[Update 2: hearing now concluded, includes SIFMA commentary]
The Securities and Exchange Commission
(SEC) voted today to move forward with new skin-in-the-game regulations.
Under the proposal, issuers of securitization will be required to retain 5% of each tranche being bonded. In theory, this will help prevent structured finance vehicles that show a greater potential for loss. The proposal will also require loan-level data disclosure.
Trade bodies representing private-label securitization traditionally opposed
the risk retention provisions, and asked for exemptions to be placed in recently proposed regulatory reform
, though at least for one that stance appears to be softening.
“We support in principle the efforts of the SEC to increase the transparency and effectiveness of the disclosure and marketing practices for ABS," said Tim Ryan, CEO of the Securities Industry and Financial Markets Association, a group representing securitization market players. "We look forward to working with the SEC to refine the risk retention provisions and other aspects of this proposal."
In reading additional comments from the industry, SEC commissioner Troy Paredes describe the cyclical pitfall such a regulation, if not keenly incorporated, may have on the securitization market. In short, he said the industry is concerned that Fannie Mae (FNM)
, Freddie Mac (FRE)
and Ginnie Mae
will be able to increase market share without much competition.
"By increasing the cost of securitization, mortgage-backed issuances under government sponsored entities will maintain a competitive advantage over the private market, further driving up the cost, and lowering the availability, of nonconforming loans," he said.
The lack of availability with lower the rate of origination which will, in turn, reduce the number of assets available for securitization.
Paredes also said the SEC will need to work closely with other federal agencies in regards to their securitization platform, though he did not specifically mention the Federal Deposit Insurance Corp.
(FDIC), which has entered the structured debt market with pseudo-securitizations.
Unlike the private-label industry, the FDIC is all for risk retention. FDIC chairman Sheila Bair said in a release today, "I applaud today's vote by the SEC to propose new standards under the securities laws for the securitization market."
Bair says the proposals will mean more than simple risk retention, adding "essential elements of reform" that emphasize transparency, loan quality and investor due-diligence. In the statement, Bair also lauded her own 'Safe Harbor' regulations that are currently under consideration.
As with risk retention, there remains a nagging investor uncertainty
until the final provisions become mandate. Bair says the Safe Harbor will work with, not against, the SEC ruling.
"Notably, the SEC's proposed new standards will extend to the nonbank 'shadow sector, demonstrating a common approach that will further the ultimate goal of ending arbitrage and implementing securitization reforms across the entire market," she said.
The SEC concluded its meeting today by approving the measure to consider risk retention requirement. There will be three more months of industry commentary before the SEC makes a final vote.
Write to Jacob Gaffney
Disclosure: the author holds no relevant investments.