October 30, 2013 Newsletter
Problem viewing this email? Click here for our online version.
October 30, 2013


Issue Spotlight

Recent Developments



SFIG Membership Call

SFIG will host a broad membership call at 11 AM (EST) on Thursday, October 31 to provide additional detail regarding the regulations proposed by Board of Governors of the Federal Reserve Board (Federal Reserve) (and released a Notice of Proposed Rulemaking (NPR)) introducing a liquidity coverage ratio (LCR) requirement that will test a bank’s ability to withstand “liquidity stress periods (Proposed Rule).

Below is the dial-in information:

Dial-In: 800-330-3765

Passcode: 2024786454

SFIG Comment Letter

SFIG expects to partner with SIFMA and other trade associations to develop two separate comment letters to the Proposed Rule. One comment letter will contain a comprehensive response to the Proposed Rule and the other will have a more targeted focus on the aspects of the Proposed Rule 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).

If you are interested in participating in RC&L Committee’s review, please contact SFIG at sairah.burki@sfindustry.org or Richard.johns@sfindustry.org.

Comments to the Proposed Rule are due by January 31, 2014.

Background on the Proposed Rule

On October 24, 2013, the Federal Reserve released and NPR that proposes the Proposed Rule. The objective of the Proposed Rule is to ensure that a bank has enough high quality liquid assets (HQLAs) that can be immediately converted into cash in the markets to meet its liquidity needs for a 30-day liquidity stress scenario.

The NPR will be published in the Federal Register jointly with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC and, together with the Federal Reserve and the FDIC, collectively, the Agencies) after each Agency has completed its internal review and approval procedures.

The Basel Committee on Banking Supervision (BCBS) initially published international liquidity standards in December 2010 and revised the LCR in January 2013 (Final Basel LCR Rule). For covered companies, the Proposed Rule implements the LCR requirement in a manner mostly consistent with the Final Basel LCR Rule, with some significant modifications that the Agencies believe are necessary to reflect the characteristics and risks of the U.S. market and the U.S. regulatory framework. However, the Proposed Rule for covered companies is more stringent than the Final Basel LCR Rule in several important areas. For modified LCR companies, a separate rule proposal by the Federal Reserve incorporates a modified version of the LCR for certain bank holding companies that are not subject to the Final Basel LCR Rule but that are subject to Section 165 of Dodd-Frank.

Firms Subject to Proposed Rule

The Proposed Rule applies to “covered companies,” including banking organizations with $250 billion or more in total assets or $10 billion or more in on-balance sheet foreign exposures, as well as to nonbanks that are designated as systemically important by the Financial Stability Oversight Council (FSOC).

As described further below, a modified version of the LCR would apply to “modified LCR companies” - depository institution holding companies with total consolidated assets of $50 billion or more that are not internationally active.

Computation of LCR

The Proposed Rule would require a covered company to calculate its LCR on each business day and provides that a covered company would calculate its LCR by dividing its HQLA amount by total net cash outflows. For purposes of this calculation, the HQLA amount numerator equals (a) the sum of Level 1 liquid assets, Level 2A liquid assets (after applying a 15% haircut) and Level 2B liquid assets (after applying a 50% haircut), minus (b) the greater of unadjusted and adjusted excess HQLA amount. The total net cash outflows denominator equals (a) the highest daily amount of cumulative net cash outflows within the 30 days following the calculation date, minus (b) specified inflows, which are capped at 75% of outflows.

In determining the excess HQLA amount, combined Level 2A and Level 2B liquid assets may not exceed 40% of total HQLA and Level 2B liquid assets may not exceed 15% of total HQLA. The unadjusted excess HQLA amount is the amount of HQLA that exceeds the Level 2 asset caps as of the first day of the relevant 30-day stress period. The adjusted excess HQLA amount is the amount of HQLA that exceeds the level 2 asset caps as of the end of the relevant stress period assuming the unwinding of all secured funding and lending transactions, asset exchanges and collateralized derivatives transactions that mature during the stress period.

Level 1 liquid assets are intended to be the safest and most liquid assets and include withdrawable Federal Reserve Bank balances and foreign reserves, U.S. treasury securities and other obligations backed by the full faith and credit of the U.S. government and obligations of foreign sovereigns and certain multilateral organizations that are assigned a 0% risk weight under the risk-based capital rules.

Level 2A liquid assets include GSE securities that are investment grade consistent with the OCCs investment regulation as of the calculation date and securities issued or guaranteed by sovereign entities and certain multilateral organizations that are assigned a 20% risk weight under the risk-based capital rules.

Level 2B liquid assets include publicly traded corporate debt securities that are investment grade under OCC investment guidelines and certain publicly traded equity securities that, in both cases, meet specified requirements that demonstrate they have a proven track record as liquid securities. Level 2B asset may not be issued by regulated financial companies, registered investment companies, non-regulated funds, pension funds, certain other financial entities to be specified by the Agencies or any consolidated subsidiary of the foregoing.

Four Key Issues for the Securitization Market

Four key issues raised by the Proposed Rule have particular relevance for the securitization and structured finance markets:

  • Level 2 Treatment of GSE Securities - Despite intense advocacy from across the industry over the past few years that GSE securities be treated as Level 1 liquid assets, the Proposed Rule provides for treatment of GSE securities as Level 2A liquid assets. As a result, covered companies will not be able to treat the full principal amount of such securities as HQLAs. Instead, a haircut of 15% would be applied and, together with other Level2A and Level 2B liquid assets, could not constitute more than 40% of a covered company’s HQLA.

In order to comply with the Proposed Rule, covered companies will likely migrate away from GSE securities and invest more heavily in Treasuries and Ginnie Mae securities. Given the integral role that GSE securities play in bank investment portfolios, this movement could have negative implications for bank liquidity risk management. Additionally, reduced bank demand for GSE securities could lead to a widening in spreads with a negative impact on the U.S. mortgage market.

  • Assumed 100% Drawdown of Commitments to Special Purpose Entities - Consistent with the Final Basel LCR Rule, the Proposed Rule requires a covered company to assume 100% drawdown of committed credit and liquidity facilities to special purpose entities (SPEs) and the loss of all funding provided to the covered company by any SPE. The only exceptions would be for commitments that could not be drawn within the next 30 days and funding from an SPE that could not be withdrawn during those next 30 days.

The mandated 100% drawdown assumption extends to all SPEs, including credit facilities used by commercial clients (including those in manufacturing and service industries) to obtain cost effective funding to support their own customer financing operations. Through the normal course of business, these companies extend credit to their clients, relying on banks for committed credit to manage their working capital needs. These companies access credit through unsecured credit facilities, secured credit facilities and securitized credit facilities (via SPEs). Securitized credit facilities are generally significantly larger than the other two types of facilities.

As a result of the 100% drawdown assumption for credit commitments to SPEs, banks may be forced to reduce, or exit completely, these credit commitments on which corporate borrowers rely so heavily. Such significant reductions in available funding (and increased costs of remaining funding) will have a dramatic impact on small businesses and corporations, with negative implications for job creation.

  • RMBS Not Included in Level 2B Liquid Assets - RMBS does not qualify as HQLA under the Proposed Rule. The Final Basel LCR Rule includes RMBS as a Level 2B liquid asset with a 25% haircut.
  • Sponsored Structured Transaction Outflow Amount - The Proposed Rule’s structured transaction outflow amount would capture obligations and exposures associated with structured transactions sponsored by a covered company, without regard to whether the structured transaction vehicle that is the issuing entity is consolidated on the covered company’s balance sheet. The outflow amount for each of a covered company’s sponsored structured transactions would be the greater of (a) 100% of the amount of all debt obligations of the issuing entity that mature 30 days or less from the calculation date and all commitments made by the issuing entity to purchase assets within 30 days or less from calculation date; and (b) the maximum contractual amount of funding the covered company may be required to provide to the issuing entity 30 days or less from such calculation date through a liquidity facility, a return or repurchase of assets from the issuing entity, or other funding agreement.

Significant Differences from Final Basel LCR Rule

As mentioned above, the Proposed Rule incorporates some modifications to the Final Basel LCR Rule that the Agencies believe are necessary to reflect the characteristics and risks of the U.S. market and the U.S. regulatory framework. Significant differences from the Final Basel LCR Rule include:

  • Shorter Compliance Period - Under the Proposed Rule, covered companies will be required to fully comply with the LCR test by January 1, 2017, with 80% compliance required by January 1, 2015 and 90% compliance required by January 1, 2016. By contrast, the Final Basel LCR Rule requires 60% compliance by January 1, 2015, with the level of required compliance increasing by 10% each year after that until reaching 100% on January 1, 2019.
  • Test Against Peak Net Outflow Day - The Proposed Rule requires covered companies (but not modified LCR companies) to hold HQLAs against their largest net cumulative cash outflow day within a 30-day liquidity stress period. By contrast, the Final Basel LCR Rule requires that HQLAs be held against the net cumulative cash-flow as of the end of the 30-day period.

For purposes of determining the peak net outflow day, the Proposed Rule requires covered companies to assume that outflows occur on the earliest possible date and that inflows occur on the latest possible date during the 30-day test period. This difference may lead to much higher outflow amounts under the Proposed Rule than under the Final Basel LCR Rule and, therefore, require covered companies to maintain much greater levels of HQLA.

  • More Stringent Definition of Hiqh Quality Liquid Assets - The Proposed Rule sets forth a more stringent definition of HQLA. For example, under the Proposed Rule, Level 2A liquid assets excludes general obligation securities and high investment grade corporate debt. Also, as discussed above, the Proposed Rule does not include RMBS as HQLA. Also, perhaps inadvertently, cash and coins have been omitted form Level 1 liquid assets to the extent not included in required reserves.
  • 21-Day Liquidity Stress Scenario for Modified LCR Companies - In a separate rule proposal, the Federal Reserve has proposed a modified LCR requirement to depository institution holding companies with total consolidated assets of $50 billion or more that are not internationally active (modified LCR companies). The proposed modified LCR requirement uses 21-day rather than a 30-day liquidity stress periods and does not require calculation of total net cash outflows based on the peak cumulative outflow day. Also, the proposed modified LCR requirement incorporates a 30% haircut for outflows with no contract maturity date.
  • Collateral Posting Requirement - The Proposed Rule requires that 100% of additional collateral that a covered company might be required to post as a result of its financial condition must be included as outflow amounts. By contrast, under the Final Basel LCR Rule, a covered company would only be required to include such amounts as would result from a three notch downgrade of a credit rating.
  • Adjustment for Greater of Adjusted vs. Unadjusted Excess HQLA Amount - In calculating the HQLA amount, the Proposed Rule requires that the sum of Level 1, Level 2A and Level 2B liquid assets be adjusted by the greater of (a) the unadjusted excess HQLA amount (i.e., the amount of HQLA that exceeds the Level 2 caps on the first day of the calculation period) and (b) adjusted excess HQLA amount (i.e., the amount of HQLA that exceeds the Level 2 caps at the end of a 30-day stress period, after assuming the unwinding of certain transactions). Under the Final Basel LCR, the HQLA amounts would only be subject to an adjusted excess HQLA amount.



On October 30, 2013, SFIG submitted a comment letter (Letter) to the Office of the Comptroller of the Currency, the Treasury Department, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development (Joint Regulators) on their Notice of Proposed Rulemaking regarding credit risk retention (Re-Proposal).

The Letter is summarized in today’s Issue Spotlight.


On October 24, 2013, SFIG held its Fall Symposium in New York City.

The Symposium had three parts:

  • A presentation by Reggie Imamura, SFIG’s Chairman, regarding SFIG developments.
  • A presentation by Alec Phillips of Goldman Sachs on “The Fiscal Policy Outlook.”
  • A panel discussion on risk retention lead by Mike Mitchell of Chapman & Cutler.

In his presentation, Reggie Imamura noted that SFIG now has 180 member organizations, representing all areas of the securitization industry. He additionally cited to 35 advocacy initiatives undertaken by SFIG since its inception in March of 2013 and the signing of the lease for SFIG’s new headquarters in Washington, D.C.

Alec Phillips gave a Washington-focused presentation on “The Fiscal Policy Outlook – Clouds Parting or Eye of the Storm?” during which he reviewed the recent government shutdown and debt ceiling controversy, describing the impact on consumer confidence, short-term Treasury yields, GDP growth and the equities market.

He also addressed the up-coming budget talk deadline of December 13, 2013, noting that there was “no penalty for failure” if the Democrats and Republicans do not make any progress, the next round of “sequestration” cuts scheduled for January 15, 2014 and the next debt ceiling limitation, expected to be reached in the Spring of 2014.

The Risk Retention panel gave an overview of the Risk Retention Re-proposal released by the Securities and Exchange Commission, the federal banking agencies and the federal housing agencies on August 28, 2013, as well as an overview of SFIG’s Comment Letter on the Re-proposal, to be submitted today.

The panel re-emphasized the view set forth in SFIG’s Comment Letter, that the risk retention rule “should not necessitate a fundamental overhaul of industry segments that have been working well.”

The panel participants addressed the Re-proposal as it affects ABCP, master trusts, auto loan and mortgage securitizations.

Click here for Mr. Imamura’s presentation materials. Click here for Mr. Phillips’ presentation materials. Click here for the presentation materials from the Risk Retention panel.



On October 30, 2013, SFIG submitted a comment letter (Letter) to the Office of the Comptroller of the Currency, the Treasury Department, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development (Joint Regulators) on their Notice of Proposed Rulemaking regarding credit risk retention (Re-Proposal).

The Letter reflects the perspectives of SFIG’s full membership, which includes sponsors of structured finance products, investors, financial intermediaries, rating agencies and other market participants. The Letter includes (i) a set of guidelines (Guidelines) underpinning the specific recommendations specified in the Letter, (ii) general issues and recommendations related to all asset classes, and (iii) recommendations specific to each asset class. In addition, the Letter proposes a number of technical corrections to the text of the Re-Proposal.


The Letter notes that the Guidelines underpinning the specific recommendations referenced in the Letter can “provide an evaluation framework that the Joint Regulators can follow to further the goals of risk retention without causing detrimental effect to the real economy.” The Guidelines specified in the Letter consist of the following:

  • Risk retention requirements should encourage sound underwriting. The Letter states that SFIG members believe that sound underwriting requirements are absolutely critical for a strong securitization market that contributes to the strength of the overall financial system and economy.
  • Risk retention requirements should not be capital prohibitive or, more generally, threaten market viability. The Letter states that SFIG members see value in the Joint Regulators’ goal of “minimize[ing] the potential for the proposed rule to negatively affect the availability and costs of credit to consumers and businesses.” The Letter states that in order to achieve that goal, risk retention requirements must permit sponsors and originators to continue to structure efficient and effective securitizations. The Letter explains that for certain asset classes, the risk retention requirements currently outlined in the Re-Proposal are incompatible with many sponsor business models and common deal structures on an operational and economic basis and that this lack of compatibility may ultimately cause market participants to exit these markets, thus leading to the reduction of available credit and/or increases in borrowing costs for a broad group of consumers and businesses. The Letter urges the Joint Regulators to reevaluate the benefit of the proposed requirements in such cases and to consider the principles discussed therein as they finalize the risk retention rules.
  • The proposed requirements should not necessitate a fundamental overhaul of industry segments that have been working well. The Letter explains that proposed risk retention standards that diverge too significantly from the way in which well-performing loans are currently originated and securitized would require needless and sweeping changes to lending and securitization practices across certain asset classes.
  • The economic impact of the proposed requirements should be commensurate with their benefits. The Letter suggests that the Joint Regulators analyze the proposed standards across asset classes to understand both the potential benefits of such standards as well as their impacts on the securitization markets, borrowers, and ultimately the wider economy at large. According to the Letter, this approach, when coupled with the other suggestions made in the Letter, will help the Joint Regulators perform their statutorily-mandated cost-benefit analysis of the proposed rules by helping to measure the proposed rule’s economic impact, identify relevant costs across asset classes and ascertain reasonable alternative scenarios to assess or quantify the likely quantitative and qualitative costs and benefits of the final rule.
  • The Joint Regulators should provide clear mechanisms for interpreting and enforcing the risk retention rules. The Letter notes that as the securitization market evolves and changes, the effect of the risk retention rules will also change. The Letter explains that a rule designed to accommodate existing products could unintentionally deter innovation and improvements in the securitization market, particularly if the market cannot determine, with sufficient certainty, how new products or structural innovation will be treated under the rules. Accordingly, the Letter states that market participants must have a clear, efficient, and timely mechanism for obtaining interpretive and other advice from the Joint Regulators. Otherwise, market participants may be reluctant to use the financial markets in the face of ongoing uncertainty (as they have been, to some extent, while waiting for the regulations to be implemented). Similarly, the Letter recommends that in order for the market to embrace the regulations and obtain the type of regulatory certainty necessary for smooth and economically stable operation, the Joint Regulators should affirmatively establish in the rules the very mechanisms to enforce the rules.
  • The Joint Regulators must consider how the interplay between this proposal and other regulations will impact the market. The Letter strongly encourages the Joint Regulators to consider how various regulations (both proposed and final) could place untenable constraints on specific markets, resulting in reduced access to financing for a wide range of borrowers. The Letter explains that a vast array of regulatory requirements initiated by the Dodd-Frank Act and the Basel Accords have already significantly reduced risk within the financial system. However, rules that are inconsistent or unduly burdensome will impede further market recovery. The Letter recommends that in order to be effective, the credit risk retention rules must (i) consider the impact that other applicable requirements—such as tax, accounting, and bankruptcy rules—play in structuring products in the securitization market and (ii) have the flexibility to continue to change as those requirements evolve over time.
  • The Joint Regulators must provide sufficient flexibility in the risk retention rules to address the dynamic nature and operational realities of the securitization markets. The Letter notes that the industry has developed structures that facilitate particular industries, investors, and assets and is subject to a complex legal and regulatory regime that has evolved over a significant period of time. The Letter states that, accordingly, there are no “one size fits all” solutions. The Letter recommends that the final risk retention rules address the realities of each asset class by identifying the right parties to retain credit risk, the best mechanisms for retaining credit risk, the most effective methods for calculating the requisite credit risk to be retained, and harmonizing the risk retention rules with other laws applicable to each specific asset class.

General Issues

The Letter specifies a number of aspects of the Re-Proposal that may adversely impact a wide range of asset classes and the goals of risk retention in general, and ultimately, could impede the successful implementation of the Guidelines laid out in the Letter.

  • Calculation of Fair Value and EHRI Certifications. The Letter states that from both policy and operational perspectives, the calculation of fair value and the certifications and calculations required with respect to eligible horizontal retained interests (EHRIs) and internal controls raise a number of concerns for SFIG members. Calculation of fair value under generally accepted accounting principles (GAAP) does not result in a definitive answer, but rather a range of values, which raises a host of questions for which SFIG members seek additional clarity from the Joint Regulators. The Letter explains that many sponsors who consolidate their issuing entities do not do fair value calculations today for their securitization interests; requiring the calculations to do so for risk retention would be a significant burden and expense.
  • Modification to the new certification requirements with respect to depositors’ internal controls to verify qualifying assets. The Re-Proposal introduces new requirements pursuant to which the related depositor in certain ABS transactions that are exempt from risk retention must: (1) make certifications regarding its internal supervisory controls for ensuring that the underlying assets are qualified assets; and (2) provide copies of those certifications to potential purchasers prior to closing. The Letter explains that many SFIG members believe that revisions should be made to the final risk retention rules so that: (a) these certifications are required only for RMBS transactions that are exempt from the standard risk retention requirements due to the inclusion of QRMs; (b) sponsors are required to provide these certifications only to the Securities and Exchange Commission and their appropriate Federal banking agencies, if any, as currently defined in the Re-Proposal; and (c) it is clear that these certifications must be retained by the sponsor for a period of no more than five years. The Letter also notes that SFIG members believe that the interests of investors are sufficiently protected under Federal securities laws without requiring the delivery of these certifications to investors. The Letter describes concerns about the potential liabilities created for sponsors and issuers by requiring that such certifications be delivered to potential investors.
  • Other alternative methods of risk retention, including representative samples, participating interests, and third party credit support. The Letter notes that many SFIG members, particularly sponsors, appreciate the flexibility given in the Re-Proposal to allow sponsors to elect different ways to meet the risk retention requirements. However, the Letter recommends that in order to better adapt the risk retention rules to the all the different kinds of securitization transactions in the market place, the addition of the following practical alternative forms of risk retention should be adopted: (1) a simplified form of the “Representative Sample” method (Representative Sample) of risk retention, available if the sponsor will continue to hold similar unsecuritized assets representing at least 5% of the amount of the securitized assets; (2) an option for the retention by the sponsor of a participating interest representing at least 5% of the asset pool to be securitized; and (3) third party credit support.
  • The lack of a clear mechanism for the Joint Regulators to provide clarifications, resolving interpretive questions, and determining appeals with respect to the final rules causes interpretive challenges and potential restraints on innovation. The Letter notes that SFIG’s membership is concerned that the Re-Proposal lacks a clear mechanism for the Joint Regulators to provide clarifications, resolve interpretive questions, and determine appeals. The Letter notes the SFIG membership’s concern with the time-consuming nature of publishing joint responses and joint guidance. The Letter states that the SFIG membership strongly believes that the final rule should include a mechanism to request clarifications, resolve interpretive questions and formally determine appeals, and should establish a clear timeline for the Joint Regulators to respond in each such instance. The final rule should also clearly lay out the hierarchy of authority for which Joint Regulators are required to provide binding or generally applicable interpretations, particularly in relationship to the definition of “asset backed security.” Furthermore, the Letter recommends that the final rule should specify a clear, initial point of contact among the Joint Regulators for all market participants seeking guidance. The Letter also requests a mechanism for interim guidance for the time period between adoption of the final rules and the date on which the risk retention rules become effective.
  • The overly narrow investment restrictions on reserve accounts restricting investment options and lower yield to investors, rather than furthering goals of risk retention. The Letter notes that some SFIG members are concerned that the Re Proposal’s restrictions on the types of eligible investments in which reserve account funds can be invested are unduly restrictive. The Letter explains that no money market mutual fund would qualify—even those that exclusively invest in government securities. The Letter also notes that these restrictions also would result in the reserve account being more highly rated than the highest rated tranche of the securitization.
  • The need for clarification of the cure rights with respect to non-qualifying assets in blended pools. The Re-Proposal’s blended pool provisions typically require that if a securitizer relies on a qualified asset provision to reduce its risk retention obligations, and such a qualified asset ceases to be qualified, the securitizer must either cure or buy-back that asset from the deal. The Letter notes that while this requirement makes sense in the context of a transaction backed purely by qualified assets, it is problematic for transactions backed by blended pools because in a blended pool transaction, the qualifying asset ratio is calculated as of the cut-off date, meaning that the percentage of credit risk retention for the transaction will be set at that time. The Letter explains that because of this distinction, SFIG members believe that the Joint Regulators should offer two different options for cure: (1) the proposed cure/buy-back option for pools with qualifying assets only; and (2) a separate option for blended pools, where a cure/buy-back would only be required to the extent that the classification of an asset as not qualifying for exemption under the risk retention rules would have caused the percentage of risk retained by the sponsor (or other holder of the required retained interest ) to be less than the applicable risk retention percentage that would have been required if such assets were treated as non-qualifying assets, calculated as of the cut-off date.
  • The need for necessary clarification of which affiliates of sponsors are permitted to hold the required risk retention. The Letter recommends that the rules should be modified to make clear that risk may be retained by the sponsor or a “majority owned affiliate of the sponsor.”
  • The desirability of a lower minimum threshold amount of retained risk for blended pools which will better serve the goals of risk retention. The Letter notes that the SFIG membership understands and agrees that a minimum threshold amount of retained credit risk is necessary to make the concept of risk retention meaningful. However, many SFIG members believe that including a 2.5% risk retention requirement for blended pools would create a disincentive for sponsors to include more than 50% qualified assets in their blended pools. The Letter explains that since there would be no incremental reduction in the retention requirement as the percentage of qualified assets increases above 50%, sponsors would be unlikely to put more qualifying assets into such a pool. Furthermore, the 2.5% floor arguably punishes originators that have the origination of mostly qualified assets as their business model. The Letter explains that a number of SFIG members believe, however, that the goals of risk retention would still be served if the required minimum threshold amount of risk retention in blended pools wer reduced to 1% (or 0% in the case of qualified auto loan (QAL) blended pools and qualified residential mortgage (QRM) blended pools. The Letter notes that on the other hand, some SFIG members, particularly investors, do not support such a reduction of the proposed minimum risk retention requirement for blended pools, on the basis that permitting less “skin-in-the-game” and allowing more latitude to blend qualifying and non-qualifying assets at the same time could result in the gaming of the risk retention rules.

Residential Mortgage Backed Securities

The Letter states that certain aspects of the Re-Proposal’s treatment of residential mortgage backed securities (RMBS) enjoy broad support from SFIG’s membership. In particular, SFIG’s members support the inclusion of the qualified mortgage (QM) criteria in the definition of QRM and the removal of the premium capture cash reserve account (PCCRA) concept. The Letter explains that SFIG’s membership does, however, believe that certain modifications are required to ensure that the final risk retention rules accomplish the goals of the Dodd-Frank Act while also supporting a robust return of the private label RMBS market.

The Letter notes that SFIG’s membership has differing views on the question of whether the Joint Regulators should adopt the definition of QM as the full definition of QRM, or whether they should adopt a more restrictive definition of QRM, that requires a minimum down payment requirement or borrower equity. To the extent that a down payment requirement were to be included in the definition of QRM, SFIG’s membership also has differing views on what down payment percentage should be applied.

The Letter explains that some of SFIG’s membership believes that the Joint Regulators should allow for some form of reduced risk retention on blended pools of qualified and unqualified mortgages, and that the Joint Regulators have the statutory authority to do so. Similarly, a significant portion of SFIG’s membership believes that the Joint Regulators should expand the current definition of “seasoned loan” to enable a robust secondary market for these loans that will provide an efficient mechanism to finance legacy mortgages assets.

Revolving Master Trusts

The Re-Proposal includes a number of revisions that reflect current market practice for master trusts. However, the Letter states that the SFIG membership believes that additional modifications to the Re-Proposal are needed in order to make the revolving master trust option a viable form of risk retention.

The Letter explains that the seller’s interest form of risk retention, as currently proposed, cannot be utilized by any master trust currently in the market. In addition, there is a substantial segment of the master trust market—most notably, floorplan—that does not currently incorporate a pari passu seller’s interests as a significant structural feature and therefore does not expect to utilize the seller’s interest option as its primary form of risk retention. Accordingly, the Letter states that it is critical that there be a workable horizontal residual interest option for master trusts. However, the Letter explains how the cash flow payment restrictions in the standard eligible horizontal interest option of the Re-Proposal are not structured in a way that would allow revolving master trusts and other issuers to comply with such an option. Additionally, the Letter explains the combined trust and series level risk retention option for revolving master trusts does not accurately capture existing master trust cash flow structures, leaving no viable horizontal risk retention mechanism.

Critically, the Letter explains that there are a number of existing master trust structures that cannot fit within any of the proposed options and consequently will be cut off from the capital markets. The Letter therefore encourages the Joint Regulators to be more flexible and principles-based with respect to the proposed forms of risk retention for master trusts, and to offer more risk retention options for such issuers, including, at the very least, a representative sample option, a vertical option and a cash reserve account option.

Collateralized Loan Obligations

The Letter states that SFIG’s members do not believe that applying risk retention to CLOs is at all necessary or desirable and that SFIG members do not believe that CLO managers should be classified as “securitizers.” CLOs are not originate-to-distribute securitizations of the type that Congress intended to target through risk retention. As a result, applying risk retention will not further the core legislative purpose of Section 15G (Section 15G) of the Securities Exchange Act of 1934 in ensuring appropriate underwriting of the underlying commercial loans.

Moreover, the Letter notes that SFIG’s members believe that the Re-Proposal’s lead arranger/open market CLO option is not viable as proposed and, accordingly, suggest several revisions and additional options that, if adopted, would at least allow risk retention to be applied to CLOs without adversely affecting the crucial role of CLOs in providing appropriate credit to commercial and other borrowers.

Asset Backed Commercial Paper

The Letter notes that many SFIG members question the framework of the Re-Proposal with respect to ABCP issuers generally, in light of the significant bank support provided to ABCP programs and the types of ordinary customer banking activities in which most ABCP issuers engage. The Letter states that to the extent that the Joint Regulators would require ABCP Conduits and their sponsors to be subject to risk retention requirements, there are a number of revisions to the Re-Proposal that SFIG’s members believe are necessary to ensure that the ABCP markets are not unnecessarily disrupted. The Letter addresses the challenges presented by the Re-Proposal with respect to asset restrictions, liquidity support requirements, disclosure requirements, compliance monitoring requirements, ABCP tenor restrictions, and the grandfathering of existing customer transactions currently funded by ABCP Conduits.

International Issues

The Letter also addresses the safe harbor eligibility calculation for foreign securitization transactions. Specifically, the Letter explains that a number of SFIG members have recommended: (1) clarifications related to the eligibility calculation, (2) an increased trigger percentage and (3) the adoption of a substituted compliance framework to minimize the adverse effects that could result from differences in risk retention requirements among major markets.

Automobile, Equipment, and Floorplan Securitizations

The Letter states that SFIG vehicle and equipment ABS sponsors support the adoption of the “Simplified Approach” discussed in Section A.4 of Part I of the Letter to reduce the complexity, cost and burden of the calculations and comparisons of fair value, Closing Date Projected Cash Flow Rate and Closing Date Projected Principal Payment Rate and the related disclosures. The Letter notes that the SFIG vehicle and equipment ABS sponsors also believe that if the calculations and comparisons of fair value, Closing Date Projected Cash Flow Rate and Closing Date Projected Principal Payment Rate are kept in the final rule, they must be modified to work in the context of revolving transactions. The Letter states that the vehicle and equipment ABS sponsors also believe that it is critical for the representative sample and participating interest alternatives to be acceptable forms of risk retention.

The Letter explains that in addition, auto issuer SFIG members are seeking changes to the qualified auto loan exemption to be more consistent with the indirect auto finance business, which involves facilitating the sale of a vehicle during the short time a customer is purchasing a vehicle at an auto dealership. The Letter’s proposed changes include the elimination of the down payment requirement and calculating the obligor’s debt to income ratio relying on information in the obligor’s credit application and credit bureau report without independent verification of that information. In addition, the Letter states that SFIG members that originate motorcycle loans note that motorcycle loans perform as well as auto loans, and are requesting that the exemption for qualifying loans focus on the quality of the loans and their underwriting criteria rather than discriminate against motorcycle loans as an asset class.

The Letter explains that SFIG members that originate equipment loans are requesting an exemption for qualifying equipment loans because, unfortunately, the exemption for qualifying commercial loans was not designed for commercial equipment finance.

The Letter states that SFIG members that are floorplan sponsors are requesting that the Joint Regulators include a subordinated seller’s interest risk retention option in the final rule, and that subordinated seller’s interests be valued at par value like pari passu seller’s interests, rather than at fair value. The Letter states that in addition, if the Joint Regulators do not provide a subordinated seller’s interest option, it is critical that the Joint Regulators modify the special horizontal interest option for master trusts as discussed in Part IV of the Letter or floorplan sponsors will be left with no viable risk retention options.

Student Loans

The Letter States that SFIG members continue to believe that the final rule should include an exemption from risk retention for ABS collateralized or otherwise backed solely by FFELP loans because FFELP loans are federally guaranteed and no longer originated. This approach would be consistent with the approach adopted by the Re-Proposal for other federally-guaranteed loan programs, including those under which new loans can still be originated.


The Letter states that many of SFIG’s members believe that the Joint Regulators took an important step in the right direction by expanding the resecuritization exemption to take account of resecuritizations of certain RMBS that are structured to address prepayment risk. However, the Letter explains that a significant portion of SFIG’s membership seeks further amendment of key terms and measures in order to foster the smooth operation of resecuritization transactions.

These members seek four key modifications to permit the following: (1) permission for unrestricted tranching in a resecuritization transaction consisting of a single tranche of compliant or exempted ABS; (2) the expansion of the definition of “originator” to include ABS owners who initiate resecuritizations or purchasers of junior tranches of resecuritization who select the collateral; (3) incorporation of an alternative risk retention measure that would accommodate the fact that most resecuritizations are initiated by owners, and not by the broker-dealers who facilitate the transaction; and (4) the expansion of the resecuritization exemption to include resecuritizations of single-pool, legacy ABS.

The Letter explains that these SFIG members believe that the adoption of these four key modifications will satisfy the goals of risk retention without impeding the valuable role that resecuritizations currently play in the economy, particularly in connection with securitization market participants’ ability to efficiently manage their legacy assets and free up private capital for newly originated assets.

Municipal Bond Repackaging/Tender Option Bonds

The Letter states that SFIG’s members urge the Joint Regulators to exempt municipal bond repackagings (MBRs) from the risk retention requirements because MBRs are not an “originate-to-distribute” product and do not present the moral hazard highlighted in the Re-Proposal’s commentary. Instead, the Letter explains how MBRs are transactions in which the party selecting the underlying asset(s) uses the MBR structure as a financing tool, directly benefits from the performance of the underlying asset(s), and, most importantly, retains virtually all of the risk of such asset(s) through its residual or subordinate interest (regardless of the nominal principal or notional amount of that interest).

The Letter explains that applying risk retention rules to MBRs would restrict and potentially eliminate a key demand component for municipal bonds or securities and consequently increase the effective borrowing costs for municipal issuers. The Letter recommends that they should likewise exempt MBRs because the Joint Regulators have acknowledged the importance of effective and efficient municipal financings by exempting these securities issued by municipal entities from risk retention.

The Letter states that while SFIG’s members appreciate the Joint Regulators’ proposal of two options intended to reflect current market practice, SFIG’s members do not believe that these options would be available to, or workable for, a significant segment of the current MBR market. In the event that an exemption for the MBR market is not offered, the Letter proposes revisions to the Re-Proposal that are necessary to accommodate all or substantially all of the various transactions in the current MBR market.

Corporate Debt Repackaging

The Letter urges the Joint Regulators to exempt corporate debt (bonds or loans) repackagings (CDRs) from risk retention because CDRs are not “originate-to-distribute” products and do not present the moral hazard that prompted these risk retention requirements. The Letter explains that subjecting CDRs to risk retention would not further the core legislative policy underlying Section 15G and would restrict and potentially eliminate an effective and valuable financial tool that permits institutional investors to tailor desired investments from underlying corporate debt with different interest rates or currencies of payment.

The Letter further explains that since CDRs are usually "secondary" market transactions, applying risk retention would have little effect (if any) on the underwriting of the underlying corporate debt, which (as the Joint Regulators properly note) is not an ABS and for which risk retention is not required or appropriate. The Letter proposes new options for CDR risk retention with a view to preserving this important financial tool for institutional investors that benefits market liquidity and transparency in the corporate debt markets.

Click here for the Re-Proposal.


Two separate financial industry bills are up for votes in the House of Representatives this week. The first would exempt many derivatives from the bank “push out” regulations mandated by the Dodd-Frank Act, and the second would delay the implementation of stricter standards for offering investment advice to retirees. The Obama administration opposes both bills.

The “push out” regulations encourage banks to “push out” their swap activities from the bank to non-bank affiliates that do not accept deposits and do not have access to the Federal Reserve’s discount window.

The bills are part of a broader campaign in the House of Representatives, among Republicans and business-friendly Democrats, to roll back certain elements of the Dodd-Frank Act. Of ten recent bills that alter Dodd-Frank or other financial regulation, six have passed the House of Representatives this year. If the House approves the two bills up for voting, the tally would rise to eight.

Both the Treasury Department and consumer groups have urged lawmakers to reject the bills, warning that they could leave the nation vulnerable again to excessive financial risk taking. The House proposals stand little chance of becoming law, having received a much chillier reception in the Senate and at the White House, which on October 28, 2013 threatened to veto the bill on investment advice for retirees.


On October 28, 2013, Senate Majority Leader Harry Reid (D-NV) took the procedural step necessary to hold a vote later in the week to end debate on the nomination of Representative Mel Watt (D-NC) to head the Federal Housing Finance Agency (FHFA). President Barack Obama nominated Representative Watt to this post nearly six months ago. Democrats will need 60 votes for Representative Watt to clear this hurdle.

Republicans have voiced opposition to Representative Watt leading the FHFA, arguing someone with more direct expertise in housing finance markets, and not a politician, should head the FHFA. Senator Richard Burr (R-NC) is the only Republican senator who has publicly expressed support for Representative Watt.

Homeowner advocacy groups have been pressing the White House to push Watt’s nomination because they argue the FHFA’s current leader, Acting Director Ed DeMarco, has not embraced programs that could aid borrowers having trouble making mortgage payments.

Democrats argue that Republican complaints about Representative Watt’s experience are unfounded and that he has shown both his interest and expertise in housing issues during his more than 20 years as a member of the House Financial Services Committee.

Watt faces a time crunch of his own. If he feels his nomination is a lost cause and wants to run for reelection, the filing deadline in North Carolina is February 28, 2014.


On October 24, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation jointly issued supervisory guidance (Guidance) on certain issues related to commercial and residential real estate loans that have undergone troubled debt restructurings (TDRs). The Guidance applies to all national banks, federal savings associations, and federal branches and agencies of foreign banks.

The Guidance reiterates key aspects of previously issued regulatory guidance and discusses the definition of collateral-dependent loans and the circumstances under which a charg e-off is required for TDRs. The Guidance also elaborates on the concept of “operation of collateral” for repayment. The agencies continue to view prudent modifications as positive actions when they mitigate credit risk, and will not criticize banks for engaging in prudent workout arrangements, even if the modified loans result in TDRs.

Click here for the Guidance.


On October 24, 2013, U.S. Bankruptcy Judge James M. Peck, the judge overseeing Lehman Brothers Holdings Inc.’s (Lehman) liquidation, told attorneys for Freddie Mac and the Federal Housing Finance Agency (FHFA) that they are unlikely to prevail in their bid to have their $1.2 billion claim against Lehman’s estate heard outside of bankruptcy.

The FHFA argued that the dispute must be heard by a federal district judge, rather than a bankruptcy judge, because it rests on a non-bankruptcy statute, the Housing and Economic Recovery Act of 2008 (HERA). HERA, the agency argued, gives it the right to avoid and recover any transfers by a debtor that hindered the repayment of an entity it regulates — in this case, Freddie Mac— and that those rights are superior to any other party’s rights in a bankruptcy proceeding.

Judge Peck was unconvinced, saying the provisions of HERA are “not arcane or unusual from the perspective of a bankruptcy tribunal.” He also noted that every other one of the thousands of claims lodged in the five-year-old Lehman proceeding have been handled within the bankruptcy court.

The judge offered his comments as he denied FHFA and Freddie Mac’s request to stay Lehman’s motion to reclassify its claim until a federal district judge rules on the motion to withdraw the matter from the bankruptcy court. Despite denying the stay motion, Judge Peck adjourned the classification matter to a November 22, 2013 hearing.


On October 23, 2013, Senator Elizabeth Warren (D-MA) asked the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency for information about their enforcement records. Senator Warren sent a letter to the agencies requesting the number of criminal charges, convictions, and prison sentences they secured between 2009 and 2012, among other items. The regulators do not have authority to bring criminal charges, but they can refer cases to law enforcement agencies, such as the Department of Justice, and work with them to bring charges.

Senator Warren said in her letter “[t]here have been some landmark settlements in recent weeks for which your agencies and others deserve substantial credit. However, a great deal of work remains to be done to hold institutions and individual accountable for breaking the rules and to protect consumers and taxpayers from future violations.”

The letter cited the enforcement record of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). It included a chart showing that SIGTARP had a lower budget than other regulators but has brought criminal charges against 144 people.

Click here for Senator Warren’s letter.


On October 22, 2013, Senators John Thune (R-SD) and Pat Toomey (R-PA) sent a letter (Letter) to Securities and Exchange Commission (SEC) Chairman Mary Jo White requesting that the SEC set aside a proposed rule that would introduce new disclosure requirements for companies that are pitching private securities offerings (including securitization offerings) under the “The Jumpstart Our Business Startups (JOBS) Act.” In the Letter, the Senators say the proposals would undermine the intent of Congress in the JOBS Act, which was written to help growing companies raise money.

Click here for the Letter.

Click here for the JOBS Act.


On October 18, 2013 the Making Home Affordable (MHA) Program issued Supplemental Directive 13-09 (Supplemental Directive), providing guidance on permitting reconciliation of MHA Program guidance with certain mortgage servicing rules issued by the Consumer Financial Protection Bureau (CFPB). The Supplemental Directive, which will be effective January 10, 2014, provides guidance on loss mitigation application, right party contract, acknowledgement and incomplete information notice, review of loss mitigation application, the Home Affordable Unemployment Program, and the Home Affordable Foreclosure Alternative Program.

The guidance does not apply to mortgage loans that are owned or guaranteed by Fannie Mae and Freddie Mac or the Federal Housing Administration (FHA).

Click here for the Supplemental Directive.

Click here for the CFPB’s mortgage servicing rules.


Some banks are citing a footnote in Commodity Futures Trading Commission (CFTC) rules that they argue allows swap trades to remain off of electronic platforms. Regulators state that a rewrite of the rule is needed. Banks counter that, in the meantime, they must interpret the often-murky guidelines. The financial institutions argue that Footnote 513 in a policy statement released in July of 2013 exempts swaps with foreign clients from CFTC trading rules as long as deals are booked through a U.S. bank's overseas affiliates. Although the footnote does not deal directly with trading rules, the banks are using it to justify their trading methods. The banks’ assertion is focused on what the footnote does not say, rather than on what it does say. It mentions bank “branches”—which generally are part of the parent company —and not “affiliates”—which are considered legally separate. The banks are taking the omission to mean that deals set up in the U.S. and booked in their foreign affiliates can escape many CFTC rules.

London-based ICAP Plc (ICAP), one of the largest swap brokers, told the banks it didn’t agree with their interpretation. Other brokers accepted the banks’ position and have been trading billions of dollars in contracts outside the new regulatory system. ICAP’s position has been costing it business, as banks take their swaps to brokers who agree with their interpretation of the footnote. ICAP also is being cautious about CFTC rules after paying $65 million in September of 2013 to settle an enforcement case with the agency over some of its brokers’ attempts to manipulate the LIBOR interest-rate benchmark. ICAP asked the CFTC to issue formal guidance on the debate over the footnote. The CFTC has yet to respond.

Click here for the CFTC’s July of 2013 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations.


As part of Ginnie Mae's plans to diversify its issuer base, the Federal Home Loan Bank of Chicago (FHLBC) will begin to issue Ginnie Mae mortgage-backed securities (MBS) as an approved Ginnie Mae issuer. Under the program, FHLBC will acquire government loans from its member institutions, pool the mortgages together, and sell them as Ginnie Mae guaranteed MBS to a broad domestic and international investor base. The new initiative will expand access for smaller lenders to the secondary mortgage markets, as members of FHLBC will be allowed to participate in the program.

Click here for the related press release.


The Federal Reserve Bank of New York (NY Fed) has been probing banks’ exposure to mortgage real estate investment trusts (MREIT). Earlier this month, the International Monetary Fund in its Global Financial Stability Report also identified MREITs as a growing component of the unregulated shadow banking system.

MREITs finance their purchases of long-term mortgages with short-term borrowings, known as repos, secured from dealer banks. The NY Fed’s worry is that MREITs could be vulnerable to a sharp increase in interest rates that would force the vehicles to reduce quickly their holdings of mortgage-backed securities (MBS) and set off a wider fire sale mentality.

That chain reaction could potentially lead to further problems in the vast repo market, where banks also secure large amounts of their funding. The NY Fed has heightened its focus on the repo market since the financial crisis, when money market funds cut back on their repo lending to big banks, spreading systemic risk.

MREITs argue that they have helped boost demand for home loans and lower the cost of residential borrowing at a time when the US government is still struggling to reform the mortgage market.

Click here for the IMF’s Global Financial Stability Report.


The Board of Governors of the Federal Reserve System (Federal Reserve) can avoid unprecedented losses by never selling mortgage-backed securities from its record $3.84 trillion balance sheet, according to updated estimates by Federal Reserve economists in Washington. The estimates are part of a revision (Carpenter Paper) of a paper, published in January, saying the Federal Reserve was on course to incur unprecedented losses and may be unable to remit a profit to the Treasury for as long as six years.

Every month, the Federal Reserve is purchasing $85 billion in Treasuries and mortgage-backed securities in a program aimed at fueling economic growth and combating unemployment, which was 7.2% in September of 2013. If interest rates quickly rise, the value of its holdings may plunge, prompting losses that may jeopardize its annual remittance to the U.S. Treasury. The central bank turned over a profit of $88.4 billion last year.

Chairman Ben S. Bernanke in June announced the Federal Reserve was abandoning a plan to eventually sell mortgage debt as part of efforts to reduce the balance sheet. The central bank instead plans to let the securities mature. The Federal Reserve, which funds its operations with interest income from its bond holdings, currently holds $1.4 trillion in mortgage bonds.

According to the Carpenter Paper, under the new strategy, “annual remittances to the Treasury remain elevated by historical standards through 2015, but then decline,” and “[t]he trough in remittances is $17 billion in 2018, a level that is not much lower than the $25 billion average remittances in the decade prior to the financial crisis,”.

Though profits are more stable than in earlier estimates, the central bank’s balance sheet wouldn’t return to normal for the foreseeable future, according to the Carpenter Paper. Even by 2025, almost two decades after the housing bubble that precipitated the financial crisis began to burst, the Federal Reserve would still own $407 billion in mortgage bonds.

Click here for the Carpenter Paper.



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 (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.


Structured Finance Industry Group
WebsiteEmail Us | Web Archive

To unsubscribe from this email listing, please click here.

Terms and Conditions | Privacy Policy