Derivatives trade associations are requesting the Securities and Exchange Commission clarify a disclosure rule dealers say is penalizing CDO issuers. The International Swaps and Derivatives Association, the Bond Market Association and the American Securitization Forum submitted a joint letter to the SEC June 8 to reach a common interpretation and hope to hold further discussions later this month.
The request centers on Regulation AB, finalized in January, and in particular Item 1115 which requires full financial statements from derivatives counterparties when the synthetic component of an asset-backed securities deal hits 10% or 20%. Dealers are concerned because counterparties such as special-purpose vehicles or capital markets desks which do not publish independent financial statements may be required to do so. Some counterparties say providing this information is costly and time-consuming, stopping them from entering deals.
Swaps providers including special-purpose vehicles and even large banks such as Citigroup, JPMorgan and ABN AMRO are affected because their financial statements are consolidated with their holding companies'. In-house securities lawyers involved in the discussions said they did not realize the difference until they started working on deals. "When we were reviewing and providing comment, we didn't realize [the SEC] would interpret it this way," said Tom Deutsch, associate director of the ASF in New York.
Some players have held off until the interpretation is clarified. "It's hard to participate in the market if you have to agree to deliver something you can't deliver," said one, adding that a hard-line interpretation could force players to exit. But others have bet against hitting triggers and have agreed to provide the required financial data if needed or pay another institution to step into their positions.
The associations have asked the SEC to allow subsidiary counterparties to provide financial data of the parent if the significance triggers are hit. Stephen Kudenholdt, counsel at Thacher Proffitt & Wood in New York, said requiring subsidiaries to publish stand-alone financial statements would be prohibitively costly and time consuming. Furthermore, investors are more concerned with the rating and financial information about the guarantor, added other lawyers.
John White, director of the SEC's division of corporate finance, and Jeff Cohan, special counsel at the SEC, did not return phone calls by press time.
