A final
The new regulation for certain asset-backed securities and related transactions may impose some new compliance burdens on nonbanks but does not appear to discourage things like routine interest-rate hedging or credit risk transfers to the extent industry advocates feared it would.
However, some trade association officials do remain concerned that the new rule could add to costs at nondepositories, which will need to put in place new safeguards against situations where a party to a transaction may have interests at odds with others.
"There are a couple of huge wins in that credit risk transfers and general interest-rate hedging appear carved out, but the mortgage market is going to have to build out a compliance regime to the SEC's satisfaction," said Michael Bright, CEO of the Structured Finance Association.
Depositories are already subject to some conflict of interest regulation under another part of the Dodd-Frank Act called
"The devil is going to be in the details of what the SEC is going to expect them to build," Bright said, noting that there will be costs associated with that.
The rule, which was designed to prevent conflicts like those seen in
It "prohibits securitization participants — including those who sell or facilitate the sale of an asset-backed security — from engaging in transactions that involve or result in any material conflict of interest with investors in that ABS," according to Gensler.
That prohibition "will remain in place for one-year after the ABS's first sale," he added.
Goldman Sachs paid a $500 million-plus civil money penalty related to Abacus without admitting or denying wrongdoing, calling the lack of disclosure around the dual role a hedge fund had in choosing subprime-mortgage collateral while shorting some of the CDO's tranches a "mistake."
"A conflicted transaction" as defined in the final rule would pertain to a similar situation that involves "directly shorting the ABS, entering into a credit default that references the underlying assets, or something economically equivalent to either," according to SEC Chair Gary Gensler.
"The final rule makes clear that generalized hedging, such as an interest rate or currency hedge, is not a conflicted transaction," he added in a written statement about the rule.
Credit risk transfers used by private mortgage insurers are specifically exempt under the final rule.
Mortgage-insurance linked notes "do not meet the definition of an ABS or synthetic ABS for the purposes of the final rule," Gensler said.
US Mortgage Insurers President Seth Appleton said in a statement that this distinction has assured the industry that the transactions, "which are used by private mortgage insurers to source capital markets-based reinsurance, are not impaired in any way by the rulemaking."
An exemption for government-sponsored enterprise credit-risk transfers also appears assured for now, and will continue "so long as their transactions meet the conditions enumerated in the risk mitigating hedging exception," the SEC said in the adopting release for its final rule.
The commission explained that it took this position to make them "subject to the same limitations on such behavior as private market participants" because the status of their government ties is subject to change.
"Although we still believe that, while the enterprises are in conservatorship, investors in their guaranteed ABS are not exposed to the same types of risk that existed in certain ABS transactions leading up the financial crisis of 2007-2009, that would not be the case once the enterprises exit conservatorship," the SEC said.
