7 August, 2010:
One repercussion of the financial crisis was that the Securities Exchange Commission of US threw spate of regulatory changes in lieu of bringing about transparency in the securitization market. One of such major changes related to retention of risk by the originator which spurred debates on the originator having ‘skin in the game’ to avoid the ‘originate to distribute model.’
The Securities Industry and Financial Markets Association and the American Securitization Forum have recently expressed concern on the regulatory changes suggested by SEC and urged to reconsider the changes. ASF suggested that a flat percentage based approach for risk retention is not appropriate and that risk retention should be different in case of different assets. For instance while a vertical slice of risk retention is more appropriate in case of MBS, retention of first loss piece is a better option in case of auto ABS and should be applied across asset classes and transaction structures and said that one-size-fits-all retention requirement would be arbitrary in its application to any particular asset type, and would not account for important differences in the expected credit and performance characteristics of that asset type versus other types of assets. Further issues with regard to consolidation of assets may arise, the issuer may already be holding equity investment in the securitization transaction in some form or the other and holding another 5% would mean an incremental cost making it unviable, relative to other funding option available, risk retention may not be required in higher quality assets as well.
ASF also expressed concerns on proposed changes to regulation AB, SEC’s requirement of disclosure of asset based information unworkable in case of credit card ABS and ABCPs, public disclosure requirements in case of private 144A transactions and so on. While ASF is supportive of SEC’s objective of providing greater transparency in securitization markets and providing investors with the opportunity of making informed investment decisions, ASF proposed few alternative modes of achieving the same. Thus it is yet to be seen whether the genuine concerns of the market as presented by ASF will be addressed or not.
[Reported by: Nidhi Bothra]