Tag: FDIC


U.S. Uncleared Swap Margin, Capital, and Segregation Rules

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk visual memorandum; the complete publication, including charts, is available here.

U.S. prudential regulators (the OCC, Federal Reserve, FDIC, FCA and FHFA) and the CFTC have finalized uncleared swap margin, capital and segregation requirements (the “PR rules,” and “CFTC rules,” respectively, and the “final rules,” collectively).* The PR rules apply to swap entities that are prudentially regulated by a U.S. prudential regulator (“PR CSEs”). The CFTC rules apply to swap entities that are regulated by the CFTC and that are not prudentially regulated (“CFTC CSEs”). In this memorandum, “covered swap entities” refers to PR CSEs and CFTC CSEs, together.

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Designated Lender Counsel in Private Equity Loans

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Rob McKenna.

Recent media reports have expressed alarm at the use of “designated lender counsel” in private equity-sponsored leveraged loan transactions. [1] The phrase refers to the practice of a private equity firm instructing the investment bank arranging its syndicated loan as to which law firm the private equity firm would like the investment bank to use as the bank’s counsel. According to the press reports, the practice (also known as “sponsor designated counsel”) has become prevalent in the syndicated loan market. The question raised in the press is whether this practice creates a material conflict of interest, because the law firm representing the investment bank arguably generates fees based on the strength of its relationship with the private equity firm across the table. If it does, the next question is whether that conflict could be argued to adversely affect the lending arrangement, with potential negative consequences for investors in the loan.

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OCC’s Recovery Planning Proposal

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On December 17th, the Office of Comptroller of the Currency (OCC) proposed recovery planning standards for banks with assets of $50 billion or more. [1] The proposal was released exactly one year after the FDIC released guidance for covered insured depository institutions (CIDI) that significantly raised the resolution planning bar for many of these same banks. [2]

Most institutions will find that they will be able to leverage their existing risk management, business continuity planning, capital and liquidity planning, stress testing, and resolution plans in order to build their recovery plan. Many of the proposed standards’ requirements can be met by modifying existing bodies of work.

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Recovery Planning for Large National Banks

This post is based on a Sullivan & Cromwell LLP publication by C. Andrew GerlachRebecca J. Simmons, Mark J. Welshimer and Connie Y. Lam. Mr. Gerlach, Ms. Simmons, and Mr. Welshimer are partners in the Financial Services Group; and Ms. Lam is a firm associate.

On December 16, 2015, the Office of the Comptroller of the Currency (the “OCC”) solicited public comment, through a Notice of Proposed Rulemaking (the “NPR”), [1] on proposed guidelines to establish standards for recovery planning by certain large insured national banks, insured Federal savings associations and insured Federal branches of foreign banks (the “Guidelines”).
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Derivatives and Uncleared Margins

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, Armen Meyer, and Christopher Scarpati.

Over the past two weeks, the US banking regulators released their much anticipated final margin requirements for the uncleared portion of the derivatives market. [1] This portion amounts to over $250 trillion of the global $630 trillion outstanding and has up to now been operating in “business as usual” mode, [2] while other derivatives have been pushed into clearing. The final rule’s release completes a long process since it was proposed in 2011 and re-proposed in 2014. [3]

The good news for the industry is that the final rule is generally aligned with international standards [4] and similar requirements proposed in major foreign jurisdictions. Most notably, the final rule increases the threshold of swap activity that would bring a financial end user (e.g., hedge fund) within the rule’s scope from $3 billion to $8 billion. This change, which aligns the rule with European and Japanese proposals, eases the compliance burden of smaller, less-risky market participants.

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UK Regulatory Proposals and Resolvability

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds, Thomas DoneganReena Agrawal SahniJoel MossAzad AliTimothy J. Byrne, and Sylvia Favretto.

The Bank of England, the UK authority with powers to “resolve” failing banks, is consulting on how it might exercise its power of direction to remove impediments to resolvability. The Bank may require measures to be taken by a UK bank, building society or large investment firm to address a perceived obstacle to credible resolution. Concurrently, the Prudential Regulation Authority is proposing to impose a rule that would require a stay on termination or close-out of derivatives and certain other financial contracts to be contractually agreed by UK banks, building societies and investment firms with their non-EEA counterparties. This post discusses the proposed approaches by the UK regulators to ensuring that impediments to resolvability are removed, as well as certain cross-border implications.

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Fed/FDIC Comments on Wave 3 Resolution Plans

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On July 28th, the FDIC and the Federal Reserve Board (together, “the regulators”) announced that they have provided private feedback on the resolution plans of 119 Wave 3 banking institutions [1] and the three systemically important non-bank financial institutions. [2] Unlike the regulators’ highly critical August 2014 public commentary on the 2013 resolution plans filed by Wave 1 banking institutions, [3] this week’s comments are largely silent on the regulators’ view of the plans’ adequacy:

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Volcker Rule: Agencies Release New Guidance

Whitney A. Chatterjee is partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication authored by Ms. Chatterjee, C. Andrew Gerlach, Eric M. Diamond, and Ken Li; the complete publication, including Appendix, is available here.

[June 12, 2015], the staffs of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) provided two important additions to their existing list of Frequently Asked Questions (“FAQs”) addressing the implementation of section 13 of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), commonly known as the “Volcker Rule.”

The Volcker Rule imposes broad prohibitions on proprietary trading and investing in and sponsoring private equity funds, hedge funds and certain other investment vehicles (“covered funds”) by “banking entities” and their affiliates. The Volcker Rule, as implemented by the final rule issued by the Agencies (the “Final Rule”), provides exclusions from the definition of covered fund for certain foreign public funds and joint ventures.

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Resolution: Deposit Insurance—Burden Shifts to Bank

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On April 21st, the FDIC proposed new requirements for its largest supervised banks (37 institutions) to improve the record keeping of their deposit accounts. Issued via an Advanced Notice of Proposed Rulemaking (“ANPR”), the proposal shifts the obligation of calculating FDIC deposit insurance payouts from the FDIC to the banks.

The agency has for some time been concerned about its ability to accurately calculate deposit insurance payouts during a short window following the failure of a large bank. These concerns are in part fueled by the current trend of deposit concentration at the largest banks, and the banks’ (and perhaps the FDIC’s) inadequate technological capability to timely process significant volumes of data.

We expect meeting these proposed requirements to be challenging for banks, especially with respect to obtaining necessary account information that is not currently collected. In addition, banks will need to significantly invest in their data systems to be able to maintain and process this (and other) information in a standardized format, and to calculate insurance payouts at the end of each business day.

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Fed Proposes Amended Bank Liquidity Rules

Andrew R. Gladin is a partner in the Financial Services and Corporate and Finance Groups at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication authored by Mr. Gladin, Samuel R. Woodall III, Andrea R. Tokheim, and Lauren A. Wansor.

On Thursday, May 21, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued a notice of proposed rulemaking (the “Proposal”) that would amend the final rule implementing a liquidity coverage ratio (“LCR”) requirement (the “Final LCR Rule”), [1] jointly adopted last September by the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”), to treat certain general obligation state and municipal bonds as high-quality liquid assets (“HQLA”). [2] Unlike the Final Rule, the OCC and FDIC did not join the Federal Reserve in issuing the Proposal. Accordingly, the Proposal would apply only to banking institutions regulated by the Federal Reserve that are subject to the LCR, absent further action by the other agencies. [3] The Proposal would allow these entities to treat general obligation securities of a public sector entity (“PSE”) as level 2B liquid assets, provided that the securities generally satisfy the same criteria as corporate debt securities that are classified as level 2B liquid assets, as well as certain other restrictions and limitations applicable only to these assets as described further below. Comments on the Proposal are due by July 24, 2015.

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