May 22, 2013 Newsletter
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Structured Finance Industry Group


Issue Spotlight

Recent Developments




SFIG announced on May 8, 2013 that Richard Johns has been named to the position of Executive Director.  Mr. Johns joins the group from Ally Financial Inc., where he served as the Managing Director and Head of Global Funding and Liquidity.  Throughout his career he has led advocacy programs related to major legislative initiatives and has worked closely with regulatory bodies including the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and the Federal Reserve.  

SFIG also announced that it will be headquartered in Washington, DC with plans to maintain a strong presence in New York.

SFIG is currently looking to hire additional staff, including a Director of Advocacy.

Click here for SFIG’s press release announcing Mr. John’s appointment.



The Securities and Exchange Commission (SEC) held a Credit Ratings Roundtable on May 14 at the SEC’s headquarters in Washington, DC.  

The Roundtable is in response to the SEC staff’s December 2012 Report to Congress on Assigned Credit Ratings, prepared by the staff as required by Section 939F of the Dodd-Frank Act. The Roundtable consisted of three panels:

  • The first panel discussed the potential creation of a credit rating assignment system for asset-backed securities.
  • The second panel discussed the effectiveness of the SEC’s current system to encourage unsolicited ratings of asset-backed securities through Rule 17g-5.
  • The third panel discussed other alternatives to the current issuer-pay business model for credit ratings.  

SFIG’s Chairman, Reggie Imamura, was invited by the SEC to participate in the first, and most comprehensive, panel focused on the credit ratings assignment system.

Throughout the panel, Mr. Imamura was clear that while the majority of SFIG’s membership thought the assignment system in the Dodd-Frank Act was unworkable and not beneficial for the market, there was not full consensus within SFIG on the matter.

Among other points raised in his opening remarks, Mr. Imamura stated on behalf of SFIG:

We do not believe that the assignment system referred to in Section 939F of Dodd-Frank is a viable solution.  We believe that it brings with it many consequential negative effects that defeat its purpose….  As a result, this system could curtail the amount of funding that securitization provides to the economy, which will hurt economic growth and job creation.

We believe it is far more prudent to continue a more targeted regulatory approach of addressing internal rating agency procedures and continuing to monitor compliance.  We believe that the combination of this approach, coupled with making other improvements in rating agency reform, such as improvements to Rule 17g-5, will significantly mitigate potential conflicts without incurring those negative effects.

The Roundtable began with remarks by Senators Franken (D-MN) and Wicker (R-MS) reiterating their support for a government-sanctioned board to select rating agencies, as outlined in Section 939F. In his opening remarks, Representative Garrett (R-NJ) stated that current initiatives to remove references to credit ratings under section 939A and a government-sanctioned credit rating agency assignment board were mutually exclusive, as the board amounted to a “tacit endorsement of that rating.”

This diversity of opinion continued throughout the day, as panels consisting of credit rating agencies (both large and small), issuers, investors, trade organizations and academics presented their views, including:

  • There was general consensus that promotion of competition among rating agencies was desirable and that efforts to increase the quality of ratings were warranted.
  • Some participants supported a board assignment process, pointing to the importance of increased competition and removal of conflicts of interest.
  • Others highlighted the risks of board assignment, specifically pointing out the dangers of assigning transactions to rating agencies that have no history or detailed understanding of an industry or product, the risk of increasing the time required to come to market, the risk of introducing new conflicts of interest, and the risk that an assigned agency may  not be satisfactory to investors and therefore jeopardizes the success of the securitization.  
  • Some participants reiterated Representative Garrett’s stance, with one panelist going as far as to request that the SEC ask investors to remove ratings requirements from their investment policies. While this view may be supported by some under the assumption that all investors should know and understand what they are buying, others highlighted the need for less sophisticated investors to have an objective basis of credit risk assessment.
  • There was much discussion around the issuer-pay versus investor-pay or subscription-based fee models. A hybrid model was suggested with the issuer selecting one agency and participating investors selecting a second agency.
  • The current effectiveness of Rule 17g-5 was questioned. Some participants suggested it was only a matter of time before we begin to see more unsolicited ratings being published. Most participants agreed that removal of the “10 percent requirement” would be helpful, while others believed more aggressive moves were required, such as ABS issuers making all data provided to hired rating agencies publicly available.  This view was countered by issuers who are concerned about disclosure of proprietary information.

Many other topics were raised throughout the day, including: licensing or certifying credit rating agency analysts, methods for increasing accuracy and transparency of credit ratings, alternative rating models in place today, and rating agency rotation models as an alternative to board assignment.

Comments on the subjects discussed in the Roundtable may be submitted to the SEC by June 3, 2013.

SFIG will submit a comment letter presenting the views of our membership. If you are interested in joining SFIG’s Credit Rating Agency Task Force working on this comment letter, please email

Click here for the Roundtable’s agenda.  Click here for the SEC staff’s December 2012 Report on Assigned Ratings.  Click here for a link to the archived webcast of the Roundtable.




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 special purpose entities (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 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 June 10, 2013 deadline.  This issue has been a topic at recent meetings of the SFIG Derivatives in Securitization Task Force and the Auto and Equipment and Legal Counsel Committees.


Section 2(h)(1)(A), 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.

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 End-User Regulations.  Click here for the CFTC's Clearing Requirement Determination release.  
Click here for the Final Rule of the Board of Governors of the Federal Reserve System.




On May 17, 2013, the European Banking Authority (EBA) released a consultation paper on the determination by European Banks of exposure to a client or group of connected clients in respect of transactions with underlying assets under Article 379 of the Proposed Capital Requirements Regulations.  Key highlights include:

  • The EBA consultation paper does not directly affect regulatory capital for securitization exposures.
  • The EBA consultation paper proposes to identify and monitor large underlying obligors and concentrations within and across securitizations.
  • The EBA consultation paper aligns with other global regulatory large exposure initiatives, including the Committee of European Banking Supervisors “Guidance on the Implementation of the Revised Large Exposure Regime” (December 2009) and the BCBS Consultative Document “Supervisory Framework for Measuring and Controlling Large Exposures” (March 2013).

SFIG’s Regulatory Capital and Liquidity Committee is studying the consultation paper to determine the best advocacy strategy for SFIG members.  If you are interested in joining this committee, please email  The comment deadline for the EBA consultation paper is August 16, 2013. 

Click here for the EBA’s press release accompanying the release of the EBA consultation paper. Click here for the consultation paper.



The Securities and Exchange Commission on May 15, 2013 named Keith F. Higgins as the new director of the SEC’s Division of Corporation Finance.  Mr. Higgins joins the SEC from law firm Ropes & Gray, where he was a partner in the Boston office.  His background includes 30 years of experience advising public companies about securities offerings, mergers and acquisitions, compliance and corporate governance.

Much of the SEC’s regulatory authority relating to the structured finance industry is exercised through the Division of Corporation Finance.

Click here for the SEC’s press release concerning Mr. Higgins’ appointment.



On May 10, 2013, the Office of the Comptroller of the Currency (OCC) released a bulletin explaining two clarifications to the market risk capital rule, 12 CFR 3, appendix B, (the Market Risk Rule).  The first clarification relates to foreign exposures and the second clarification relates to securitization exposures.  The Market Risk Rule and the clarifications apply to national banks meeting one of the following two criteria unless exempted by the OCC:

  • The sum of the bank's trading assets and liabilities is at least 10 percent of total assets, or
  • The sum of the bank's trading assets and liabilities exceeds $1 billion.

Foreign Exposure Clarifications

Under the Market Risk Rule, the risk weight assigned to a foreign sovereign (defined as a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government) is determined by using the Organization for Economic Cooperation and Development's (OECD) Country Risk Classifications (CRCs).  The OECD’s CRCs are an assessment of a country’s credit risk, used to set interest rate charges for transactions covered by the OECD arrangement on export credits.  Under the CRC methodology, countries are classified into one of eight risk categories (0-7), with countries rated zero having the lowest risk assessment and countries rated seven having the highest risk assessment.  Under the new clarifications, sovereign entities that are members of the OECD but do not receive a CRC will be treated as having the functional equivalent of a CRC of zero.  Foreign banks, depository institutions, public sector entities and credit unions would receive the same treatment as the applicable sovereign entity.  

Securitization Exposure

Under the Market Risk Rule, the specific risk of a securitization exposure takes into account the quality and nature of the underlying collateral.  The capital requirement for a bank's securitization exposure increases when delinquencies in the underlying collateral (90 days or more past due) of the securitization increase.  After the publication of the Market Risk Rule, commentators observed that the term "delinquencies" can be interpreted to include deferral of payments that are unrelated to the performance of the loans, such as contractually permitted payment deferrals.  The OCC is clarifying that "delinquency" in the Market Risk Rule should be read to exclude loans with contractual provisions that allow deferral of principal and interest provided that the periods of deferral are not related to changes in the creditworthiness of the borrower.  

Click here for the OCC's May 10, 2013 bulletin.



On May 6, 2013 the House Financial Services Committee passed several bills that may affect the securitization industry – certain of them unanimously and all of them on a bi-partisan basis – the effect of which, according to most press reports (click here for a Washington Post story), would lead to a weakening of the derivatives provisions of Dodd-Frank.  These bills include:

  • H.R. 1341, the “Financial Competitive Act of 2013” (click here) would require the Financial Stability Oversight Council to conduct a study of the likely effects of the differences between the United States and other jurisdictions in the implementation of the credit value adjustment requirements of the BASEL III standards.
  • H.R. 634, the “Business Risk Mitigation and Price Stabilization Act of 2013” (click here) would exempt end-users from the margin requirement proposed by the CFTC and the SEC.  The end-users covered by the bill include farmers, ranchers, manufacturers and small businesses, but not banks or specialty finance companies, which are not subsidiaries of manufacturers.
  • H.R. 1256, the “Swap Jurisdiction Certainty Act” (click here) would direct the SEC and the CFTC jointly to adopt rules setting forth the application of certain of the Dodd-Frank provisions to cross-border swap transactions.

A bill identical to H.R. 634 was introduced on May 8, 2013 in the U.S. Senate by Senators Johanns (R-Neb) and Tester (D-Mont).  

Click here for the text of the Johanns-Tester bill.

The Administration is opposing these attempts to re-open the derivatives provisions of Title VII of the Dodd-Frank Act.  On May 6, 2013, Treasury Secretary Lew sent identical letters to Representative Hensarling, the Chairman of the House Financial Services Committee, and Representative Waters, the Committee’s Ranking Member, urging them to reject proposals designed to roll back existing rules governing derivatives, stating:

“The derivatives provisions in the Wall Street Reform Act constitute an important part of the reforms being put in place to strengthen our financial system by improving transparency and reducing risks for market participants … These reforms should not be weakened or repealed."

Click here for Secretary Lew’s letter to Representative Hensarling.

The U.S. House Financial Services Committee also approved on the same day as the derivatives-related bills H.R. 1062, the “SEC Regulatory Accountability Act (click here) which would require the SEC to assess the costs and benefits, both qualitative and quantitative, of each regulation intended to be proposed, and to choose the regulatory approach (which may be no regulation) that “maximizes net benefits.”  This bill passed the Committee on a party-line vote of 31-28 and was passed by the full House and referred to the Senate on May 20.



The International Swaps and Derivatives Association (ISDA) released on May 13, 2013 a reporting protocol to facilitate compliance with trade reporting requirements.

Click here for ISDA’s May 13, 2013 news release. Click here for information relating to ISDA’s protocols.



The Federal Housing Finance Agency (FHFA) announced on May 6, 2013 that it is directing Fannie Mae and Freddie Mac to limit their future mortgage acquisitions to loans that meet the requirements for a qualified mortgage, including those that meet the special or temporary qualified mortgage definition, and loans that are exempt from the “ability to repay” requirements under the Dodd-Frank Act.

Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:

  • Is not fully amortizing,
  • Has a term of longer than 30 years, or
  • Includes points and fees in excess of 3% of the total loan amount, or such other limits for low balance loans as set forth in the rule.

Click here to for the FHFA’s News Release. Click here for Fannie Mae’s Lender Letter. Click here for Freddie Mac’s Lender Letter. Click here for the Consumer Financial Protection Board (CFPB) guidance on “qualified mortgage.”



On July 1, 2013, the interest rates on subsidized Stafford student loans will be doubling from the current 3.4% rate unless Congress passes a new measure imminently.  This rate hike was supposed to occur last year, but was delayed by an election-season amendment to protect student borrowers.  To avoid the upcoming interest rate increase, Congress can extend the current rate for a year or possibly link subsidized student loan debt to the borrowing of the government at large.  For example, Senator Warren (D-MA) introduced on May 8, 2013 a bill to give borrowers a rate of 0.75% for one year (the same rate the Federal Reserve uses when lending to member banks).    

Click here for the full text of Senator Warren’s proposed bill, the Bank on Students Loan Fairness Act.

Sources suggest that the U.S. Senate Committee on Banking, Housing and Urban Affairs will be holding hearings in the coming weeks to explore the issues in the private student loan sector, and the CFPB has recently issued an important report on private student loans titled “Student Loan Affordability:  Analysis of Public Input on Impact and Solutions.” 

Click here for the CFPB’s link to the report.

The current events and the recent CFPB report were recently analyzed in depth by a securitized products research white paper.  The white paper outlined some of the most salient solutions to help struggling private student loan borrowers, such as loan refinancing, loan modifications for repayment flexibility, and loan rehabilitation.  All three options have been road-tested in the housing market and proven relatively effective, but many are wary of how these possible work-outs could impact securitization SPEs containing student loan assets.  Some important issues for student loan ABS participants to watch are:

  • If government reform enables the best credit private borrowers to refinance their student loans into lower rates, there could be a sizeable prepayment trend.  Also, if only the best borrowers are refinancing, the pricing of some subordinated ABS notes would be negatively impacted by the remaining weaker credits backing the notes.
  • If Congress gave private student loan holders flexible repayment options that are afforded to borrowers under the Federal Family Education Loan Program (FFELP) , the modified loans could suffer from unfavorable accounting treatment, impact the cash flows to some ABS SPEs and the flexibility may not  help all borrowers get back on track.
  • If Congress permitted private student loan borrowers to rehabilitate their loans in the same fashion as federal borrowers, rehabilitated private loans may continue to perform poorly. The private student loan market has no buyout mechanism to correct defaulted loans’ impact on securitization SPEs.

Click here for Senator Warren’s fact sheet about student loans and the impetus behind her Bank on Students Loan Fairness Act.



On May 6, 2013, the U.S. District Court for the Central District of California ruled that AIG could pursue its New York law tort claims based on fraud and alleged misstatements in the offering documents relating to various Countrywide RMBS.  The ruling was not on the merits of the case, but procedural.  

By way of summary background, AIG sold a number of Countrywide RMBS to the Maiden Lane II facility established by the Federal Reserve Bank of New York.  The issue was whether, in light of that sale, AIG had standing to pursue tort claims against Bank of America.

The Court ruled that “under long-standing New York law, the sale of an asset and the assignment of the right to assert contract claims does not automatically entail the right to assert tort claims arising from that contract.”

The Court found, as a matter of law, that the asset purchase agreement pursuant to which Maiden Lane II acquired the RMBS was ambiguous as to the transfer of tort claims, and further, that, as a matter of fact based on extrinsic evidence considered in response to that ambiguity, the parties did not objectively intend that any tort claims were to be transferred to Maiden Lane II.

The upshot of the ruling would appear to be that the original purchaser of RMBS does not transfer any right it may have to pursue New York law tort claims for allegedly fraudulent misstatements in the offering documents to a subsequent purchaser of those RMBS, unless the purchase documents unambiguously so provide, or, if those documents are ambiguous, if extrinsic evidence reveals an intent to transfer those rights.  

Click here for the Court’s ruling.



SFIG is pleased to share this edition of the 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 ( to learn about membership opportunities.



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



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, and how to join.


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