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Derivatives

SEC Proposal Threatens Equity/Commodity ABS Repackagings

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The Securities and Exchange Commission recently published proposals that could put the brakes on trusts issuing structured notes that repackage various securities, including equity, into asset-backed securities.

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The Securities and Exchange Commission recently published proposals that could put the brakes on trusts issuing structured notes that repackage various securities, including equity, into asset-backed securities. This is a multi-billion dollar industry for banks structuring notes for U.S. retail investors. Dealers issue these notes from trusts so that they are able to get the rating of the swap counterparty, normally AAA, and in some circumstances there may also be accounting benefits, explained lawyers. The notes are repackaged as ABS through swaps.

Trusts that hold and issue securities are required to register with the SEC as investment companies, which are subject to strict guidelines, including restrictions on leverage and self-dealing rules. Issuers of asset-backed securities are currently exempt, explained Micah Bloomfield, partner at Stroock & Stroock & Lavan in New York. The SEC proposals exclude synthetic securitizations that reference underlying equity, commodity or other index securities from being defined as ABS, he noted. This is expected to stump future issuance.

One of the best known trusts to repackage securities as ABS is Citigroup Global Markets' TIERS series. These notes, which consist of some 25 certificates offering exposure to various underlying markets such as equity, power and gas, are sold by the American Stock Exchange. An official at Citigroup in New York said the firm is concerned about the proposed rules and noted that it will likely discuss them with the SEC before the comment deadline on July 12.

 

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