the grounds that the Debtors exercised their reasonable business judgement in doing so. At that time, the Court issued a "non-binding" ruling on whether the agreements were (or contained) "covenants running with the land" that would have rendered rejection impossible or useless.

On May 3, 2016, approximately six weeks later, Judge Chapman reached a final "binding" ruling on this open issue – holding that the contracts do not constitute (or include) covenants running with the land, and can be rejected in full. The Court largely reiterated its prior analysis – and even attached the prior opinion to the new opinion. The Court also noted for the first time that, if the contracts had contained covenants affecting the value and use of the real property, they likely would have defaulted the Debtors' credit facility. Mem. Decision on Motions of Nordheim Eagle Ford Gathering, LLC et al. at 11, In re Sabine Oil & Gas Corp., No. 15-11835 (Bankr. S.D.N.Y., May 3, 2016). Read more.

Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion

On May 5, 2016,the U.S. Department of the Treasury announced several actions to strengthen financial transparency. Treasury announced a Customer Due Diligence (CDD) Final Rule, proposed Beneficial Ownership legislation and proposed regulations related to foreign-owned, single-member limited liability companies (LLCs).

CDD Final Rule

The CDD Final Rule adds a new requirement that financial institutions – including banks, brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities – collect and verify the personal information of the beneficial owners who own, control, and profit from companies when those companies open accounts. The Final Rule also amends existing Bank Secrecy Act (BSA) regulations to clarify and strengthen obligations of these entities.

Specifically, the rule contains three core requirements: (1) identifying and verifying the identity of the beneficial owners of companies opening accounts; (2) understanding the nature and purpose of customer relationships to develop customer risk profiles; and (3) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. With respect to the new requirement to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity. The final rule extends the proposed implementation period from one year to two years, expands the list of exemptions and makes use of a standardized beneficial ownership form optional as long as a financial institution collects the required information.

Beneficial Ownership Legislation

Treasury announced it is sending beneficial ownership legislation to Congress. As part of the legislation, companies formed within the United States would be required to file beneficial ownership information with the Treasury Department, and face penalties for failure to comply.

Foreign-Owned Single-Member LLC Proposed Regulations

Treasury also announced proposed regulations to require foreign-owned "disregarded entities," including foreign-owned single-member limited liability companies (LLCs), to obtain an employer identification number (EIN) with the IRS.

Federal Appellate Court Reinstates RMBS Action Against Moody's

On May 2, 2016, the First Circuit Court of Appeals reinstated a $5.9B suit brought by the Federal Home Loan Bank of Boston ("FHLBB"), alleging that Moody's Corp and Moody's Investor's Service, Inc. (together, "Moody's") knowingly provided false ratings on certain Residential Mortgage-Backed Securities purchased by FHLBB. The case had been dismissed for lack of personal jurisdiction by Judge George A. O'Toole Jr. of the District of Massachusetts, who also held that the court could not transfer the case to another federal court where jurisdiction would be proper because 28 U.S.C. §1631 only permitted the transfer of cases dismissed for lack of subject matter jurisdiction, rather than personal jurisdiction.

The First Circuit vacated that decision, concluding that the plain language of 28 U.S.C. §1631, the statute's legislative history, and case law from other Circuits all weighed in favor of a ruling that the statute also permits transfer where the claims at issue were dismissed on either personal or subject matter jurisdiction grounds. Accordingly, the First Circuit remanded the case to the district court to determine whether transfer was "in the interests of justice," in accord with the statutory requirement for transfer under 28 U.S.C. §1631. Decision.

Bank of America Settles RMBS Actions for $190 Million

On April 25, 2016, the Federal Home Loan Bank of Seattle ("FHLBS") agreed to a $190 million settlement with Bank of America in connection with multiple lawsuits filed in 2010 stemming from the sale of hundreds of millions of dollars of RMBS. FHLBS alleged that Bank of America made misstatements or omissions in connection with the issuance of the RMBS in violation of the Washington State Securities Act. Additional details of the settlement are not publicly available.

ESMA Publishes Final Report on Amendment of Draft RTS on Reporting Obligations under Article 26 of MiFIR

On May 4, 2016, The European Securities and Markets Authority (ESMA) published its final report requesting an amendment of ESMA draft regulatory technical standards (RTS) on transaction reporting under the Markets in Financial Instruments Regulation (MiFIR).

The draft RTS were submitted to the European Commission in September 2015. However, ESMA has since identified a need to amend Article 2 of RTS 22 as a result of an unintentional omission in the final stage of drafting.

The amendment relates to the list of instances that are not considered to be reportable transactions for the purposes of Article 26 of MiFIR. It resolves an unintended omission by adding acquisitions or disposals that are solely a result of a transfer of collateral to the list of exclusions from transaction reporting specified in Article 2(5) of RTS 22. It thus ensures that investment firms are not required to submit transaction reports for transfers of collateral, which ESMA concluded would be costly and bring no supervisory benefit. ESMA anticipates that the amendment will be taken into account in the context of the Commission's endorsement of RTS 22.

EBA Publishes Discussion Paper on Use of Consumer Data by Financial Institutions

On May 4, 2016, the EBA published a discussion paper on innovative uses of consumer data by financial institutions, in line with its mandate to monitor financial innovation. The EBA report notes that although general provisions apply to financial institutions regarding secrecy, conduct and data protection, which impose restrictions on the use of consumer data, EU legislation specific to the financial sector contains few requirements that address the use of consumer data by financial institutions.

In recent years, some financial institutions have started using consumer data in innovative ways across the EBA's regulatory remit (that is, mortgages, personal loans, payment accounts, payment services, and electronic money). The paper identifies risks and benefits for consumers and financial institutions of such uses, as well as for financial integrity in general. Feedback received on this discussion paper will inform the EBA's decision on which, if any, further actions may be required to mitigate the risks arising from this innovation, while also allowing market participants to harness its benefits.

EBA Amends Historical Look-Back Approach Method for Calculating Additional Collateral Outflows

On May 3, 2016, the European Banking Authority (EBA) issued an opinion to the European Commission supporting the Commission's proposed amendment to the historical look-back approach (HLBA) methodology used in the draft Regulatory Technical Standards (RTS) on additional collateral outflows.

The amendment by the EBA followed a request by the European Commission that the draft RTS be amended so that the calculation of the additional collateral outflows was based on the HLBA for market valuation changes developed by the Basel Committee on Banking Supervision (BCBS). The BCBS's HLBA focuses on the largest net difference in collateral posted instead of the largest gross difference which had been the focus of the EBA's approach. In December 2015, the Commission had raised concerns that the EBA's HLBA approach could have a significant impact on credit institutions and international derivative markets. Therefore, it decided not to adopt the draft RTS as it had been submitted by the EBA, but signalled it was open to endorsing an amended draft RTS based on the BCBS's HLBA approach.

European Parliament Adopts Final Text of Benchmark Regulation

On May 3, 2016, the Council of the EU published the text of the proposed Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Benchmark Regulation). This follows adoption of the Benchmark Regulation by the European Parliament on April 28, 2016.

Next, the Benchmark Regulation must be formally adopted by the Council, after which it will be published in the Official Journal of the EU. It will then enter into force on the day after its publication.

Conversations@Orrick: Fighting Hunger in the United States

Please join us in our New York office on Tuesday, May 24, for an evening with Joel Berg, Executive Director of Hunger Free America and a nationally recognized leader in the fight against domestic hunger. Joel will give a talk about the prevalence of hunger in New York City and nationwide, and how this problem can best be addressed. For more information, please visit our website. You may RSVP here.