On May 28, 2020, the Commodity Futures Trading Commission (CFTC) unanimously approved an interim final rule in order to grant an extension of the compliance schedule for uncleared swaps in response to the many operational challenges entities are facing in the wake of the COVID-19 (coronavirus) pandemic. It also approved a proposed rule exempting certain foreign persons from registration as a commodity pool operator (CPO). Recently, the CFTC extended previous waves of no-action relief in response to the coronavirus.
On June 11, the European Commission (the “EC”) opened for feedback a trio of draft delegated acts that, if adopted, would constitute a major step toward cohesive global regulation of international securities and derivatives markets. Specifically, the delegated acts (see here, here, and here) would allow certain central counterparties in non-EU Member States (“third-country CCPs”) to submit a request to the European Securities and Markets Authority (“ESMA”) to grant a recognition of comparable compliance. If granted, the third country’s regulatory framework would be deemed to satisfy compliance with EU regulatory requirements, which would enable the third-country CCP to serve EU market participants. The draft delegated acts also specify the criteria to be applied by ESMA when considering such requests, and the fees to be paid by third-country CCPs.
As we have written previously, cross-border swaps reform has been an important – and contentious – area of focus for securities and derivatives regulators in recent years. The adoption of comparable compliance frameworks by regulators would significantly reduce administrative and regulatory burdens on market participants and promote global regulatory cohesion. For this reason, U.S. CFTC Chairman Heath P. Tarbet praised the EC for the draft delegated acts. In his remarks, Chairman Tarbert signaled that the CFTC would explore ways to defer to EU and other regulators as appropriate, stating that deference “is a two-way street.”
Chairman Tarbert’s comments come on the heels of the recent announcement by the International Organization of Securities Commissions (“IOSCO”) that Chairman Tarbert will serve as a Vice Chair of the IOSCO Board for the 2020–2022 term. Through this new leadership role, Chairman Tarbert will have the opportunity to significantly advance international cooperation among securities and derivatives regulators.
On June 8, 2020, the Federal Reserve Bank of New York (“FRBNY”) published revised FAQs and three updated transaction documents for the Term Asset-Backed Securities Loan Facility (“TALF”). The three documents are the (i) Form of Issuer and Sponsor Certification as to TALF Eligibility for ABS, the Form of Indemnity Undertaking for ABS; (ii) the Form of Auditor Attestation, the Form of Management Report on Compliance; and (iii) Guidance for Accounting Firms in Determining TALF Collateral Eligibility for ABS. The term sheets have not changed. The additional documentation, guidance, and clarifications include the following:
- Redemption options. The rules on redemption options are more lenient for collateralized loan obligations (“CLOs”). The FAQs previously allowed a redemption option in a newly issued ABS only if the option could be exercised no earlier than three years after the disbursement date of the loan secured by the ABS (other than a customary clean-up call) or at any time when the ABS is owned by the FRBNY or TALF II LLC (the “SPV”). The revised FAQs carve out collateralized loan obligations; a redemption option for a CLO that can be exercised no earlier than one year after the issuance date does not affect the CLO’s eligibility, provided that the exercise is subject to a condition that the eligible CLOs and any pari passu class(es) of the securitization are redeemed at their full outstanding principal amount plus any accrued interest outstanding. The lender may exercise the option even if the CLOs are owned by the FRBNY or the SPV.
- Maturity dates. The documents clarify that most classes of existing ABS are eligible only if they mature before the TALF termination debt (presently, Sept. 30, 2020) and after January 1, 2020.
- Junior AAA-rated ABS tranches. Generally, junior AAA-rated ABS tranches are not eligible collateral. The revised FAQs provide that, for the purpose of this restriction, money market eligible tranches for auto loan and equipment loan securitizations are not considered senior to other AAA-rated securities in those transactions.
- Auto loan ABS. Auto loan ABS with any revolving feature must have all of the features of a revolving master trust in order to qualify as eligible collateral.
- Timing. The FAQs also cover various timing issues. For the June 17 subscription date, ABS may be priced no earlier than June 15. ABS priced earlier would be eligible for later subscriptions.
- Issuer and Sponsor Certification. A borrower must provide an Issuer and Sponsor Certification as to TALF Eligibility for ABS. For newly issued ABS, the certification must be included in prospectus or offering document.
- Material investor. A borrower is required to identify all “material investors” for the purpose of Federal Reserve disclosures. The FAQs explain that a borrower may rely on the beneficial ownership analysis conducted in connection with reporting obligations under the securities laws. Indirect ownership through another investor is the product of an investor’s percentage ownership in that investor multiplied by the holding company’s percentage ownership in the borrower.
- Sovereign wealth funds. A sovereign wealth fund is considered a foreign government under the TALF and therefore ineligible as a borrower.
On June 8, 2020, the Federal Reserve Board (“Board”) announced changes to its Main Street Lending Program (“MSLP”) intended to allow more small and medium-sized businesses to participate in the MSLP. The Board also published updated term sheets for each of the MSLP facilities reflecting these changes; to illustrate how these changes affect the term sheets, we have prepared a blackline of the updated Main Street New Loan Facility (“MSNLF”) term sheet against the most recent prior version released on April 30, 2020. The Board notes that these changes are based on extensive feedback received from potential participants in the MSLP. The announcement does not provide further specifics on the timing of the MSLP launch, but does state that the MSLP will be open for lender registration “soon” and that it will be actively buying loans “shortly afterwards.”
On May 20, 2020, the Office of the Comptroller of the Currency (the “OCC”) issued a final rule overhauling its regulations implementing the Community Reinvestment Act (the “CRA”). The CRA, enacted in 1977, incentivizes banks to meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. The final rule makes the first major revisions to CRA regulations in nearly twenty-five years, and applies only to national banks, federal savings associations, and insured federal branches.
Click here to read our Covington Alert analyzing key features of the final rule.
On May 29, 2020, the Office of the Comptroller of the Currency (the “OCC”) issued a final rule to clarify that the interest on a loan originated by a national bank (or a Federal savings association), if permissible when the loan was originated, continues to be permissible after the loan is sold, assigned, or otherwise transferred to a third party. The OCC’s regulation interprets section 85 of the National Bank Act, which prescribes the interest that a national bank may charge a loan, to incorporate the common law “valid-when-made” doctrine.
On May 20, 2020, the federal financial institution regulatory agencies—the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency—issued principles for responsibly offering small-dollar loans in order to meet consumers’ growing short-term credit needs.
On Wednesday, May 20, 2020, the Board of Governors of the Federal Reserve System (the “Board”) announced further details on the Term Asset-Backed Securities Loan Facility (“TALF”). The Board’s announcement contains key documents and forms, including the Master Loan and Security Agreement; updated FAQs and a blackline reflecting changes made against the version published on May 12, 2020; and an initial list of TALF Agents.
On May 15, 2020, the federal banking agencies issued an interim final rule to permit depository institutions to exclude from their supplementary leverage ratio (“SLR”) denominators through March 31, 2021 the balance sheet value of U.S. Treasury securities and funds on deposit at a Federal Reserve Bank, subject to restrictions on capital distributions. The interim final rule complements a similar interim final rule that the Federal Reserve issued in April, which excluded the same set of assets from the SLR denominator of bank holding companies, savings and loan holding companies, and intermediate holding companies of foreign banking organizations subject to the SLR (the “Holdco Rule”).
On April 3, 2020, the European Commission launched two public consultations on a new digital finance strategy for Europe and on a retail payment strategy for Europe, which will both run until July 15, 2020. The consultations follow two other consultations on an EU framework for markets in crypto-assets and on a potential initiative on digital operational resilience in the area of financial services, both launched in December 2019. The efforts are part of the larger Commission’s Digital Finance Outreach 2020 to prepare the new digital finance strategy. However, due to the COVID-19 pandemic, most events have either been cancelled or postponed. An overview of upcoming events, such as DG FISMA’s online roundtables and other national events, is available here. Continue Reading