Weekly RoundUp
September 30, 2015

Financial Services Weekly News

Update on European Financial Regulation. Three substantial new pieces of European regulatory legislation are intended to be implemented over the following: (1) the Markets in Financial Instruments Directive II (MiFID II, together with the implementing regulation, MiFIR) that sets out business conduct standards for EU investment firms and other firms trading on EU exchanges, (2) the new Market Abuse Regulation (MAR) and (3) the Central Securities Depositories Regulation (CSDR). Many of the technical details of these new laws were left to the European Securities and Markets Authority (ESMA) – the college of European securities regulators – to work out. On Sept. 28, ESMA announced that it has now published significant final reports which include over 400 pages covering proposals for 28 final draft technical standards in the areas of transparency, market microstructure, data publication and access, requirements applying on and to trading venues, commodity derivatives, market data reporting, post-trading and investor protection. The final reports discuss the feedback received to the previous consultations and the rationale behind ESMA’s final proposals in the three areas. MiFID II is intended to increase market transparency, efficiency and safety. MAR is intended to increase market integrity and investor protection; specifically, the MAR requirements will strengthen the existing market abuse framework by extending its scope to new markets, platforms and behaviors, and will contain prohibitions for insider dealing and market manipulation, and provisions to prevent and detect these. Finally, CSDR is intended to harmonize the functioning of European central securities depositories, providing organizational, business conduct and prudential requirements to ensure CSDs are safe, efficient and sound and introducing a settlement discipline regime, including measures to prevent and address settlement fails, such as a mandatory buy-in and cash penalties as well as reporting requirements for internalized settlement. In the Sept. 28 announcement, Steven Maijoor, ESMA Chair, said, “The rules put out by ESMA today on MiFID II, MAR and CSDR will notably change the way Europe’s secondary markets function. And this will no doubt impact market participants and regulators alike. The magnitude of this change should not be underestimated. But the past has taught us that change is needed in order to make markets more transparent, efficient, and safer to invest in. This will entail a certain cost but we should not forget the other side of this equation, which is the great benefits safer and sounder markets will bring to everybody.”

Regulatory Developments

SEC Proposes to Amend Administrative Proceedings Rules

On Sept. 24 the SEC announced that it had voted to propose amendments to rules governing its administrative proceedings. The proposals, in Release No. 34-75977, include three primary changes to the Commission’s Rules of Practice that: (1) adjust the timing of administrative proceedings, including by extending the time before a hearing occurs in appropriate cases, (2) permit parties to take depositions of witnesses as part of discovery and (3) require parties in administrative proceedings to submit filings and serve each other electronically, and to redact certain sensitive personal information from those filings. The SEC will seek public comment on the proposal for 60 days after publication in the Federal Register.

SEC Requests Comment on Regulation S-X

On Sept. 25 the SEC announced that it had issued Release No. 33-9929 requesting comment on the effectiveness of financial disclosure requirements in Regulation S-X. The request for comment focuses on the requirements for the form and content of financial disclosures that companies must file with the Commission about acquired businesses, affiliated entities, and guarantors and issuers of guaranteed securities, and is part of the SEC’s Disclosure Effectiveness Initiative, a broad-based staff review of the disclosure requirements and the presentation and delivery of the disclosures. The public comment period will remain open for 60 days following publication in the Federal Register.

FINRA Proposes to Amend Margin Rule to Include To Be Announced Transactions

On Sept. 24 FINRA filed with the SEC a proposed amendment to FINRA Rule 4210 (Margin Requirements) to establish margin requirements for (1) To Be Announced (TBA) transactions, inclusive of adjustable rate mortgage (ARM) transactions, (2) Specified Pool Transactions, and (3) transactions in Collateralized Mortgage Obligations (CMOs), issued in conformity with a program of an agency or Government-Sponsored Enterprise, with forward settlement dates, as further defined in the proposed amendment. A TBA transaction is defined in FINRA Rule 6710(u) to mean a transaction in an Agency Pass-Through Mortgage-Backed Security or a Small Business Administration-Backed Asset-Backed Security where the parties agree that the seller will deliver to the buyer a pool or pools of a specified face amount and meeting certain other criteria but the specific pool or pools to be delivered at settlement is not specified at the Time of Execution, and includes TBA transactions for good delivery and TBA transactions not for good delivery. According to FINRA, the TBA market is one of the few markets where a significant portion of activity is unmargined, thereby creating a potential risk arising from counterparty exposure. This amendment was originally proposed in Regulatory Notice 14-02. The proposal has not yet been published for comment by the SEC.

MSRB Seeking Comment on Proposal to Require Municipal Securities Dealers to Disclose Mark-Up of Riskless Principal and Other Principal Transactions

On Sept. 24 the MSRB announced that it had issued Regulatory Notice 2015-16 requesting comment on draft rule amendments to require disclosure of mark-ups for specified principal transactions with retail customers, including riskless principal transactions. According to the Notice, the change to require disclosure of mark-ups for riskless principal and other principal transactions had been called for in public statements by SEC Chair Mary Jo White and each of the other Commissioners. The comment period ends on Nov. 10, 2015.

Enforcement & Litigation

CFTC Settles with Bitcoin Swap Execution Facility for Wash Trade Violation

On Sept. 24 the CFTC announced that it had entered into an order settling charges against TeraExchange LLC (Tera), a provisionally registered Swap Execution Facility (SEF), for failing to enforce its prohibition on wash trading and prearranged trading on the SEF platform. According to the CFTC, Tera brought together two market participants and arranged for them to enter into the transactions, telling one that the trade would be “to test the pipes by doing a round-trip trade with the same price in, same price out.” Subsequent to the transactions, Tera issued a press release and made statements at a meeting of the CFTC’s Global Markets Advisory Committee (GMAC) announcing the transactions, creating the impression of actual trading interest in the Bitcoin swap. Neither Tera’s press release nor the statements at the GMAC meeting indicated that the Oct. 8 transactions were pre-arranged wash sales executed for the purpose of testing Tera’s systems. The CFTC Order requires Tera to cease and desist from future violations relating to its obligations to enforce rules on trade practices. Commissioner Sharon Bowen issued a dissent stating that she believed there should have been a penalty beyond the cease and desist order for creating fictitious trades.

New ERISA Litigation Update Available

Goodwin Procter’s ERISA Litigation Practice published its latest quarterly ERISA Litigation Update. The update discusses (1) the Fifth Circuit affirming dismissal of claims involving de-risking of pension assets; (2) a federal court’s denial of class certification in an excessive fee case against a service provider; and (3) a federal court trial decision addressing measure of damages in an ERISA breach of fiduciary duty case.