March 19, 2014 Newsletter
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March 19, 2014
 
SFIG News

SFIG Calendar

Advocacy Outlook

Issue Spotlight

Recent Developments

Next Week in Washington

 
SFIG NEWS
SFIG REVIEWS RECENTLY RELEASED JOHNSON-CRAPO HOUSING FINANCE BILL WITH MEMBERSHIP
On Monday, March 17th, SFIG held a call with its membership to share its analysis of the housing finance reform legislation released on Sunday by Senate Committee on Banking, Housing and Urban Affairs Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID).

SFIG will be posting a side-by-side comparison of the legislation to both the Corker-Warner bill and the House Financial Services Committee’s PATH Act on our website for member use.

Important to the SFIG membership, the legislation details the following reforms:

  • Retaining the ability of the mortgage market to have a 30-year, fixed-rate mortgage;
  • Maintaining broad liquidity in the TBA market;
  • Creation of a Federal Mortgage Insurance Corporation which would provide a government guarantee as a backstop and oversee key market participants;
  • Creating several market participants including aggregators, guarantors, and supervised servicers;
  • Requiring a 10 percent first loss position for guarantors, based upon the principal or face value of the covered security at the time of issuance;
  • Creating the Mortgage Insurance Fund in order to guarantee the payment of principal and interest with respect to losses incurred after the first loss assumed by guarantors;
  • Encouraging credit risk transfer transactions to help restore private capital;
  • Creating of at least one member-owned small lender mutual with cash windows in order to allow institutions with less than $500,000,000 in total consolidated assets access to the secondary mortgage market;
  • Creating a transition plan including a 5-year orderly wind-down of Fannie Mae and Freddie Mac, which can be extended if specific benchmarks are not met;
  • Creating a member-owned securitization platform that will issue a single, standardized security guaranteed by the newly created Federal Mortgage Insurance Corporation;
  • Eliminating housing goals and establishment of a 10 basis-point fee to support the Housing Trust Fund, Capital Magnet Fund and newly created Market Access Fund in order to aid the underserved; and
  • Establishment of multifamily subsidiaries within Fannie Mae and Freddie Mac to support the transition to private entities.

A detailed summary of the Johnson-Crapo bill by the Banking Committee staff can be found here and a section-by-section summary of the legislation is also available here.

SFIG’s GSE Reform Task Force and broader RMBS Committee have been meeting regularly to formulate policy positions in anticipation of the bill’s release. In the coming weeks, SFIG will work with members of Congress to ensure these positions are heard as Senators Johnson and Crapo move forward in their efforts to pass meaningful housing finance reform legislation.

To register your interest in the GSE Reform Task Force and to listen to a playback of the call, please contact Amanda.Bateman@sfindustry.org.

 
HOUSE FINANCIAL SERVICES PASSES CLO FIX BY STRONG BIPARTISAN VOTE
Over the past few months, SFIG has been advocating that the Final Volcker Rule, issued on December 10, 2013, inadvertently captures CLOs that contain any securities as “covered funds.”

Most CLOs issued prior to the final rule either contain a small number of securities or have the ability to purchase securities, and are thus considered “covered funds.” One of the primary consequences of a CLO being treated as a covered fund under the Volcker Rule is that banks are not permitted to acquire or hold an “ownership interest” in that CLO. CLOs provide the holders of debt securities with a number of creditor rights designed to protect their interests. The most notable of these rights is the ability to participate in the removal and replacement of the CLO manager “for cause,” such as breach of contract or fraud or criminal activities.

Under the Volcker Rule, however, such a right might be considered an “ownership interest,” which converts CLO debt securities into equity securities. Given that banks are not allowed to have ownership interests in “covered funds” under the Volcker Rule, they would have to divest roughly $80 billion in CLO holdings prior to July, 2015.

On March 13th, the House Financial Services Committee passed H.R. 4167, the Restoring Proven Financing for American Employers Act, by a strong bipartisan vote of 55-3. H.R. 4167 is supported by SFIG and aims to permit banks to maintain their investments in CLOs that both contain securities baskets and were issued prior to publication of the Final Volcker Rule.

Prior to passage, the bill was amended to extend the conformance period to the Volcker rule by two years to 2017. While this bill would likely help CLO 1.0’s, CLO 2.0’s – or those issued post crisis – would likely still be at risk of divestiture.

However, both parties recognized that while the bill is not perfect, it will maintain bipartisan support in order to help regulators find a quick solution to the issue.

“We all know that creating jobs, hope and opportunity for the American people - who have lost way too many jobs, way too much hope and way too much opportunity - is still the number one job we have as members of Congress. We also know in divided government it is always challenging to find common ground. I want to applaud the members who have worked together on a bipartisan basis to bring these common sense bills before this committee,” said Chairman Jeb Hensarling (R-TX).

 
SFIG FORMING WORKING GROUP TO RESPOND TO CANADIAN SECURITIES ADMINISTRATORS PROPOSED AMENDMENTS REQUIRING ABCP DISCLOSURES
In response to the January 24th release of the Canadian Securities Administrators’ (CSA) Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions Relating to the Short-Term Debt Prospectus Exemption and Proposed Securitized Products Amendments, SFIG is creating a working group to submit a comment letter regarding industry concern over proposed disclosure requirements.

The CSA's proposed New Prospectus Exemption would require that short-term securitized products comply with a number of new conditions and disclosure requirements. The proposed condition that may present the largest area of interest and concern to the Canadian securitization market is the Mandatory Information Memorandum, discussed below, which requires extensive disclosures for Asset Backed Commercial Paper transactions. The potential impact the ABCP disclosure requirements have on issuer business operations and exposure directly implicate the Canadian constituency of SFIG membership. SFIG is also interested in obtaining investor perspective regarding the breadth and potential impact of the proposed disclosures.

The required conditions and disclosures include: obtaining two credit ratings and prescribed liquidity support; permitted asset disclosure; and, release of a Mandatory Information Memorandum (IM). The IM must detail material information relating to the corresponding ABCP transaction, including: significant Parties to the securitized transaction; structure of the transaction; eligible assets; liquidity support and credit enhancement; property interest in asset pool and priority of payments; compliance of termination; description of short-term and securitized product offering; additional information about the conduit; and material agreements.

In addition to the initial IM, each conduit would be required to contractually agree to provide investors with ongoing disclosure, including a monthly disclosure report and timely disclosure reports issued upon an event reasonably expected to materially affect the class of ABCP or the performance of the asset pool. Monthly reports would require disclosure of risk retention and interest alignments. All of the disclosure reports would be required to be reasonably available to investors and securities regulators.

SFIG was very pleased with the efforts of our first Canadian Working Group in response to the proposed Canadian Liquidity Adequacy Requirements (LAR). The OSFI LAR Working Group submitted a comment letter to Canadian regulators on January 24, 2014 outlining industry concern for the proposed LAR requirements. We hope to continue engaging our membership through this effort and seek participation in the CSA ABCP working group to assure that the industry view is presented fully and accurately. If you are interested in learning more about the CSA ABCP Proposed Amendments, or participating in the related Working Group, please contact Mary.Robinson@sfindustry.org.

 
SFIG CALENDAR
NSFR WORKING GROUP CALL (WEEKLY)
THURSDAY, March 20, 2014
11:00 a.m. (EST)
 
 
PROJECT RMBS 3.0 REPS, WARRANTIES, REPURCHASE ENFORCEMENT WORKING GROUP CALL (WEEKLY)
THURSDAY, March 20, 2014
4:00 p.m. (EST)
 
 
REGULATION AB II TASK FORCE ADDITIONAL CALL
FRIDAY, March 21, 2014
3:00 p.m. (EST)
 
 
REGULATION AB II TASK FORCE CALL (WEEKLY)
TUESDAY, March 25, 2014
3:00 p.m. (EST)
 
 
PROJECT RMBS 3.0 DUE DILIGENCE, DATA AND DISCLOSURE WORKING GROUP CALL (WEEKLY)
WEDNESDAY, March 26, 2014
4:00 p.m. (EST)
 
 
CANADIAN CSA ABCP COMMENT LETTER WORKING GROUP KICK-OFF CALL
WEDNESDAY, March 26, 2014
4:00 p.m. (EST)
 
 
PROJECT RMBS 3.0 ROLE OF TRUSTEE/BONDHOLDER COMMUNICATION WORKING GROUP CALL (BI-WEEKLY)
THURSDAY, March 27, 2014
3:00 p.m. (EST)
 
 
SFIG AND U.S. TREASURY MEETING
WEDNESDAY, April 2, 2014
1:30 p.m. – 2:30 p.m. (EST)
U.S. Department of Treasury
Note: Closed Meeting to discuss return of private capital in the mortgage market
 
 
FDIC EDUCATION DAY
MONDAY, April 7, 2014
10:00 a.m. – 4:00 p.m. (EST)
Arlington, VA
Note: Closed Meeting
 
 
CANADIAN SYMPOSIUM
TUESDAY, April 15, 2014
4:00 p.m. – 6:00 p.m. (EST)
McCarthy Tétrault LLP
66 Wellington Street West #5300
Toronto, ON M5K 1E6
Note: Closed to Press
 
 
SFIG AND FHFA MEETING
WEDNESDAY, April 16, 2014
4:00 p.m. – 5:00 p.m. (EST)
Federal Housing Finance Agency
Note: Closed Meeting to discuss return of private capital in the mortgage market
 
 
IMN's INVESTOR’S CONFERENCE ON CLOs AND LEVERAGED LOANS
TUESDAY, April 22, 2014 - WEDNESDAY, April 23, 2014
Marriott Marquis
1535 Broadway
New York, NY 10036
 
 
SFIG SPRING SYMPOSIUM
WEDNESDAY, May 14, 2014
Time and Agenda to be announced
Société Générale
245 Park Avenue, New York, NY
 
 
IMN's 2014 GLOBAL ABS CONFERENCE
TUESDAY, June 10, 2014 – THURSDAY, June 12, 2014
Barcelona International Convention Centre
Barcelona, Spain
 
 
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.

Regulation AB II SFIG is developing a response to the proposal on asset-level disclosures issued by the Securities and Exchange Commission (SEC) on February 25, 2014. (For additional details on this approach please see the staff memorandum included in the public comment file.) Given that comments are due on March 28, 2014, SFIG is moving forward as expeditiously as possible and holding weekly calls of its Regulation AB II Task Force. The goals of these calls are to identify common positions; note differences in opinion; and build consensus where possible across membership. SFIG also submitted a request to the SEC for an extension to the comment deadline. Please contact Alyssa.Acevedo@sfindustry.org with any questions.

Project RMBS 3.0 Working Groups have begun meeting via conference call. The Working Groups are addressing issues specific to private label mortgage securities in the following categories: 1) Representations, Warranties and Repurchase Enforcement; 2) Due Diligence/Loan Review, Data and Disclosure; and 3) Role of Trustees and Bondholder Communications. We encourage members to participate in any or all of the Working Groups to contribute towards the mission of Project RMBS 3.0. Please contact Mary.Robinson@sfindustry.org to join a Working Group or with any additional questions on Project RMBS 3.0.

SFIG’s GSE Reform Task Force has formulated policy recommendations that it will review with the broader membership within SFIG. These positions will form the basis for any advocacy efforts before the Senate Committee on Banking, Housing and Urban Affairs as it works to move forward on bipartisan legislation introduced this week by Chairman Johnson (D-SD) and Ranking Member Crapo (D-ID). Among the topics that the Task Force has discussed thus far include the Common Securitization Platform, Guarantors, Cooperatives, TBA Market, Credit Risk Transfer; and Transition. As we continue to analyze the Johnson-Crapo text, the GSE Reform Task Force may develop additional issues that SFIG will address as part of its engagement strategy with legislators. If you would like to learn more about SFIG’s activities with respect to GSE Reform, please contact Amanda.Bateman@sfindustry.org.

SFIG’s Mortgage Loan-Level Disclosure Subcommittee has reviewed and developed additional data elements for potential disclosure. SFIG will use this work as a basis of discussions and correspondence with the Securities and Exchange Commission on the mortgage aspects of Regulation AB II. SFIG continues to have weekly Mortgage Industry Standards Maintenance Organization calls to go through data elements that lenders should deliver in securitizations. Please contact Alyssa.Acevedo@sfindustry.org for additional information on SFIG’s work on this topic.

SFIG is forming a working group on Canadian Proposed ABCP Disclosure Requirements in response to the Canadian Securities Administrators’ (CSA) related proposed amendments. The CSA’s proposed New Prospectus Exemption would require that short-term securitized products comply with a number of new conditions and disclosure requirements, including extensive disclosure of Asset Backed Commercial Paper transactions. For more information, or to participate on this working group, please contact Mary.Robinson@sfindustry.org.

SFIG is collaborating with the Global Financial Markets Association, Institute for International Finance, Commercial Real Estate Finance Council and International Association of Credit Portfolio Managers to develop a comment letter in response to the Basel Committee on Bank Supervision’s (BCBS) Second Consultative Document, Revisions to the Securitization Framework. The letter will be submitted to the BCBS this Friday and addresses the Joint Trade Associations’ views regarding capital requirements and other matters proposed in the Consultative Document. Once the letter is complete, the group will continue to meet in order to develop additional data that will be submitted separately in support of the letter. SFIG’s work on this project is being undertaken through the Regulatory Capital and Liquidity Committee. Please contact Amanda.Bateman@sfindustry.org for additional information.

SFIG is planning hill meetings next week to discuss the LCR numerator and denominator in order to continue its advocacy efforts regarding the Liquidity Coverage Ratio proposal. Please contact Alyssa.Acevedo@sfindustry.org with your questions or comments.

The Volcker Task Force is working with the asset class committees to determine key issues and need for interpretative guidance regarding the Volcker Rule. The Task Force is also collaborating with the CLO Committee to offer suggestions to enhance the legislative fix for CLOs sponsored by Congressman Barr (R-KY) and recently passed by the House Financial Services committee with a strong bipartisan vote (55-3). Please contact Amanda.Bateman@sfindustry.org for additional information on the Volcker Task Force.

The Net Stable Funding Ratio (NSFR) Working Group is meeting via weekly conference call to develop a comment letter in response to the Basel Net Stable Funding Ratio proposal. The proposed NSFR seeks to ensure banks have a fortified balance sheet (in particular, one that is not overly reliant on short-term funding). The Working Group will develop comment letters to reflect the concerns and positions of SFIG members regarding the proposed revisions to the NSFR, as well as letters to U.S. and European regulators regarding implementation of the Basel leverage ratio. Comments are due April 11, 2014. Please see the SFIG Calendar for additional information on the NSFR Working group call, and email Mary.Robinson@sfindustry.org with any questions on the NSFR proposal or Working Group.

The Risk Retention Committee is continuing to follow up with regulators on risk retention questions across asset classes. Topics currently under discussion include participations, representative sample and the simplified approach. Please email Alyssa.Acevedo@sfindustry.org with any questions.

SFIG is continuing to build membership for its Chinese Market Committee among its members and is currently looking to establish committee chairs as well. If you would like more information on SFIG’s work with respect to Chinese securitization, please contact Alyssa.Acevedo@sfindustry.org.

SFIG has launched its initiative to provide critically needed input for the Financial Stability Board’s “Shadow Banking” project. For more information on SFIG’s work on Shadow Banking, please contact Amanda.Bateman@sfindustry.org.

 
ISSUE SPOTLIGHT
kattenSOLAR SECURITIZATION ADVANCES ON SEVERAL FRONTS
By: Chris DiAngelo, Partner at Katten Muchin Rosenman LLP

chris diangeloIntroduction The application of securitization technology to the financing of distributed generation of electricity by means of photovoltaic solar panels has attracted much attention over the past several years, although deal flow has been minimal, with only a single rated securitization having taken place. However, in addition to the traditional securitization approach used in the one rated deal – the issuance of asset-backed bonds backed by the cash flows of a pool of solar leases – other deal structures have begun to emerge. These alternative deal structures are built around several states’ initiatives to promote renewable energy and energy conservation and include the use of property-assessed clean energy (PACE) bonds and state-sponsored “green banks”. Further, the U.S. Department of Energy, acting through the National Research Energy Laboratory, has sponsored an initiative known as “solar access to public capital” (SAPC). The SAPC working group is in the process of, among other things, developing template “mock” solar securitization transactions and presenting them to the rating agencies for review.

Current Tax Equity Financing Structure for Solar Solar and other forms of renewable energy receive substantial subsidies. Many of these subsidies take the form of various tax subsidies, such as accelerated depreciation, investment tax credits and production tax credits. Largely as a result of being tax-advantaged investments, solar projects have tended to be financed by investors that have substantial taxable income and few other ways of offsetting that income. These investors are usually referred to as “tax equity investors.”

The investments made by the tax equity investors historically have relied on somewhat complicated partnership structures, and are generally thought of as following more of a project finance (single asset) financing model than a securitization (pool of assets) financing model. The tax benefits that accrue to the tax equity investors are subject to “recapture” during the first five years of the solar project. This risk of recapture has proven to be a challenge to designing structures that allow for leverage, such as securitization debt, to be integrated with the tax equity, as the intercreditor provisions necessary between the two sets of investors tend not to produce a satisfactory result. The “easy way out” so far has been to focus only on those projects that are seasoned past the five-year recapture period.

Under present law, many of the tax advantages begin to phase out after 2016. Assuming that those provisions are not extended, solar and other forms of renewables will need to seek other financing alternatives and other sets of investors beginning in 2017.

The SAPC Working Group The SAPC working group was created in large part to further the U.S. Department of Energy’s “Sunshot” initiative, which is an attempt to bring the cost of solar-generated electricity down to parity, on an unsubsidized basis, with electricity generated from conventional sources, by 2020.

SAPC has determined that, at this point, further reductions in the costs of the “hardware” – the solar panels themselves – would not by themselves achieve the Sunshot goal. Rather, it seems more useful to focus on the “soft costs” of solar projects, such as permitting, installation, and finance.

With respect to finance, SAPC has argued that the industry’s reliance on tax equity has proven to be an inhibitor to the development of alternative, and more efficient, financing strategies. SAPC makes the point that there are likely no more than two dozen or so tax equity investors of any scale currently active in the United States. These investors not only have to have the appetite for a tax-advantaged investment, they also have to have substantial expertise in structuring of complex partnership arrangements, project finance and the renewable energy industry. SAPC believes these requirements all serve to narrow substantially the number of potential investors in solar.

Thus SAPC has advocated moving financing to sources of “public capital” such as securitization, and possibly also REITs, master limited partnerships, and other fixed-income capital markets projects that appeal to a much broader set of investors. SAPC feels that accessing the capital markets for solar financing is one of the most promising avenues for reducing solar’s soft costs.

SAPC’s work to date has included the development of mock transactions that can be presented to the rating agencies for feedback, as well as the collection of data on existing solar systems. The data point is particularly important, since the lack of history has proven to be another large challenge to the use of securitization for solar.

Most of SAPC’s work on solar securitizations has focused on the “traditional” securitization structure: a pool of cash-flow generating assets (solar panel leases, loans or power purchase agreements) are held by a special purpose vehicle and back one or more tranches of rated, asset-backed bonds. This was the structure used in the single rated solar securitization done to date and is likely to be one of the principal structures going forward. However, other securitization-based financing structures that also access the capital markets for solar projects may be available.

PACE Structures Last week saw the first rated transaction of bonds backed by PACE assessments. The assessments repay amounts borrowed by residential homeowners for clean-energy related improvements that may include the installation of solar panels.

PACE transactions require state enabling legislation; currently over 30 states have such legislation. This legislation allows the state’s local property tax jurisdictions (say, counties) to establish special assessment districts for the financing of clean energy projects within the district. PACE can apply to both residential and commercial properties.

The funding for PACE originates with the issuance for bonds by the county. These bonds are municipal bonds, but they are not federally tax exempt. The proceeds of the bond issue are made available to property owners, who in turn use the proceeds to make the clean energy improvements –for example, leasing solar panels by means of a prepaid lease. The leased solar panels, in turn, may be owned for tax purposes by a tax equity investor.

The homeowner agrees to repay the money to the county by means of an “assessment.” Assessments by special districts, such as sewer districts, are a common technique in municipal finance. These assessments are essentially taxes, they are prior to mortgage liens on the property and they “run with the land” if the property is sold, until the amount is paid in full.

The feature of PACE assessments that they are prior to mortgages on the related property has led to skirmishes between PACE promoters and the Federal Housing Finance Agency (FHFA), the conservator and regulator of Fannie Mae and Freddie Mac. The FHFA has argued that PACE assessments are unlike traditional, sewer district type assessments since they are voluntarily assumed by the homeowners in transactions that optically look like extensions of credit. Sewer district assessments, by contrast, would be imposed on all properties in the sewer district. For the time being Fannie Mae and Freddie Mac are prohibited from acquiring mortgage loans with existing PACE liens.

PACE securitizations come into being when the underlying municipal bonds are securitized (similar to a bond-backed CLO) and rated tranches of asset-backed non-municipal debt are issued by a special purpose vehicle.

The PACE structure appears to avoid the challenging intercreditor issues that arise in attempting to insert traditional securitization debt into a tax-equity structure. However, the structure may be seen as having substantial barriers to implementation – the creation of a special assessment district – and is also quite complex.

“Green Banks” Hawaii recently passed legislation that would allow for the issuance of asset-backed bonds backed by non-bypassable special charges on all utility customers in a utility’s service area. The proceeds of these bonds will be used by the state to make loans for clean energy improvements.

The Hawaii structure imports technology from what are sometimes called “rate reduction” or “stranded costs” transactions generally undertaken by utilities – not by the state directly, as is the case in Hawaii. These deals also incorporate what is referred to as a “true-up” mechanism that enables the charge paid by electric customers to be adjusted periodically, to account for under or over collections, thus keeping the asset-backed debt on a pre-established amortization schedule.

The clean energy improvement loans to be funded with the bond proceeds are not themselves pledged to support the bonds.

Thus the Hawaii green bank type of structure, similar to the PACE approach, disengages the solar equipment and its attendant tax benefits from the asset-backed bonds. Consequently, if proceeds from the Hawaii loan fund were used by a property owner to enter into a pre-paid lease for solar equipment, with the equipment owner for tax purposes by a tax equity investor, the difficult to resolve intercreditor arrangements found in a solar securitization using a “traditional” securitization approach may perhaps be avoided.

(See the SFIG Newsletter’s September 25, 2013 edition for a discussion of the New York Green Bank and its potential role in securitization.)

Conclusion Although the complex partnership structure and tax-advantaged nature of solar energy projects has arguably inhibited a capital-markets based approach to financing such projects, that is changing rapidly. Not only are the tax benefits phasing out in a few years, but other structures are emerging that, although also complex, manage to get around the structuring aspects that have made combining securitization with tax equity difficult. These developments, combined with the push provided by the SAPC working group, appear to provide a promising outlook for the future development of solar securitizations. Click here for SAPC's most recent report on solar securitization.

If you are interested in SFIG's activities in the solar securitization space, please contact Kristi Leo at kristi.leo@sfindustry.org or Chris DiAngelo at chris.diangelo@kattenlaw.com.

Click here for the National Energy Research Laboratory’s Report on solar “soft costs”.

Click here for Standard & Poor’s presale report on the recent Solar City securitization.

Click here for Kroll Bond Rating Agency’s recent presale report on the recent HERO PACE securitization.

 
RECENT DEVELOPMENTS
TREASURY ISSUES SERVICER DIRECTIVE REGARDING HOME AFFORDABLE MODIFICATION PROGRAM LOANS
Monthly payments on home loans reworked under the Treasury Department’s Home Affordable Modification Program (HAMP) are set to rise given pending increases in reset rates. Beginning this year, the interest rates on an estimated 30, 126 HAMP mods will begin to rise one percent per year until reaching an agreed upon rate between 4 percent and 5.4 percent. The Treasury Department directed servicers of such loans to provide notification of the rate increase to borrowers at least 120 days in advance of the hike. In a March 12th note to mortgage servicers, Mark McArdle, Chief of the Treasury’s Homeownership Preservation Office, indicated that the office “will monitor the interest rate resets to ensure that if signs of homeowner distress arise, servicers are ready and able to help by providing loss mitigation options and alternatives to foreclosures."
 
 
FEDERAL RESERVE MAY REQUIRE LARGER CAPITAL SURCHARGE ON LARGE INSTITUTIONS
The Federal Reserve (Fed) may propose new regulations imposing an increased capital surcharge on large U.S. financial institutions in an effort to promote risk reduction. The increase in the capital surcharge would be designed to provide a larger financial cushion for the biggest financial firms to assure they could withstand losses during a potential economic downturn. Jerome Powell, a Fed Governor, said that he is “absolutely committed to ending too big to fail,” and that the possible proposal would be a step towards this end. Along with the possible capital surcharge increase, Powell indicated that the Fed is considering additional measures to address the perception that some banks are so large that their potential failure could lead to further government bailouts. Furthering the Fed’s focus on moving away from “too big to fail” Federal Reserve Board nominee Lael Brainerd indicated that that other countries need to also begin moving away from “too big to fail” saying, "[th]e one area we are really going to have to push very hard in is to make sure that other major financial jurisdictions have the capacity and the will to resolve their largest institutions. That piece is still a work in progress."

 
SEC PROPOSES RULES FOR SYSTEMICALLY IMPORTANT AND SECURITY-BASED SWAP CLEARING AGENCIES
The Securities and Exchange Commission (SEC) voted on March 12, 2014 to propose new rules enhancing the oversight of clearing agencies that are designated “systemically important” or involved in complex transactions, such as clearing security-based swaps. The rules stem from provisions in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act which call for increased oversight of certain clearing agencies that are both registered with the SEC and deemed systemically important by the Financial Stability Oversight Council (FSOC). If implemented, those entities would be subject to provisions regulating their financial risk management, operations, governance and disclosure to market participants and the public.

In 2012, FSOC designated six registered clearing agencies as systemically important. As a result, the SEC has been made the “supervisory agency” of four of the entities, while the Commodities Futures Trading Commission serves as the supervisory agency for the remaining two.

The SEC proposal builds on Rule 17Ad-22, which was adopted in 2012 to establish standards for the risk management and operation of registered clearing agencies. The latest rules create enhanced requirements for “covered clearing agencies” (as described above) and provides a framework for determining when new agencies would be subject to SEC oversight.

The March 12th provisions would create two tiers of regulations under Rule 17Ad-22: enhanced rules for covered clearing agencies under Rule 17Ad-22(e) and existing rules for all other registered clearing agencies under Rule 17Ad-22(d). The enhanced requirements would apply to those agencies that raise systemic concerns due to their size, systemic importance, global reach or the risks inherent in the products they clear, among other criteria. In addition to creating a more stringent regulatory framework for designated clearing agencies, the rules are intended to provide flexibility for new entrants seeking to operate as registered clearing agencies.

Rule 17Ad-22(e) would mandate covered clearing agencies to establish, implement, maintain and enforce policies and procedures to address certain aspects of its risk management and operation. These aspects include organizational structure, financial risk management, settlement, central securities depositories and settlement systems, default management, business and operational risk management, access, efficiency and transparency. New requirements under Rule 17Ad-22(d) address the clearing agencies’ governance and comprehensive risk management, financial risk management and general business risk.

The public has 60 days following the proposal’s publication in the Federal Register to submit their comments to the SEC.

 
COMMISSIONERS DISPLEASED WITH CFTC’S NO-ACTION LETTERS
Scott O’Malia, a Commissioner at the Commodity Futures Trading Commission (CFTC), shared figures at an annual conference of the Futures Industry Association regarding the number of no-action letters issued by the CFTC since the passage of the Dodd-Frank Act in July 2010. The CFTC has issued 68 new rules since this passage and has expanded on, delayed, postponed or altered those rules by issuing nearly 170 no-action letters, 34 staff guidances or interpretative letters, 11 exemptive letters and eight exemptive orders, according to O’Malia. He also argues that these letters complicate the rule-making process and that no-action letters do not benefit from public comment and cost-benefit analysis. The commissioner also pointed out the untimeliness of these letters, given that the commissioners often receive the letters only one night before they are issued. Most commissioners, both current and former, agree that no-action letters will sometimes be necessary; however several of the commissioners disapprove the way in which the letters are developed and believe that they are cut out of the rule-making process.  

 
NEXT WEEK IN WASHINGTON
CFTC ROUNDTABLE CONCERNING END-USERS AND DODD-FRANK
THURSDAY, April 3, 2014
Time will be forthcoming
Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC

The U.S. Commodity Futures Trading Commission will hold a public roundtable to discuss issues concerning end-users and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFTC has received a number of comments and requests for clarification from commercial end-users that have been impacted by Dodd-Frank.

The roundtable will consist of three panels, discussing:

1) the obligations of end-users under Regulation 1.35 concerning recordkeeping for commodity interest and related cash or forward transactions;

2) the appropriate regulatory treatment of forward contracts with embedded volumetric optionality; and

3) the appropriate regulatory treatment for purposes of the $25 million (special entity) de minimis threshold for swap dealing to government-owned electric utilities.

The discussion will be open to the public with seating on a first-come, first-served basis. Members of the public may also listen by telephone and should be prepared to provide their first name, last name and affiliation. The time of the meeting, call-in numbers and agenda will be forthcoming.

 

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 Senior Policy Analyst

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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