To any reader of military history the following adage is very
familiar: the military always prepares to fight the last
war. One could say that this adage applies equally well to the
SEC proposals. The more
one plows through them the more one is struck by how its
formulation of the problems, and thus the solutions proposed, have
been dictated by the specific character of the 2007-09 RMBS
collapse. For instance, it is received wisdom that at the root
of the collapse was the deteriorating underwriting standards of
originators. The SEC appears to believe that this
deterioration might have been revealed earlier had there been
adequate asset-level disclosure. Accordingly, it proposes to make
mandatory in any public issue and for all asset classes (other than
credit cards, for which certain groupings are contemplated) certain
very specific disclosure points.
As we have seen previously, in formulating its proposals, the
SEC has not adequately taken into account the fact that the RMBS
market was unique in various ways. First, as discussed in an
earlier blog piece, it made almost unique use of the
originate-to-distribute model. RMBS was also typified by very
complex structuring of securities with multiple tranches which, in
many cases, were completely distributed. As a result, small changes
in pool performance could have major impacts on those specific
narrowly-tailored securities. Products involving mortgage
loans also involved many fewer discrete assets of a much larger
per-asset size than transactions involving most other asset
classes. Finally, mortgage assets are subject to refinancing
risk and involve protracted liquidation.
In contrast, assets such as vehicle ABS are homogenous, short
term, not particularly interest rate sensitive, generally not
subject to financing risk and are liquidated quickly. Pools
typically contain many more assets than would a RMBS pool. The
securities involved are much simpler and less structured and the
tranches are 'thicker' than RMBS and much less sensitive to
changes in pool performance. It is rare for these structures to be
tranched and distributed beyond the mid-to-high investment grade
level. The more senior the investor, the less it is subject to the
types of risks that require asset-level data to properly
Perhaps most importantly, there has been no evidence that there
was deteriorating underwriting standards in other
sectors. This is probably because of the fact that originators
had always kept more "skin in the game", as discussed in
our earlier blog piece, than RMBS originators. Any increase in
obligor defaults in these other sectors have been more attributable
to general economic downturn and, even at the height of the
recession, were not of such a magnitude as to threaten default in
respect of offered securities.
1.The credit models applied by finance companies are proprietary
and competitively sensitive and there is significant risk that the
required disclosure could be reverse engineered by competitors.
2. Disclosure of asset-level data could pose significant
threats to consumer privacy and the originators' related legal
3.The burden placed on issuers would be extraordinary given the
number of loans in the usual vehicle ABS transaction (approximately
50,000). Producing the stipulated 59 or 61 required data
points would mean producing approximately 3 million separate bits
of information. (For a floor plan transaction this could be as much
as 13.6 million data points.) By contrast, a typical RBMS
offering would include 3,317 loans and require 534,037 data points.
4.The data points are mandatory yet many of them are simply not
applicable outside of RMBS.
It is feared that the requirement to provide asset-level data
may deter securitizations, restrict capital formation and eliminate
market access for some issuers without supporting meaningful
additional due diligence by investors or otherwise providing a
benefit to investors.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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