--Joy Wiltermuth
Industry officials squared off with regulators on the “US Regulatory Developments and the Impact on Structured Finance,” session, jousting over continued uncertainty surrounding an avalanche of reforms aimed at reining in the industry. A proposal to require public-level disclosure in private label offerings was among the key points covered, as well as clarification on risk retention rules and the future of Freddie Mac and Fannie Mae.
Moderator Jason Kravitt, senior partner at Mayer Brown, pressed fellow panelists for specifics on risk retention rulemaking. Thomas Boemio, senior project manager-policy at the Board of Governors of the Federal Reserve System, responded by saying the regulatory body was still unsure if the final rule would include exemptions for “any particular asset class.”
The final rule on risk retention is expected to include a flat 5% vertical slice of all securitizations, with qualified residential mortgages being among the few exemptions. “Another question is who holds the responsibility for risk,” Boemio added, indicating that a notice of proposed rulemaking on the issue would be out “soon.”
Another hot potato was a little-known Section 621 of the Dodd-Frank Act, which is aimed at thwarting arrangers from betting against their own deals. “That was slipped into the bill,” remarked Edward Gainor, partner at Bingham McCutchen. “Aside from hedging and market making, nearly everything else could be considered a conflict of interest.”
Gainor said he would like to see the agencies issue more moderated final rules. “I can’t say I’d seen a lot in the recent blizzard of legislation that indicates a commonsense approach is going to be the way we’re headed,” he said.
Stephen Kudenholdt, co-chair at Sonnenschein, Nath & Rosenthal agreed. “There seems to be some mandate from the [Securities and Exchange Commission] to prohibit conflict of interest in the development of rules they plan to implement. “Reg AB does already mandate disclosure, which is a similar concept to [Section] 621.” Reg AB broadly covers loan-level disclosure, risk retention and ongoing reporting.
Bob Bean, chief in the policy section at the Federal Deposit Insurance Corporation, chimed in, adding that capital reserve requirements would be increased across the board. “A lot of these securitization positions prior to the crisis were under capitalized,” he countered, noting the final rule would align with Basel III.
Finally, Tom Deutsch, executive director of the American Securitization Forum, rounded out the discussion, touching on lingering uncertainty over Freddie and Fannie. “Some kind of proposal has to come out of somewhere,” he remarked. A big concern in the agency bond market is whether reforms would continue government-backed guarantees for the mortgage industry.