Posts Tagged ‘Securitization’

Volcker Rule: Observations on Interagency FAQs, OCC Interim Examination Guidelines

Editor’s Note: Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on a Davis Polk client memorandum.

More than six months after the release of final Volcker Rule regulations, banking organizations continue to grapple with a long list of interpretive questions and an opaque process for seeking clarity from the Volcker agencies. Regulatory silence broke for a brief moment this past week in the form of a short interagency FAQ and, from the OCC, interim examination guidelines for assessing banking entities’ progress toward Volcker Rule compliance during the conformance period.

Neither document is a significant source of new guidance or interpretive gloss. Nonetheless, the OCC guidelines evidence the staff’s intention to begin detailed inquiries into banks’ conformance efforts to date and suggest a higher standard for interim compliance than many may have expected. It remains to be seen whether the other Volcker agencies take the same approach.

…continue reading: Volcker Rule: Observations on Interagency FAQs, OCC Interim Examination Guidelines

Who Knew that CLOs were Hedge Funds?

Editor’s Note: Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on a Davis Polk client memorandum.

U.S. financial regulators found themselves on the receiving end of an outpouring of concern from law makers last Wednesday about the risks to the banking sector and debt markets from the treatment of collateralized loan obligations (“CLOs”) in the Volcker Rule final regulations. Regulators and others have come to realize that treating CLOs as if they were hedge funds is a problem and we now understand from Governor Tarullo’s testimony that the treatment of CLOs is at the top of the list for the new interagency Volcker task force. But what, if any, solutions regulators will offer—and whether they will be enough to allow the banking sector to continue to hold CLOs and reduce the risks facing debt markets—remains to be seen.

…continue reading: Who Knew that CLOs were Hedge Funds?

The SEC in 2014

Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the 41st Annual Securities Regulation Institute Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

For nearly 80 years, the Securities and Exchange Commission has been playing a vital role in the economic strength of our nation. Year after year, the agency has steadfastly sought to protect investors, make it possible for companies of all sizes to raise the funds needed to grow, and to ensure that our markets are operating fairly and efficiently.

That is our three-part mission.

But, while commitment to this mission has remained constant and strong over the years, the world in which we operate continuously changes, sometimes dramatically.

When the Commission’s formative statutes were drafted, no one was prepared for today’s market technology or the sheer speed at which trades are now executed. No one dreamed of the complex financial products that are traded today. And, not even science fiction writers would have bet that individuals would so soon communicate instantaneously in so many different ways.

…continue reading: The SEC in 2014

The Volcker Rule: A First Look at Key Changes

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 18, 2013 at 9:02 am
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Editor’s Note: The following post comes to us from Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden memorandum.

On December 10, 2013, five U.S. financial regulators (the Agencies) adopted a final rule implementing the Volcker Rule. [1] The text of the final rule and its accompanying preamble are available here. [2] The Volcker Rule was created by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and prohibits banking entities from engaging in “proprietary trading” and making investments and conducting certain other activities with “private equity funds and hedge funds.”

In October 2011, the Agencies released a proposed rule to implement the Volcker Rule. Our analysis of the proposed rule is available here. [3] The proposal generated extensive and diverse feedback from industry participants, policymakers and the public. After more than two years of deliberation, the final rule reflects the efforts of the Agencies to incorporate this feedback to the extent consistent with statutory requirements and policy objectives.

…continue reading: The Volcker Rule: A First Look at Key Changes

Regulatory Agencies Re-Propose Risk-Retention Rules for Securitizations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 15, 2013 at 9:08 am
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Editor’s Note: The following post comes to us from Anthony R.G. Nolan, partner in the Finance practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Nolan, Sean P. Mahoney, and Drew A. Malakoff.

On August 28, 2013, a consortium of U.S. banking, housing and securities regulators (the “Agencies”) [1] re-proposed the joint regulations (the “Re-Proposed Rules”), to implement Section 15G of the Securities Exchange Act of 1934. Section 15G requires the Agencies to prescribe joint regulations to require “any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells or conveys to a third party.” [2] This has popularly been referred to as a “skin in the game” requirement intended to align the interests of those originating or aggregating loans with the interests of investors in securitizations of those loans. The Re-Proposed Rules are the Agencies’ second attempt at rulemaking under Section 15G, the first coming with proposed joint regulations released on April 14, 2011 (the “Initial Proposed Rules”). [3]

Both the Initial Proposed Rules and the Re-Proposed Rules would generally require a “securitizer” to retain at least 5 percent of the credit risk associated with the assets backing a securitization transaction, subject to various exemptions and offsets. The Initial Proposed Rules prescribed some basic forms of risk-retention that could be used in any type of securitization, as well as some forms of risk-retention that would apply only to specific types of securitizations (such as those involving revolving asset master trusts, which are common to credit-card and automobile floorplan securitization, CMBS transactions, certain federal agency securities issuances, and ABCP conduits). [4] The Re-Proposed Rules appear to be dramatically simpler than the Initial Proposed Rules and address many of the more significant issues presented by the Initial Proposed Rules. Nevertheless, the Re-Proposed Rules present a number of issues of their own.

…continue reading: Regulatory Agencies Re-Propose Risk-Retention Rules for Securitizations

Statement Regarding Joint Rule Reproposal Concerning Credit Risk Retention

Posted by Michael S. Piwowar, Commissioner, U.S. Securities and Exchange Commission, on Friday September 20, 2013 at 8:53 am
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Editor’s Note: Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s statement regarding the SEC’s joint rule reproposal concerning credit risk retention. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Securities and Exchange Commission (“SEC” or “Commission”) today approved a joint rule reproposal to implement Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). [1] I am not able to support the release in the form approved because the reproposal does not contain necessary economic analyses and does not adequately consider alternatives to credit risk retention requirements or the interplay between those requirements and other regulatory reforms.

Before discussing these shortcomings, I want to recognize all the hard work the SEC’s staff in the Division of Corporation Finance and the Division of Economic and Risk Analysis (“DERA”) put into developing the joint rule reproposal. I also want to thank them for briefing me on the rulemaking and answering my questions.

While I am not able to vote in favor of the reproposal, I am encouraged that some improvements were made to the original proposal in response to public comments. For example, the reproposal removes the problematic premium capture cash reserve account approach. And, with respect to some classes of asset-backed securities (“ABS”), the reproposal revises various risk retention obligations and allows alternative incentive alignment practices.

…continue reading: Statement Regarding Joint Rule Reproposal Concerning Credit Risk Retention

Agencies Propose Revised Risk Retention Rule

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday September 14, 2013 at 9:43 am
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Editor’s Note: The following post comes to us from Susan M. Curtis, partner and co-head of the Structured Finance Group at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden memorandum.

On August 28, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development (collectively, Agencies) issued a notice of proposed rulemaking (Proposed Rule) in connection with the risk retention requirement mandated by Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Proposed Rule can be found here.

Background

The risk retention requirements of Section 941 of the Dodd-Frank Act are intended to align the interests of securitizers with those of other securitization transaction participants by requiring securitizers to retain some of the credit risk in the assets they securitize, or to have “skin in the game.” Section 941 added Section 15G to the Securities Exchange Act of 1934, which requires the Agencies to prescribe risk retention rules. Section 15G also generally requires a securitizer to retain no less than 5 percent of the credit risk in assets it sells into a securitization and prohibits a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain, subject to limited exemptions. The Proposed Rule follows the initial rule proposal and request for comment by the Agencies released in April 2011 (the Original Proposal). As described below, the Proposed Rule reflects comments received on the Original Proposal and re-proposes the risk retention rules with a number of modifications.

…continue reading: Agencies Propose Revised Risk Retention Rule

Agencies Re-Propose Rule Implementing Risk Retention Requirements of Dodd-Frank Act

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday September 6, 2013 at 8:56 am
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Editor’s Note: The following post comes to us from Eric R. Fischer, partner in the Business Law Department at Goodwin Procter LLP, and is based on a Goodwin Procter Financial Services Alert by William E. Stern, Brandon T. Thompson, and Brian M. Baum.

On August 28, 2013, the FDIC, OCC, FRB, SEC, Federal Housing Finance Agency, and Department of Housing and Urban Development (collectively, the “Agencies”) issued a second Notice of Proposed Rulemaking (the “revised proposal”) that would implement the risk retention requirements of Section 941 of the Dodd-Frank Act, which amended the Securities Exchange Act of 1934 (the “Exchange Act”) by adding a new Section 15G. Section 15G requires the Agencies to issue rules that would generally require that a securitizer of asset-backed securities (“ABS”) retain an economic interest in not less than 5% of the credit risk of the assets collateralizing such ABS. As discussed in the April 19, 2011 Financial Services Alert, the first Notice of Proposed Rulemaking (the “original proposal”) was jointly approved in April 2011 by the Agencies. In response to numerous comments received on the original proposal, the Agencies collectively developed the revised proposal, which includes significant modifications.

…continue reading: Agencies Re-Propose Rule Implementing Risk Retention Requirements of Dodd-Frank Act

Out of the Shadows and Into the Light

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday January 29, 2013 at 9:47 am
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Editor’s Note: The following post comes to us from Jeremy Jennings-Mares, partner in the Capital Markets practice at Morrison & Foerster LLP, and is based on a Morrison & Foerster bulletin by Mr. Jennings-Mares, Peter Green, and Lewis Lee.

For the last four years, regulators and law makers have been focusing extraordinary efforts on ensuring that financial regulation is adequate to protect the financial system from risks emanating from the banking sector. However, it is only more recently that policy makers have turned their attention towards possible systemic risk related to entities which carry out similar functions to the banking sector or to which the banking sector is otherwise exposed. Such entities have, for convenience, been grouped under the heading of “shadow banks”, although no precise definition or description of shadow banking has yet been agreed upon by policy makers.

At their November 2010 Seoul Summit, the leaders of the G20 nations requested that the Financial Stability Board (FSB) develop recommendations to strengthen the oversight and regulation of the shadow banking system in collaboration with other international standard setting bodies, and in response to such request, the FSB formed a task force with the following objectives:

…continue reading: Out of the Shadows and Into the Light

Skin in the Game and Moral Hazard

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday May 23, 2012 at 9:29 am
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Editor’s Note: The following post comes to us from Gilles Chemla, Professor of Finance at the Imperial College Business School, and Christopher Hennessy, Professor of Finance at the London Business School.

Formulation of optimal regulation of asset-backed securities (ABS) markets has been hindered by the inability to identify specific market failures as well as the absence of well-defined social welfare objectives. In our paper, Skin in the Game and Moral Hazard, which was recently presented at Harvard University, we develop a tractable framework for analyzing social welfare in both regulated and unregulated ABS markets, accounting for moral hazard at the origination stage, private information at the distribution stage, and asymmetric information across ABS investors. We show originators operating in unregulated markets fail to internalize the costs they impose on investors if they utilize a common ABS structure (e.g. zero retentions) rather than credibly signaling positive information to the market via higher retentions. Further, originator effort incentives are reduced since those developing high value assets must either signal via high retentions or otherwise face underpricing of their securities. Mandated retentions have the potential to raise welfare by increasing originator effort incentives in an efficient way, accounting for investor-level spillovers.

The first important policy implication to emerge from the model is that regulators must choose between a “one-size scheme” under which all originators are forced to hold the same retention size (e.g. 5%) or a “menu scheme” under which originators must choose amongst multiple retention sizes (e.g. 4% or 8%). Both schemes can restore effort incentives. However, the menu scheme carries the added social benefit of allowing originators to signal positive information to investors via the choice of a larger retention. Signaling promotes efficient sharing of risks by mitigating the adverse selection problem confronting uninformed ABS investors. The weakness of the menu scheme is that it generally results in higher average retentions, resulting in lower originator fundraising.

…continue reading: Skin in the Game and Moral Hazard

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