Credit Risk Retention – Joint Regulatory Re-Proposed Rules - Financial Services

On August 28, 2013, six federal agencies¹ jointly re-proposed rules² to implement the credit risk retention requirements of Section 15G of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which was added by Section 941 of the Dodd-FrankWall Street Reform and Consumer Protection Act. The Agencies originally proposed rules to implement the credit risk retention requirements on March 29, 2011.³

The supplementary information that accompanies the re-proposed rules includes over 100 specific questions on which comments are sought. Comments on the re-proposed rules must be received by October 30, 2013.

SCOPE OF THE RE-PROPOSED RULES

Generally, the re-proposed rules require a sponsor of a publicly registered or privately placed asset backed securities transaction to retain at least 5% of the credit risk related to the securitization and restrict the transfer, hedging and pledging of the sponsor's retained interest. No risk retention is required with respect to specified asset classes if all of the underlying loans in a securitization comply with the qualification provisions set forth in the re-proposed rules for those asset classes, namely for residential mortgages, commercial loans, commercial real estate loans and auto loans. Other general exemptions from the proposed credit risk retention rules are also provided for certain specified transactions.

The re-proposed rules delineate, among other things, the permitted forms of risk retention, including standard forms and certain transaction-specific forms, the circumstances in which a sponsor may allocate its risk retention responsibilities to the originator of the loans included in the securitization, the disclosure requirements applicable to each permitted form, restrictions on transferring, hedging and pledging the retained credit risk, and the definitions of "qualified residential mortgage," "qualifying commercial loan," "qualifying CRE loan" and "qualifying automobile loan."

PERMITTED FORMS OF RISK RETENTION

The original proposal provided five principal options for satisfying the risk retention requirements, including vertical risk retention, horizontal risk retention, L-shaped risk retention, seller's interest (for revolving asset master trusts) and representative sample risk retention.

The re-proposed rules provide for a "menu of options" to satisfy the risk retention requirements, including "standard" options as well as options designed for specific structures and asset classes.⁴ Unless a transaction qualifies for an exemption from the risk retention requirements or for one of the reduced risk retention alternatives, the sponsor would be required to retain a portion of the credit risk of the securitization equivalent to at least 5% of the credit risk of the securitized assets. The retained credit risk may be in any of the forms described below, subject to the satisfaction of the related requirements.

Standard Risk Retention Options (§__.4)

Under the re-proposal, the sponsor may satisfy the risk retention requirements by retaining an eligible vertical interest, an eligible horizontal residual interest or any combination thereof, in any proportion, in a total amount equal to no less that 5%of the fair value⁵ of all "ABS interests"⁶ issued as part of the transaction.

Vertical Risk Retention The sponsor may retain at least 5%of the fair value of each class of ABS interests issued in the securitization. Alternatively, the sponsor may satisfy its risk retention requirements under the vertical option by electing to retain a "single vertical security" entitling the holder to a specified percentage (at least 5%) of the principal and interest payable on each class of ABS interests issued by the issuing entity (not including such single vertical security). The Agencies indicated that the single vertical security option is intended to provide sponsors with an option that is simpler than holding a separate interest in each ABS interest issued by the issuing entity, which the Agencies acknowledge could prove burdensome from a valuation and financial reporting standpoint.

Horizontal Risk Retention The sponsor may retain a first-loss position of at least 5%of the fair value of all ABS interests issued in the securitization. The horizontal option can be satisfied by the retention of one or more classes so long as each interest qualifies, individually or in the aggregate, as an eligible horizontal residual interest. Multiple retained classes would need to be consecutive in terms of subordination level. To qualify, a retained interest must have the most subordinated claim to payments of both principal and interest by the issuing entity. In addition, on any payment date on which there is a shortfall in principal or interest, payment on the horizontal residual interest must be reduced by the amount of such shortfall before payments on any other ABS interest are reduced.

Projected Cash Flows Prior to the issuance of an eligible horizontal residual interest, a sponsor would be required to calculate projected cash flows on the horizontal residual interest and principal payments on all ABS interests and certify to investors that the horizontal residual interest is not projected to receive cash flows on any future payment date at a faster rate than the rate at which principal payments are projected to be received on all ABS interests. A sponsor would be required to retain written records of the certifications it provides in connection with projected cash flows on the horizontal residual interest until three years after all ABS interests are no longer outstanding. The re-proposal provides a detailed method for calculating the projected cash flows using the same assumptions and discount rates used to calculate the fair value of the horizontal residual interest, as described below. This feature of the rule is intended to prevent sponsors from structuring a transaction in which the eligible horizontal residual interest will receive cash flows at a disproportionally faster rate, thus diluting the sponsor's "skin in the game." The projections would be calculated once, prior to issuance, allowing for sponsors to receive the upside from a transaction that outperforms expectations. The Agencies are also considering an alternative formulation based on actual payments rather than projected cash flows that would limit the amounts payable on the horizontal residual interest by reference to amounts paid on the other ABS interests.
Horizontal Cash Reserve Account As an alternative to retaining a horizontal residual interest, the sponsor may establish and fund a horizontal cash reserve account, to be held by a trustee for the benefit of the issuing entity, in the amount that would be required if the sponsor were to hold an eligible horizontal residual interest. Funds in the cash reserve account would be used to cover shortfalls in the cash flows on the ABS interests. The cash reserve account option includes restrictions on the release of funds to the sponsor and restrictions on the investments that may be made with the funds in the account. If money is released from the account other than to cover shortfalls in cash flows on the ABS interests (other than interest on permitted investments), the cash flow projection requirements described above would also apply to the horizontal cash reserve account option.

Combined Option While the original proposal provided for an "L-shaped" risk retention option, which consisted of a combination of vertical and horizontal risk retention in a proportion specified under the original proposal, the re-proposed rules would allow for the risk retention requirement to be satisfied using a combination, in any proportion, of the vertical risk retention option and horizontal risk retention option (including the cash reserve fund option). The Agencies indicated that this flexible approach is intended to accommodate a variety of structures utilized in the securitization industry.

Calculation of Retained Interest Amount Under the standard risk retention option, regardless of whether the retained interest is held in the form of a vertical interest, a horizontal residual interest or a combination of the two, the total interest must equal at least 5% of the fair value of all ABS interests issued in the subject securitization transaction, determined in accordance with United States generally accepted accounting principles. The fair value of the ABS interests must be determined on the date of pricing of the ABS interests.

In light of the replacement of the original proposal's par value approach with the fair value approach, the Agencies have eliminated the "premium capture cash reserve account" concept included in the original proposal, which was intended to restrict the sponsor from monetizing excess spread at the outset of a securitization that included interest-only tranches or premium bonds, potentially reducing the effect of the risk retention provisions.

Transaction-Specific Risk Retention Options

Revolving Master Trusts (Seller's Interest) (§__.5) The re-proposal would allow the sponsor of a revolving master trust⁷ to satisfy the risk retention requirements by retaining a seller's interest of at least 5%of the unpaid principal balance of all outstanding investors' ABS interests issued by that revolving master trust.

A "seller's interest" under the re-proposal is an ABS interest or ABS interests (1) collateralized by all of the securitized assets and servicing assets owned or held by the issuing entity other than assets that have been allocated to a specific series, (2) that is pari passu to each series of investors' ABS interests of the issuing entity with respect to the allocation of distributions and losses with respect to the securitized assets prior to early amortization, and (3) that adjusts for fluctuations in the outstanding principal balance of the securitized assets.

The re-proposal makes a number of modifications to the seller's interest option provided for in the original proposal, including the following:

allowing the seller's interest to be held by one or more wholly-owned affiliates of the sponsor and recognizing that the seller's interest is often held by the depositor;
calculating the minimum seller's interest based on the amount of the outstanding unpaid principal balance of investors' ABS interests, rather than calculating the minimum seller's interest based on the amount of trust assets (note, however, that the amount of outstanding ABS interests used in this calculation would include any sponsor/seller-retained ABS interests issued under a series);
removing the restriction prohibiting the use of the seller's interest risk retention option for master trust securitizations backed by non-revolving assets;
revising the definition of "seller's interest" from requiring the seller's interest to be pari passu with all other ABS interests issued by the issuing entity to requiring the seller's interest to be pari passu with investors' ABS interests at the series level;
clarifying that servicing assets, to the extent allocated as collateral for a specific series, are not part of the seller's interest;
allowing the seller's interest to be retained in multiple interests, rather than a single interest, to address legacy trust structures;
prohibiting the seller's interest approach for any revolving master trust that includes senior interest-only bonds or premium bonds among the ABS interests it issues to investors; and
allowing the sponsor to be eligible to combine the seller's interest with either of the following two horizontal types of risk retained at the series level: (A) the standard horizontal risk retention option, or (B) the residual interest option so long as (i) the sponsor maintains a specified amount of horizontal risk retention in every series issued by the trust, (ii) each series distinguishes between the series' share of the interest and fee cash flows and the series' share of the principal repayment cash flows from the securitized assets collateralizing the revolving master trust (i.e., separate waterfalls), (iii) the horizontal residual interest's claim to any part of the series' share of the interest and fee cash flows is subordinated to all accrued and payable interest and principal due to more senior ABS interests in the series and reduced by the series' share of losses, (iv) the horizontal residual interest has the most subordinated claim to any part of the series' share of the principal repayment cash flows, and (v) the trust remains a revolving trust.

The re-proposed rules also address the circumstances under which a sponsor may become noncompliant with the risk retention requirements in the early amortization context, but do not address circumstances where a sponsor becomes non-compliant with the risk retention requirements in the scheduled amortization context. Under the re-proposed rule, the sponsor of a revolving master trust collateralized solely by revolving assets that suffers a decline in its seller's interest during an early amortization period caused by an unsecured adverse event would not violate the rule's risk retention requirements as a result of such decline if (i) the sponsor was in full compliance with the risk retention requirements on all measurement dates before the early amortization triggering event occurred, (ii) the terms of the seller's interest continue to make it pari passu or subordinate to each series of investors' ABS interests issued by the issuing entity with respect to the allocation of losses, (iii) following the commencement of early amortization, the revolving master trust issues no additional ABS interests to any person not wholly-owned by the sponsor, and (iv) to the extent that the sponsor is relying on any horizontal residual interests to reduce the percentage of its required seller's interest, those interests continue to absorb losses. The re-proposed rules also recognize excess funding accounts as a supplement to the seller's interest, and the required amount of the seller's interest may be reduced on a dollar-for-dollar basis by the amount of cash retained in an excess funding account triggered by the trust's failure to meet the minimum seller's interest.

The sponsor would be required to meet, and therefore presumably demonstrate compliance with, the 5% test not only at the closing of each issuance of ABS interests by the revolving master trust, but at every seller's interest measurement date specified under the securitization transaction documents, and no less than monthly.

Sponsors relying on the seller's interest approach would need to comply with the rule upon its effectiveness, without regard to whether the investors' ABS interests were issued before or after the rule's effective date. A sponsor's compliance with the risk retention requirements will be based on the sponsor's actual conduct, and therefore, the sponsor does not need to revise the terms of outstanding series to conform to the rule's exact requirements.

Eligible ABCP Conduits (§__.6) Aside from the detailed items set forth below, the re-proposed rules for ABCP⁸ securitization transactions retain the basic structure of the original proposal. In short, the sponsor of an eligible ABCP conduit can satisfy its risk retention requirements where (i) the ABCP conduit is fully supported by a liquidity facility provided by a prudentially regulated domestic financial institution or by certain foreign financial institutions, and (ii) the related sponsor-approved originator-seller or majority-owned originator-seller affiliate retains an economic interest in the credit risk of the transferred assets using one of the standard risk retention or revolving master trust options.

The following items are important modifications from the original proposal:

Whereas previously each pool of assets would be required to have only one originator seller, now both an originator-seller and a majority-owned originator-seller affiliate would be permitted to sell or transfer assets that they have originated to a wholly-owned (directly or indirectly) but bankruptcy remote special purpose vehicle that issues asset-backed securities collateralized solely by such assets (an "intermediate SPV").⁹
Whereas previously all senior interests in each pool of assets were required to be purchased only by ABCP conduits, the re-proposal provides additional flexibility to finance credits through not only an ABCP conduit, but also other asset-backed securities channels (e.g., some originator-sellers operate a revolving master trust).
Whereas previously originator-sellers would lose the option of choosing the risk retention requirement most suitable to the pools of assets being securitized (since the ABCP alternative risk retention option required each originator-seller to comply with the horizontal risk retention requirement), the re-proposed rules allow originator-sellers to rely on any of the risk retention options described in the re-proposed rule.
Whereas previously disclosure of the originator-seller's identity was required, the reproposal only requires the sponsor of an ABCP conduit to provide to each purchaser of ABCP the name and form of organization of the regulated liquidity provider that provides liquidity coverage to the eligible ABCP conduit (including a description of the form, amount, and nature of such liquidity coverage, and notice of any failure to fund).

The re-proposed rules also introduce several new concepts:

The re-proposed rules introduce the concept of a "majority-owned originator-seller affiliate," defined as an entity that, directly or indirectly, majority controls, is majority controlled by, or is under common majority control with, an originator-seller participating in an eligible ABCP conduit.
The re-proposed rules allow for multiple intermediate SPVs between an originator-seller and a majority-owned originator-seller affiliate. The intermediate SPV would be permitted to acquire assets originated by the originator-seller or its majority-owned originator-seller affiliate from the originator-seller or majority-owned originator-seller affiliate, or it could also acquire assets or asset-backed securities from another controlled intermediate SPV collateralized solely by securitized assets originated by the originator-seller or its majority owned originator-seller affiliate, and servicing assets.
The re-proposed rules expand the types of collateral that an eligible ABCP conduit can acquire, which would include: (1) ABS interests supported by securitized assets originated by an originator-seller or one or more majority-owned originator-seller affiliates of the originator seller, and by servicing assets; (2) special units of beneficial interest or similar interests in a trust or special purpose vehicle that retains legal title to leased property underlying leases that were transferred to an intermediate SPV in connection with a securitization collateralized solely by such leases originated by an originator-seller or majority-owned originator-seller affiliate, and by servicing assets; and (3) interests in a revolving master trust collateralized solely by assets originated by an originator-seller or majority-owned originator-seller affiliate, and by servicing assets.

Certain restrictions are clarified by the re-proposed rule:

The ABCP conduit has to be collateralized solely by asset-backed securities acquired by the ABCP conduit in an initial issuance by or on behalf of an intermediate SPV directly from the intermediate SPV, from an underwriter of the securities issued by the intermediate SPV, or from another person who acquired the securities directly from the intermediate SPV, and servicing assets.
The re-proposed rules require that a regulated liquidity provider must have entered into a legally binding commitment to provide 100% liquidity coverage on all the ABCP issued by the issuing entity. In the event that the ABCP conduit is unable for any reason to repay maturing ABCP issued by the issuing entity, the total amount for which the liquidity provider may be obligated would be equal to 100%of the amount of ABCP outstanding plus accrued and unpaid interest. Liquidity coverage that only funds performing receivables or performing ABS interests would not meet the requirements of the ABCP option.

The sponsor of an eligible ABCP conduit would be responsible for compliance and therefore would be required to (i) monitor compliance by the originator-sellers, (ii) approve each originator-seller and each intermediate SPV, and (iii) establish criteria governing eligible assets. If an ABCP sponsor determines that compliance has not been maintained by an originator-seller or majority owned originator-seller affiliate, such sponsor would be required to promptly notify investors, the Commission and its appropriate Federal banking agency, if any, in writing of (1) the name and form of organization of any originator-seller that fails to maintain its credit risk retention and the amount of asset-backed securities issued by an intermediate SPV of such originator-seller and held by the ABCP conduit, (2) the name and form of organization of any originator-seller or majority owned originator-seller affiliate that hedges, directly or indirectly through an intermediate SPV, its risk retention in violation of its risk retention requirements and the amount of asset-backed securities issued by an intermediate SPV of such originator-seller or majority-owned originator seller affiliate and held by the ABCP conduit, and (3) any remedial actions taken by the ABCP conduit sponsor or other party with respect to such asset-backed securities. In addition, such ABCP conduit sponsor would be required to take other appropriate steps, including, as appropriate, curing any breach of the requirements or removing from the eligible ABCP conduit any asset-backed security that does not comply with the applicable requirements.

CMBS (§__.7) The rules re-propose, with some modification, an option specific to commercial mortgage backed securities (CMBS) transactions (now defined as those collateralized solely by commercial real estate loans and servicing assets), in addition to the general options discussed above. The risk retention requirement may be satisfied, in whole or in part (thereby permitting this option to be combined with a sponsor-retained vertical interest), if a third-party purchaser (or two pari passu third-party purchasers), purchases and retains for its own account an interest that would satisfy the horizontal risk retention option discussed above and if the following additional conditions are satisfied:

the purchaser pays for its interest in cash at closing without financing (direct or indirect) from any transaction party (or affiliate thereof) other than an investor;
each third-party purchaser reviews the credit risk of each asset in the pool prior to the sale of the CMBS including, at a minimum, underwriting standards, collateral and expected cash flows;
no third-party purchase rmay be affiliated with any transaction party other than an investor except (x) the special servicer or (y) one or more originators, as long as the assets originated by the affiliated originator(s) collectively comprise less than 10% of the principal balance of the securitized assets at closing;
the operative documents provide (1) an unaffiliated operating advisor is appointed that does not have a direct or indirect financial interest in the transaction other than its fees as operating advisor, (2) the operating advisor is required to act in the best interest of the investors as a collective whole, (3) the standards with respect to the operating advisor's required experience, expertise and financial strength in relation to its duties over the life of the transaction, (4) the terms of the compensation of the operating advisor, (5) when the retained horizontal risk interest is 25%or less of its initial principal balance, the special servicer is required to consult with the operating advisor in connection with (and prior to) material servicing decisions including material modifications or waivers, foreclosure or comparable conversion, or acquisition of a property, (6) the operating advisor is given access to information necessary for it to perform its duties and shall be responsible for reviewing the actions of the special servicer, reviewing all special servicer reports, reviewing calculations made by the special servicer in accordance with the transaction documents and issuing periodic reports to investors and the issuer as to the compliance by the special servicer with the standards set forth in the operating documents, and (7) the operating advisor may recommend that the special servicer be replaced if the special servicer has failed to comply with the applicable standard and such replacement would be in the interest of the investors as a collective whole (in which case the special service may be replaced upon the affirmative vote of a majority of the outstanding principal amount of all ABS interests voting on the matter (with holders of 5%of the outstanding principal amount of all ABS interests constituting a quorum); and
each third-party purchaser complies with the hedging and similar restrictions as would be applicable to a retaining sponsor except (I) an initial third-party purchaser (or a sponsor retaining the required horizontal residual interest)may, on or after the date that is five years after the closing date, transfer the interest to a subsequent third-party purchaser complying with the requirements described above and (II) a subsequent third-party purchaser may transfer the acquired interest to a different subsequent third-party purchaser complying with the requirements described above (in each case, with any such requirements as may be applicable before closing being required to be satisfied at or before the time of transfer).

The sponsor would be responsible for compliance with the requirements described above and must maintain and follow policies and procedures to monitor compliance by any third-party purchasers. If the sponsor determines that compliance has not been maintained by a third-party purchaser, such sponsor would be required to promptly notify the holders of ABS interests issued in the securitization transaction of such non-compliance.

GSEs (§__.8) The original proposal provided that the full guarantee of timely payments of principal and interest provided by Fannie Mae and Freddie Mac on their securitizations would be sufficient to satisfy the credit risk retention requirements of the rule, so long as such entities are operating under the conservatorship or receivership of the FHFA with capital support from the United States. This provision would also apply to a successor entity under similar circumstances. The re-proposed rules offer the same treatment for Fannie Mae and Freddie Mac as under the original proposal, without modification. In addition, the prohibition on hedging by a retaining sponsor, its affiliates and the issuing entity would not apply.

CLOs (§__.9) The Agencies in the re-proposed rules reiterated their view that a CLO Manager is a "securitizer" required to retain risk under the regulations. "CLO Manager" is defined as "an entity that manages a CLO,¹⁰ which entity is registered as an investment adviser under the Investment Advisers Act...or is an affiliate of such a registered investment adviser and itself is managed by such registered investment adviser."

In addition to the standard risk retention options, the re-proposed rules add a new risk retention option for "open market CLOs", defined to mean a CLO whose assets consist of senior secured syndicated loans acquired by the CLO directly from the sellers in openmarket transactions (and servicing assets), that is managed by a CLO Manager and that holds less than 50% of its assets (by principal amount) in loans syndicated or originated by lead arrangers that are affiliates of the CLO. This option is intended to permit the required risk retention to be shifted from the CLO Manager to the "lead arrangers" (defined below) of the underlying loans under a set of very specific (and many commentators suggest, likely difficult to satisfy) conditions. The option does not permit the use of a combination of the standard option (CLO Manager-retained risk) and open market option (lead arranger retained risk).

In order to satisfy the risk retention requirements using this option, an open market CLO must:

hold only "CLO-eligible loan tranches" (defined below) meeting the requirements described below (and servicing assets);
provide in its governing documents that at all times the assets of the CLO consist of senior secured syndicated loans (defined generally consistently with current CLO practice) that are CLO-eligible loan tranches (and servicing assets);
not invest in ABS interests or derivatives other than hedging transactions that are servicing assets to hedge risks of the open market CLO;
purchase CLO-eligible loan tranches directly or through a warehouse facility in open market transactions on an arms-length basis; and
not permit the CLO Manager to receive any management fee or gain on sale at the time of issuance.

A "CLO-eligible loan tranche" is a term loan in a syndicated credit facility to a commercial borrower where (x) at least 5% of the face amount of the tranche is retained by the lead arranger until the earliest of repayment, maturity, involuntary and unscheduled acceleration, payment default or bankruptcy default of the tranche (and only if the lead arranger retaining the risk complies with the limitations on hedging, transferring and pledging of the retained risk), (y) holders of the CLO eligible loan tranche are given voting/consent rights in the underlying loan documents with respect to material waivers and amendments, including adverse changes to money terms, alterations to pro rata or voting provisions and waivers of conditions precedent, and (z) the voting, pro rata and similar provisions applicable to the security for the CLO-eligible loan tranche are not materially less advantageous to the obligor than the terms of other tranches of comparable seniority.

The "lead arranger" with respect to a CLO-eligible loan tranche is one which (1) is active in the origination, structuring and syndication of commercial loan transactions and has played a primary role in the structuring, underwriting and distribution of the CLO-eligible loan tranche in the primary market, (2) has taken an allocation at closing of the related syndicated credit facility of at least 20% of the original principal balance and no other member of the syndication group (or affiliated members) has taken a greater allocation, and (3) is identified at the time of origination in the applicable agreements, represents to holders that it and the related CLO-eligible loan tranche satisfy the risk retention requirements and covenants to retain the required risk.

Municipal Bond Repackagings (Tender Option Bonds) (§__.10) In response to industry comments, the Agencies included in the re-proposed rules two risk retention options for certain securitizations involving tender option bonds (TOBs), a common form of municipal bond repackaging. While their characteristics can vary, a typical TOBs transaction involves the deposit of a single issue of highly rated, long-term municipal bonds in a trust, which issues two classes of securities: a floating rate, puttable security (a "floater") and an inverse floating rate security (a "residual").

The TOBs-specific risk retention options would be available to a "qualifying tender option bonds entity," defined as a TOBs issuing entity with respect to which:

only two classes of securities are issued: (i) a floater that entitles the holder to put such floater to the issuing entity upon no more than 30 days' notice and that is eligible for purchase by money market funds under Rule 2a-7 of the Investment Company Act of 1940, as amended, and (ii) a residual interest entitled to all remaining income of the issuing entity;
the collateral is limited to servicing assets and municipal securities¹¹ having the same issuer, obligor or source of payment;
interest payments received on the municipal securities are excludable from gross income under the Internal Revenue Code;
interest payments received on the securities issued by the TOBs issuing entity are likewise excludable from gross income;
a regulated liquidity provider provides a guarantee or liquidity coverage on all of the TOBs; And
the issuing entity qualifies under the applicable IRS revenue procedure.¹²

Two risk retention options would be available to the sponsor of a qualifying tender option bond entity. First, the sponsor may retain an interest in the issuing entity that, upon issuance, meets the requirements for an "eligible horizontal residual interest" but that, following a "tender option termination event,"¹³ meets the requirements of an "eligible vertical interest." Second, the sponsor may satisfy its risk retention obligation by holding municipal securities from the same issuance of municipal securities deposited in the qualifying tender option bonds entity in a face amount equal to 5% of the value of the deposited municipal securities.

The re-proposal's inclusion of these two risk retention options for qualifying tender option bond entities represents the first time that the regulators have explicitly included TOBs within the scope of rulemaking efforts aimed at asset-backed securities, which results in a number of questions for the TOBs market to address, including how certain securities laws that are more applicable to products traditionally categorized as asset-backed securities might be applied to a typical TOBs structure.

Footnotes

1 The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (the "FDIC"), the U.S. Securities and Exchange Commission (the "Commission"), the Federal Housing Finance Agency (the "FHFA") and the Department of Housing and Urban Development (collectively, the "Agencies").

2 Referred to herein as the "re-proposal" or the "re-proposed rules." The re-proposed rules and supplementary information are available at http://www.sec.gov/rules/proposed/2013/34-70277.pdf .

3 Referred to herein as the "original proposal." The original proposal and supplementary information are available at http://sec.gov/rules/proposed/2011/34-64148.pdf. Orrick's white paper summarizing the original proposal is available at http://www.orrick.com/Events-and-Publications/Documents/3565.pdf.

4 The representative sample form of risk retention included in the original proposal has been eliminated in the re-proposal.

5 The method for calculating the retained interest amount has changed from a "par value" method in the original proposal to a "fair value" method, as discussed further under "Calculation of Retained Interest Amount" below.

6 The re-proposed rules define "ABS interests" broadly to include any type of interest or obligations, certificated or not, issued by an issuing entity, including a security, obligation, beneficial interest or residual interest, the payments on which are primarily dependent on cash flows from the securitized assets. "ABS interests" do not include interests issued primarily to evidence ownership in the issuing entity, such as common or preferred stock, that are not dependent on cash flows from the securitized assets.

7 Defined as "an issuing entity that is (1) A master trust; and (2) established to issue on multiple issuance dates one or more series, classes, subclasses, or tranches of asset-backed securities all of which are collateralized by a common pool of securitized assets that will change in composition over time."

8 Defined as "asset-backed commercial paper that has a maturity at the time of issuance not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."

9 An intermediate SPV cannot, however, acquire assets directly from non-affiliates, and thus the re-proposed rules do not accommodate aggregators who use ABCP to finance assets acquired in the open market.

10 Defined as a "special purpose entity that (1) issues debt and equity interests and (2) whose assets consist primarily of loans that are securitized assets and servicing assets."

11 As defined in Section 3(a)(29) of the Exchange Act.

12 IRS Revenue Procedure 2003-84.

13 "Tender option termination event" is defined by reference to IRS Revenue Procedure 2003-84 and generally includes bankruptcy, payment default or ratings downgrade.

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