November 6, 2013 Newsletter
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November 6, 2013


Issue Spotlight

Recent Developments



SFIG Membership Call - LCR

SFIG will be holding a series of LCR Working Group Calls on Thursdays at 11 am EST through January 30, 2014 to discuss the joint agency regulations introducing a liquidity coverage ratio (LCR) requirement that will test a bank’s ability to withstand “liquidity stress periods."

Below is the dial-in information:
Dial-In: 800-330-3765
Passcode: 2024786454

SFIG Comment Letter - LCR

SFIG expects to partner with SIFMA and other trade associations to develop two separate comment letters to the LCR proposed rules (Proposed Rules). One comment letter will contain a comprehensive response to the Proposed Rules and the other will have a more targeted focus on the aspects of the Proposed Rules that have particular importance to the securitization and structured finance markets. SFIG will coordinate its participation in these comment letters through the Regulatory Capital and Liquidity Committee (RC&L Committee). Comments to the Proposed Rules are due by January 31, 2014.

If you are interested in participating in RC&L Committee’s review, please contact our Director of ABS Policy at


The U.S. Senate Committee on Banking, Housing, and Urban (Banking Committee) affairs released a list of questions to numerous stakeholders involved in the reform of the Government-Sponsored Enterprises (GSEs). SFIG, as a key stakeholder in the process, provided responses after consulting with members of the RMBS Committee's GSE Reform Subcommittee. The Banking Committee Questions centered on the future state of the GSEs and included responses to questions regarding a government guarantee, consumer access, underwriting, and servicing standards.

If you would like a copy of SFIG's responses, please contact our Director of Mortgage Policy, Sonny Abbasi, at


On August 9, 2013, the Federal Housing Finance Agency (FHFA) requested public input on specific strategies for reducing the Government Sponsored Enterprises’ (GSEs), Fannie Mae’s and Freddie Mac’s, presence in the multifamily housing finance market. In the FHFA’s release entitled “Options for Reducing Fannie Mae and Freddie Mac’s Multifamily Business,” the FHFA requested input on the following topics:
  • loan terms,
  • types of loan products offered,
  • limits on property financing,
  • limits on GSEs’ business activities, and
  • other options that the FHFA should consider to achieve the strategic goal of contracting the GSEs’ multifamily businesses.

The FHFA received almost seventy responses (FHFA Response Letters) to its input request from a broad array of multifamily housing market participants. The FHFA did not ask for input regarding the use of GSE guaranties in multifamily transactions or the privatization of the GSEs’ multifamily businesses.


The GSEs’ multifamily businesses have received considerably less attention than their respective single-family businesses. One reason for this is that the GSEs' multifamily businesses are much smaller. A second reason is that they have performed much better than the single-family businesses during the recent financial crisis. Furthermore, as the FHFA’s “Strategic Plan for Enterprise Conservatorships: The Next Chapter in a Story that Needs an Ending” (FHFA Strategic Plan) notes, Fannie Mae and Freddie Mac do not play the same dominant role in the multifamily market as they do in the single-family market.

However, several of the FHFA Response Letters noted the vital role that the GSEs played during the financial crisis – many suggesting that the GSEs largely kept the multifamily market open. Multiple FHFA Response Letters noted that though the GSEs funded just over a quarter of the multifamily mortgage loans from 2004 through 2006, their market share increased to 85% of the multifamily rental housing market mortgage loans funding in 2008 and 2009.

Fannie and Freddie's Experience in Multifamily

One of the principal differences between the GSEs' single-family and multifamily businesses is the wide divergence between the performance of the two products. From January 2008 through the third quarter of 2011, the two GSEs lost a combined $208 billion on their single-family businesses while their multifamily businesses made a combined $7 billion profit, according to the FHFA.

Prudent underwriting standards account for this difference between GSE multifamily and single-family loans. The GSEs developed and applied a rigorous definition of what constitutes a "prime" multifamily loan, and generally abided by those criteria with respect to their multifamily portfolios. Given the strength of the collateral, the guaranty fees charged by the GSEs on the securitized multifamily portfolio more than cover the losses, and the business is profitable.

However, the GSEs' multifamily business has not always looked so rosy: the period from 1991-1995 was almost the reverse of the 2008-2012 experience, insofar as multifamily performed poorly while single-family stayed on track. In 1991, the multifamily portfolio comprised 5.7% (by principal balance) of Freddie's total portfolio, but accounted for 30.2% of all charge-offs.

A commercial real estate bubble centered around 1981-1986, rather than a single-family bubble that preceded the 2008 crisis, accounted for the multifamily portfolio’s poor performance during that period. The 1981-1986 bubble was created by changes in tax laws and underwriting deficiencies. Accelerated depreciation schedules that were introduced in 1981 and 1984 encouraged developers to take advantage of write-offs. Then tax reform passed in 1986, and returned depreciation to the straight-line method, adversely affecting property values. In addition, appraisals relied on pro-forma increases in operating income, inflating property values.

One of the main observations in the discussion regarding the privatization of the GSE multifamily business is that the multifamily business has survived the latest financial crisis without experiencing material losses, and has actually made money. A reasonable conclusion is that Fannie and Freddie have correctly assessed the risks in multifamily and the multifamily platform has value that can be monetized via a privatization.

However, history provides a basis for skepticism about the proposition that surviving the most recent financing crisis suggests a business model capable of surviving all future financial crises. It may be especially useful to consider that one of the major difficulties faced by the GSEs' multifamily business in the late 1980's and early 1990's was not of their own making: it was a fairly abrupt change in tax laws (although poor appraisals and bad underwriting made a contribution as well).

The Guaranty Fee Debate

Multiple FHFA Response Letters cited a guaranty as critical in keeping liquidity fluid through all multifamily market cycles. On December 17, 2012, Fannie Mae released a paper entitled: “Analysis of the Viability of Fannie Mae’s Multifamily Business Operating without a Government Guarantee” (Viability Report). The Viability Report concluded that without a government guarantee, a multifamily entity separate from Fannie Mae could potentially raise start-up equity capital in the private markets as a stand-alone, unregulated specialty finance company, but the Viability Report’s analysis suggests that the resulting company long term survival would be uncertain.

The way a credit guarantee business makes money is by charging risk premiums which generate more than enough income to cover losses. Thus the essential business model revolves around the correct pricing of the risk premiums. Much of the commentary on the topic of the GSEs' guarantee fees (G-Fees), particularly from conservative sources such as the American Enterprise Institute, argues that the government is structurally incapable of pricing risk at an appropriate level.

However, recent experience with credit guarantee insurance may suggest that the private sector also has difficulties pricing risk at an appropriate level. Going into the financial crisis there were a number of non-government "monoline" credit guarantors, including Ambac Assurance, MBIA, Financial Security Assurance, Assured Guaranty, Syncora, Financial Guaranty Insurance Company, as well as others. Today, other than Assured, almost all of these companies are in receivership or conservatorship, and for essentially the same reason as Fannie and Freddie: the risk on single-family mortgages (or mortgage-based CDOs) was mispriced. In fairness, the single-family origination business may have suffered from a considerable level of fraud, which is a notoriously difficult risk to evaluate and price.

Clearly, it is a challenge to assess credit risk appropriately, and perhaps nobody may be able to do it correctly over the long run. Indeed, since nobody can do it, perhaps it is best left to private market, in which different credit guarantors can develop their own risk models, and then let the market test each of them out. Furthermore, it is not implausible to assume that government involvement in the process may bring additional considerations (particularly political considerations) to the process which, it is difficult to imagine, would improve the setting of a guarantee fee at a financially appropriate level. Consequently, to the extent that any future model of privatizing the multifamily business relies in whole or in part on those future entities issuing or purchasing a federal guarantee, the investors in those privatized entities (as well as the taxpayers) will need to assess carefully the risk pricing models to be employed.

Potential Models For Privatization

Several FHFA Response Letters took the position that an abrupt and significant reduction or removal of the GSEs’ role in the multifamily housing market would be too disruptive to such market. Thus, any reduction of the GSEs’ role in the multifamily housing market and/or privatization of the GSEs’ multifamily business must occur slowly over a period of years rather than months. Several FHFA Response Letters noted that the GSEs’ role in the multifamily origination activities has organically reduced post-crisis as private lenders have increased their lending activities. Many FHFA Response Letters argued that due to this natural reduction, affirmative actions to reduce the GSEs’ role in the multifamily housing market are unnecessary and possibly detrimental to the housing market and in particular housing for low income individuals. Similarly, these letters point out the vital liquidity backstop role the GSEs played during the crisis when other sources of funds were not available.

However, on the other hand there appears to be a political imperative toward privatization of the GSEs. A threshold issue with regard to privatization is whether apart from the ability to access the federal guarantee, there is any value to the GSE multifamily platform, from a systems, personnel, loan-processing, securitization or other point of view. Several of the FHFA Response Letters noted that there is some value to a platform which currently processes approximately 50% of the multifamily loan market. The difficulty is assessing how much the platform is worth. In addition, as noted above, the ability to access the federal guarantee is a vital component to the survival of any entities spun off from the GSEs.

If one assumes that the nation is better served by more rather than fewer private lenders in the multifamily space, and if one assumes that the GSEs' multifamily platform is a valuable asset, then it might make sense to figure out how to allow multiple future players to purchase or otherwise access parts of the platform. The FHFA Strategic Plan presents the concept of a possible new "securitization platform" to be accessed in the future by multiple market players. Although most of the commentary on the "securitization platform" idea has revolved around its application to single-family, such an approach may also be applicable to multifamily. More specifically, the multifamily platform could become monetized by allowing multiple private players to access it for a fee.

If the FHFA had only a single objective, to monetize the upfront proceeds from the sale of the multifamily platform, what structure would best achieve that goal? The answer is probably this: sell the multifamily platform as a whole to a single buyer, and then allow that single buyer the sole right to issue or access from the Treasury full faith and credit guarantees of its securitizations. Essentially, such a monetization would create the most valuable asset: a single de novo multifamily GSE, owned by private investors, able to access a full faith and credit guarantee. Although this would essentially be a return to the 1990s' formulation of the GSEs, one can see why it would be a valuable asset to own, and why it would likely command the highest price.

The FHFA and the government generally have a broader set of goals than just maximizing the proceeds of a one-off sale. The FHFA’s goals must align with the FHFA’s three-pronged congressional mandate to: a) preserve the assets of the GSEs; b) promote a stable and liquid mortgage market; and c) minimize taxpayer losses. Thus the other variants regarding the multifamily platform include:

  • selling the platform to a single entity without access to a guarantee;
  • selling the platform to a single entity which can issue or access a guarantee but requiring substantial risk-sharing through the issuance of non-guaranteed securitization interests, loss-sharing agreements, etc.;
  • selling or allowing access to the platform to multiple entities which can issue or access guaranties, subject to substantial risk-sharing as above; and
  • selling or allowing access to the platform to multiple entities which can issue or access guaranties only on properties meeting specified affordability guidelines.

Again, purely in terms of the up-front proceeds from any monetization transactions, the following principles probably are true:

  • the access to a federal guarantee has value, and the fewer stipulations/restrictions on the use of the guarantee, the more valuable that access becomes;
  • the greater the number of entities eligible to access the guarantee, the less value it has – there is likely a monopoly premium for access to the guarantee; and
  • the more that other types of stipulations/restrictions attach to these new private lenders (e.g., affordability mandates), the less value they will have.

If there were an ironclad, foolproof way to establish the G-Fees consistently at an appropriate level, the analysis of how to proceed would be more informed and easier. To the extent that any future multifamily product can be narrowly defined (in terms of the definition of a "prime" loan; restricting originators only to prime loans and imposing affordability considerations only sparingly, if at all) then the task of setting an appropriate G-Fee becomes easier – although it is likely never to be foolproof.

Enterprise Proposal

In August 2013, Enterprise Community Partners co-authored a detailed plan (Enterprise Proposal) for multifamily housing finance reform. The plan was drafted as a supplement to the bipartisan Housing Finance Reform and Taxpayer Protection Act of 2013 (Corker-Warner Bill) introduced by Senators Bob Corker (R-TN) and Mark Warner (D-VA), which preserves a limited and paid-for government guarantee on qualifying multifamily securities. Here’s a brief overview of the Enterprise Proposal:

  • Starting immediately, spin off Fannie’s and Freddie’s multifamily businesses into two self-contained subsidiaries of their respective corporations. The new entities would maintain the current multifamily products—namely the Fannie Mae DUS Model and the Freddie Mac CME Program K-Series—and contract with Fannie and Freddie to manage the existing multifamily assets.
  • During a brief transition period, these entities would continue to purchase, securitize and insure qualifying multifamily mortgage-backed securities, with support from the U.S. Treasury as needed.
  • When the public guarantor (called the FMIC under Corker-Warner Bill) is fully operational, the insurance function would be transferred to the federal government. From that point on, the new entities would have the option of purchasing FMIC insurance on the multifamily securities they issue, backed by the full faith and credit of the U.S. government.
  • Over time, the new entities would be required to raise private capital with the option of buying out the government’s interest. Meanwhile, other government-approved, privately-funded companies would have the option of purchasing FMIC insurance on the multifamily securities they issue. As soon as possible, the FMIC would establish a third issuer (beyond the two new entities) to ensure that smaller banks have access to the secondary market for multifamily mortgages.
  • For each approved issuer of FMIC-backed multifamily securities, at least 60% of the rental units financed through these securities in a given year must be affordable to families making 80% of Area Median Income (AMI) or below at the time of origination, based on a 30% affordability standard.
  • In addition to the guarantee fee to cover its risk and reserve requirements, the FMIC would charge a 5-10 basis point fee on all multifamily securities it insures to fund affordable housing programs. If the majority of units in a multifamily property financed by a FMIC-backed security are unaffordable to families earning less than 150 percent of AMI, the FMIC will collect an additional 50 basis point fee on the associated principal.
  • FMIC oversees the entire secondary multifamily mortgage market for safety and soundness and maintains all multifamily guarantee fees in a separate insurance fund.
  • Each approved issuer must develop an annual plan for serving communities and market segments often neglected by private capital, including low-income communities, rural communities, subsidized affordable multifamily housing and small rental properties.


The prospect of achieving some level of privatization of the GSEs' multifamily business appears to be good. The GSEs' multifamily business has performed quite strongly during the recession. More importantly, there is a general sense among most observers that federal government involvement in housing must be decreased, and finding a solution will be much easier in the multifamily arena than in the GSEs' single-family business.

Click here for the FHFA Strategic Plan. Click here for the Options for Reducing Fannie Mae and Freddie Mac’s Multifamily Business. Click here for Fannie Mae’s Viability Report. Click here for the FHFA Response Letters. Click here for the Enterprise Proposal. Click here for the Corker-Warner Bill.


On November 5, 2013, the Federal Housing Finance Agency (FHFA) announced that it has directed Fannie Mae and Freddie Mac to prohibit servicers from being reimbursed for expenses associated with captive reinsurance arrangements (FHFA Announcement). The FHFA Announcement follows a notice that FHFA published in March of 2013 regarding the FHFA’s views on these lender-placed insurance practices and requesting public input (Notice). The Notice also cited concerns that the practices expose Fannie Mae and Freddie Mac to potential losses as well as litigation and reputational risks.

The FHFA Announcement also stated that FHFA has established a Regulatory Working Group consisting of federal and state regulatory agencies to ensure that all parties with an interest and role in the subject of lender-placed insurance are engaged in the discussions. The views of the Working Group were carefully considered along with the more than 30 replies the FHFA received from consumer advocates, state regulators, lender-placed insurance carriers, servicers, managing general agents, individuals, and trade associations in response to the Notice. The FHFA Announcement stated that the FHFA’s November 5 action reflects this input.

The FHFA Announcement also stated that Fannie Mae and Freddie Mac will provide aligned guidance to sellers and servicers to prohibit these practices, including implementation schedules.

Click here for the FHFA Announcement. Click here for the Notice.



On November 5, 2013, the Federal Deposit Insurance Corporation (FDIC), together with the Bank of England, the German Federal Financial Supervisory Authority (BaFin), and the Swiss Financial Market Supervisory Authority (FINMA), authored a joint letter (Joint Letter) to encourage the International Swaps and Derivatives Association, Inc. (ISDA) to adopt language in derivatives contracts to delay the early termination of those instruments in the event of the resolution of a global systemically important financial institution (G-SIFI).

In the Joint Letter, the international authorities express support for the adoption of changes to ISDA's standard documentation to provide for short-term suspension of early termination rights and other remedies in the event of a G-SIFI resolution. The adoption of such changes would allow derivatives contracts to remain in effect throughout the resolution process following the implementation of a number of potential resolution strategies. By minimizing the disorderly unwinding of such contracts, these changes would place resolution authorities in a better position to resolve G-SIFIs in a manner that promotes financial stability while providing market certainty and transparency.

ISDA said in response to the request, "We are committed to working with supervisors and regulators around the world to achieve an appropriate solution that will contribute to safe, efficient markets."

Click here for the Joint Letter. Click here for ISDA’s response statement.


On November 4, 2013, SolarCity announced that its wholly-owned subsidiary, SolarCity LMC Series I, LLC, intends, subject to market and other conditions, to offer in a private placement $54,425,000 aggregate principal amount of Solar Asset Backed Notes, Series 2013-1. This would be the first deal of its kind.

These notes will be secured by a pool of photovoltaic systems and related leases and power purchase agreements and ancillary rights and agreements that will be owned by SolarCity LMC Series I, LLC.


On November 1, 2013, the Board of Governors for the Federal Reserve System (Federal Reserve) issued the supervisory scenarios that will be used in the 2014 capital planning and stress testing program, as well as instructions to firms with timelines for submissions. The program includes the Comprehensive Capital Analysis and Review (CCAR) of 30 bank holding companies with $50 billion or more of total consolidated assets.

Financial institutions submitting capital plans will be evaluated to ensure they have sufficient capital to continue to lend to households and businesses even under stressful conditions. In addition, financial institutions must incorporate the transition requirements from the recently finalized Basel III capital standards into their stress tests and capital plans.

CCAR includes an evaluation of institutions' plans to make capital distributions, such as dividend payments or stock repurchases. The Fed will approve capital distributions only for institutions whose capital plans it approves and who demonstrate sufficient financial strength even after making the planned capital distributions to continue operating as financial intermediaries under stressful economic and financial conditions.

Eighteen bank holding companies will be participating in the CCAR for the fourth consecutive year in 2014. An additional 12 financial institutions will be participating in CCAR for the first time during this stress testing cycle. All 30 of the companies participating in the CCAR in 2014 must submit their capital plans on or before January 6, 2014.

Click here for the 2014 Supervisory Scenarios for Annual Stress Tests Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule.

Click here for the CCAR.


On November 1, 2013, the Commodity Futures Trading Commission’s (CFTC) issued a letter (CFTC Letter No. 13-68) providing time-limited extensions of relief for swaps in the foreign exchange (FX) asset class previously provided in the following CFTC letters:
  • CFTC Letter No. 13-55 (amended) (Time-Limited No-Action Relief for Temporarily Registered Swap Execution Facilities from Certain Swap Data Reporting Requirements of Parts 43 and 45 of the Commission’s Regulations);
  • CFTC Letter No. 13-56 (Time Limited No-Action Relief for Reporting Counterparties from Certain Continuation Data Reporting Requirements of Section 45.4 of the Commission’s Regulations with respect to Uncleared Swaps Executed on or Pursuant to the Rules of a Temporarily Registered Swap Execution Facility); and
  • CFTC Letter No. 13-58 (Time-Limited No-Action Relief to Temporarily Registered Swap Execution Facilities from Commission Regulation 37.6(b) for Non-Cleared Swaps in All Asset Classes).

The CFTC extended the relief provided in each letter for swaps in the FX asset class, subject to certain terms and conditions, until 12:01 a.m. eastern time on November 29, 2013.

Click here for CFTC Letter No. 13-68. Click here for CFTC Letter Nos. 13-55, 13-56 and 13-58.


On October 31, 2013, Fannie Mae filed a complaint (Fannie Mae Complaint) in U.S. District Court in Manhattan accusing various banks of conspiring for several years to manipulate LIBOR. Fannie Mae alleges that it lost hundreds of millions of dollars due to LIBOR manipulation related to transactions dealing with swaps, mortgages, and mortgage securities. Fannie Mae is seeking more than $800 million in damages.

Freddie Mac filed a similar lawsuit in March of 2013 seeking unspecified damages related to LIBOR manipulation from more than one dozen banks. In September of 2013, the National Credit Union Association sued 13 banks for their alleged participation in the rate manipulation. The NCUA said the rate manipulation resulted in a loss of income from investments and other assets held by five failed corporate credit unions: U.S. Central, WesCorp, Members United, Southwest and Constitution.

Click here for the Fannie Mae Complaint.


On October 31, 2013, the Board of Governors of the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank announced that their existing temporary bilateral liquidity swap arrangements are being converted to standing arrangements, that is, arrangements that will remain in place until further notice.

The standing arrangements will constitute a network of bilateral swap lines among the six central banks. These arrangements allow for the provision of liquidity in each jurisdiction in any of the five currencies foreign to that jurisdiction, should the two central banks in a particular bilateral swap arrangement judge that market conditions warrant such action in one of their currencies.

The existing temporary swap arrangements have helped to ease strains in financial markets and mitigate their effects on economic conditions. The standing arrangements will continue to serve as a prudent liquidity backstop.

Click here for information on the actions taken by the central banks.


On October 31, 2013, Senate Republicans blocked a vote on the nomination of Representative Mel Watt (D-NC) to head up the Federal Housing Finance Agency (FHFA).

Representative Watt’s nomination was stopped in a 56-42 vote to end the debate over his confirmation. Sixty votes were needed to invoke cloture and move forward. Edward DeMarco has led the FHFA as acting director since August of 2009 following his appointment by President Obama. Throughout his tenure, Mr. DeMarco has attracted criticism from Democrats and consumer advocates who say he has not gone far enough to help distressed homeowners. One of the bigger controversies surrounding DeMarco is his steadfast opposition to the use of principal forgiveness by the GSEs, which he believes would be too costly to taxpayers.


On October 30, 2013, the Blackstone Group launched the first-ever REO-to-rental securitization deal (2013-SFR1). In this deal, Blackstone packaged rental income from single-family homes it owns into a pass-through security, similar to a commercial mortgaged-backed security. The nearly $500 million deal involves Deutsche Bank as lead manager, along with JPMorgan Chase and Credit Suisse as co-managers.

The deal is secured by individual mortgage liens on each underlying property rather than an equity pledge in the property-owning special purpose vehicle so that a REMIC structure could be used. Partially because of this structure, each of KBRA, Moody’s and Morningstar awarded their highest respective ratings to the largest tranche of the deal valued at $278.7 million. The expected closing date is November 19, 2013.


On October 30, 2013, the Basel Committee on Banking Supervision (Basel Committee) issued a second consultative paper (October 2013 Paper) on the fundamental review of capital requirements for the trading book. Comments to the October 2013 Paper are due on Friday, January 31, 2014.

The October 2013 Paper provides more detail on the approaches introduced in the May 2012 consultative paper (May 2012 Paper), and sets out a draft text for a revised market risk framework. The October 2013 Paper has been informed by comments received on the May 2012 Paper and lessons learned from the Committee's recent investigations into the variability of market risk-weighted assets.

The key features of the proposed revised framework set forth in the October 2013 Paper include:

  • A revised boundary between the trading book and banking book. The new approach aims to create a less permeable and more objective boundary that remains aligned with banks' risk management practices, and reduces the incentives for regulatory arbitrage.
  • A revised risk measurement approach and calibration. The proposals involve a shift in the measure of risk from value-at-risk to expected shortfall so as to better capture "tail risk.”
  • The incorporation of the risk of market illiquidity, through the introduction of "liquidity horizons" in the market risk metric, and an additional risk assessment tool for trading desks with exposure to illiquid, complex products.
  • A revised standardized approach that is sufficiently risk-sensitive to act as a credible fallback to internal models, and is still appropriate for banks that do not require sophisticated measurement of market risk.
  • A revised internal models-based approach, encompassing a more rigorous model approval process, and more consistent identification and capitalization of material risk factors. Hedging and diversification recognition will also be based on empirical evidence that such practices are effective during periods of stress.
  • A strengthened relationship between the standardized and the models-based approaches. This is achieved by establishing a closer calibration of the two approaches, requiring mandatory calculation of the standardized approach by all banks, and requiring mandatory public disclosure of standardized capital charges by all banks, on a desk-by-desk basis.
  • A closer alignment between the trading book and the banking book in the regulatory treatment of credit risk. This involves a differential approach to securitization and non-securitization exposures.

Click here for the October 2013 Paper. Click here for the May 2012 Paper.


On October 30, 2013, the Office of the Comptroller of the Currency (OCC) issued updated risk management guidance for national banks and federal savings associations related to third-party relationships (Risk Management Guidance).

Third-party relationships include business arrangements between a bank and another entity, by contract or otherwise. The use of third parties does not diminish the responsibility of the board and management to ensure that a given activity conforms to safe and sound banking practices and complies with applicable laws.

The Risk Management Guidance advises banks to adopt risk management processes commensurate with the level of risk and complexity of their third-party relationships. According to the Risk Management Guidance, to manage risks from third-party relationships, banks should:

  • Develop a plan that outlines the bank’s strategy, identifies the inherent risks of the activity, and details how the bank will select, assess, and oversee the third party;
  • Perform proper due diligence to identify risks and select a third-party provider;
  • Negotiate written contracts that clearly outline the rights and responsibilities of all parties;
  • Conduct ongoing monitoring of the third party’s activities and performance;
  • Execute a plan to terminate the relationship in a manner that allows the bank to transition the activities to another third party, bring the activities in-house, or discontinue the activities;
  • Assign clear roles and responsibilities for overseeing and managing third-party relationships and the risk management process;
  • Maintain proper documentation and reporting to facilitate oversight, accountability, monitoring, and risk management; and
  • Conduct independent reviews of the risk management process to enable management to assess that the bank’s process aligns with its strategy and effectively manages risks from third-party relationships.

Click here for the Risk Management Guidance.


On October 30, 2013, the U.S. House of Representatives (House) approved HR 992, a revision to the Dodd-Frank Act, that would evert the Dodd Frank Act's "push-out" rule by allowing banks with access to deposit insurance and discount borrowing to trade a greater variety of derivatives. The House bill amends the Dodd-Frank Act to allow those banks to trade “plain vanilla” derivatives, (including equity and commodity-based swaps), but not complex asset-based derivatives.

The push out provision requires banks with access to deposit insurance or the Federal Reserve discount window to move their derivatives business to separately capitalized affiliates. This provision is aimed at mitigating risks, but critics, such as Federal Reserve Chairman Ben Bernanke, expressed concern that it could increase risks by incentivizing banks to move derivatives trading to affiliates that are less regulated.

Notwithstanding such concern, the White House continues to oppose the bill, claiming that it will be disruptive and harmful to the implementation of the Dodd-Frank Act. A companion bill has failed to gain traction in the Democrat-controlled Senate despite receiving votes from 70 Democrats in the House.

Click here for H.R. 992.



On October 30, 2013, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed a rule (Proposed Rule) to strengthen the liquidity risk management of large banks and savings associations.

The OCC and FDIC’s proposed liquidity rule is substantively the same as the proposal approved by the Board of Governors of the Federal Reserve System on October 24, 2013. That proposal, which was developed collaboratively by the three agencies, is applicable to banking organizations with $250 billion or more in total consolidated assets; banking organizations with $10 billion or more in on-balance sheet foreign exposure; systemically important, nonbank financial institutions that do not have substantial insurance subsidiaries or substantial insurance operations; and bank and savings association subsidiaries thereof that have total consolidated assets of $10 billion or more (covered institutions). The Proposed Rule does not apply to community banks.

Under the Proposed Rule, covered institutions would be required to maintain a standard level of high-quality liquid assets such as central bank reserves, government and Government Sponsored Enterprise securities, and corporate debt securities that can be converted easily and quickly into cash. Under the proposal, a covered institution would be required to hold such high-quality liquid assets on each business day in an amount equal to or greater than its projected cash outflows less its projected cash inflows over a 30-day period. The ratio of the firm's high-quality liquid assets to its projected net cash outflow is specified as a "liquidity coverage ratio," or LCR, by the proposal.

The liquidity proposal is based on a standard agreed to by the Basel Committee on Banking Supervision. The proposed rule is generally consistent with the Basel Committee's LCR standard, but is more stringent in some respects such as the range of assets that will qualify as high-quality liquid assets and the assumed rate of outflows of certain types of funding. In addition, the proposed rule’s transition period is shorter than that included in the Basel framework. The accelerated transition period reflects a desire to maintain the improved liquidity positions that U.S. institutions have established since the financial crisis. Under the proposal, U.S. firms would begin the LCR transition period on January 1, 2015, and would be required to be fully compliant by January 1, 2017.

On Thursday, November 7, 2013 SFIG, will host a broad membership call at 11 AM (EST) to discuss the proposed regulations.

Click here for the Proposed Rule. Click here for statement by Comptroller Thomas J. Curry.


On October 30, 2013, the Board of Governors of the Federal Reserve System (Federal Reserve) released the latest Federal Open Market Committee (FOMC) statement, revealing a generally cautious attitude among members as the economy struggles against headwinds. In its statement, the FOMC says information received since September “generally suggests that economic activity has continued to expand at a moderate pace.”

In the labor markets, the FOMC noted that “conditions have shown some further improvement,” though the unemployment rate is still elevated. Regarding housing, the FOMC noted growth has slowed in recent months; however, unlike the September statement, October’s release does not cite rising mortgage rates as a concern. Despite continued improvements and greater economic stability, the FOMC said it will wait for more evidence of sustainable progress before adjusting the pace of its $85 billion-per-month asset purchases.

However, the FOMC left open the possibility of a taper in the future, asserting that “[a]sset purchases are not on a preset course” and saying future decisions about their pace will be based on the committee’s economic outlook.

The committee also maintained its strategy of keeping the range for the federal funds rate at 0 to ¼%, anticipating the low range “will be appropriate at least as long as the unemployment rate remains above 6-1/2%” and as long as inflation projections are within the 2% goal.

Click here for the FOMC statement.


On October 30, 2013, the Chairman of the Commodity Futures Trading Commission (CFTC), Gary Gensler, said that he plans to hold a public vote on the Volcker Rule the second or third week of December of 2013.

Chairman Gensler said that he is still coordinating with the Board of Governors of the Federal Reserve System (Fed), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC) , and U.S. Department of the Treasury.

On November 7, 2011, the Fed, FDIC, OCC, SEC and U.S. Department of Treasury initially released a joint Volcker Rule notice of proposed rulemaking (Joint NPR) separate from the NPR issued by the CFTC on February 14, 2012 (CFTC NPR).

Click here for the Joint NPR. Click here for the CFTC NPR.


On October 24, 2013, the Bipartisan Policy Center's (BPC) Capital Markets Task Force released a report, entitled "A Better Path Forward on the Volcker Rule and the Lincoln Amendment" (BPC Report).

The BPC Report proposes the following six recommendations for regulators regarding Volcker Rule implementation. Financial regulators should:

  • gather a robust set of data about trading activities to allow themselves the opportunity to clearly identify relevant patterns;
  • (analyze collected data to identify relevant patterns of trading activity to assign one or more metrics that are relevant to defining what constitutes proprietary trading;
  • identify an appropriate set of metrics holistically in a way that best fits each asset class, product, and market;
  • sequence compliance with the final regulations to allow agencies time to monitor for unanticipated effects and to make any appropriate modifications based on the metrics and unique characteristics of each individual market and product;
  • adopt a methodology that collects and analyzes data before proprietary trading is defined and that relies on a phased-in implementation to allow regulators to learn as they go; and
  • adopt the Federal Reserve’s approach in its existing Regulation K to address the extraterritorial problems of the Volcker Rule with respect to foreign banking organizations and what activities occur “solely outside the United States.”

The BPC Report also recommends delaying implementation of the Lincoln Amendment on swaps “push-out” until more real-world experience is gained with the Volcker Rule, however it is adopted.

Click here for the BPC Report.



On October 24, 2013, Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco sent a letter (October 24 Letter) to Representative Carolyn Maloney (D-NY) in response to an letter from a bipartisan group of 66 House Members dated October 7, 2013 (October 7 Letter). The October 7 Letter opposed loan limit reductions.

The October 24 Letter from Mr. DeMarco states that FHFA has the authority to establish a maximum loan size eligible for purchase by Fannie Mae and Freddie Mac (GSEs). The October 24 Letter also stated that in November of 2013 the FHFA will follow its practice of announcing the 2014 conforming loan limits and at that time will also provide further information on potential reductions in the size of loans the GSEs will guarantee going forward including the analysis requested by the House Members in the October 7 Letter.

Also on October 24, 2013, Mr. DeMarco delivered a speech in Washington, D.C. entitled, “The Five-Year Anniversary of the Conservatorships of Fannie Mae and Freddie Mac: No Time to Celebrate” (October 24 Speech). In the October 24 Speech, Mr. DeMarco specifically noted that FHFA would announce in late November whether it would reduce the 2014 conforming loan limits for the GSEs, but that any potential reduction would be gradual and accompanied by at least a six-month implementation period. In addition, he specified that any reductions would be across the board, and not targeted to specific areas of the country.

The October 24 Speech also referenced several other issues related to the conservatorship of the GSEs, including a review of FHFA’s actions over the past five years and the steps it plans to take to implement the “build, contract, and maintain” goals of its Strategic Plan. In addition, Mr. DeMarco discussed risk-sharing transactions and guarantee fees for the single-family guarantee business, as well as issues relating the multifamily market and the retained portfolios of the GSEs. On October 28, FHFA Mr. DeMarco delivered a similar speech in Washington, D.C (October 28 Speech).

Click here for the October 24 Letter. Click here for the October 7 Letter. Click here for the October 24 Speech. Click here for the October 28 Speech.



ABS Vegas 2014 – January 21-24, Las Vegas, Nevada.

Momentum is continuing to build. The preliminary agenda has been released and the speaker nomination process has begun. SFIG is now accepting sponsorship contracts for this conference. If you are interested, please contact SFIG.

Click here for the preliminary agenda, the speaker nomination form and more information about the conference.



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 ( to learn about membership opportunities.


Contact Information

For all matters, please contact Richard Johns.

For Investor related matters, please contact Kristi Leo.

For ABS Policy related matters, please contact Sairah Burki.

For MBS Policy related matters, please contact Sonny Abbasi.


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