June 4, 2013 Newsletter
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Structured Finance Industry Group


Issue Spotlight Update

Recent Developments




Representatives of SFIG’s Derivatives in Securitization Task Force met with Gary Gensler, the Chairman of the Commodities Futures Trading Commission (CFTC), along with members of the CFTC’s staff, on June 4, 2013. The purpose of the meeting was to acquaint the CFTC with SFIG and its membership and to discuss securitization industry concerns about the clearing requirements going into effect on June 10 and other potential concerns relating to swaps with securitization SPEs under new CFTC regulations.  

SFIG will report on the details of the CFTC meeting later today.

If you would like to participate on the Derivatives in Securitization Task Force, please contact SFIG at Richard.Johns@sfindustry.org.



On June 3, 2013, SFIG submitted a comment letter to the Securities and Exchange Commission (SEC) in response to the SEC's Credit Ratings Roundtable, held on May 14, 2013.  The comment letter was produced by SFIG's Credit Rating Reform Task Force.

The Roundtable consisted of three panels: one addressed the potential creation of a credit rating assignment system for asset-backed securities (the concept embodied in the so-called "Franken Amendment"), one focused on the effectiveness of Rule 17g-5 in encouraging unsolicited ratings, and one discussed alternatives to the issuer-pay business model for credit ratings.

SFIG has taken the position in its comment letter that, not only would the assignment system fail to achieve its primary goal of mitigating the potential conflicts of interest in the issuer-pay model, but it also would bring with it many consequential negative effects.  Rather than adopt the assignment system, SFIG proposes changes to Rule 17g-5 that are intended to increase the number of ratings and credit commentaries issued on asset-backed securities so that investors will be better able to perform their own credit analyses by reviewing, and not simply relying on, the ratings and credit commentaries of rating agencies. In addition, the increased competition among rating agencies arising from the more accommodative access to and use of Rule 17g-5 information will improve the quality of ratings and credit commentaries in general.

The SEC continues to consider these and other matters relating to credit rating reform.  If you would like to participate in SFIG's advocacy efforts on this topic, please contact SFIG at Richard.Johns@sfindustry.org to join the Credit Rating Reform Task Force.

Click here for SFIG's comment letter.



SFIG joined a comment letter dated May 31, 2013, addressed to the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) and submitted by the Financial Instruments Reporting Convergence Alliance (FIRCA), of which SFIG is a member.  The comment letter relates to the IASB’s March 2013 Exposure Draft ED/2013/3, (Exposure Draft) regarding the reporting of expected credit losses on financial instruments.

In its press release accompanying the release of the Exposure Draft, the IASB observed that both U.S. and international accounting standards currently use an incurred loss model to determine when impairment is recognized on financial instruments.  The IASB further noted that during the financial crisis the incurred loss model was criticized for delaying the recognition of losses and for not reflecting accurately expected credit losses.  The Exposure Draft proposes that full lifetime expected credit losses be recognized when a financial instrument deteriorates significantly in credit quality.

Click here for the FIRCA comment letter.  Click here for the Exposure Draft.  Click here for the IASB’s press release accompanying the release of the Exposure Draft.

If you are interested in joining SFIG’s Accounting Policy Committee, please contact SFIG at Richard.Johns@sfindustry.org.



Representatives of SFIG and staff members of the Securities and Exchange Commission (SEC) will meet via conference call on June 11, 2013.  The purpose of the meeting will be to introduce SFIG and its membership to SEC staff working in the securitization area.  SFIG will be represented by members of our Regulation AB II Issue Task Force and our Residential Mortgage Committee (including its Loan Level Disclosure Subcommittee).  

If you would like to participate on the Regulation AB II Issue Task Force or on the Residential Mortgage Committee, please contact SFIG at Richard.Johns@sfindustry.org.  



To encourage dialogue on a variety of topics relating to the re-establishment of a robust private-label market for residential mortgage-backed securities (RMBS), SFIG's Residential Mortgage Committee's Subcommittee (Subcommittee) on Representations, Warranties and Repurchase Governance is in the process of planning a series of roundtables.

Among the topics slated for discussion will be the exploration of the different approaches adopted by market participants involving the contractual framework and related enforcement mechanisms for representations and warranties provided in connection with recent offerings of RMBS backed by newly-originated residential mortgage loans. The roundtables will also include a focus on the expected impact of the Consumer Financial Protection Bureau's Qualified Mortgage (QM) rule on new origination RMBS, including related due diligence issues, the potential to securitize "rebuttable presumption" QM loans and non-QM loans, and the interplay between origination and securitization dynamics relating to the QM rule.

Roundtable planners intend to include representatives from all sectors of the securitization industry reflected in SFIG's membership - investors, originators, issuers, trustees, servicers, independent reviewers, underwriters/placement agents and credit rating agencies. 

Please contact SFIG at Richard.Johns@sfindustry.org if you are interested in learning more about, or participating in, one of these Roundtables or if you would like to join the Residential Mortgage Committee or any of its subcommittees.




On June 10, 2013, "financial entities" will be required to begin clearing certain interest rate swaps pursuant to Section 2(h)(1)(A) of the Commodity Exchange Act (CEA).  Since many securitization SPEs could be considered to be "financial entities" under the CEA, they may be required to begin clearing certain interest rate swaps entered into, or substantially modified or novated, on and after June 10, 2013.  Because clearing would impose additional costs on the swap, and clearing may not be feasible for securitization SPEs due to their inability to post the initial or variation margin required by the clearinghouses, securitization issuers need to review their programs that utilize interest rate swaps in light of the swiftly approaching June 10, 2013 deadline. 

In addition, certain "financial entities," such as captive finance companies and small depository institutions, that intend to rely on the "end-user" exemption from mandatory clearing available for such entities in Section 2(h)(7) of the CEA, may be required to make the necessary certifications for such exemption (either directly to their swap dealer or through entry in the ISDA March 2013 DF Protocol, or Protocol 2.0) by June 10, 2013.  "End users" that are not "financial entities" will not need to make such certifications until September 9, 2013.


Section 2(h)(1)(A) of the CEA, which was added by Title VII of the Dodd-Frank Act, requires that all swaps must be cleared "if they are required to be cleared."  On December 13, 2012, the Commodity Futures Trading Commission (CFTC) released a Clearing Requirement Determination that provided that four classes of interest rate swaps and two classes of credit default swaps are required to be cleared.  However, the CFTC indicated that swaps with "conditional notional amounts" (e.g., balance guarantee swaps) are not clearable, and that swaps with "idiosyncratic" provisions (e.g., unique termination events) may not be clearable.  The publication of the Clearing Requirement Determination triggered the implementation of mandatory clearing pursuant to the Swap Transaction Compliance and Implementation Schedule released by the CFTC on July 30, 2012.  Pursuant to this release, clearable swaps between swap dealers and/or major swap participants (Category 1 entities) have been required to be cleared since March 11, 2013; clearable swaps between Category 1 entities and persons "predominantly engaged…in activities that are financial in nature" as defined by the Board of Governors of the Federal Reserve System (Category 2 entities) are required to be cleared starting June 10, 2013; and all other clearable swaps involving entities that are not invoking a clearing exception (Category 3 entities) are required to be cleared starting September 9, 2013.

Section 2(h)(7) of the CEA provides an exception to the mandatory clearing requirements described above for commercial end-users.  To qualify for the exception, a party must not be a financial entity and must use the swap to hedge or mitigate commercial risk.  "Financial entities" include persons "predominantly engaged…in activities that are financial in nature" as defined by the Board of Governors of the Federal Reserve System, although "captive finance companies" and depository institutions with assets of less than $10 billion are specifically exempted from the definition.  On May 6, 2013, a Final Rule of the Board of Governors containing a definition of this phrase (compiled from several different releases) became effective, and provides that "making, acquiring, brokering or servicing loans or other extensions of credit…for the company's account or for the account of others" is an activity that is "financial in nature."

Click here for Section 723 of the Dodd-Frank Act.  Click here for Section 2(h) of the CEA.  Click here for the CFTC's Clearing Requirement Determination release.  Click here for the CFTC's Swap Transaction Compliance and Implementation Schedule.  Click here for the CFTC's End-User Regulations.  Click here for the Final Rule of the Board of Governors of the Federal Reserve System.

As noted above under SFIG News, representatives of SFIG’s Derivatives in Securitization Task Force have been meeting with CFTC Chairman Gensler and the CFTC's staff to raise the securitization industry’s concerns regarding the clearing requirements. The members of this task force are working to collaborate with other industry groups to develop approaches to the numerous derivatives related issues currently facing the securitization industry as a result of the Dodd-Frank Act.




American International Group Inc. (AIG), Prudential Financial Inc. (Prudential) and GE Capital have been designated as “systemically important financial institutions” (SIFI) by the Financial Stability Oversight Council (FSOC) on June 3, 2013.

Section 113 of the Dodd-Frank Act authorizes the FSOC to determine that a nonbank financial company shall be supervised by the Board of Governors of the Federal Reserve System (Federal Reserve) and shall be subject to prudential standards, in accordance with Title I of the Dodd-Frank Act, if the FSOC determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States.

On April 3, 2012, the FSOC released a final rule and interpretive guidance setting forth the criteria and process it will use to designate nonbank financial firms as systemically important.

Among the “prudential standards” that may apply to a SIFI, in addition to Federal Reserve oversight, are stress tests and increased capital and liquidity requirements.  Special provisions may also apply to a SIFI in an insolvency or distress situation.

Each of the designated companies has 30 days to request a hearing before the FSOC to contest the proposed determination.  The FSOC is required to deliver a final determination within 60 days of the hearing, if one is requested.

Click here for the Dodd-Frank Act.  Click here for the FSOC’s April 3, 2012 rule and interpretive guidance relating to the SIFI designation. 



The Securities and Exchange Commission (SEC) is holding an open meeting on June 5, 2013, to discuss amendments to the Investment Company Act rules relating to money market funds (MMFs).  Although the text of the proposed amendments, presumably to Rule 2a-7 under the Investment Company Act, has yet to be released, news reports indicate that the proposed amendments would require “prime” MMFs (i.e. MMFs which invest in private debt instruments, as distinguished from Treasury, Government and Municipal MMFs) to adopt a floating net asset value (NAV).  The floating NAV requirement would replace the current rule, which permits MMFs to maintain a stable NAV of $1.00 per share using the amortized cost method of accounting and penny rounding.

According to data supplied to the SEC by prime MMFs, prime MMFs held $117 billion in asset-backed commercial paper (ABCP) as of June 30, 2012, as well as an unreported amount of “money market tranches” issued by term asset-backed securitizations.  Prime MMFs had approximately $1.7 trillion in assets under management as of that date.

The impetus for these proposed amendments, and for money market reform generally, has emanated more from the Financial Stability Oversight Council (FSOC) than from the SEC, which is the primary regulator of MMFs.  In 2012, the FSOC specifically recommended that the SEC publish structured reform proposals for MMFs and adopt reforms to address MMFs’ lack of capacity to absorb losses and their susceptibility to runs.  The SEC’s then-Chairperson, Mary Shapiro, subsequently announced that a majority of the SEC’s Commissioners would not support moving forward with proposals to reform the structure of MMFs. The FSOC then proceeded under its authority pursuant to Section 120 of the Dodd-Frank Act, releasing in November 2012 its own proposed recommendations to reform MMFs and essentially compelling the SEC to respond.

MMF reform that results in or causes a reduction in assets under management at MMFs will potentially impact the liquidity available to ABCP and “money market tranches” of term securitizations.

SFIG will assess the impact to the securitization industry of the proposed rule after it is presented at the June 5, 2013 meeting.

Click here for the FSOC’s November 2012 report on MMF reform.  Click here for the FSOC’s press release accompanying the release of the report.



On May 31, 2013, the Securities and Exchange Commission (SEC) issued an approving no-action letter to The Bank of Nova Scotia (Bank) relating to the Bank’s proposed covered bond offering in the U.S.  The Bank noted that it had previously sold its covered bonds in the U.S. in reliance on Rule 144A under the Securities Act of 1933, but is now proposing to undertake publicly registered offerings of covered bonds.  As a “foreign private issuer” under Rule 3b-4 of the Securities Exchange Act of 1934, the Bank would be registering its covered bond offerings on Form F-3.  The registration statement would encompass the covered bonds themselves and the related guarantee.

In its request letter, the Bank undertook to provide disclosure in its registration statement with respect to the associated cover pool “consistent with the applicable disclosure requirements specified in Regulation AB,” including information regarding repurchases and replacements and static pool information.

Click here for the Bank’s no-action letter request.  Click here for the SEC’s no-action letter.



The Federal Housing Finance Agency (FHFA) on May 30, 2013 instructed Fannie Mae and Freddie Mac to extend both the Home Affordable Modification Program (HAMP) and the streamlined modification initiative through the end of 2015 in order to help borrowers at risk of losing their homes. HAMP lowers monthly payments for homeowners struggling to repay their loans, and the streamlined modification initiative “gives borrowers who are at least 90 days late another path to avoid foreclosure and lower their monthly payments without requiring financial or hardship documentation.”

Click here for the FHFA press release.



On May 29, 2013 the Consumer Financial Protection Bureau (CFPB) finalized amendments to the qualified mortgage (QM) rule, which is scheduled to go into effect on January 10, 2014.

On January 10, 2013, the CFPB issued a final rule to implement the ability-to-repay (ATR) requirements and QM provisions.  At the same time, the CFPB issued a proposed rule related to certain proposed exemptions, modifications, and clarifications to the ATR requirements.  The May 29 final rule addresses the issues put forth for public comment in the January 10 proposed rule.

The final rule provides an exemption from the ATR requirements for extensions of credit made by certain types government-sanctioned or charitable creditors. 

The final rule also provides an exemption from the requirements for extensions of credit made pursuant to programs administered by a housing finance agency and for an extension of credit made pursuant to an Emergency Economic Stabilization Act program, such as extensions of credit made pursuant to a State Hardest Hit Fund program.

The final rule clarified certain calculations to be used in determining the amount of loan origination compensation for purposes of the QM points and fees cap; and contains several provisions that are designed to facilitate compliance and preserve access to credit from small creditors, which are defined as creditors with no more than $2 billion in assets that (along with affiliates) originate no more than 500 first-lien mortgages covered under the ATR rules per year.  In the final rule, the CFPB is:

  • providing an exclusion from the points and fees calculation of certain compensation, including: compensation paid by a lender to its loan officers; compensation paid by a consumer to a mortgage broker when that payment has already been counted as part of the finance charge; and compensation paid by a mortgage broker to its employees.  Left remaining in the points and fees test are payments made by lenders to mortgage brokers for broker-originated loans;
  • adopting a new, fourth category of QMs for certain loans originated and held in portfolio for at least three years (subject to certain limited exemptions) by small creditors, even if they do not operate predominantly in rural or underserved areas.  The loans must meet the general restrictions on QMs with regard to loan features, points and fees, and creditors must evaluate consumers’ debt-to-income ratio as they would be under the general QM definition;
  • raising the threshold defining which QMs receive a safe harbor under the ATR rules for loans that are made by small creditors under the balloon-loan or small creditor portfolio categories of QMs.  For loans originated by small creditors, the final rule shifts the threshold separating QMs that receive a safe harbor from those that receive a rebuttable presumption of compliance with the ATR rules from 1.5 percentage points above the average prime offer rate (APOR) on first-lien loans to 3.5 percentage points above APOR; and
  • providing a two-year transition period during which small creditors that do not operate predominantly in rural or underserved areas can offer balloon-payment QMs if they hold the loans in portfolio. 

Click here for the CFPB’s May 29 rule.

If you are interested in participating in SFIG’s Residential Mortgage Committee, which is following the development of the QM rule and related matters, please contact SFIG at Richard.Johns@sfindustry.org    



On May 22, 2013, the European Banking Authority (EBA) released a consultation paper on (i) draft Regulatory Technical Standards (RTS) to specify securitization retention rules and related requirements and (ii) draft Implementing Technical Standards (ITS) to clarify the measures to be taken in the case of non-compliance with such obligations.

The European Union's Capital Requirements Regulation (CRR) sets out requirements (such as the provision of loan-level data) concerning risk retention and other topics relating to securitizations.  The CRR mandated the EBA to prepare draft RTS with respect to such requirements.  The CRR also set out requirements concerning the convergence of supervisory practices for the implementation of additional risk weighting, and mandates the EBA to provide draft ITS in this area.  The CRR mandates that the EBA submit both the RTS and the ITS to the European Commission by January 1, 2014.

Specifically, Article 122(a) of the European Union's Capital Requirements Directive (Directive) provides that investor institutions subject to the Directive may only assume exposure to a securitization if the originator, sponsor, or original lender has explicitly disclosed to the investing institution that it will retain, on an on-going basis, a material net economic interest of no less than 5%, and imposes due diligence requirements on the investing institutions.  These requirements apply to institutions operating asset-backed commercial paper programs (ABCP) as well as investors in term securitizations.  They also apply to institutions acting as a derivative or hedge counterparty to a securitization transaction, if the hedge assumes the credit risk of the securitization.  Consequently, the consultation paper is important to U.S. securitizers to the extent they transact with European institutions subject to the Directive as term investors, through ABCP or as derivative counterparties.

SFIG’s Risk Retention Task Force is coordinating SFIG’s response to the consultation paper. Please contact SFIG at Richard.Johns@sfindustry.org if you would like participate on this Task Force.

Comments on the consultation paper are due by August 22, 2013.

Click here for the EBA's press release concerning the consultation paper.  Click here for the EBA consultation paper.



On May 16, 2013, the U.S. Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued a revised exposure draft on leases to address the 786 comment letters the boards received on the original exposure draft published in August of 2010.  The exposure drafts stem from a joint project of the two boards to develop a new approach to lease accounting in order to ensure that assets and liabilities arising under leases are properly recognized on balance sheets.  The existing accounting model has been criticized over the years by various groups for failing to meet the needs of users of financial statements.

Under the existing accounting models, lessees and lessors are required to classify their leases as either capital leases or operating leases and account for those leases differently.  The proposed accounting model would change both the lessee accounting and the lessor accounting.  Under the proposed requirements, a lessee would be required to recognize assets and liabilities for leases with a maximum possible term of more than 12 months, recognizing a right-of-use asset representing its right to use the leased asset for the lease term and a liability to make lease payments for the same time period.  A lessor would apply a different accounting approach to different leases depending on whether the lessee is expected to "consume more than an insignificant portion of the economic benefits embedded in the underlying asset."

The overall effect of the proposed changes would be to require U.S. companies that are the lessees of real estate assets or equipment to capitalize the cost of their leases onto their balance sheets.  Under current accounting principles, lessees record the costs of such leases as a business expense.  The proposal would also require symmetry in accounting treatment for both the lessee and the lessor with respect to any individual lease.

Broadly speaking, the proposed changes can be viewed as favorable to those equipment lessors that are securitizers, since the proposal would result in operating leases being treated as financial assets without the need for the lessor to purchase residual insurance.  On the other hand, the new accounting treatment would not take into account the lessor's business model (e.g., as a financial lessor versus an operating lessor).  The proposal could also affect equipment lessors’ ability to review their lessees' financial statements, since lessees' financial statement treatment of leases would become more disconnected from their legal treatment (as debt or as executory contracts).

The proposal prompted 60 members of Congress, led by Representative Brad Sherman (D-CA) and John Campbell (R-CA), both certified public accountants, to send the FASB a letter urging a rethinking of the proposed rule change.

Comments on the revised exposure draft are due by September 13, 2013.  The proposed new rules are scheduled to be released in final form in 2014, to take effect in 2017.

Click here for the May 2013 Exposure Draft on Leases.  Click here for the August 2010 Exposure Draft on Leases. 

If you are interested in participating in SFIG’s Accounting Policy Committee, which is addressing this and other accounting matters, please contact SFIG at Richard.Johns@sfindustry.org.



In a May 13, 2013 release, Ginnie Mae announced that it is considering revising its policy regarding buyouts of delinquent loans from Ginnie Mae pools.  The current policy allows issuers to buy out loans if the borrower fails to make any payment for three consecutive months.  The revision under consideration would permit issuers to buy out loans that are due, but unpaid, for four consecutive months.

In the same release, Ginnie Mae also announced that it is delaying beyond June 1, 2013 (to a future date that has yet to be specified) the new requirements set forth in its revised Document Custodian Manual, and that it will be requiring new pooling and reporting file layouts for its reverse mortgage program

Click here to read the press release.



SFIG is pleased to announce its inaugural Summer Symposium, followed by a cocktail reception on Wednesday, June 26, 2013.  The event is open to both members and non-members, and is complimentary to attend.  The event will be held from 5 pm to 8 pm at the offices of Skadden, Arps, Slate, Meagher and Flom LLP, Four Times Square, New York, New York. 

Additional agenda details to follow.  Please note that SFIG will not be able to accommodate members of the press at this event.

ABS Vegas 2014 – January 22-24, Las Vegas, Nevada.  Click here for more information.

SFIG is now accepting sponsorship contracts for this conference.  If you are interested, please contact Richard Johns at SFIG.



SFIG has a number of Committees and Task Forces meeting and working on many topics of interest to the securitization industry.  Please visit our website 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 (www.sfindustry.org) to learn about membership opportunities.


Contact us at info@sfindustry.org.



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