Action Line Update
June 4, 2007
Highlights
- FOMC May 9 Minutes
- Bernanke Speaks on Subprime Lending
- FICC Rules for Unregistered Investment Pools
- FASB Discusses FAS 140 Amendments Project and Proposed FSP
- Fannie Mae Announces Effective Date for Updated Single-Family MBS Master Trust Agreement
- S&P Issues Methodology for Rating Global Structured Finance Securities
- CESR Publishes Final MiFID Level 3 Guidance
- FSA Policy Statement on Conduct of Business Reform
- FSA Issues Handbook Notice 66
- CESR Publishes Responses Received to Calls for Evidence on UCITS Investor Disclosures
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Indicates a new item. Items that are solely informational are generally removed after two weeks. New items normally will be posted to the website weekly.
CROSS MARKET ISSUES
Fixed Income Operations Conference Planning Committee: The Fixed Income Operations Conference Planning Committee has scheduled a meeting for Wednesday, June 13, 2007 at 4:00 p.m. The purpose of the meeting is to begin discussions regarding the development of the program agenda. If you have any questions or comments please contact Brian MacWilliams at 646.637.9227.
CORPORATE CREDIT MARKETS
SIFMA Comment Letter Regarding Nasdaq Proposal to Reestablish a Quotation and Trading System for PORTAL Securities: On May 30, 2007, SIFMA filed a comment letter with the SEC regarding the Nasdaq Proposal to reestablish a quotation and trading system for certain securities that are designated as PORTAL Securities. SIFMA requested clarification on a number of issues including, among other things, the reporting of information to TRACE and the OTC Reporting Facility; the information to be disseminated to PORTAL participants; regulatory jurisdiction; and the nature of subscriber agreements and other documents required of PORTAL participants. For further information, please contact Mary Kuan at 646.637.9220.
FUNDING
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FOMC May 9 Minutes: The minutes of the meeting of the Federal Open Market Committee held on Wednesday, May 9, 2007 have been released. The Committee voted to maintain the federal funds rate at an average of around 5-1/4 percent, and as well voted to encompassed text in its statement that noted that its "...predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
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Government Operations Committee Meeting: For full story see Government and Federal Agency Markets Issues section.
Specials Working Group Meeting: A meeting of the Specials Working Group is scheduled for Monday, June 18 at 4:00 p.m. at SIFMA'S 360 Madison Avenue, New York offices. If you have any questions regarding the meeting please contact Robert Toomey at 646.637.9224.
FICC Reminder for Final Deadline for Repo Sub., Requests: The Fixed Income Clearing Corporation has reminded its Government Securities Division Netting Members of an upcoming implementation of a rule change to add a final deadline of 1:00 p.m. (New York time) to the repo collateral substitution process of the GSD. This new deadline will be implemented on trade date, Monday, June 4, 2007 (the "Implementation Date"). (Please see Important Notice dated April 20, 2007, for the previous announcement of this change). If you have any questions or comments please contact Robert Toomey at 646.637.9224.
Treasury Market Practices Group Conference: For full story see Government and Federal Agency Markets Issues section.
GOVERNMENT AND FEDERAL AGENCY MARKETS
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Government Operations Committee Meeting: A meeting of the Government Division Executive Committee has been scheduled for Thursday, June 21, 2007 at 4:00 p.m. at SIFMA's 360 Madison Avenue offices. If you have any questions, please call Brian MacWilliams at 646.637.9227 with any questions.
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FOMC May 9 Minutes: For full story see Funding Issues section.
Treasury Market Practices Group Conference: The Treasury Market Practices Group is hosting a conference on Thursday, June 14, 2007 from 8:30 a.m. to 12:30 p.m. at the Federal Reserve Bank of New York in New York City. Speakers at the event will provide guidance and information on applying best practice principles in the Treasury cash, repo and related markets. The conference will feature remarks by Anthony Ryan, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, and Tom Wipf, Chairman of the TMPG. All market participants - dealers, brokers, investment funds and foreign central banks - are encouraged to attend. Registration deadline is Tuesday, June 12, 2007. If you have any questions or comments please contact Robert Toomey at 646.637.9224.
MBS AND SECURITIZED PRODUCTS
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Bernanke Speaks on Subprime Lending: On June 5, 2007 Fed Chairman Bernanke gave a speech focused on subprime lending and the Fed's response to troubles in the housing market. He stated that the Fed would review mortgage disclosure practices in a manner similar to the recent effort regarding credit card disclosures, and the Chairman also highlighted an upcoming Fed hearing being held June 14, 2007 under the auspices of HOEPA. The complete text of the speech is available here.
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FICC Rules for Unregistered Investment Pools: Effective June 4, 2007 the FICC will implement rules for unregistered investment pools found in the approved FICC rule filing 2006-10. MBS Division of the FICC's current clearing participants that meet the definition of "unregistered investment pool" will have until January 3, 2008 to conform to the new minimum financial and qualitative rating requirements. The approved rule changes include a definition for "unregistered investment pool". There are a number of requirements regarding SEC registration, Minimum Net Assets, and a Qualitative Rating. For more information, click here.
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FASB Discusses FAS 140 Amendments Project and Proposed FSP: At its May 30, 2007 meeting, the Financial Accounting Standards Board (FASB) discussed the FAS 140 amendments project and came to several preliminary decisions. FASB members decided to consider treating certain transfers under a linked presentation model, subject to certain to-be-determined criteria. FASB plans to further research the removal of the QSPE concept in its entirety from FAS 140 and also will reconsider the legal isolation criteria. The Board also discussed the transition provisions of the proposed FASB Staff Position (FSP) 140-3 on the transfer of a financial asset and a repurchase financing of that asset that involves the same parties to the initial transfer. The Board tentatively decided on the following transition alternative: prospective application to new transactions plus transactions that are modified after the effective date and to outstanding repurchase agreements as of the effective date. The FSP is expected to be issued for comment in July. Please click here for the meeting handouts. Please click here (FAS 140 amendments) and here (FAS 140-3) for E+Y publications about the issues.
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Fannie Mae Announces Effective Date for Updated Single-Family MBS Master Trust Agreement: Fannie Mae has announced that its updated Single-Family MBS Master Trust Agreement, which will be used for securitizations of fixed-rate and adjustable rate mortgages, will be effective on June 1, 2007. All single-family mortgage-backed securities issued on or after that date will conform to the terms of the new Master Trust Agreement, which includes clarifications for servicing MBS mortgage loans that will apply generally to all loans in Fannie Mae MBS, whether the security is based on the current Trust Indentures or the new Master Trust Agreement. Fannie Mae has also published a new MBS Prospectus for single-family pools that will apply to all single-family mortgage-backed securities issued on or after June 1, 2007. Please click here for the Master Trust Agreement, here for the MBS Prospectus and here for more information.
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S&P Issues Methodology for Rating Global Structured Finance Securities: On May 29, 2007 Standard & Poor's issued a report entitled "Principles-Based Rating Methodology For Global Structured Finance Securities." The report details S&P's core methodologies for analyzing and rating securitization transactions and notes that its analytical framework for structured finance securitization ratings comprises five key areas of analysis: credit quality of the securitized assets, legal and regulatory risks, payment structure and cash flow mechanics, operational and administrative risks and counterparty risk. The report also details the range of and meaning behind S&P's structured finance ratings. Please click here for the report.
Federal Reserve Board Governor Speaks on Consumer Credit Disclosures: On May 23, 2007 Federal Reserve Board Governor Randall S. Kroszner spoke at the George Washington University School of Business Financial Services Research Program Policy Forum on consumer credit disclosures. He noted that the Board has been conducting "extensive, in-depth interviews with individual (credit card) consumers to study the effectiveness of disclosures" and will be using similar methods to study mortgage loan disclosures. He indicated that "in fulfilling its responsibility to protect consumers, the Federal Reserve will do all that it can to prevent fraudulent and abusive mortgage lending practices. Because information is critical to more competitive, and thus more efficient, markets, effective disclosure also has the capacity to weed out abuses." Please click here for the speech.
Federal Reserve Board Issues Proposed Amendments to Regulation Z: On May 23, 2007 the Federal Reserve Board issued for public comment proposed amendments to Regulation Z, which implements the Truth in Lending Act. The amendments are intended to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving credit plans by ensuring that information is provided in a timely manner and in a form that is readily understandable. The proposed amendments principally focus on the rules for open-end credit accounts that are not home-secured, chiefly general-purpose and retail credit card plans. Board members have indicated that the process used for this project and lessons learned will be considered by the board when drafting revised mortgage disclosure regulations. Please click here for more information, including links to the proposed amendments. Comments are due 120 days after the proposals are published in the Federal Register.
Senators Urge Regulators to Finalize Subprime Guidance: On May 18, 2007 several senators, including Christopher Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, released a letter to federal regulators commending their decision to extend the protections and underwriting requirements established by the Nontraditional Mortgage Guidance to subprime borrowers, and urging them to finalize the guidelines as quickly as possible. The letter also urges the regulators to encourage servicers to abide by the Statement of Principles that a number of industry participants had agreed to after Chairman Dodd convened a Homeownership Preservation Summit in April. Please click here for the letter and here for more information.
SEC Adopts Rules on Credit Rating Agency Oversight: On May 23, 2007 the SEC voted to adopt final rules to implement provisions of the Credit Rating Agency Reform Act of 2006, which was enacted by Congress on September 29, 2006. The rules are designed to improve competition among nationally recognized statistical rating organizations (NRSRO) and prevent unfair and abusive practices in the industry. The rules detail the procedure for applying and registering as an NRSRO, recordkeeping requirements for NRSROs and requirements designed to protect NRSRO impartiality. The SEC released proposed rules on credit rating agency oversight in February, 2007 and the SIFMA submitted a comment letter to the SEC on March 12, 2007. Please click here for the SEC's press release on the final rules and here for SIFMA's comment letter.
Fed Releases Reg Z Proposals for Revolving Credit: On the heels of a statement by Fed Chairman Bernanke last week that, "Using consumer testing, we will be working to improve the disclosures associated with mortgage lending and to fight deceptive marketing practices. This effort will draw heavily on our nearly-completed review of disclosures relating to open-end credit, including credit cards, for which we made extensive use of consumer testing to determine which disclosure formats are most effective and informative.", the Fed on May 23, 2007 issued proposed amendments to Reg Z regarding revolving credit disclosure requirements. The Fed stated that the rules are intended to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving credit plans by ensuring that information is provided in a timely manner and in a form that is readily understandable. Links to the documents released: Section 1 (198 KB PDF), Section 2 (682 KB PDF) , Section 3 (522 KB PDF) , Section 4 (699 KB PDF) , Board meeting materials, Statement by Governor Randall S. Kroszner.
MBS AND SECURITIZED PRODUCTS
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Federal Reserve Board Governor Speaks on Consumer Credit Disclosures: On May 23, 2007 Federal Reserve Board Governor Randall S. Kroszner spoke at the George Washington University School of Business Financial Services Research Program Policy Forum on consumer credit disclosures. He noted that the Board has been conducting "extensive, in-depth interviews with individual (credit card) consumers to study the effectiveness of disclosures" and will be using similar methods to study mortgage loan disclosures. He indicated that "in fulfilling its responsibility to protect consumers, the Federal Reserve will do all that it can to prevent fraudulent and abusive mortgage lending practices. Because information is critical to more competitive, and thus more efficient, markets, effective disclosure also has the capacity to weed out abuses." Please click here for the speech.
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Federal Reserve Board Issues Proposed Amendments to Regulation Z: On May 23, 2007 the Federal Reserve Board issued for public comment proposed amendments to Regulation Z, which implements the Truth in Lending Act. The amendments are intended to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving credit plans by ensuring that information is provided in a timely manner and in a form that is readily understandable. The proposed amendments principally focus on the rules for open-end credit accounts that are not home-secured, chiefly general-purpose and retail credit card plans. Board members have indicated that the process used for this project and lessons learned will be considered by the board when drafting revised mortgage disclosure regulations. Please click here for more information, including links to the proposed amendments. Comments are due 120 days after the proposals are published in the Federal Register.
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Senators Urge Regulators to Finalize Subprime Guidance: On May 18, 2007 several senators, including Christopher Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, released a letter to federal regulators commending their decision to extend the protections and underwriting requirements established by the Nontraditional Mortgage Guidance to subprime borrowers, and urging them to finalize the guidelines as quickly as possible. The letter also urges the regulators to encourage servicers to abide by the Statement of Principles that a number of industry participants had agreed to after Chairman Dodd convened a Homeownership Preservation Summit in April. Please click here for the letter and here for more information.
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SEC Adopts Rules on Credit Rating Agency Oversight: On May 23, 2007 the SEC voted to adopt final rules to implement provisions of the Credit Rating Agency Reform Act of 2006, which was enacted by Congress on September 29, 2006. The rules are designed to improve competition among nationally recognized statistical rating organizations (NRSRO) and prevent unfair and abusive practices in the industry. The rules detail the procedure for applying and registering as an NRSRO, recordkeeping requirements for NRSROs and requirements designed to protect NRSRO impartiality. The SEC released proposed rules on credit rating agency oversight in February, 2007 and the SIFMA submitted a comment letter to the SEC on March 12, 2007. Please click here for the SEC's press release on the final rules and here for SIFMA's comment letter.
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Fed Releases Reg Z Proposals for Revolving Credit: On the heels of a statement by Fed Chairman Bernanke last week that, "Using consumer testing, we will be working to improve the disclosures associated with mortgage lending and to fight deceptive marketing practices. This effort will draw heavily on our nearly-completed review of disclosures relating to open-end credit, including credit cards, for which we made extensive use of consumer testing to determine which disclosure formats are most effective and informative.", the Fed on May 23, 2007 issued proposed amendments to Reg Z regarding revolving credit disclosure requirements. The Fed stated that the rules are intended to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving credit plans by ensuring that information is provided in a timely manner and in a form that is readily understandable. Links to the documents released: Section 1 (198 KB PDF), Section 2 (682 KB PDF) , Section 3 (522 KB PDF) , Section 4 (699 KB PDF) , Board meeting materials, Statement by Governor Randall S. Kroszner.
MBA Publishes 2006 MARI Mortgage Fraud Report: The Mortgage Bankers Association has published MARI's 2006 Mortgage Fraud Report. The report indicates a 30% increase in reports of fraud for 2006 vintage loans when compared to the previous year, with over 28,000 reports collected so far. Florida was found to be the most fraud-ridden state in 2006, displacing Georgia which held the top spot from 2002-2005. The full report is available here.
FICC Announces Go-Live of Specified Pool Trading: The FICC has announced that participants will be able to send and receive specified pool trade messages beginning June 22, 2007. The FICC reports that "more than half of the MBSD accounts that submit and take interactive messages have been certified for Specified Pool Trade messages" and that "the remaining firms are in the process of testing or finalizing testing arrangements". Firms that cannot complete their development effort in the required time frame will need to utilize the RTTM web to enter Specified Pool Trades, or to affirm those trades submitted against them. Firms that take interactive message output from RTTM must test to ensure that they are able to process revised message output prior to June 22, 2007.
Federal Reserve Board Chairman Speaks on Subprime Market: Federal Reserve Board Chairman Bernanke spoke this morning at the Federal Reserve Bank of Chicago's Annual Conference on Bank Structure and Competition on the subprime mortgage market, detailing current issues in the market and possible regulatory responses. He noted that "in deciding what actions to take, regulators must walk a fine line; we must do what we can to prevent abuses or bad practices, but at the same time we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers." He indicated that "markets are adjusting to the problems in the subprime market, but the regulatory agencies must consider what additional steps might be needed. The Federal Reserve is currently undertaking a thorough review of all its options under the law" and he believes that "effective disclosures should be the first line of defense against improper lending." Please click here for the speech.
Senator Proposes Legislation on Foreclosure Prevention: On May 14, 2007 Senator Jack Reed (D-RI), Chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investment, introduced comprehensive legislation to expand access to foreclosure prevention services to homeowners who are experiencing financial hardship. The bill, known as the Homeownership Protection and Enhancement (HOPE) Act of 2007, provides $615 million for the creation and operation of State Homeownership Protection Centers, one-time grants or subsidized loans to qualified families and effective HUD-approved counseling agencies. The bill also creates an affirmative duty for lenders and servicers to engage in reasonable loss mitigation prior to foreclosure and requires notifications by lenders to provide borrowers with information on the full array of counseling services available in their state. Please click here for more information.
MUNICIPAL MARKETS
EUROPEAN MARKETS
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FSA Publishes May 2007 Market Watch Newsletter: The Financial Services Authority (FSA) has published the May 2007 edition of its Market Watch newsletter. Amongst other things, the latest edition contains information on: (i) shareholder activism by market participants, such as hedge funds, proposing to implement strategies which involve buying shares in quoted companies with a view to a subsequent exercise of shareholder rights and a corporate re-structuring of the relevant target; and (ii) how the FSA sees the Code of Market Conduct applying to investment banks involved with block trades.
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ECJ Judgment on Meaning of Inside Information: The European Court of Justice (ECJ) has issued a judgment in Ipourgos Ikonomikon and Proistamenos DOI Amfissas v Charilaos Georgakis in which it was asked to rule on the meaning of 'inside information' and 'taking advantage of inside information' under Articles 1 and 2 of Council Directive 89/592/EEC of 13/11/1989 on insider dealing (the directive on insider dealing before the Market Abuse Directive or MAD). The ECJ held that Articles 1 and 2 must be interpreted as meaning that information that the main shareholders and members of the board of directors of a company have agreed to effect between themselves stock-market transactions in the transferable securities of that company in order to support artificially the price of those securities is inside information. However, it went on to hold that, as there was equality of information between the parties to the transactions, they did not take advantage of the inside information when they carried out those transactions and thus did not engage in insider dealing under Article 2 of the Directive. The ECJ cited the provisions of MAD stating that prior to MAD, there was no Community legal framework addressing the issues of price manipulation and the dissemination of misleading information as supporting this view.
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Amendments to AMF General Regulations regarding MiFID Published: A ministerial order (arrêté), amending Books III and V of the French Financial Markets Authority (AMF) General Regulations (Règlement Général), has been published in the Official Journal, completing the implementation of the Markets in Financial Instruments Directive (MiFID) in France. Book III has been totally restructured and now includes a common set of rules applicable to all investment service providers. Amongst other things, the amendments to Book III provide for: (i) a new system for preventing and managing conflicts of interest; (ii) conduct of business rules which vary according to the types of clients referred to in MiFID; and (iii) the duty to adopt and implement a best execution policy. Book V on market infrastructure now includes the principles governing the execution of orders on different venues (regulated markets and multilateral trading facilities (MTFs)), as well as by systematic internalisers. The new provisions will come into force on November 1, 2007, in accordance with MiFID and are available on AMF's website.
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Decrees Completing Implementation of MiFID in France Published: Two decrees completing the implementation (by way of Ordinance No.2007-544) of the MiFID in France have been published in the Official Journal. Amongst other things, the decrees: (i) provide for a new definition of financial instruments; (ii) amend Book IV of the French Monetary Code for the purposes of multilateral trading facilities (MTFs); and (iii) contain provisions aimed at enhancing cooperation between the AMF and other foreign supervisory authorities. The new provisions will come into force on November 1, 2007 and are available here.
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FSA Publishes MiFID Permissions and Notifications Guide: The Financial Services Authority (FSA) has published its "MiFID Permissions and Notifications Guide" which explains the changes that firms must make in order to meet the implementation deadline for the Markets in Financial Instruments Directive (MiFID) on November 1, 2007. Amongst other things, the Guide covers: (i) FSMA-authorised firms' permissions; (ii) client categorisation; (iii) the Article 3 MiFID exemption; and (iv) passporting. Many of the changes covered by the Guide are also relevant to non-MiFID firms.
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FSF Publishes Updated Report on Highly-Leveraged Institutions: In response to a request from the Finance Ministers and Central Bank Governors of the G7 group of countries at their February 2007 meeting in Essen, the Financial Stability Forum (FSF) has published an update to its April 2000 report on highly-leveraged institutions (HLIs). Amongst other things, the report encourages financial authorities, counterparties, investors and hedge fund managers to strengthen their protection against potential systemic risks relating to hedge funds and other HLIs, and makes five recommendations to this effect.
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City of London Publishes Report on Importance of Wholesale Financial Services to EU Economy: A report by the centre for economic and business research (cebr), entitled "The Importance of Wholesale Financial Services to the EU Economy 2007", has been published on the City of London website. The report: (i) examines the contribution of the wholesale financial services sector to the EU economy; and (ii) considers the EU Commission's current work on the evaluation of the impact of the Financial Services Action Plan (FSAP) on the financial services sector. Overall, the report finds that the EU wholesale financial sector has strongly benefitted from the growth in world trade and wholesale finance, expanding more rapidly than the US sector over the last five years.
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AIMA Publishes Revised Guide for European Hedge Fund Managers: The Alternative Investment Management Association (AIMA) has published a revised version of its September 2002 "Guide to Sound Practices for European Hedge Fund Managers", which considers various practical aspects of establishing and managing a hedge fund business in Europe and suggests corresponding sound practices. The Guide has been revised in order to reflect significant developments in the European hedge fund industry, which include changes to the way in which the industry is regulated. Like the previous version, the latest version of the guide covers: (i) creating and managing a hedge fund business; (ii) investment process and portfolio risk management; (iii) portfolio administration and operational controls; (iv) raising capital and investor relations; and (v) hedge fund structures and organisation.