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| Insights from Winston & Strawn |
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On May 1st, the date on which many of the External Business Conduct Standards rules went into effect for swap dealers ("SDs") and major swap participants ("MSPs") under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Commodity Futures Trading Commission ("CFTC") issued a no-action letter providing relief from the requirement that SDs and MSPs disclose a pre-trade mid-market mark of certain swap transactions to their counterparties prior to entering into such transactions. There are two parts to the relief. The first is for transactions that are: (a) physically-settled FX swaps and forwards where each currency is one of the top 31 currencies listed in a report of the Bank for International Settlements on global foreign exchange market activity in 2010 (available here on page 12) ("BIS 31 Currencies") or (b) physically-settled vanilla FX options included among the BIS 31 Currencies where the option has a maturity of six months or less. Other conditions that must also be met include that real-time tradeable bid and offer prices must be made available electronically to the counterparty and that the counterparty must agree in advance in writing that the SD or MSP need not disclose the pre-trade mid-market mark. The second part of the relief issued in the letter provides that, for exempt FX transactions initiated on an electronic platform where the SD or MSP does not know the identity of the counterparty prior to execution of the swap and real-time tradeable bid and offer process for the exempt FX transactions are available electronically to the counterparty, the SD or MSP need not comply with the requirements set forth in Section 23.431 (a) and (b) of the Commodity Exchange Act regarding disclosure of material information concerning each swap and provision of scenario analysis. The no-action letter is available here. A second no-action letter, issued on May 2nd, provides a further delay until September 1, 2013, with respect to the start date for compliance by SDs and MSPs with the External Business Conduct Standards rules for FX transactions with a settlement cycle of no more than seven business days, in order to provide market participants with the time needed to develop systems and processes to distinguish between FX spot transactions, FX forwards and other FX transactions, which many SDs and MSPs currently treat in the same way due to operational constraints. The May 2nd letter is available here. Jennifer L. Genzler
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| Feature: Shadow Banking |
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- International Developments.
Project Syndicate discussed the extent of shadow banking in China, noting that Chinese shadow banking totals about $2.2 trillion. By comparison, U.S. shadow banking is ten times that amount. However, Chinese shadow banking is involved in riskier activities including real estate and small and medium-sized enterprises. Suggestions for how China's regulators might address that risk are noted. According to Financial News, U.K. pension funds are increasingly turning to physical assets as a means of reducing scheme deficits. The four principal ways in which assets may be used for that purpose are discussed, as are some of the more exotic assets to be pledged. Closer to home, the Financial Post voiced concern about the Canadian government's efforts to reduce risk in residential lending, commenting that the actions might damage that country's asset-backed commercial paper markets. On the global level, Reuters noted the Financial Stability Board's request to the G20 that member countries consider whether commodity trading houses should be subject to new oversight because of their growing role as lenders to commodity traders. Business Week reported on the plans of the Basel Committee on Banking Supervision to implement securitization reforms in 2014.
In the U.S., the possibility of money market reform continues to dominate the shadow banking discussion. Market Watch noted that in her first appearance at the Financial Stability Oversight Council, SEC Chairman Mary Jo White made it clear that her agency, and not the Council, should be guiding those reforms. Reuters summarized White's remarks before the Investment Company Institute. White told her audience that the SEC is working on proposed money market fund reforms but refrained from providing any details. Local municipalities are still considering the use of eminent domain laws to address the underwater mortgage problem. CrunchedCredit discussed developments in Brockton, Massachusetts and Richmond, California. More esoteric forms of securitizations are being developed. Duke Law Journal published a Villanova Law/Public Policy Research paper on the securitization of patents.
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| Banking Developments |
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- Banks Affected by Red River Flooding May Close.
On April 30th, the Office of the Comptroller of the Currency ("OCC") issued a proclamation allowing national banks and federal savings associations to close offices affected by the flooding along the Red River. OCC Press Release. - Federal Reserve Announces Term Deposit Facility.
On April 26th, the Federal Reserve announced it plans to conduct fixed-rate offerings of term deposits with full allotment of tenders under the Term Deposit Facility ("TDF") as part of the ongoing program of small-value offerings announced on September 8, 2010. These small-value operations are designed to ensure the operational readiness of the TDF and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures. The Federal Reserve plans to use a fixed-rate, full-allotment format to offer 28-day term deposits on May 20, 2013 with settlement on May 23. Under this format, the Federal Reserve will announce the operation interest rate and each participating institution may submit one tender that will be awarded in full at the pre-determined rate. Official operation terms, including the fixed-rate and maximum tender size, will be announced nearer to the time of the operation. Federal Reserve Press Release. The OCC will host a workshop in Dallas on June 3-5, 2013, for directors of national community banks and federal savings associations. "Mastering the Basics: A Director's Challenge" is a workshop designed exclusively for directors of institutions supervised by the OCC and provides practical information on the fundamental requirements of board participation. The workshop focuses on directors' duties and core responsibilities, effective board and committee structure, expectations of the regulators, key information needs, understanding bank ratings, and the like. OCC Dallas Press Release. On June 11-12, 2013, the OCC will host two workshops in Sioux Falls, S.D. The "Risk Assessment for Directors" and "Credit Risk: A Director's Focus" workshops are designed exclusively for directors of institutions supervised by the OCC. The risk assessment workshop focuses on the OCC's approach to risk-based supervision and ways directors can effectively measure, monitor, identify, and control risks. The credit risk workshop focuses on the loan portfolio and the roles of the board and management, as well as current industry trends and news. OCC Sioux Falls Press Release.
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| Treasury Department Developments |
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- CFPB Revises Remittance Transfer Rules.
On April 30th, the Consumer Financial Protection Bureau published revisions to its rules for international money transfers Under Regulation E. Under the rules, remittance transfer providers will be required to disclose certain fees and taxes, as well as the exchange rates that will apply to each transfer. The rules also provide consumers with error resolution and cancellation rights. The revised rules are effective October 28, 2013. CFPB Press Release. - CFPB Publishes CARD Act Amendments.
On April 29th, the Consumer Financial Protection Bureau published amendments to the Truth in Lending Act allowing credit card issuers to consider income that a stay-at-home applicant, who is 21 or older, shares with a spouse or partner when evaluating the applicant for a new account or increased credit limit. The amendments are effective immediately. CFPB Press Release. - CFPB Civil Penalty Fund Rules.
On April 26th, the Consumer Financial Protection Bureau issued a rule governing the administration of the agency's Civil Penalty Fund. The rule describes the conditions under which the Bureau may make payments to victims and establishes a timetable and procedures for allocating funds for payments to victims. Under the rule, money in the Civil Penalty Fund will be used to provide compensation to victims of violations for which civil penalties have been imposed. The amount of compensation that the Bureau may provide will depend on compensation victims may have received from other sources as well as the circumstances of each case. The CFPB also published for comment a proposed rule on the management of the Fund. The rule creates a process for allocating money from the Bureau's Civil Penalty Fund to compensate victims harmed by a person or company that was fined in an enforcement action brought by the Bureau. Comments on the proposed rule should be submitted within 60 days after publication in the Federal Register, which is expected shortly. CFPB Press Release.
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| Securities and Exchange Commission |
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Proposed Rules
- Cross-Border Swaps Activities.
On May 1st, the SEC published for comment proposed rules and interpretive guidance for parties to cross-border security-based swap transactions. The proposal explains which regulatory requirements apply when a transaction occurs partially within and partially outside the U.S. The proposed rules also set forth when security-based swap dealers, major security-based swap participants, and other entities (such as clearing agencies, execution facilities, and data repositories), must register with the SEC. The proposal outlines a "substituted compliance" framework approach which recognizes that market participants may be subject to conflicting or duplicative compliance obligations in the global derivatives market. Comments should be submitted within 90 days after publication in the Federal Register, which is expected during the week of May 6. SEC Press Release. In her open meeting remarks concerning the proposed rules, SEC Chairman Mary Jo White presented her view of substituted compliance. It "would not be based on a line-by-line comparison of the relevant rules in a foreign jurisdiction. Instead, in making a substituted compliance determination, the Commission would look at key categories of the Title VII regime, focusing on regulatory outcomes rather than the particular means of achieving those outcomes. As part of this process, the Commission would look not just at the way in which a country's laws and regulations are written, but also at how that country supervises and enforces compliance with its rules." Misgivings concerning the proposal were implied by the open meeting comments of Commissioners Luis A. Aguilar and Daniel M. Gallagher. - Comment Reopened for Dodd-Frank Act Securities-Based Swap Rules.
On May 1st, the SEC reopened the public comment period for all rules not yet finalized stemming from Title VII of the Dodd-Frank Act. The comment periods for these rules, and a policy statement describing the expected order for these new rules to take effect, will be reopened for 60 days after notice is published in the Federal Register, which is expected during the week of May 6. SEC Press Release. Other Developments
On May 2nd, the SEC issued an investor alert on private oil and gas offerings. Investor Alert. - SEC Issues Political Intelligence Subpoenas.
On May 1st, the Washington Post reported the SEC has issued subpoenas in connection with an investigation into whether information was inappropriately used to trade in advance of a government decision which would benefit certain health insurers. Among those subpoenaed are Mark Hayes, who once worked for Senator Chuck Grassley, and Hayes' law firm, Greenberg Traurig. Subpoenas. May 2nd, the Washington Post provided background on the political intelligence industry, discussing the type of information gleaned and those who do the gleaning. Political Intelligence. - SEC Advisory Committee on Small and Emerging Companies.
On May 1st, Bloomberg summarized the comments made at the meeting of the SEC's Advisory Committee on Small and Emerging Companies. The issues discussed included a separate exchange for small issuers, payments to market makers, and tick size. Summary. Reuters reported NASDAQ OMX Group intends to seek SEC approval for a "liquidity concentration program," which would allow smaller issuers to ask that their shares be traded only on the exchange on which they are listed. Liquidity Concentration. On May 1st, On Wall Street discussed the SEC's examination of the sales practices employed by banks selling structured notes. Other areas of concern include how the notes' underlying assets are valued and the adequacy of the risk disclosure. Structured Questions. - Report on Administrative Proceedings.
On April 30th, the SEC issued its report on administrative proceedings for the period beginning October 1, 2012 and ending March 31, 2013. SEC Release No. 34-69479. On April 26th, Bloomberg reported SEC Chairman Mary Jo White would like to adopt as an interim final rule the Commission's August 2012 proposed rule lifting the prohibition against general solicitation and general advertising in exempt securities offerings. Lifting the Lid.
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| Commodity Futures Trading Commission |
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Regulatory Relief
- Time-Limited No-Action Relief from Certain External Business Conduct Standards.
On May 2nd, the CFTC's Division of Swap Dealer and Intermediary Oversight issued a time-limited no-action letter that provides swap dealers ("SDs") and major swap participants ("MSPs") with relief from compliance with External Business Conduct Standards rules in connection with certain foreign exchange transactions that have a settlement cycle of no more than seven local business days. The relief provided in the no-action letter applies only to transactions executed prior to September 1, 2013. CFTC Letter No. 13-13. - Disclosure Relief for Certain Forex Swaps and Futures.
On May 1st, the CFTC's Division of Swap Dealer and Intermediary Oversight issued a no-action letter that provides SDs and MSPs with relief from certain disclosure requirements prescribed under Commission Regulation 23.431 for certain transactions in foreign exchange swaps and foreign exchange forwards. The relief allows SDs and MSPs, under certain circumstances, to enter into certain foreign exchange swaps and foreign exchange futures transactions without disclosing a pre-trade mid-market to non-SD or non-MSP counterparties. CFTC Letter No. 13-12. - Time-Limited No-Action Relief for Prime Brokerage.
On April 30th, the CFTC's Division of Swap Dealer and Intermediary Oversight issued a time-limited no-action letter that provides SDs with relief from certain External Business Conduct Standards rules in the context of prime brokerage arrangements. CFTC Letter No. 13-11. Other Developments
- Order of Registration Issued to NGX.
On May 2nd, the CFTC issued an Order of Registration to the Natural Gas Exchange Inc., a foreign board of trade located in Calgary, Alberta, Canada. Under the Order, NGX is permitted to provide its identified members or other participants located in the U.S. with direct access to its electronic order entry and trade matching system. The Order is the first issued by the CFTC pursuant to Part 48 of the CFTC's regulations, which provide that such an Order may be issued to a foreign board of trade that possesses, among other things, the attributes of an established, organized exchange and that is subject to continued oversight by a regulator that provides comprehensive supervision and regulation that is comparable to the supervision and regulation exercised by the CFTC. CFTC Press Release. - Commissioner Chilton Suggests Transaction Fee.
On May 1st, CFTC Commissioner Bart Chilton suggested the imposition of transaction fees to help fund the CFTC. End-users would be exempted from the fee, which would be levied at the rate of $0.06 per futures or swaps trade. Chilton notes that the CFTC is the only federal financial regulator that is not at least partially self-funded. Chilton Remarks. On May 1st, FCW.com discussed the CFTC's upcoming technology report. The report, which will be issued as a concept release, will be published on an accelerated basis in response to the market volatility which occurred after the Associated Press' Twitter account was hacked and a false tweet sent. The concept release will address testing, supervision and system safeguards. Concept Release.
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| Federal Rules Effective Dates |
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May 2013 - July 2013
- Commodity Futures Trading Commission
June 7, 2013 – Dual and Multiple Associations of Persons Associated with Swap Dealers, Major Swap Participants and Other Commission Registrants. 78 FR 20788.
June 10, 2013 – Clearing Exemption for Swaps Between Certain Affiliated Entities. 78 FR 21749. - Consumer Financial Protection Bureau
May 3, 2013
– Truth in Lending (Regulation Z)
78 FR 25818
June 1, 2013 (Amendments) – Loan Originator Compensation Requirements Under the Truth in Lending Act (Regulation Z). 78 FR 11279.
May 6, 2013 – Definitions of "Predominantly Engaged In Financial Activities" and "Significant" Nonbank Financial Company and Bank Holding Company. 78 FR 20755.
May 13, 2013 – Retail Foreign Exchange Transactions (Regulation NN). 78 FR 21019. - National Credit Union Administration
June 11, 2013 – Alternatives to the Use of Credit Ratings. 77 FR 74103. - Securities and Exchange Commission
June 10, 2013 – Amendment to Rule Filing Requirements for Dually-Registered Clearing Agencies. 78 FR 21046. - Treasury - Comptroller of the Currency
July 1, 2013
– Short-Term Investment Funds
77 FR 61229
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| Exchanges and Self-Regulatory Organizations |
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On April 29th, CNBC, reprinting a Financial Times article, reported that the foreign exchange trading platform EBS may abandon "first in, first out" trading in favor of a plan that would aggregate orders which would then be traded in random order. The new trading system is meant to address perceived trading abuses caused by algorithmic trading. Trading Places. The Fixed Income Clearing Corporation
- Proposal Regarding Options on Interest Rate Futures Contracts is Filed.
On April 29th, the SEC provided notice of the Fixed Income Clearing Corporation's filing of a proposed rule change that would allow FICC to include options on interest rate futures contracts with maturities not longer than two years in the one-pot cross-margining program between FICC's Government Securities Division and New York Portfolio Clearing. Comments should be submitted on or before May 24, 2013. SEC Release No. 34-69470. Financial Industry Regulatory Authority
- FINRA Guidance on Communications with the Public.
On May 2nd, the Financial Industry Regulatory Authority provided guidance to firms on communications with the public concerning unlisted real estate investment programs, including unlisted real estate investment trusts and unlisted direct participation programs that invest in real estate. FINRA Regulatory Notice 13-18. - New Securities Exchange Act Section 31 Fees.
On May 1st, the Financial Industry Regulatory Authority advised that, effective May 25, 2013, the Section 31 fee rate applicable to specified securities transactions on the exchanges and in the over-the-counter markets will decrease from its current rate of $22.40 per million dollars in transactions to a new rate of $17.40 per million dollars in transactions. FINRA Information Notice. NASDAQ OMX Group
- Longer Period Designated to Consider Proposed Attestation Amendment.
On April 25th, the SEC designated June 9, 2013 as the date by which it will approve, disapprove, or institute disapproval proceedings regarding The Nasdaq Stock Market's proposed amendment of the attestation requirement of Rule 4780 to allow a Retail Member Organization to attest that "substantially all" orders submitted to the Retail Price Improvement Program will qualify as "Retail Orders." SEC Release No. 34-69450. National Securities Clearing Corporation
- Supplemental Liquidity Obligation Proposed.
On April 25th, the SEC advised that the National Securities Clearing Corporation has filed an advance notice of a proposed change that would institute supplemental liquidity obligations in order to increase liquidity resources. Comments should be submitted on or before May 22, 2013. SEC Release No. 34-69451. NYSE Euronext
- Moving Average Check Proposed.
On April 24th, the SEC provided notice of NYSE Arca's filing of a proposed amendment to NYSE Arca Equities Rule 7.31(a) to add a Moving Average Check that would prevent incoming Market Orders and marketable Limit Orders, as defined in NYSE Arca Equities Rule 7.31(b), from trading if the order size exceeded certain thresholds. The Exchange believes that the proposed Moving Average Check would serve as an additional safeguard that could help limit potential harm from extreme price volatility by preventing executions of potentially erroneously sized orders. Comments should be submitted on or before May 21, 2013. SEC Release No. 34-69443. The Options Clearing Corporation
- Change in Expiration Date Proposed.
On April 30th, the SEC provided notice of The Options Clearing Corporation's filing of a proposal that would change the expiration date for most options contracts to the third Friday of the expiration month instead of the Saturday following the third Friday. Comments should be submitted within 21 days after publication in the Federal Register, which is expected during the week of May 6. SEC Release No. 34-69480.
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| Judicial Developments |
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- Sarbanes-Oxley Protects Employee Who Implicates Supervisor.
On May 1st, the U.S. District Court for the Southern District of New York addressed an issue of first impression under the whistleblower provisions of the Sarbanes-Oxley Act. It held that a report by an employee to his supervisor (and no one else) is protected under the Act even if the supervisor is implicated in the wrongdoing. Since the plaintiff established his prima facie case and the employer failed to demonstrate that, as a matter of law, there is "clear and convincing" evidence that plaintiff would have suffered the same unfavorable action even in the absence of the retaliatory factor, summary judgment was denied. Leshinsky v. Televent GIT, S.A.- Court Lacks Jurisdiction to Hear Market Data Fee Challenges.
On April 30th, the D.C. Circuit Court dismissed a petition challenging the non-core market data fees charged by various stock exchanges. The Court originally addressed the issue in 2010, finding the SEC's approval of the fees to be arbitrary and capricious. Since then, the Dodd-Frank Act amended the Securities Exchange Act, requiring the SEC to grant immediate effectiveness to changes in market data fees. After the exchanges filed fee changes post-Dodd-Frank Act, which were effective upon filing, petitioners again challenged those fees. Now, the Court dismissed the petitions because the Dodd-Frank Act deprived the Court of jurisdiction. NetCoalition v. SEC.
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| Industry News |
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On May 1st, Marketplace noted Putnam Investments' list of words which, if used by investment firms on their social media sites, may trigger a regulatory inquiry. The list includes "conceal," "inaccurate" and "unverified." What not to Tweet. - Barbaric Yawp or Actual Force.
On May 1st, Jesse Eisinger of ProPublica discussed for DealBook the "Terminating Bailouts for Taxpayer Fairness Act," S.798. The bipartisan bill introduced by Senators Sherrod Brown and David Vitter would impose a new 15 percent capital requirement on banks with $500 billion or more in assets, prohibit banking regulators from allowing non-depository bank units to access the Federal Reserve discount window, require separate capitalization for bank subsidiaries and prohibit bank holding companies from moving assets from non-banking affiliates to banking affiliates. Brown-Vitter. - Mandatory Arbitration Ban Sought.
On April 30th, Reuters reported that a group of Congressmen from both houses have asked the SEC to exercise authority granted to it under the Dodd-Frank Act to adopt rules prohibiting broker-dealers from requiring their customers to sign mandatory arbitration agreements. Request. - FHFA Progress Report on the Common Securitization Infrastructure.
On April 30th, the Federal Housing Finance Agency provided a progress report on its proposal for Fannie Mae and Freddie Mac to establish a "common securitization infrastructure."
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| Winston & Strawn Speaking Engagements and Publications |
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- Antitrust and Competition—The EU Weekly Briefing, Vol. 1, Issue 26
Antitrust and Competition — The EU Weekly Briefing is designed to provide timely updates on recent European Union competition law by including a short description of, and links to, recent developments. EU Weekly Briefing. - London Fortnightly Financial Newsletter, Volume 1, Issue 11
Litigation / Contentious Regulatory — the Fortnightly Financial Newsletter is written by lawyers in Winston & Strawn's London office, focusing on key developments within the contentious financial services and financial crime arena. It contains brief highlights of those developments together with links to the source material for further review, if desired. Fortnightly Financial Newsletter. - Edwards to Speak at Inside Counsel Executive Leadership Development Workshop
Winston & Strawn partner Chris Edwards is among the speakers at Inside Counsel's Promotion Executive Leadership Development Workshop for Women Direct Reports to the General Counsel being held on May 15, 2013 in Chicago. Event. - Winston & Strawn Sponsors Managed Funds Association's Forum 2013 in Chicago
Winston & Strawn will sponsor Forum 2013, the Managed Funds Association's ("MFA") 19th annual managed futures and global macro strategies conference. This program is designed to bring managers and investors together for networking, education and business development. Forum 2013 will be held June 19-20, 2013 in Chicago. Event.
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