On our radar - September 3, 2020
These notable developments hit our radar over the past two weeks:
1. Crisis relief continues. The financial services regulatory agencies have continued to take actions to support the economy and markets in response to heightened volatility and uncertainty. Specifically:
- On Tuesday, the House subcommittee on the crisis released a memorandum highlighting evidence of fraud in certain Paycheck Protection Program (PPP) loans. Specifically, the subcommittee found that $1 billion of PPP loans went to businesses receiving multiple loans, $96 million to firms prohibited from doing business with the government and $195 million to government contractors with “significant performance or integrity issues.” For more on the crisis and fraud, see our Financial crimes observer.
- On Tuesday, Fed Governor Lael Brainerd gave a speech on longer-run goals and changes in the economy. She explained that the economy has seen improvements in the housing sector and consumer spending since the beginning of the crisis, but that employment has slowed and inflation remains weaker than pre-crisis levels. She also acknowledged that the economy continues to face risks related to the uncertainty of the crisis and that further fiscal support will be “essential to sustaining many families and businesses.”
- On Tuesday, the New York Fed released updated FAQs on the Term Asset-Backed Securities Loan Facility.
- On Monday, the CFPB released a report on the effects of the crisis on consumer credit. The report found that there was a sharp increase in the share of accounts reported with zero payments due despite a positive balance (indicating payment assistance). It also indicated that new delinquencies fell between March and June 2020 and availability of credit card debt slightly declined in that same time period.
- Last Thursday, the FHFA announced that Fannie Mae and Freddie Mac will extend their moratoriums on single-family foreclosures and real estate owned evictions until at least December 31, 2020.
- Last Wednesday, the Fed and FDIC issued a final rule to provide more flexibility in determining “eligible retained income,” thereby strengthening the incentive for banks to use capital buffers by reducing the likelihood that they will need to limit distributions.
- Last Wednesday, the Fed, FDIC and Treasury issued a final rule to temporarily keep the community bank leverage ratio at eight percent through the remainder of the year, raise it to 8.5 percent in 2021 and return it to nine percent in 2022.
2. SEC approves expansion of “accredited investor” definition. Last Wednesday, the SEC approved final amendments to its “accredited investor” definition, which determines eligibility for participation in private capital markets. In addition to the traditional net worth and income thresholds, the amendments expand the definition to include categories such as knowledgeable employees of a fund, registered investment advisers, and limited liability companies with at least $5 million in assets.
3. Start and stop for direct listings expansion. Last Monday, the SEC approved a New York Stock Exchange (NYSE) proposal that would permit companies going public to raise capital through primary direct listings, a method of selling shares to the public market without going through the traditional IPO process, thereby avoiding underwriting fees and road show expenses. However, a group of institutional investors petitioned the SEC to review this approval, and the SEC notified the NYSE that direct listings would be halted during this review.
4. OCC to move ahead with payments charter. In an interview this week, OCC Comptroller Brian Brooks stated that he intends to begin accepting applications to grant special purpose charters to payments firms in the near future. Last October, a New York federal court struck down the OCC’s plans to offer a special purpose charter to fintechs, finding that the OCC’s statutory authority is limited to chartering depository institutions and that issuing the charter would preempt state consumer protection laws.
5. LIBOR transition: The last two weeks also saw several developments related to the LIBOR transition, including:
- Last week, the Alternative Reference Rates Committee (ARRC) published an update to its recommended fallback language for new bilateral LIBOR business loans. As was the case for syndicated loans, the hardwired fallback approach has been revised to replace the adjusted compound Secured Overnight Financing Rate (SOFR) with adjusted simple SOFR as the second step in the waterfall behind term SOFR. The update also removes the amendment approach, which would require parties to negotiate a new reference rate upon LIBOR cessation as an alternative and expands the permissiveness of the early opt-in trigger allowing parties to replace LIBOR with SOFR prior to LIBOR’s official cessation.
- The ARRC also released a technical reference document last week in support of its recently released recommendations for syndicated loan conventions. The document includes discussions on the different conventions for calculating interest and a series of supporting spreadsheets demonstrating examples for calculating daily cash flows and accruals under the various conventions.
- On Monday, the CFTC’s divisions of Swap Dealer and Intermediary Oversight, Market Oversight and Clearing and Risk each issued revised no-action letters that provide various forms of relief from cleared and uncleared swap trading requirements regarding amendments to legacy contracts that reference LIBOR. Earlier this year, the ARRC had communicated a number of considerations for edits to the CFTC’s initial no-action letters.
- Concluding phase 2 of its project on benchmark reform, the International Accounting Standards Board (IASB) last week published updates to IFRS Standards relating to changes to contractual cash flows, hedge accounting and disclosures. The IASB also released proposed taxonomy updates to reflect new disclosure requirements.
Subscribe to PwC’s LIBOR Transition Market Update here to read more about these and other developments.