Fed May Review Rating Agencies for ABS Eligibility in TALF
The Federal Reserve Board is looking to make some changes to the procedures used to evaluate certain asset-backed securities (ABS) pledged to the Term Asset-Backed Securities Loan Facility (TALF). TALF, which aims to keep credit flowing to households and businesses by lending to investors of highly-rated ABS and commercial mortgage-backed securities (CMBS), would have greater requirements for ratings and risk assessments under the proposed rules. The Fed proposed a rule establishing criteria for the Federal Reserve Bank of New York to determine the Nationally Recognized Statistical Rating Organizations (NRSROs) whose ratings are accepted for determining the eligibility of ABS to be pledged as collateral under TALF. The Fed said this rule, which would require a certain minimum level of experience in rating deals, should expand TALF-eligible NRSROs for ABS. The rule aims to promote competition among NRSROs and ensure protection against credit risk for US taxpayers, the Fed said in a statement. A second change proposed by the Fed would require the NY Fed to conduct a formal risk assessment of ABS in addition to CMBS as proposed collateral. This change would take effect beginning with the November subscription and aims to ensure credit quality, transparency and structural simplicity of TALF collateral, according to the Fed. "To facilitate the risk assessment, each issuer wishing to bring a TALF-eligible ABS transaction to market will be required to provide, at least three weeks prior to the subscription date, information including, but not limited to, all data on the transaction the issuer has provided to any NRSRO," the Fed said. The changes would not affect the requirement that collateral for TALF loans receive two triple-A ratings from TALF-eligible NRSROs. Write to Diana Golobay.