MARK YOUR CALENDAR for FMA’s LEGAL AND LEGISLATIVE ISSUES CONFERENCE October 29, 2020 ■ Washington Marriott Georgetown Hotel ■ Washington, DC Ask about the 2-for-1, first-timer and team registration discounts! Volume 29, Number 2 Financial Markets Association June 2020 In This Issue The LIBOR Transition: Time to Face the Music 2020 Legal and Legislative By Adam Schneider, Oliver Wyman Issues Conference …24 Co-Chair, Federal Reserve ARRC Infrastructure Working Group 2021 Securities Compliance and Seminar …24 Serge Gwynne, Oliver Wyman FINRA / SEC / Exam Priorities for 2020 …16 For over 50 years markets have used LIBOR as an efficient mechanism FINRA Examination Findings …16 for pricing loans. LIBOR is almost ubiquitous with notional amounts over $200 Job Bank …26 trillion, and has been called “The World’s Most Important Number.” But soon Legislative/Regulatory no more: in 2017 the U.K. Financial Conduct Authority, its regulator, Actions …2 announced it would stop supporting the rate after 2021. Despite COVID-19, New Members …6 LIBOR is very likely to end in 2022. Program Update …24 Sponsor Acknowledgements …25 This is a sea change. An array of positions must move off LIBOR and Spotlight on Service Member …4 for that to happen products must be built using different reference rates. Attorney Survey (for fall program ) …26 Lenders, borrowers, investors, and asset managers need to understand this Watch For …13 change, and manage it and the resultant impacts. Who’s News …12, 25, 26 Given this ubiquity, LIBOR transition programs require executing three MARKET SOLUTIONS large-scale programs. Editor Managing LIBOR exposures. This requires inventorying LIBOR Dorcas Pearce across loans, derivatives, supporting technology, valuation models…and then building the processes that support LIBOR Contributing Editors* discontinuation. This is a new, very difficult, build. Of course, exiting Marc-Alain Galeazzi LIBOR earlier is recommended. Barbara Mendelson Creating replacement products; which of course cannot use LIBOR. Market Solutions is a quarterly newsletter Market regulators have created Alternate Risk-Free Rates (ARRs) for about the activities of the Financial Markets this purpose. The U.S. preferred rate is SOFR, and the UK preferred Association as well as legislative/regulatory rate is SONIA. developments of interest to FMA members. The opinions expressed in this publication are those Managing customers and counterparties who need to understand of the authors, not necessarily those of the Association and are not meant to constitute changes to exposures and impacts on forward choices. legal advice. Market Solutions membership service of the Financial Markets Association, The industry has formed groups such as the UK Sterling RFR Working 333 2nd Street, NE - #104, Washington, DC Group and the US Alternative Reference Rates Committee to support this, in 20002, [email protected], 202/544-6327, conjunction with ISDA, LSTA, and others. Enormous work has gone into www.fmaweb.org. Please let us have your planning. But it remains that transition will be daunting. suggestions on topics you would like to see addressed in future issues. (Continued on page 3) ©2020, Financial Markets Association ============================================================================================== Route to: ❏ Audit ❏ Compliance ❏ Legal ❏ Risk Management ❏ Back Office ❏ Training Market Solutions 2 Legislative/Regulatory Actions This column was written by lawyers from Morrison & Foerster sole discretion, an individual who is a controlling shareholder LLP to update selected key legislative and regulatory of a Covered Company to enter into the agreement. developments affecting financial services and capital markets activities. Because of the generality of this column, the Under the proposed rule, the FDIC would have the authority information provided herein may not be applicable in all to require a Covered Company and its industrial bank subsidiary situations, and should not be acted upon without specific legal to submit to the FDIC, and comply with, a “contingency plan.” advice based on particular situations. The contingency plan would set forth, “at a minimum, recovery actions to address significant financial or operational stress that In this issue, we address selected developments from the federal could threaten the safe and sound operation of the industrial banking regulators, the Financial Crimes Enforcement Network bank and one or more strategies for the orderly disposition of (FinCEN), the Office of Foreign Assets Control (OFAC), and such industrial bank without the need for the appointment of a the Consumer Financial Protection Bureau (CFPB). receiver or conservator.” Under the proposed rule, the FDIC would also impose FEDERAL BANKING REGULATORS additional restrictions on industrial banks that are subsidiaries of Covered Companies. Specifically, the proposed rule would FDIC Moves Ahead with Significant Developments Related to require prior approval from the FDIC for such industrial banks the Industrial Bank Charter to do any of the following (among other things): make a material change in its business plan; add or replace a member of On March 17, 2020, the Federal Deposit Insurance Corporation the board of direc- tors (or its equivalent); add or replace a (FDIC) announced two significant developments relating to senior executive officer; employ a senior executive officer who industrial banks (also sometimes called industrial loan is associated in any manner with an affiliate of the industrial companies). First, in a notice of proposed rulemaking (NPR), bank; or enter into any contract for services material to the the FDIC laid out the regulatory regime it expects to apply to operations of the industrial bank with such Covered Company or companies not subject to consolidated supervision by the Board any subsidiary thereof. of Governors of the Federal Reserve System (Federal Reserve) that seek to control industrial banks. Second, the FDIC In the preamble to the NPR, the FDIC also indicates it may approved applications for deposit insurance submitted by impose additional requirements on Covered Companies through Square, Inc. and Nelnet, Inc., paving the way for these conditional approvals of applications or non-objections to companies to establish the first de novo industrial banks in over change in control notices. These conditions may be enforced a decade. pursuant to the FDIC’s authority under the FDI Act. These two developments, taken together, signal a path While the FDIC has entertained a number applications from forward for the use of deposit-taking industrial bank charters by would-be shareholders in industrial banks in recent years, the companies that cannot (or do not wish to) subject themselves to absence of any approvals raised the question of whether the the activity restrictions of the Bank Holding Company Act of charter’s use by FinTech firms was actually a viable option. 1956, as amended (the “BHC Act”). The FDIC has now answered the question by approving applications from Square, Inc. and Nelnet, Inc. Though largely The proposed rule would apply solely with respect to similar, in certain limited respects, the conditions accepted by industrial banks that are controlled by “Covered Companies.” Square, Inc. and Nelnet, Inc., in connection with their The term “Covered Company” means any company that is not application approvals, are less restrictive than those that would subject to consolidated supervision by the Federal Reserve and be required under the NPR, as summarized above. that controls an industrial bank (in each case after the effective date of the rule) as a result of: (1) a change in bank control; (2) For further information on the recent developments on a merger transaction; or (3) a de novo application. industrial banks from the FDIC, please see our Client Alert, available at https://www.mofo.com/resources/insights/200403- The proposed rule would require Covered Companies to fdic-business-industrial-banks.html. enter into a written agreement with the FDIC and its industrial bank subsidiary as a condition of the FDIC’s non-objection or approval. Among other things, the agreement would require the Government Action to Address Economic Impacts of COVID-19 Covered Company to submit certain information to the FDIC; Pandemic consent to examination; limit board representation on its industrial bank subsidiary to 25%; and maintain certain capital Congress and the federal financial regulators have taken bold and liquidity levels at the subsidiary industrial bank. In and unprecedented actions to respond to the economic fallout addition, the FDIC would reserve the authority to require, in its (Continued on Page 5) Market Solutions 3 The LIBOR Transition Continued from Page 1 First the scale is enormous. LIBOR interest rate swaps database, let alone the ability to compare or calculate go- have a notional exposure over $200 trillion plus there are $10- forward interest payments. 12 trillion in loans. This is literally millions of loans and contracts. Recommendations: Second, at transition assets using LIBOR fall back to Proactively re-negotiate LIBOR contracts off the rate. new terms, a situation we dubbed “The World’s Largest Corporate Action.” Fallback language is often inaccessible, Similarly it is imperative to stop issuing LIBOR poorly worded and changes deal economics. While the industry products as soon as possible. In May 2020 the ARRC has proposed fallbacks that minimize value transfer, these will released “Best Practice”