October 2, 2013 Newsletter
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October 2, 2013


Issue Spotlight

Recent Developments


Several members of SFIG’s board and senior staff will be speaking at ABS East which will be taking place on October 6-8, 2013. 
  • Executive Director Richard Johns and Board Members Lisa Filomia, Steve Kudenholdt, and Ned Myers will be panelists on “The Unchartered Road Ahead: Are Regulations Paving the Way for the ABS Market to Enter the Fast Lane, or Are They Creating a Major Detour?” The panel will be moderated by Board Member Jason Kravitt.
  • Board Member Gregg Silver will be moderating a panel entitled “Credit Card ABS: A Benchmark No More?"
  • Board Member John Arnholz will be a panelist on the “Overview of the State of US Housing” panel.
  • Board Member Patricia Evans will be moderating a panel entitled “Improving Bondholder Communication.”
  • Board Member Tricia Hazelwood will be moderating a panel entitled “Seeking Opportunity in ABS: Investors’ Hot List of Sectors to Watch.”

Between sessions all are welcome to stop by SFIG’s booth which will be stocked with information about SFIG and great giveaways.

Click here for the ABS East conference agenda.


On September 27, 2013, SFIG representatives met with senior House Financial Services Committee (HFSC) staff of Chairman Jeb Hensarling (R-TX) and Ranking Member Maxine Waters (D-CA) to discuss SFIG’s views on housing finance reform issues. Chairman Hensarling’s staff encouraged SFIG to suggest substantive and technical improvements to the PATH Act legislation that was reported out of the HFSC. Representative Water’s staff sought SFIG’s input on issues as the staff prepares to draft legislation for introduction by the Representative. Both meetings are part of SFIG’s ongoing efforts to promote its members’ views on housing finance reform and related securitization issues.


On September 27, 2013, SFIG’s Auto and Equipment Committees submitted to Standard & Poor’s Ratings Services (S&P) a comment letter responding to S&P’s “Request for Comment: Global Non-Diversified Auto Dealer Floorplan Rating Methodology” that was issued on July 29, 2013. The primary concerns expressed in the comment letter consist of the following: a manufacturer’s current corporate credit rating (CCR) is not an appropriate basis to assess the severity of a hypothetical future insolvency of the manufacturer; the CCR is a weak and indirect proxy for the fundamental drivers of risk in dealer floorplan; and linkage to CCR will unnecessarily and inappropriately increase ABS ratings volatility.

Click here for S&P’s Request for Comment: Global Non-Diversified Auto Dealer Floorplan Rating Methodology.

Click here for SFIG’s comment letter.




Following the financial crisis, the housing stock of the United States contained an unusually high number of distressed and, in many cases, vacant, single-family homes. Starting in early 2012, the Federal Housing Finance Agency (FHFA) launched a pilot program to make pools of federally-controlled foreclosed REO properties available to investors with the requirement that such properties be rented out for a specific number of years. Around the same time, institutional investors began to purchase REO properties with the intent to retain and rent out such properties. Over a year and a half later, the supply of REO properties has diminished and property values have stabilized. With many investors analyzing future REO-to-Rental transactions and the possibility of securitizing REO-to-Rental assets, interest has increased in the structuring of such transactions.

It is expected that REO-to-Rental securitizations will rely on two sources of funds to repay investors: rental income paid by the renters in the homes, and the proceeds of the sale of the rental properties by a date certain. The latter source of funds will likely supply the majority of amounts to be paid to investors.

To generate the sale proceeds from the rental properties, these transactions are likely to contain a feature, referred to by one of the credit rating agencies that has issued criteria in this space as a “monetization feature” (Monetization Feature). The Monetization Feature may take the form of a loan with a due date, a put agreement, or some other device that requires the properties to be sold by a date certain. It is expected that the tenor of these transactions will be in the three-to-five year range based primarily on the Monetization Feature.

As a result of property sale proceeds being expected to furnish the lion’s share of the source of funds, investors in these transactions will be taking the risk of future housing prices, arguably in a more direct way than they do in RMBS transactions.

As a result of this reliance on home prices, there is some speculation that a continued increase in prices may in fact reduce the number of REO-to-Rental securitizations that will be executed. The reason is simply that it may become more profitable, and less risky, for potential transaction sponsors to sell properties in their portfolios sooner rather than later, and spare themselves the expenses involved in undertaking an REO-to-Rental securitization.

On the other hand, there is also speculation that a robust single-family rental market has long been an overlooked pocket of the nation’s housing stock. Historical data that pre-dates the financial crisis indicates that roughly one-third of households in the United States are renters, and that one-third of renters rent single-family homes. Some observers believe, now that larger players have focused on the single-family rental market that the market can be professionalized and made more efficient than if it is left to the small “mom and pop” local operators.

In addition, a possible trend away from home ownership as well as a desire, particularly among younger people, to remain flexible in terms of “going where the jobs are” may nevertheless promote the development of the single-family rental market.

The advocates of a single-family rental program would like to see it become a common financial technique for single-family homes, in the same way that leasing is a popular option for automobiles.

REO-to-Rental Securitization Structures

REO-to-Rental securitizations are likely to be relatively complex, in part but not exclusively due to the presence of the Monetization Feature.

The Borrower/Issuer

In most instances, the borrower/issuer (Borrower) will be a special purpose vehicle (SPV) in the form of a Delaware limited liability company or limited partnership. Pre-securitization warehouse lenders to the portfolio owner often require the Borrower to have one or more independent managers that provide additional protections to the lender by requiring independent manager consent for material actions by the Borrower. In addition, the independent managers may act as “special members” to continue the existence of the Borrower in certain scenarios. The Borrower will act as the primary obligor under the pre-securitization Warehouse line and on the Monetization Feature and will enter into many of the ancillary documents normally entered into by a borrower in a secured lending transaction. The Borrower will own one or more SPVs in a limited liability company or limited partnership form (Property Owners). The Borrower will pledge to the lender its ownership interest in each Property Owner.

The Property Owners

The Property Owners are wholly-owned subsidiaries of the Borrower, and like the Borrower, often are required to have independent managers for the reasons set forth above. In some circumstances, the Property Owners may have been direct subsidiaries of the securitization sponsor or a sponsor related party and have accumulated and warehoused the properties prior to the REO-to-Rental transaction.

To avoid costly re-titling expenses and delays that would be involved in the transfer of the real property from those warehouse entities to new Property Owner SPVs, the securitization investors may permit the sponsor or sponsor related entities to contribute the membership interests in these warehouse entities to the Borrower, effectively making these warehouse entities wholly-owned subsidiaries of the Borrower.

As owners of the real property, the Property Owners will enter into the rental agreements with the renters, management agreements with property managers, assignments of management agreement for the benefit of the investors and a full pledge, guaranty and environmental indemnity in favor of the investors. In addition, if the real properties have mortgages, the Property Owners will act as mortgagors.

In many instances, lenders the investors may encourage the Borrower to create multiple Property Owners in an effort to segregate potential liabilities. Liabilities could arise from, among other sources, environmental claims, suits by renters and regulatory actions. (State regulatory scrutiny may be greater and potential regulation more likely if the transactions are structured as rent-to-own or lease-to-own transactions.) Borrowers likely may choose to have one Property Owner for each state in which real property is located.

Benefits of Property Owner (Not Borrower) Owning Real Properties

By owning real property through the Property Owners, the Borrower will be one step removed (and therefore potentially more insulated) from the potential liabilities described in the preceding paragraph with respect to the Property Owners. In addition, in states where a single action rule prevents a lender from foreclosing on property and then pursuing the related property owner for a loan deficiency, the investors have greater protection and flexibility in the Borrower/Property Owner structure, because the investors can take possession of the pledged ownership interests in the Property Owners that own the real property and pursue the Borrower for the loan deficiency (including any deficiency on the Monetization Feature).


The managers of the properties play a crucial role in REO-to-Rental transactions including, among other things, the maintenance and restoration of properties and interactions with renters including the collection of rents. In part, REO-to-Rental transactions are concentrated in metropolitan areas that suffered high foreclosure rates, because the concentration of REO properties allows for more efficient management by managers. Managers will enter into a management agreement with the Property Owner setting forth the rights and obligations of the manager with respect to the properties. The Property Owner then assigns its rights in the management agreement to the lender. Managers may or may not be affiliated with the Borrower.

Those observers who suggest that the recent interest in the REO-to-Rental market may serve to “professionalize” that market often focus on the role of property managers. Many believe that the success or failure of large-scale REO-to-Rental programs will hinge on whether it will be possible to replicate on a regional or national scale the “local touch” brought by the local “mom and pop” property managers that have historically dominated the market.


Investors may require Property Owners to place mortgages on the properties. Absent a proper mortgage filing, a lender’s security in the property would not be perfected, potentially jeopardizing the priority of the lender’s security interest. To mitigate costs, some lenders will permit blanket mortgages for properties located in a common jurisdiction, but the mortgage process often remains costly and time consuming. In addition, investors and rating agencies may consider mortgages to be a necessary precursor to any securitization of REO-to-Rental assets.


Borrowers are required to obtain and maintain insurance policies mandated by the investors. Required policy coverage may include “all risk” for full replacement cost of a property, rental loss insurance, construction liability insurance, general liability insurance, automobile insurance, worker’s compensation insurance and excess liability insurance. The costs of insurance coverage are borne by the Property Owners. The Property Owners generally are required to set aside monthly reserves for the payment of insurance in controlled accounts.


The Borrower is required to maintain a number of collection and reserve accounts, and each account usually is required to be subject to a deposit account control agreement. In addition, each property manager also maintains rent receipt accounts into which the renter’s rent payments are collected and security deposit accounts into which renter security deposits are deposited. Both types of accounts typically are required to be subject to deposit account control agreements. Reserves may be required for, among other things, renovations, maintenance, leasing commissions, taxes, insurance and debt service. The deposit account control agreements typically provide for springing control by the lender upon the occurrence of an event of default.


Whether REO-to-Rental securitizations develop into a distinct asset class is likely to depend on several factors: the future direction of home prices, the ability of regional and national property managers to replicate the local touch of the small, local operators that have previously dominated the market, demographic factors relating to mobility and broader consumer sentiment regarding the desirability of home ownership.

To the extent that REO-to-Rental securitizations do occur, they are likely to be relatively complex transactions, the repayment of which will depend in large part on the sale proceeds of the rental properties.


On October 1, 2013, the Senate Committee on Banking, Housing, and Urban Affairs (SBC) held the latest in a series of hearings on housing finance reform. The hearing was entitled, "Housing Finance Reform: Fundamentals of a Functioning Private Label Mortgage Backed Securities Market." Witnesses included market participants and academics. The SBC plans to hold a series of hearings concerning housing finance reform. SFIG Executive Director Richard Johns testified at the first in the series of SBC hearings held on September 12, 2013.

The Chairman and the Ranking Member of SBC are actively working on a GSE reform bill that they expect to introduce by the end of 2013. In the course of developing that bill, the SBC will hold hearings to consider in detail, among other things: (i) the role of the secondary mortgage market in any reform approach; (ii) the role and structure of credit risk transfer; (iii) the structure of a potential guarantee and the role of private capital; (iv) the details and duration of any transition period; and (v) specific views on reform of the government role in multifamily housing finance. The SBC will hold its next hearing on housing finance reform the week of October 7, 2013. After returning from the Columbus Day recess on October 21, 2013, the SBC plans to hold additional housing finance reform hearings each week throughout the fall of 2013.

Click here for the testimony transcripts and webcast of the October 1, 2013 hearing.


The Securities and Exchange Commission’s (SEC) economists are attempting to calculate the costs and benefits of the Volcker Rule – the ban on banks holding federally insured customer deposits from trading for their own accounts imposed by the Dodd–Frank Act. Court challenges that overturned other Dodd-Frank regulations due to inaccurate cost-benefit analysis have increased pressure on the SEC economists. The economists’ work may determine whether the rule could withstand a lawsuit to overturn the Volcker Rule.

The SEC’s economists are under some time pressure because regulators have been encouraged by President Barack Obama and Treasury Secretary Jacob J. Lew to finish the rule by the end of 2013. Wall Street banks face a July 21, 2014 deadline for complying with the Volcker Rule, which must be formally adopted by five regulatory agencies before it takes effect. If regulators miss their 2013 goal, banks will have three weeks to file for individual extensions, a process expected to cause more delays.


On September 30, 2013, the U.S. Department of Housing and Urban Development (HUD) proposed a rule (Proposed Rule) to define a “Qualified Mortgage (QM).” HUD is seeking the public’s comment on the Proposed Rule by October 30, 2013.

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires HUD to propose a QM definition that is aligned with the Ability-to-Repay criteria set out in the Truth-in-Lending Act (TILA) as well as HUD’s historic mission to promote affordable mortgage financing options for qualified lower income borrowers. HUD’s proposed QM definition also builds off of the existing QM rule finalized by the Consumer Financial Protection Bureau (CFPB) earlier this year.

In order to meet HUD’s QM definition, mortgage loans must: require periodic payments; have terms not to exceed 30 years; limit upfront points and fees to no more than 3% with adjustments to facilitate smaller loans (except for Title I, Section 184 and Section 184A loans); and be insured or guaranteed by FHA or HUD.

Similar to the Consumer Financial Protection Bureau’s general QM rule, the Proposed Rule establishes two categories of QMs that have different protective features for consumers and different legal consequences for lenders. HUD’s proposed QM categories are determined by the relation of the Annual Percentage Rate (APR) of the loan to the Average Prime Offer Rate (APOR).

The first category is a Rebuttable Presumption Qualified Mortgage. These loans will have an APR greater than APOR plus 115 basis points (bps) plus on-going borrower paid mortgage insurance premiums (MIP). Legally, lenders that offer these loans are presumed to have determined that the borrower met the Ability-to-Repay standard. Consumers can challenge that presumption, however, by proving that they did not, in fact, have sufficient income to pay the mortgage and their other living expenses. The second category is Safe Harbor Qualified Mortgages. These will be loans with APRs equal to or less than APOR plus 115bps plus on-going MIP. Lenders originating these mortgages have the greatest legal certainty that they are complying with the Ability-to-Repay standard. Consumers can still legally challenge their lender if they believe the loan does not meet the definitions of a Safe Harbor Qualified Mortgage.

Furthermore, in the Proposed Rule HUD proposes that Title I insured mortgages (manufactured housing and home improvement loans), Section 184 mortgages (Indian Home Loan Guarantee Program), and Section 184A mortgages (Native Hawaiian Housing Loan Guarantee Program) be covered by this rule. The Proposed Rule designates loans within these programs as Safe Harbor Qualified Mortgages and does not require the 3% cap on upfront points/fees and APR to APOR ratio.

Click here for the rule.


On September 27, 2013, the Federal Deposit Insurance Corp. issued a Financial Institution Letter (September 2013 FDIC Letter) clarifying its policy and supervisory approach for financial institutions related to facilitating payment processing services directly, or indirectly through a third party, for merchant customers engaged in higher-risk activities. The FDIC previously stated in its Financial Institution Letter issued in January 2012 (January 2012 FDIC Letter) that “higher-risk activities” are those that tend to display a higher incidence of consumer fraud or potentially illegal activities than some other businesses. The January 2012 FDIC Letter further clarified that higher-risk activities are typically characterized by high rates of return, high rates of unauthorized transactions, consumer complaints, or evidence of state or federal regulatory or criminal actions against the business customer, which indicate that the activity needs to be reviewed to determine whether fraudulent or illegal activity is occurring.

The September 2013 FDIC Letter states that facilitating payment processing for merchant customers engaged in higher-risk activities can pose risks to financial institutions; however, those institutions that properly manage these relationships and risks are neither prohibited nor discouraged from providing payment processing services to customers operating in compliance with applicable law.

The September 2013 FDIC Letter states that financial institutions providing payment processing services directly or indirectly for merchant customers engaged in higher-risk activities are expected to perform proper risk assessments, conduct due diligence to determine that merchant customers are operating in accordance with applicable law, and maintain systems to monitor relationships over time. Furthermore, proper management of relationships with merchant customers engaged in higher-risk activities is essential. The FDIC noted in the September 2013 FDIC Letter that financial institutions need to assure themselves that they are not facilitating fraudulent or other illegal activity. Institutions could be exposed to financial or legal risk should the legality of activities be challenged.

The September 2013 FDIC Letter states that the FDIC’s examination focus is to assess whether financial institutions are adequately overseeing activities and transactions they process and appropriately managing and mitigating risks. Financial institutions that have appropriate systems and controls will not be criticized for providing payment processing services to businesses operating in compliance with applicable law.

Click here for the text of the September 2013 FDIC Letter.

Click here for the text of the January 2012 FDIC Letter.


On September 27, 2013, the Commodity Futures Trading Commission (CFTC) issued three letters (CFTC Letters) indicating that it has decided to provide time-limited relief from some of the rules related to swap-execution facilities (SEFs). The CFTC has refused to give in to industry demands to delay the October 2, 2013 deadline for all SEF rules opting instead for the more limited relief.

The SEF rules ban the practice of privately negotiating swap deals - something that was largely done over the phone. Deals must now be entered into systems that are more like stock exchanges, though negotiating over the phone will still be allowed as long as buyers and sellers can prove that they have spoken to more than one counterparty. The CFTC has been rushing through permits for SEFs. SEFs are required to create and enforce trading rules to which all traders must agree, but the CFTC said on September 27, 2013 that SEFs were having trouble getting all their customers signed on before the deadline.

One CFTC Letter provides time-limited no-action relief to SEFs for compliance with the reporting obligations under Part 43 of the CFTC’s regulations and the obligation to report creation data pursuant to Part 45 of the CFTC’s regulations, related to swaps in foreign exchange, commodity and equity asset classes. The relief is conditioned on either the reporting counterparty reporting the data, or the SEF back-loading the data when it is able. In addition, the SEFs must submit a notice to the CFTC and comply with all recordkeeping requirements. The relief expires on October 30, 2013 for foreign exchange swaps and on December 2, 2013 for other commodity and equity swaps.

The second CFTC Letter provides time-limited no-action relief to a reporting swap counterparty for failing to report required swap continuation data under Part 45 of the CFTC’s regulations or for errors and omissions in swap continuation data for equity, foreign exchange and other commodity asset classes that are executed on, or pursuant to, the a SEF’s rules. A reporting counterparty's ability to report continuation data may depend on the SEF's fulfillment of its reporting obligations to report swap creation data. As described above, those obligations have been delayed pursuant to the first CFTC Letter. The reporting swap counterparty must inform the SEF of circumstances causing a failure to report and must retain records of the transactions. This reporting relief expires on October 29, 2013 with respect to foreign exchange swaps and December 1, 2013 with respect to other commodity and equity swaps.

The third CFTC Letter provides time-limited no-action relief to SEFs for enforcement responsibilities required by certain CFTC regulations with respect to market participants trading on those SEFs. The rules covered by this CFTC Letter would require SEFs to enforce their own rulebooks and compel participants to consent to the jurisdiction of the SEF. As a practical result, this means that market participants would have to agree to each SEFs rulebook, many of which have just been released or have not yet been released. SEFs must still create rulebooks, but they will not have to enforce them against market participants until November 1, 2013 when the no-action relief of the third CFTC letter expires.

Click here for the full text of the CFTC Letters.


The U.S. House of Representatives is scheduled to vote on H.R. 922, the "Swaps Regulatory Improvement Act" this week. The bill was introduced by Rep. Randy Hultgren (R-IL) and amends provisions in Section 716 of the Dodd-Frank Act relating to federal assistance for swap entities, particularly the use of any advances from specified Board of Governors of the Federal Reserve System credit facilities or discount windows, or Federal Deposit Insurance Corporation insurance or guarantees. The legislation would extend to any major swap participant or major security-based swap participant that is an uninsured U.S. branch or agency of a foreign bank.

Click here for the full text of H.R. 922.


On September 27, 2013, the Federal Housing Administration (FHA) told lawmakers that it will draw $1.7 billion from the U.S. Treasury (Treasury) before the fiscal year ended on September 30, 2013, in order to support its Mutual Mortgage Insurance Fund (Fund). The Fund insures mortgages made by the FHA on single-family homes. This cash infusion from the Treasury is the first in the FHA’s 79-year history.

During the economic crisis, the FHA increased its mortgage financing activity, causing the Fund considerable stress. The Fund's capital reserve ratio has been below a statutory 2% threshold since 2009. Under federal law, the FHA is required to have enough reserves to cover all of its anticipated future losses over 30 years.


On September 26, 2013, the Consumer Financial Protection Bureau (CFPB) issued a decision and order (Order) stating that it has the authority to investigate the activities of tribal payday lenders. The CFPB rejected an appeal from three Native American owned and operated firms (Lenders), Great Plains Lending LLC, MobiLoans LLC and Plain Green LLC, seeking to set aside the CFPB’s Civil Investigative Demands (CIDs) issued to the Lenders. According to the Order, the CFPB issued the CIDs to the Lenders in June of 2012.

In the Order, CFPB Director Richard Cordray, who has the sole authority to rule on appeals of CIDs, states that the Consumer Financial Protection Act (CFPA) “broadly authorized the [CFPB] to issue a CID to ‘any person’ the [CFPB] has reason to believe may have information relevant to a violation.” The Order states that the Lenders fall within the definition of “persons” for the purposes of the CFPA.

Furthermore, Mr. Cordray noted in the Order that tribal sovereign immunity does not apply to the Lenders and the CFPB has the right to regulate the Lenders’ activities, including probing to see whether their product offerings complied with the CFPA and other federal consumer protection laws because the Lenders are believed to be doing business with customers outside of tribal jurisdiction.

The CFPB states that it will proceed with the CIDs and that the Lenders must provide the requested information within 21 days of the Order.

Click here for the CFPB’s Decision.

Click here for the Lenders’ joint petition.


On September 24, 2013, the Board of Governors of the Federal Reserve System (FRB) issued two interim final rules that clarify how companies should incorporate the Basel III final rules into their capital and business projections for the next cycle of capital plan submissions and stress tests. Rules to implement Basel III capital reforms in the United States were finalized in July of 2013, and will be phased-in beginning in 2014 or 2015 depending on the size of the banking organization. The next capital planning and stress testing cycle begins on October 1, 2013 and overlaps with the implementation of the Basel III capital reforms.

The first interim final rule applies to bank holding companies with over $50 billion in total consolidated assets. The second rule also requires these companies to incorporate the revised capital framework into their projections and stress tests, and clarifies that for the upcoming cycle, capital adequacy will continue to be assessed against a minimum 5% tier 1 common ratio. The second interim final rule provides a one-year transition period for banking organizations with between $10 billion and $50 billion in total consolidated assets. It requires these companies to calculate stress test projections using the FRB’s current regulatory capital rules during the upcoming stress test to allow time to adjust their internal systems to the revised framework.

In addition, both rules clarify that companies will not be required to use the advanced approaches in the Basel III rules in a given annual cycle unless they are notified by September 30 of that given year, prior to the start of that capital planning and stress testing cycle. The rules became effective on September 30, 2013, and comments are due by November 25, 2013.

Click here for the first interim final rule that applies to bank holding companies with over $50 billion in total consolidated assets.

Click here for the second interim final rule that applies to banking organizations with total consolidated assets of more than $10 billion but less than $50 billion.


On September 24, 2013 the Consumer Financial Protection Bureau (CFPB) released a reference chart on the types of qualified mortgages that small creditors can originate. The chart is intended to help market participants visualize how the new mortgage rules, including the ability-to-repay rule, will apply to certain products or transactions.

Click here for the CFPB Small Creditor Qualified Mortgage Reference Chart.


On September 20, 2013, several industry groups, consisting of the Global Financial Markets Association, the American Bankers Association, the Institute of International Bankers, the Institute of International Finance and the International Swaps and Derivatives Association, submitted a comment letter (GFMA Comment Letter) to the Secretariat of the Basel Committee on Banking Supervision (Basel Committee) as part of the Basel Committee’s public consultation on leverage ratios in Basel III. The Basel III leverage ratio is defined as the ratio, expressed as a percentage, of the Capital Measure (the numerator) divided by the Exposure Measure (the denominator). The GFMA Comment Letter requested that the Basel Committee reconsider its proposed Basel III leverage ratio for banks. In the GFMA Comment Letter, the groups emphasize that the requirements could exacerbate risk and that the proposed methodology would overstate banks' economic exposure.

Regarding securitization, the GFMA Comment Letter points out that the proposed changes to the leverage ratio calculation methodologies could potentially impact securitization issuers because the Exposure Measure (the denominator) would include all assets “that are inside the scope of regulatory consolidation or inside the scope of accounting consolidation” whereas the Capital Measure (the numerator) is calculated using only the regulatory scope of consolidation. The GFMA Comment Letter recommends that the regulatory scope of consolidation be used in the calculation of the Exposure Measure (the denominator) of the leverage ratio. The GFMA Comment Letter also notes that the Basel Committee should take full account of pending changes in both international and US accounting standards including stricter consolidation requirements for securitization-related activities.

In the GFMA Comment Letter, the industry groups said that they are concerned that the proposed framework’s methodologies would significantly overstate actual economic exposure of banks. Their view is that the proposed framework’s methodologies will result in the leverage ratio, rather than the risk-based capital ratio, becoming the binding capital measure for a significant number of banks. The industry groups emphasize in the GFMA Comment Letter that a binding leverage ratio would require banks to hold much higher capital for their least risky assets such as cash and highly liquid government securities.

The GFMA Comment Letter recommends a range of modifications to the Basel Committee, including the exclusion of cash claims on central banks from its exposure measurements, as well as excluding several very low risk assets. The GFMA Comment Letter explained that by not including these assets in the leverage ratio, there would be less incentive for banks to push them out of their portfolios in favor of riskier financial instruments. The letter suggested that there should at least be partial exclusions on such assets based on their relative levels of liquidity to ensure that the securities financing market keeps functioning. The GFMA Comment Letter urged the Basel Committee to reaffirm the principles that “the supplementary leverage ratio is intended to be just that –supplementary and a backstop—not the binding capital ratio that supersedes the risk-based requirement and that “national authorities should adopt capital standards, including leverage ratios, that are comparable internationally.”

On September 20, 2013, the Clearing House Association L.L.C. (Clearing House) submitted a comment letter (Clearing House Comment Letter) to the Basel Committee. The Clearing House Comment Letter raises many of the same concerns detailed in the GFMA Comment Letter. In addition the Clearing House Comment Letter discusses the results of a study (Clearing House Leverage Study) conducted by Clearing House on the impact of the proposed revisions to Basel III on the U.S. banking industry, products offered by U.S. Banks and U.S. markets. The Clearing House Leverage study found that the combination of the U.S. proposal for U.S. global systemically important banks (G-SIB) and the Basel III proposal would establish the leverage ratio as a binding constraint for 67% of U.S. G-SIB assets or approximately 40% of the overall U.S. banking and securities industry. Clearing House argues in its comment letter that this is inconsistent with the Basel Committee’s stated intent to establish the leverage ratio as a “backstop” to risk-based capital measures and would produce perverse financial and economic outcomes.

Click here for the GFMA Comment Letter.

Click here for the Clearing House Comment Letter.

Click here for the results of the Clearing House Leverage Study.

Click here for the June 2013 Consultative Document issued by the Basel Committee, “Revised Basel III leverage ratio framework and disclosure requirements.”


On September 19, 2013, the Governing Council of the European Central Bank (ECB) announced that it has introduced loan-level reporting requirements for asset-backed securities (ABS) backed by credit-card receivables used as collateral in the Eurosystem’s monetary policy operations. The reporting requirements will be as follows:
  • loan-level data must be provided on the basis of the template, at least on a quarterly basis, or within one month of, the interest payment date of the instrument in question;
  • the provision of loan-level information for these instruments is mandatory as of April 1, 2014, with a nine-month phasing-in period and where loan-level data are incomplete on April 1, 2014, they must gradually be completed in the course of the phasing-in period;
  • to enable effective reporting of loan-level data, the credit card cash flow-generating assets backing an ABS must all belong to the same asset class; and
  • ABS backed by credit card receivables that do not comply with the loan-level data reporting requirements because they consist of mixed pools of heterogeneous underlying assets and/or do not conform to any of the loan-level templates will remain eligible for use as collateral until March 31, 2014, subject to compliance with all other applicable provisions.

Click here for more information about the ECB’s ABS Loan-level initiative.



Residential Mortgage Roundtable – October 16, 2013, New York City, New York, 2pm – 6pm. The Roundtable will focus on the various approaches to representations, warranties and enforcement mechanisms that have arisen in the post-crisis RMBS world. Roundtable participants will include investors, issuers and other industry players. The event is open only to SFIG members and non-member investors. Venue details to follow.

Fall Symposium – October 29, 2013, New York City, New York, 5pm – 8pm. The Symposium will be followed by a cocktail party. The event is open to both members and non-members. The event will be held at the offices of Cadwalader, Wickersham & Taft, One World Financial Center, New York City, New York.

ABS Vegas 2014 – January 21-24, Las Vegas, Nevada. Click here for more information.

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



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


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



Contact 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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