February 25, 2015 Newsletter
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February 25, 2015
 

SFIG News 

Issue Spotlight

SFIG Calendar

Advocacy Outlook

Recent Developments

Next Week in Washington

 
SFIG NEWS
SFIG MEN: JOIN YOUR COLLEAGUES AND REGISTER FOR WOMEN IN SECURITIZATION TODAY!
In an overwhelming show of support, over 560 industry members have registered to support and promote SFIG’s Women in Securitization initiative since the online sign-up opened this past December. As Women in Securitization continues working on the development of a mentoring and peer sponsorship network and delivering content and programming to enhance educational and career opportunities, we are also looking to further engage our industry’s men. The support and engagement of men is an important facet to ensuring Women in Securitization’s ongoing efforts at promoting the presence, potential and prominence of women within the structured finance industry. We encourage all industry participants, regardless of gender, SFIG members and non-members alike, to take part in this exciting initiative – register online today!
 
 
SFIG TO SEND DELEGATION TO CHINESE SECURITIZATION FORUM 2015 ANNUAL CONFERENCE
The Chinese Securitization Forum will be holding its annual conference at the Crowne Plaza Beijing Lido in Beijing, China on March 23rd through the 25th. SFIG will be playing a significant role in the conference and sending a delegation from our Chinese Market Committee. In addition to attending, SFIG will also be sponsoring a number of panels, workshops and meetings with Chinese regulatory authorities. If you are interested in registering for the conference, please click here. If you would like to join SFIG’s Chinese Market Committee, please contact Alyssa.Acevedo@sfindustry.org
 
 
CONGRATULATIONS TO JASON KRAVITT FOR RECEIVING IFLR'S "OUTSTANDING ACHIEVEMENT" AWARD

SFIG would like to congratulate Secretary to the Board of Directors of SFIG, Jason Kravitt, for receiving the International Financial Law Review's ("IFLR") "Outstanding Achievement" award for the Americas. Mr. Kravitt was recognized by IFLR for his "tremendous contributions to securitization law." Congratulations Jason!

If you or anyone else in your organization has received a notable achievement and would like to be recognized, please contact us at info@sfindustry.org.

 
 
ISSUE SPOTLIGHT

SEC STAFF VIEWS ON REG. AB II AND OTHER NEW REGULATORY ISSUES BEGIN TO EMERGE [An excerpt]

By Charlie Sweet, Managing Director, Morgan, Lewis & Bockius LLP

Following a session at the recent ABS Vegas 2015 conference in which Katherine Hsu, David Beaning, and M. Hughes Bates, all from the SEC’s Office of Structured Finance, gave their personal views on various Regulation AB II and other current regulatory hot topics, Charlie Sweet from Morgan Lewis provided a recap for the industry. Please see below for an excerpt and click here for the entire article.

[Hsu, Beaning and Bates] prefaced their remarks with the traditional disclaimer that the views presented were their own and did not necessarily represent the views of the SEC or its staff and noted that they expect to engage in dialogue with issuers about many of these topics during the registration statement review process. While the individual views of SEC staff members may not represent official SEC or staff positions, and they may change their views as a result of discussions with registrants, knowing those views should still be useful to issuers who are preparing to file Regulation AB II–compliant shelf registration statements in the pilot program or otherwise.

Certification by Depositor’s CEO

  • The depositor’s CEO needs to sign the required certification at the time of each takedown. Generally, the depositor will need to make sure that the CEO is available for this purpose. There may be circumstances in which a CEO is on an extended absence, during which the depositor has appointed an acting CEO. In that case, the staffers’ view is that the acting CEO should be able to sign the certification because he or she is the CEO for all practical purposes.

Asset Representations Review

  • Asset classes other than RMBS may not have a history of repurchase requests due to alleged breach of representations and warranties concerning the pool assets. However, the rules were intended to prevent the same problems that historically arose in RMBS from recurring in other asset classes. In the staffers’ view, any flexibility in asset representations review of these asset classes is limited to the flexibility provided by the rules, such as the delinquency trigger (with its associated required disclosure of why the trigger chosen was reasonable). The staff expects to engage in significant dialogue with registrants about the reasonableness of the delinquency trigger chosen.
  • While the asset representations reviewer for each takedown may not be identified at the time that the registration statement is initially filed, the staffers expect that filing to include in brackets the disclosure required regarding the asset representations reviewer and its responsibilities, as required by Item 1109(b) of Regulation AB. The staffers also noted that they expect to see bracketed placeholder language that specifically mirrors how the registrant intends to address the required disclosure items at the time of takedown.
  • According to the staffers, the procedures for triggering asset representations review must strictly comply with the rules. For example, they believe that an extended timing component in the delinquency trigger—e.g., that a certain delinquency threshold must have been exceeded for a given number of months—may be impermissible, depending on the facts and circumstances. They are concerned that the imposition of additional requirements not specifically contemplated by the rules might make the process of initiating a review too onerous for investors. In their view, once the delinquency threshold has been exceeded, investors’ right to vote on initiating an asset representations review cannot be revoked.
  • The staffers are skeptical of imposing quorum requirement for the investor vote to trigger asset representations review because the rule states that the required vote may not exceed a simple majority of votes cast. The only potential flexibility the staffers showed was the possibility of a 5% quorum requirement because the maximum number of investors that may be required to initiate a vote is 5% of the total pool, but even there, they indicated that further analysis would be required.
  • According to the staffers, the disclosure in a registration statement filing should include robust information about how the asset representations reviewer will conduct any review. While they understand that potential asset representations reviewers may wish to negotiate specific procedures for reviewing compliance with particular representations and warranties, they are wary of the imposition of contractual limits on testing that the reviewer can perform. They believe that the reviewer should have the flexibility and discretion to perform additional testing if and when it finds it appropriate.
  • The staff will review forms of transaction documents in tandem with the prospectus disclosure, so registrants are urged to file those documents as soon as possible.
  • Because the rules state that an asset representations reviewer must review all assets that are 60 days or more delinquent, the staffers are wary of approaches that involve sampling, even for asset classes that involve large numbers of receivables.

Dispute Resolution

  • According to the staffers, access to the dispute resolution procedures for alleged breaches of representations and warranties is not limited to investors. Any transaction party that could submit a repurchase request—including the trustee—may use these procedures.
  • The staffers do not believe that registrants may impose additional hurdles to invoking the dispute resolution process that are not specified by the rules, such as representation of a minimum percentage of security holders or imposing a “loser pays” requirement. In their view, the rules’ requirement that the arbitrator allocate arbitration costs and that the parties agree upon the allocation of mediation costs with the assistance of the mediator is a sufficient deterrent to frivolous claims. Otherwise, they believe that transaction parties should have an almost unlimited right to invoke and pursue dispute resolution, even for claims that the issuer believes, in good faith, are meritless.

Preliminary Prospectus Filing Period

  • Although the requirement to file a preliminary prospectus three business days before pricing may concentrate market activity in certain days of the week, the staffers believe that the rule as adopted represents a significant compromise from the initial proposal and that issuers should be able to manage their offerings within these constraints.
  • There is no specific preliminary disclosure requirement for private transactions. However, the staffers noted that when the credit risk retention rules become effective, the disclosures required by those rules will need to be provided a reasonable period of time before sale.

Registration Statement Exhibits

  • While the CEO certification does not need to be filed until the time of a takedown, and its language may not be changed, the staffers still expect to see a form of the certification filed as an exhibit to new registration statements.
  • The staffers believe that new registration statements should include language that introduces and forward-incorporates future asset-level data filings by reference, even though asset-level data does not need to be filed until the time of a takedown.

NRSRO Third Party Diligence Rules

  • The NRSRO third-party diligence rules were a statutory mandate, so the staffers do not believe that the SEC had any flexibility in applying them to asset classes other than RMBS. Registrants with questions are encouraged to bring them to the staff—probably beginning with a phone call—after which the staff would let the questioner know whether written follow-up is required. When required, questioners should be sure to include detailed descriptions of the relevant facts and circumstances, as well as legal analysis.

Credit Risk Retention

  • Many in the industry have expressed great interest in pursuing a workable representative sample option, but the staffers did not believe that any of the agencies have the current intention to revisit this issue.
  • Shelf registration statements are usable for three years, during which time the credit risk retention rules will become effective for all asset classes. Therefore, unless registrants wish to face the possibility of having to file a post-effective amendment at that time, the staffers encourage the inclusion of bracketed risk retention language in filings now. They noted that Rule 430D requires a post-effective amendment for any new structural feature, and while they admitted that the retention of a vertical strip may not constitute a new structural feature, the required language is so simple that that they would like to see it anyway.
 
 
SFIG CALENDAR
BIWEEKLY CREDIT CARD ISSUER COMMITTEE CALL
THURSDAY, February 26, 2015
10:00 a.m. – 11:00 a.m. (EST)
 
 
BIWEEKLY RESIDENTIAL MORTGAGE COMMITTEE CALL
THURSDAY, February 26, 2015
2:00 p.m. – 3:00 p.m. (EST)
 
 
STANDING MONTHLY LEGAL COUNSEL COMMITTEE CALL
MONDAY, March 2, 2015
11:00 a.m. – 12:00 p.m. (EST)
 
 
HIGH QUALITY SECURITIZATION TASK FORCE CALL: EC CONSULTATION ON SIMPLE, TRANSPARENT AND STANDARDIZED SECURITIZATIONS
TUESDAY, March 3, 2015
10:00 a.m. – 11:00 A.m. (EST)
 
 
BIWEEKLY REGULATION AB II COMMENT LETTER CALL
WEDNESDAY, March 4, 2015
10:00 a.m. – 11:00 a.m. (EST)
 
 
BIWEEKLY AUTO ISSUER COMMITTEE CALL
WEDNESDAY, March 4, 2015
2:00 p.m. – 3:00 p.m. (EST)
 
 
BIWEEKLY NRSRO DUE DILIGENCE INDUSTRY GUIDE CALL
THURSDAY, March 5, 2015
3:00 p.m. – 4:00 p.m. (EST)
 
 
BIWEEKLY EQUIPMENT ISSUER COMMITTEE CALL
MONDAY, March 9, 2015
2:00 p.m. – 3:00 p.m. (EST)
 
 
BIWEEKLY RISK RETENTION INDUSTRY GUIDE CALL
TUESDAY, March 10, 2015
11:00 a.m. – 12:00 p.m. (EST)
 
 
BOARD OF DIRECTORS MEETING
WEDNESDAY, March 18, 2015
12:00 p.m. – 5:00 p.m. (EST)
New York, NY
Please note: This is a closed meeting.
 
 
CHINESE SECURITIZATION FORUM 2015 ANNUAL CONFERENCE
MONDAY, March 23, 2015 – WEDNESDAY, March 25, 2015
Crowne Plaza Beijing Lido
Beijing, China
Registration available here.
 
 
ADVOCACY OUTLOOK

If you would like to participate in the work SFIG is undertaking through our committees as highlighted below, please e-mail Committees@sfindustry.org. For specific inquiries on any of SFIG’s advocacy efforts, please contact the staff member listed for the related project.

The RMBS 3.0 Task Force released its Second Edition RMBS 3.0 Green Paper in November. Following the successful SFIG/IMN Private Label RMBS Symposium, the Task Force will continue its efforts to address key issues specific to private label mortgage securities through work streams relating to (1) Representations, Warranties, and Repurchase Enforcement; (2) Due Diligence, Data, and Loan-Level Disclosure; and (3) Role of Transaction Parties and Bondholder Communications. Presently, the Task Force is working on (1) developing a comprehensive compilation of representations and warranties for release in the spring of 2015 and (2) a grid summarizing roles of transaction parties. We encourage members to participate in any or all of the working groups to contribute towards the mission of RMBS 3.0. For additional information on RMBS 3.0, or to join the Task Force, please contact Mary.Robinson@sfindustry.org.

The GSE Reform Task Force has been actively engaging the Federal Housing Finance Agency (“FHFA”) in recent months on several fronts, including SFIG’s response to the proposed structure for a single agency security. SFIG has also submitted comments on guarantee fee pricing and FHFA’s Strategic Plan for 2015-2019. The Task Force previously reviewed various proposals in Congress including the Johnson-Crapo bill, with SFIG staff summarizing members’ recommendations in a briefing book, and the PATH Act. If you would like to learn more about SFIG’s activities in these areas, please contact Amanda.Bateman@sfindustry.org.

 The Mortgage Loan-Level Disclosure Task Force is studying the recent Regulation AB II release of Schedule AL and comparing it to SFIG’s Schedule L submission to the Securities and Exchange Commission in February of 2014. SFIG also continues to have weekly Mortgage Industry Standards Maintenance Organization calls to go through data elements that lenders should deliver in securitizations. We will also be conducting an analysis of the data elements included in SFIG’s Schedule L submission in order to determine any privacy concerns. Please contact Alyssa.Acevedo@sfindustry.org for additional information on SFIG’s work on this topic.

The Volcker Task Force has been working with SFIG’s various asset class and legal counsel committees to identify areas within the Volcker Rule in need of clarification, particularly questions regarding covered funds and the loan securitization exemption. Please contact Amanda.Bateman@sfindustry.org to participate on the Task Force.

The Risk Retention Industry Guide Work stream is creating best practices and developing consensus positions around several areas within the Credit Risk Retention final rule. Please contact Alyssa.Acevedo@sfindustry.org with any questions.

SFIG’s Chinese Market Committee continues to hold regular calls focusing on a high-level description of SFIG’s partnership with the Chinese Securitization Forum, potential upcoming educational discussions and sharing recent market developments in China. If you would like more information on SFIG’s work with respect to Chinese securitization, please contact Alyssa.Acevedo@sfindustry.org.

SFIG’s Shadow Banking Task Force has established the following agenda:

  • Leverage the predictive powers of the G20’s shadow banking initiative to determine future SFIG advocacy initiatives;
  • Assess the level of regulation to which our members are already subject;
  • Measure the full impact of those regulations on lending decisions and business models; and
  • Provide input into IOSCO, BCBS and IAIS on the revitalization of securitization markets.

The Task Force will have its first full meeting in the coming weeks, and members from across asset classes are encouraged to participate. To register your interest in SFIG’s Shadow Banking Initiative, please contact Amanda.Bateman@sfindustry.org.

The Regulation AB II Task Force will focus on the disclosure and offering process requirements within the final rule. Two work streams have been formed to develop a comment letter on the proposed rules that remain outstanding and to produce an industry guide for critical elements of the final rule. SFIG members who are interested in joining this task force or asset specific committees should contact Alyssa.Acevedo@sfindustry.org.

The Regulatory Capital and Liquidity Committee is addressing industry concerns related to the Federal Reserve Board’s Final Rule on the Liquidity Coverage Ratio (“LCR”). This committee will also develop a comment letter when U.S. regulators release their proposed Net Stable Funding Ratio (“NSFR”). To become involved in SFIG’s advocacy on the Final LCR rule or NSFR, please contact Alyssa.Acevedo@sfindustry.org.

The Derivatives in Securitization Task Force recently commented on the CFTC’s proposal on margin requirements for uncleared swaps, as well as the prudential regulators’ proposal regarding margin and capital requirements for covered swap entities. SFIG also submitted a comment letter at the end of June 2014, advocating for asset-backed securities issuers to qualify for the “low-risk financial end user” designation proposed by prudential regulators in the original proposal. SFIG members who are interested in learning more about this initiative should email Amanda.Bateman@sfindustry.org.

The NRSRO Due Diligence Industry Guide Work stream is continuing to review the due diligence elements of the Final Rules on NRSROs. The working group meets biweekly on Thursdays at 3:00 p.m. (EST) and members interested in learning more should contact Amanda.Bateman@sfindustry.org.

The Money Market Fund Reform Working Group submitted a comment letter on October 13, 2014 regarding the Securities and Exchange Commission’s July 23, 2014 proposal which includes, among other things, possibly amending rule 2a-7’s issuer diversification provisions to eliminate an exclusion that is currently available for securities subject to a guarantee issued by a non-controlled person. SFIG also submitted acomment letter in September 2013 on Money Market Fund Reform. If you are interested in joining this working group, please contact Alyssa.Acevedo@sfindustry.org.

The High Quality Securitization Task Force recently developed and submitted a response to the BCBS-IOSCO consultation on its criteria for identifying simple, transparent and comparable securitizations. SFIG’s comments were built off of those sent to the European Banking Authority on January 14th (available here) regarding its proposed criteria and to the European Central Bank and Bank of England last summer (available here) regarding the development of a sustainable securitization market in Europe. Next, the HQS Task Force will respond to the European Commission’s related proposal, announced last week in conjunction with its plans for a capital markets union. The call to kick off that effort will take place on Tuesday, March 3rd at 10:00 a.m. (EST) and members can join by emailing Amanda.Bateman@sfindustry.org.

 
 
INDUSTRY NEWS HIGHLIGHTS
PRESSURE RISES ON CONGRESS TO MOVE ON HOUSING FINANCE REFORM
A recent drop in long-term interest rates has dramatically reduced the value of the derivatives contracts that Fannie Mae uses as hedges in financial markets, according to a recent Reuters article. As a result, low capital buffers are increasing the possibility of another taxpayer draw and raising pressure on the U.S. Congress to overhaul housing finance laws. However, a real push on legislation is not expected anytime soon, according to the article.
 
 
FEDERAL RESERVE’S SEMI-ANNUAL REPORT TO CONGRESS DISCUSSES SECURITIZATION

This week, Federal Reserve (“FRB”) Chair Janet Yellen discussed the FRB’s semi-annual monetary policy report before the Senate Committee on Banking, Housing & Urban Affairs and the House Committee on Financial Services. While Congress questioned her on the economy, the timing of any interest-rate increases and transparency at the FRB, the monetary policy report discussed the securitization market. Of note, the report addressed the following areas:

  • New Securitizations: New securitizations have been boosted by commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”).  Such issuance remained robust amid continued reports of relatively accommodative underwriting standards for the underlying assets.
  • Risk-Retention: The risk retention rules finalized in October have the potential to affect market activity, especially in the private-label residential mortgage-backed securities, non-agency CMBS and CLO sectors.
  • Residential Real Estate: While valuations appear within historical norms, recent data points to some “cooling” of house price gains in regions that recently experienced rapid price appreciation.
  • Commercial Real Estate (“CRE”): Valuation pressures in the CRE market may have increased in recent quarters as prices have risen relative to rents, and underwriting standards in securitizations have weakened somewhat, though debt growth remains moderate.  
 
 
EUROPE TURNS TO SECURITIZATION MARKET TO KICK-START ECONOMY

According to an article by the Irish Independent, European Financial Markets Commissioner Lord Jonathan Hill proposed a plan to include high quality securitization in an attempt to create a single capital markets union to increase access to financing for start-ups and growing businesses. The EU hopes to emulate the U.S. venture capital markets to ease European firms’ reliance on banks for capital. The European Commission (“EC”) said that if European markets were at a similar level of development as the U.S., companies would have had an additional €90 billion available between 2008 and 2013. The European market has experienced rapid growth despite the strain left by shrinking banks, which accounted for 75 percent of lending to small businesses. “The outstanding stock of securitization in Europe, including bundled up mortgages and business loans was €1.4 trillion compared to €7.6 trillion in the U.S.” The EC will focus on establishing a system that will efficiently provide access to financing for small businesses.  

 
 
EBA EXECUTIVE DIRECTOR PROVIDES INSIGHT INTO EU CONSULTATIONS ON HQS

As European regulators engage the industry on developing criteria to identify high quality securitizations (“HQS”), European Banking Authority (“EBA”) Executive Director Adam Farkas warns that his agency would prefer that the definition not include resecuritizations, retranching and derivatives enhancing these structures. According to a recent article in Bloomberg, Farkas told interviewers in London that “We propose the underlying securitizations stay simple, homogeneous and not in a complex structure… What we are saying is that derivatives should not be used unless for hedging purposes.”

In addition to the EBA’s push for an HQS framework, the European Central Bank is currently engaged in a purchasing program targeting simple and transparent asset-backed securities in an effort to encourage bank lending to the real economy. Under a separate proposal by the European Commission (“EC”), qualifying securities could be granted relief from risk retention requirements and receive other preferential regulatory treatment. The Basel Committee on Banking Supervision and International Organization of Securities Commissions have also proposed criteria for HQS. According to Farkas, “The ideal situation would be to have the global agreements in place by the time there are legislative steps in Europe so there’s no issue of inconsistency between European and global standards.” The EBA expects to provide its guidance on HQS to the EC by June 2015. 

 
 
SHANGHAI STOCK EXCHANGE LAUNCHES NEW REPO REFORMS AND CLOs ARE POISED TO EXPAND IN CHINA’S ABS MARKET

According to an article in FinanceAsia, the Shanghai Stock Exchange (“SSE”) launched new debt repurchase (“repo”) reforms last week to help boost China’s asset-backed securities (“ABS”) market by expanding the range of collateral to allow for ABS. While ABS only accounted for 2.8 percent of the Chinese fixed-income market, China’s securitization market grew in 2014 to $54 billion. “The new repos business will help to provide liquidity for the bond and asset-backed securities,” said the SSE in an announcement. The new reforms aim to counter the obstacle of secondary market illiquidity, which has so far hindered growth in the ABS market.

Collateralized loan obligations have also begun to surge with the China Banking Regulatory Commission predicting that $14.4 trillion in outstanding bank loans could be eligible for securitization, according to a recent Financial Times article.

 
 
UPCOMING EVENTS IN WASHINGTON
HOUSE FINANCIAL SERVICES SUBCOMMITTEE ON HOUSING AND INSURANCE HEARING ENTITLED “THE FUTURE OF HOUSING IN AMERICA: OVERSIGHT OF THE FEDERAL HOUSING ADMINISTRATION - PART II”
THURSDAY, February 26, 2015
10:00 a.m. (EST)
2220 Rayburn House Office Building
Please see here for more information.
 
 
SFIG COMMITTEES AND TASK FORCES

SFIG has a number of Committees and Task Forces meeting and working on many topics of interest to the securitization industry. Please email us for more information, including how to join.

SFIG is pleased to share this edition of its newsletter with our members, as well as our supporters in the structured finance community. To ensure that you receive future editions of the newsletter, please visit our website or email us to learn more about membership opportunities.

Contact Information

Richard Johns Executive Director

Kristi Leo Investor Relations

Sonny Abbasi Director of MBS Policy

Sairah Burki Director of ABS Policy

Michael Flood Director of Advocacy

Mary Robinson Policy Manager

Alyssa Acevedo Policy Analyst

Amanda Bateman Policy Analyst

Jennifer Serpas Office Manager

Allison Creswell Executive Administration

1775 Pennsylvania Ave. NW
Suite 625
Washington, DC 20006

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