As a repercussion to the present financial crisis that has left investors whining and markets locked, The Securities and Exchange Commission has proposed revision to regulation AB and have called for public comments on the proposed rules to be received by the Commission within 90 days from its publication in the Federal Register. Regulators are of the view that investors ended up investing in securities without understanding the underlying risk associated with their investment; coupled with the issuers lax underlying standards and use of originate to distribute model, absence of aligned interest saw the debacles of the markets, freezing liquidity and leaving industry players pointing figures alike at the complexity of the product.
The proposed rules seek to revise the disclosure, reporting and offering process for asset-backed securities (ABS). The intent of the proposed rules is to gain investors confidence back and revive the structured finance market as the regulators recognize that the absence of this financing option has impacted the availability of credit. The proposed amendments bring about greater transparency not only in the issuance procedure but on a continual basis to improve investor protection and promote more efficient asset-backed markets.
Few of the issues/ concerns raised by the market participants on the operations of securities were:
- Reliability on the credit rating agencies role in the issuances
- Lack of time to analyse the securities issued and the quality of assets backing them as in the active markets, there is no sufficient time to analyse the securities prior to making investments
- Reps and warranties added to the offer document are weak and do not provide for adequate protection
- Structured products like CDOs are exempted from registrations hence in the private markets people invested without having necessary information to analyse the securities
By and large the proposal is for initial disclosure, continual disclosure, greater transparency, be more informative and reduce the dependence of investors on credit rating agencies. These proposed amendments are applicable in case of privately placed deals as well which were not required to be registered with SEC. These include the following:
- More time to investors to consider the “shelf offering,” to study the transaction specific information
Do away with investor’s dependence on credit ratings, by certification from the chief executive officer of the ABS issue, under the new rules, that the assets have characteristics that provide a reasonable basis to believe that they will produce cash flows as described in the prospectus. The originator would state:
- their ‘skin in the game,’
- repurchase of the asset in case of breach of reps and warranties and third party indicating whether terms of pooling and servicing agreement have been complied with
- file exchange reports as long as there are outstanding public securities are submitted
- Issuer retains a portion of the tranche of securities sold and the issuer undertakes to file exchange Act reports on an ongoing basis as long as public securities are outstanding
- Along with the prospectus, in the public offering of asset backed securities ongoing Exchange Act report information to be provided about each of the asset backing the securities. The data is to be provided in eXtinsible Markup Language (XML) format. Under the current ABS ABS rules, information about the loans in an ABS pool is required only at the pool level, whereas with the proposed amendments coming into force, issuers will have to provide specific data for each loan in the asset pool both at the time of securitization and on an ongoing basis.
- Waterfall of the transaction to be submitted along with the prospectus expressed in downloadable source code, Python, a commonly used open interpretive programming language rather than a brief narrative description of the waterfall as is done presently
See the full text of the report here
[Reported by: Nidhi Bothra]