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Financial Services Law Insights and Observations

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  • Special Alert: NYDFS accelerates Libor transition planning

    Federal Issues

    On December 23, 2019, the New York Department of Financial Services issued an “Industry Letter” requesting that each NYDFS-regulated institution submit the institution’s plan for addressing the transition away from Libor-based credit, derivative, and securities exposures. The NYDFS letter has spurred additional focus by financial institutions in the issue, and not only by those regulated by NYDFS. This Client Alert summarizes the current state of play in Libor transition, and outlines some key considerations for developing a Libor transition plan.

    * * *

    Click here to read the full special alert.

    If you have any Libor-related questions please contact a Buckley attorney with whom you have worked in the past.

     

    Federal Issues Special Alerts LIBOR NYDFS Risk Management SOFR

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  • NCUA releases 2020 supervisory priorities

    Federal Issues

    In January, the NCUA issued a letter to board of directors and chief executive officers at federally insured credit unions outlining the agency’s 2020 supervisory priorities. Top supervisory priorities include:

    • Bank Secrecy Act/Anti-Money Laundering (BSA/AML). Examinations will continue to focus on customer due diligence and beneficial ownership requirements. The NCUA will also collaborate with law enforcement and banking regulators on initiatives such as updates to the FFIEC’s BSA/AML examination manual and enforcement guidelines, guidance concerning politically exposed persons, and measures for improving suspicious activity and currency transaction report filing procedures.
    • Consumer Financial Protection. Based on a rotating regulation review cycle, NCUA examiners will review compliance (at a minimum) with the following regulations: the Electronic Fund Transfer Act, Fair Credit Reporting Act, Gramm-Leach-Bailey (Privacy Act), Payday Alternative Lending and other small dollar lending, Truth in Lending Act, Military Lending Act, and the Servicemembers Civil Relief Act.
    • Cybersecurity. In 2020 the NCUA will continue conducting cybersecurity maturity assessments for credit unions with assets over $250 million and will begin to assess those with assets over $100 million. In addition, the NCUA intends to pilot new procedures—scaled to an institution’s size and risk profile—to evaluate critical security controls during examinations between maturity assessments.
    • LIBOR Cessation Planning. Examiners will assess credit unions’ planning related to the discontinuation of LIBOR. According to the NCUA, credit unions should “proactively transition away from instruments using LIBOR as a reference rate.”

    Other areas of focus include credit risk, current expected credit losses, liquidity risk, and modernization updates. The extended examination cycle will continue to apply to qualifying credit unions.

    Federal Issues NCUA Compliance Examination Supervision Bank Secrecy Act Anti-Money Laundering Consumer Protection Privacy/Cyber Risk & Data Security LIBOR

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  • NYDFS directs financial institutions to submit LIBOR transition risk management plans

    State Issues

    On December 23, NYDFS issued an Industry Letter (Letter) directing its regulated depository and non-depository institutions, insurers, and pension funds to outline their plans for managing the risks associated with the potential impact of LIBOR’s likely cessation at the end of 2021. NYDFS seeks assurance that regulated institutions’ board of directors and senior management fully understand the associated risks, have developed appropriate plans, and have initiated actions to facilitate transition to an alternative reference rate. The Letter does not mandate use of any particular alternative rate, but notes that “the Alternative Reference Rates Committee . . ., convened by the FRB and the [Federal Reserve Bank of New York (FRBNY)], has chosen [the Secured Overnight Financing Rate published by the FRBNY] as its recommended alternative to U.S. dollar LIBOR.” The Letter requires NYDFS-regulated institutions to describe: (i) programs that will assess financial and non-financial transition risks; (ii) “processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties”; (iii) processes to communicate with customers and counterparties; (iv) plans and processes for “operational readiness, including related accounting, tax and reporting aspects of [the] transition” from LIBOR; and (v) their governance framework, including oversight by an institution’s board of directors or its equivalent governing authority. Institutions are required to submit their transition-risk management plans to NYDFS by February 7.

    State Issues State Regulators LIBOR SOFR NYDFS Risk Management

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  • OCC highlights key risks affecting the federal banking system in semiannual risk report

    Federal Issues

    On December 9, the OCC released its Semiannual Risk Perspective for Fall 2019, identifying and reiterating key risk areas that pose a threat to the safety and soundness of national banks and federal savings associations, including credit, operational, and interest rate risks. While the OCC commented that “bank financial performance is sound,” it also advised that “[b]anks should prepare for a cyclical change while credit performance is strong,” emphasizing that “[c]redit risk has accumulated in many portfolios.” The OCC also highlighted that competition with nonbank mortgage and commercial lending could pose a risk as well.

    Specific areas of concern that the OCC described include: elevation of operational risk as advances in technology and innovation in core banking systems result in a changing and increasingly complex operating environment; increased use of third-party service providers that contribute to continued threats of fraud; need for prudent credit risk management practices that include “identifying borrowers that are most vulnerable to reduced cash flows from slower than anticipated economic growth”; “volatility in market rates [leading] to increasing levels of interest rate risk”; LIBOR’s anticipated cessation and whether banks have started to determine the potential impact of cessation and develop risk management strategies; and strategic risks facing banks as non-depository financial institutions (NDFI) use evolving technology and expand data analysis abilities (the OCC commented that NDFIs “are strong competitors to bank lending models”). The OCC also noted that there is increased interest from banks in sharing utilities with NDFIs to implement Bank Secrecy Act/anti-money laundering compliance programs and sanctions processes and controls.

    Federal Issues OCC Agency Rule-Making & Guidance Risk Management Bank Regulatory Third-Party LIBOR Fintech Bank Secrecy Act Bank Compliance

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  • National bank and coalition of 42 Attorneys General settle LIBOR action for $100 million

    State Issues

    On June 15, the New York Attorney General, along with 41 other state Attorneys General, announced a $100 million settlement with a national bank for allegedly fraudulent conduct involving U.S. Dollar LIBOR. According to the settlement agreement, the bank “misrepresented the integrity of the LIBOR benchmark” to government and private institutional counterparties. The bank allegedly concealed, misrepresented, or failed to disclose information to “avoid negative publicity and protect the reputation of the bank,” including, among other things, asked employees in other sections of the bank avoid offering higher rates than the bank’s USD LIBOR submissions. Additionally, contributing to inaccurate LIBOR benchmark rates, the bank allegedly was aware that other financial institutions made USD LIBOR submissions that were inconsistent with their borrowing rates. The bank is required to pay $95 million into a settlement fund, which government and non-profit entities with LIBOR-linked investments from the bank may be eligible for distribution, while the remaining $5 million will cover costs and fees associated with the investigation and settlement.

    State Issues State Attorney General Settlement LIBOR

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  • State Attorneys General Announce $220 Million Settlement With German Bank for Allegedly Artificially Manipulating LIBOR Interest Rates

    State Issues

    On October 25, New York Attorney General Eric T. Schneiderman announced, in coordination with 44 other state attorneys general, a $220 million settlement with a German bank (bank) to resolve allegations that the bank manipulated the U.S. Dollar London InterBank Offered Rate (LIBOR) and other benchmark interest rates and defrauded government and non-profit entities across the nation. The settlement is the second related to alleged LIBOR manipulations brought by state attorneys general, and is more than twice the amount announced last year with a London-based financial institution and related international investment bank. (See previous InfoBytes summary here.) According to AG Schneiderman, the multi-state investigation revealed that from 2005 to 2010, the bank failed to disclose to “affected governmental and not-for-profit counterparties” that (i) it had made false LIBOR submissions inflating borrowing costs linked to the London and U.S. dollar interbank offered rates; (ii) bank traders tried to influence other banks’ LIBOR submitters to make rate alterations in order to benefit their own trading positions; and (iii) the bank was cognizant of the fact that other banks manipulated LIBOR submissions and that “LIBOR was a false rate.” Under the terms of the settlement, affected entities will be eligible to receive a portion of the settlement fund, with the remainder to be used for investigation expenses and other purposes.

    State Issues State Attorney General Enforcement LIBOR Settlement

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  • State Attorneys General Settle with London-based Financial Institution over Alleged LIBOR Manipulation

    State Issues

    On August 9, Massachusetts AG Healey announced, in coordination with more than 40 state attorneys general, a $100 million settlement with a London-based financial institution and related international investment bank (collectively, defendants) to resolve allegations that the defendants manipulated the U.S. Dollar London InterBank Offered Rate (LIBOR) and defrauded government and non-profit entities across the nation. According to AG Healey, from 2007-2009, defendants’ managers instructed its LIBOR submitters to lower their LIBOR rate setting. LIBOR submitters allegedly agreed to these instructions. State attorneys general further allege that, at various times beginning in 2005 and continuing at least into 2009, the defendants’ traders asked LIBOR submitters “to change their LIBOR submissions in order to benefit their trading positions.” LIBOR submitters allegedly often agreed to the traders’ requests. The defendants are the first of “several USD-LIBOR-setting panel banks under investigation by the state attorneys general to resolve the claims against it.”

    State Attorney General LIBOR

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  • DOJ Announces Indictment of Former Derivatives Traders for Alleged LIBOR Manipulation

    Consumer Finance

    On June 2, the DOJ announced that a federal grand jury of the Southern District of New York indicted two former senior traders of an international investment bank for their alleged roles in a scheme to manipulate the U.S. Dollar London InterBank Offered Rate (LIBOR). Specifically, the former employees were charged with “one count of conspiracy to commit wire fraud and bank fraud and nine counts of wire fraud for their participation in a scheme to manipulate the USD LIBOR rate in a manner that benefited their own or [the investment bank’s] financial positions in derivatives that were linked to those benchmarks.” According to allegations included in the indictment, as director of the Pool Trading Desk in New York and as director of the Money Market Derivatives (MMD) Desk in London, the two former senior traders directed subordinates and/or requested that colleagues “submit false and fraudulent LIBOR contributions consistent with the traders’ or the bank’s financial interests rather than the honest and unbiased costs of borrowing.” Chief U.S. District Judge Colleen McMahon of the SDNY has been assigned to the case.

    DOJ LIBOR

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  • DOJ Announces Prison Sentences of Former Derivatives Traders for LIBOR Manipulation

    Federal Issues

    On March 10, the DOJ announced that U.S. District Judge Jed S. Rakoff sentenced two former derivatives traders for a Netherlands-based bank to prison for their roles in a scheme to manipulate the London Interbank Offered Rates (LIBOR) for the U.S. Dollar (USD) and Japanese Yen (JPY) from 2005-2009. The defendants, who were convicted of bank fraud, wire fraud and conspiracy charges in November 2015, were sentenced to 24 months and 12 months and a day in prison. Two additional bank employees were convicted in the same LIBOR investigation after pleading guilty to one count of conspiracy each for their roles in the scheme; two other individuals were charged and are awaiting trial.

    DOJ LIBOR

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  • Former Derivatives Trader Convicted and Sentenced in U.K. on Libor Manipulation Charges, Also Facing Criminal Charges in U.S.

    Federal Issues

    On August 3, a jury in the United Kingdom convicted former derivatives trader Tom Hayes on eight counts of fraud for his role in the manipulation of the London Interbank Offered Rate (Libor) for Japanese Yen. Hayes was subsequently sentenced to 14 years in prison. Prosecutors had argued that Hayes, a former trader at two international banks, had asked traders at his bank who were responsible for submitting the bank’s daily Libor submissions for publication – as well as submitters at other banks and brokers involved in the Libor process – to raise or lower their submissions for the Yen Libor from 2006 to 2010 to help Hayes increase the profit on his trades. Hayes was the first individual to be tried in U.K. courts for Libor manipulation, with some of Hayes’ alleged co-conspirators set to go to trial in late September. Hayes is also facing criminal charges for the same conduct in the U.S.

    Enforcement LIBOR Financial Crimes

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