Sliver of light appears for issuers and noteholders in key UK negligence decision

Patrick Mc Guigan and Jeffrey Keey -

In a recent decision, the English High Court has held that a valuer was liable in relation to its negligent valuation of a property that was collateral for a securitised loan.  The judgment in Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) , will be of interest to investors, issuers and other participants in the CMBS industry that may be contemplating negligence claims against valuers.

The case arose out of a complex structured finance transaction.  The valuation concerned a property in Germany (the Property) which was owned by a company called Valbonne.  Credit Suisse identified the Property as suitable for a CMBS transaction.  The Property was subsequently valued at 135m Euro by Colliers and Credit Suisse agreed to lend 110m Euro to Valbonne based on the valuation.

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CSA sharpen focus on short term securitized products

Mark McElheran -

As previously noted in our post of January 24, the Canadian Securities Administrators have published for comment proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions. These amendments represent a significant retreat from the more comprehensive set of amendments that were originally proposed by the CSA in 2011. Insofar as both the public and private term markets are concerned, status quo is the happy result. This is a sensible and welcome result and credit to the CSA for taking into consideration the feedback received from the industry consultation on the 2011 proposals.

Given that the only troubling issues in the asset-backed securities market during the financial crisis occurred in the asset-backed commercial paper (ABCP) market (albeit in the non-bank sponsored portion of the market), it is not surprising to see the CSA retain some semblance of heightened regulation over this sector. Consistent with the approach taken in 2011, the CSA have (thankfully) chosen not to impose some of the more substantive (and controversial) requirements on transactions that are being implemented in other jurisdictions (such as mandatory risk retention) but instead have chosen to impose additional requirements (that are largely disclosure-based) on ABCP conduit issuers in order for them to be able to access the prospectus-exempt market. 

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CSA propose changes to current short-term debt exemption and new rules for exempt trading of short-term securitized products

The CSA yesterday released proposed two sets of amendments to National Instrument 45-106 Prospectus and Registration Exemptions that would introduce a bifurcated approach to how they will treat asset-backed commercial paper (ABCP) as opposed to commercial paper (CP). 

With respect to CP,  the proposed amendments would remove the current “split rating condition” that requires CP to have a designated rating at or above the designated ratings thresholds, and if a second rating is obtained, require that it not be below any of the same designated rating thresholds. Instead, a “modified split rating condition” is proposed that would require that CP not having any rating below a different (and generally lower) set of designated rating thresholds. Among other things, this is intended to remove the disincentive for issuers of commercial paper to seek additional ratings. According to the CSA, the modified condition would also provide for consistent treatment of commercial paper issuers with similar credit risk and maintain the current credit quality of commercial paper distributed under the exemption.

Meanwhile, the CSA announced that since securitization activity in Canada, with the exception of non-bank ABCP, does not raise systemic risk or investor protection concerns, they do not intend to proceed with their 2011 proposals to introduce a new framework for the regulation of securitized products. However, more targeted amendments focusing on short-term securitized products were included as part of the proposal released yesterday. (For more comprehensive commentary on the various aspects of the earlier proposals, see our Canadian Structured Finance Law blog posts from 2011)

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The Fairness Budget: Was it fair to all?

Doug Klaassen, Jason Kroft and Mark McElheran -

The Canadian federal budget delivered on March 21, 2013 had a couple of very significant highlights (or perhaps more appropriately characterized as lowlights) for the Canadian structured finance industry.

Restrictions on Use of Government-Backed Mortgage Insurance

Buried on page 141 of the Conservative budget (did they honestly think no one would notice?), under the heading “Reinforcing the Housing Financing Framework”, is a very short one-page summary of new measures intended to “increase market discipline in residential mortgage lending and reduce taxpayer exposure to the housing sector”.

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Structured finance regulatory resources available

If you're looking for quick access to standard industry documentation, like IIROC's securities loan agreements or SIFMA's standard forms, make sure you bookmark our blog's Resources page. Links to provincial securities transfer legislation and other resources are also provided.

Many industry associations also maintain resource libraries. For example, CASLA's resources page provides information on such topics as IIROC regulatory updates, Dodd Frank developments and potential effect on the Canadian market, and insights from CASLA's recent roundtable held to discuss the effects of the eurozone crisis and regulatory trends.

'We are all Macro-Prudentialists now': the brave new world of systemic risk

Michael Rumball  -

A specter is haunting the financial markets – the specter of systemic risk’                                           (with apologies to Karl Marx)


It wasn’t long after the immediate, frenzied response to the financial crisis that governments and regulators began to turn their minds to the fault lines that had been exposed in the financial system as a whole and to ways in which these could and should be addressed. The phrase which has come to be used to describe these fault lines is ‘systemic risk’.

Systemic risk has been defined as “the threat that a material event (whether an unexpected crisis, the failure of proper risk management, or the result of public policies) would result in the failure of either financial markets or a significant number of financial firms and cause significant harm to the [U.S.] economy because of the interconnections between such markets and firms” (The Financial Services Round Table, Systemic Risk Implementation: Recommendations to the Financial Stability Oversight Council and the Office of Financial Research, September 10, 2010) or, more simply, “the risks that cumulate across institutions, markets and even countries to levels that could have serious effects on the real economy “(Paul Jenkins and Gordon Thiessen, Reducing the Potential for Future Financial Crises: A Framework for Macro-Prudential Policy in Canada, May 2012).

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The Bulk Sales Act and Securitization Transactions

Mark McElheran   Michael Rumball

Rarely do judicial decisions arising under bulk sales legislation garner much attention. That being said, there really aren’t many to be found, given the fact that the legislation isn’t exactly novel and has been viewed as so ineffective or irrelevant that it has been repealed pretty much everywhere but Ontario. 

Every so often, however, a decision comes along that piques everyone’s interest. As we discussed in a blog post last week, the Ontario Superior Court of Justice recently found the Bulk Sales Act (BSA) to be inapplicable to a proposed lease and equipment securitization transaction. The decision, Cle Leasing Enterprises Ltd. (Re), has certainly caught the attention of commercial lawyers and, more specifically, lawyers in the securitization bar.

Hopefully, the decision will resolve the issue of the legislation’s applicability to securitization transactions or, better yet, give rise to a renewed effort to convince the government to finally repeal the legislation.

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Court finds Bulk Sales Act inapplicable to proposed securitization transaction

Mark McElheran -

In a decision sure to pique the interest of the securitization bar, Ontario's Superior Court of Justice has found the Bulk Sales Act inapplicable to a proposed lease and equipment securitization transaction. The case, Cle Leasing Enterprises Ltd. (Re), involved an asset originator that had applied for a BSA exemption order in the context of a lease securitization transaction that would extend to present and future sales under a program. 

In a decision dated June 9, the Court ultimately found that the proposed transaction did not fall within the BSA's definition of "sale in bulk", which must be outside the usual course of business or trade of the seller. In the present case, however, the Court distinguished the proposed transaction from those captured by the BSA, stating that

[t]he Proposed Transaction employs the legal device of a sale for the purpose of raising financing in the ordinary course of the operations of the applicants' business. The applicants no doubt considered a number of financing options before selecting the form of the Proposed Transaction. They could have approached a financial institution to borrow money, charging the Leases and Leased Equipment as security for that loan. The definition of "sale" in the BSA makes it clear that the Act would not apply to that form of financing. Why, then, should the use of securitization as the means-of-choice for financing attract scrutiny under the BSA? It is merely another financing option.

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Risk retention redux: the international context

Michael Rumball  -

In comparison to the ongoing regulatory onslaught in Europe and the United States, we in Canada appear to have gotten off pretty lightly and may even have felt that this was completely justifiable given our country’s performance and the high performance standards maintained by Canadian assets throughout the financial crisis. Although there is little we enjoy more than a good dose of smugness, if we review the regulatory surge in its international context, we may have second thoughts about what may await us.

In their July 2011 report entitled Report On Asset Securitization Incentives, the Joint Forum, consisting of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors, while recognizing the potential benefits of securitization, acknowledged that “reforms are necessary to address the incentive conflicts and misalignments highlighted during the crisis, which distorted risk transfer, increased structural complexity and opacity, and led to extreme leverage in the financial system. If such negative aspects of securitization are limited through rules and supervisory frameworks that better align incentives and promote appropriate disclosures, the foundation should be in place for a sustainable and responsible securitization market”.

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CMHC and covered bonds: be careful what you wish for

Doug Klaassen  and Mark McElheran -

On April 26, 2012, the federal government introduced the Jobs, Growth and Long-Term Prosperity Act, the legislation to implement the March 29, 2012 federal budget. Buried in this legislation (over 420 pages!) are significant changes to both the Canada Mortgage and Housing Corporation (CMHC) and the law in respect of Canadian covered bonds that will have direct and material effects on our mortgage and securitization markets.  Industry participants who initially asked for covered bond legislation must surely be regretting it.

CMHC is now (finally) under adult supervision. As a federal Crown corporation with over $540 billion of outstanding guarantees on Canadian housing (an amount equal to the entire Canadian federal debt), CMHC will now report to the Office of the Superintendent of Financial Institutions, instead of the Minister responsible for Human Resources and Skills Development Canada (believe it or not!). With CMHC approaching its current statutory guarantee cap of $600 billion (which has been raised 4 times in 8 years), something had to give.

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High regulatory tide

Michael Rumball  -

Over the past few months, while waiting for further regulatory developments in the securitization space, I have engaged in a self-taught course in finance and economics. Along with the plethora of tell-all’s detailing the main players in and the course of the late great financial crisis, or the “Great Recession” as it seems to be called in some sectors, among the titles perused were The Origin of Financial Crises (Cooper), Zombie Banks (Onarin), How Markets Fail(Cassidy),  Extreme Money (Das), The Black Swan (Taleb), The Myth of the Rational Market (Fox), Fault Lines (Rajan), This Time Is Different (Reinhart & Rogoff), Endgame (Mauldin and Tepper) and Freefall (Stiglitz). While this has (predictably) failed to result in the development of any sort of expertise on my part, the main conclusion that I managed to draw from this reading is that there was no single cause of the financial crisis; rather it resulted from the interaction of a multitude of interconnected factors the significance of which is yet to be fully understood. Nevertheless, I will venture a few observations:

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SE at ASF 2012

Mark McElheran -

The American Securitization Forum returned to its old haunt in Las Vegas this year for the first time since 2009. With north of 4,500 delegates in attendance, it was hardly an intimate gathering but the facilities at the ARIA City Centre were first class and there was certainly ample opportunity for participants to re-connect with their industry colleagues. The mood of the conference was similar to last year’s conference in Orlando which I would describe as “cautiously optimistic”. While there are encouraging signs in some sectors (in particular in the auto space), it would be difficult to conclude that the industry at large is close to regaining its old form.

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Regulatory overkill, Canadian style

Michael Rumball  -

Last week, I highlighted regulatory overkill in the U.S. where, together, Congress and the SEC have proposed scorched earth solutions to the issues raised by the financial crisis. Whereas the CSA commendably declined to imitate most of the more extreme U.S. initiatives, they seem to have gone off the rails somewhat in their approach to the exempt market. As was the case south of the border, the Canadian regulators have, in approaching a problem which could have been adequately addressed by a limited and targeted approach, instead mounted a multi-pronged attack. First, they proposed the removal of the existing prospectus exemptions for distributions of securitized products and the introduction of a new securitized product exemption which, although similar to the accredited investor exemption, is intended to exclude retail investors. Second, they would require that issuers deliver an information memorandum to investors which discloses “sufficient information about the securitized product and securitized product transaction to enable a prospectus purchaser to make an informed investment decision”. Finally, they proposed a certification requirement as to no misrepresentation for issuers and underwriters.

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Regulatory overkill, American style

 Michael Rumball -

Emerging from the vast literature generated by the recent financial crisis are two competing narratives attempting to identify the root cause of the crisis. One, emanating from the more conservative side of the political spectrum, emphasizes the role played by governmental policies encouraging and subsidizing the expansion of home ownership among middle and low income households. The other side focuses on the extent to which a free market philosophy came to dominate governmental thinking and led to deregulation and hence catastrophe. Although it will be crucial, from a policy perspective, to eventually ascertain just exactly what were the main drivers of the crisis, due to entrenched partisan and dogmatic differences, it may not be possible to do so until we have achieved some historical perspective. However, what does appear to be common to both narratives is that governmental actions, or, perhaps more precisely, their unintended consequences, were in some way heavily implicated.

Apart from anything else, what the foregoing might suggest is that governments should be cautious about its interventions in the market place. Rather than grand, sweeping reforms, the long-term effects of which governments have notoriously unable to accurately anticipate, what may be  called for are more surgical, incremental reforms, which, if necessary, can be revisited and adjusted from time to time as their effects become manifest.

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American Senators introduce covered bond legislation

P. Jason Kroft and Javier Gonzalez -

On November 9, 2011, a group of Democrat and Republican U.S. senators introduced legislation to create a regulatory framework for an American covered bond market. Specifically, the United States Covered Bond Act sets out the legal context for such a market and clarifies investors’ rights in the event of an issuer’s default.

By way of background, covered bonds are debt products issued by financial institutions and backed by a cover pool of assets, such as high-quality mortgages and public sector loans. Although they operate similarly to asset-backed securities, there is an important difference: if the issuer defaults the investor has preferential claim to the loans. Covered bonds are therefore seen as a safe source of funding for financial institutions.

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Overview of comments on SEC's Re-proposal of shelf eligibility conditions

 Michael Rumball -

As reported earlier, on July 26, 2011 the SEC issued for comment a proposing release entitled “Re-Proposal of Shelf Eligibility for Asset-Backed Securities and Other Additional Requests” (the Re-Proposal). The Re-Proposal put forward modifications to the proposals originally issued in April 2010 relating to those Shelf Eligibility Conditions dealing with certification and asset repurchases. The comment period for these re-proposals expired on October 4. 

As expected, the most contentious element of the Re-Proposal was that portion of the certification dealing with expected cash flow from the securitized assets. It may be recalled that the original proposal required the chief executive officer of the issuer to certify that “the securitized assets backing the issue have characteristics that provide a reasonable basis to believe that they will produce, taking into account internal credit enhancements, cash flows at times and in amounts necessary to service any payments of the securities as described in the prospectus”. While the Re-Proposal purports to address some of the criticisms levelled against the original proposal, it continues to address, in somewhat modified form, the ultimate performance of the offered securities. As argued earlier in this space, commentators continue to insist that “certification should only address the disclosure included in the prospectus, rather than a belief as to the future cash flows from the pool assets or the quality of the ABS”.

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Overview of comments on the CSA's exempt market proposals

 Michael Rumball -

Whereas the comments on the definition of securitized product and the prospectus disclosure proposals were quite limited and restrained, those on the proposed exempt market rules were both extensive and harshly critical. The general themes were common to most commentators. The proposed rules:

  •  are an over‑reaction to the failure of the third‑party sponsored ABCP market in Canada;
  •  focus unnecessarily on risks inherent in high‑risk structures such as those originated under the originate‑to‑distribute model or synthetic structures that either did not or no longer exist in Canada;
  • inappropriately apply a one‑size‑fits‑all approach to the traditional securitization market; and
  • unfairly differentiates between securitized products and other high risk securities.
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Overview of comments on CSA's prospectus disclosure proposals

 Michael Rumball -

For the most part the CSA’s proposed prospectus disclosure rules escaped substantive comment although we and a few others did provide some technical comments. This is not surprising in as much as they by and large are a copy of the existing rules under Reg AB Among the few items which did attract attention were those requiring the disclosure of financial information in respect of significant obligors, credit enhancers and counterparties and that requiring disclosure of any material conflict of interest between participants in a transaction and investors.

In respect of the first item, several commentators pointed out that, where the obligor or credit enhancer is a private company, imposing an obligation on an issuer to obtain the financial information and to disclose it would be unfair and may preclude a seller from accessing the market due to a refusal of the obligor, etc. to provide such information. Most of these commentators recommended that it should be sufficient to direct the reader to publicly available information, if any, and not require disclosure of private and/or confidential information.

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Overview of comments of CSA securitization proposals

 Michael Rumball -
 On August 31 the comment period in respect of the Canadian Securities Administrators’ Proposed Securitized Product Rules ended. About 30 comment letters were submitted. Over the next couple of weeks I will briefly canvass the comments received on the prospectus disclosure rules and the exempt market rules. Following is a brief discussion of the more general comments.

While almost all commentators concurred with the general principles enunciated by the CSA, a few concluded from the distinct nature of the traditional Canadian securitization market (no originate-to-distribute model; good asset performance) and the nature of the financial crisis that it experienced (liquidity only), that any new rules should leave traditional ABS alone and concentrate solely on those transactions which in fact at the root of the financial turmoil of the past few years. These were identified as those transations utilizing originate‑to‑distribute model and those involving synthetic securities. Although this view has much to recommend it, it does not seem likely that the CSA will abandon the omnibus approach which they have taken. They will probably feel that they have already provided sufficient recognition of the distinct nature of the Canadian market by refraining from applying the more intrusive Dodd‑Frank and Reg AB II proposals, an approach otherwise all but uniformly praised by commentators.

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SEC's shelf eligibility re-proposal: still a long way to go

Michael Rumball

In April, 2010 the SEC proposed a number of rules relating to shelf eligibility and various disclosure requirements in respect of asset-backed securities (the April 2010 Proposals). Among other proposals, the April 2010 Proposals contained certain eligibility requirements for use of a shelf prospectus including:


  • A specified minimum amount of risk retention;
  • A covenant to periodically furnish an opinion of an independent third party regarding instances in which securitized assets were not repurchased following a demand for repurchase based on an alleged breach of representations or warranty; and
  • A certification by the chief executive officer of the depositor as to the adequacy of the cash flows generated by the securitized pool assets.
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Risk retention tea party

 Michael Rumball  -

One of the main questions that I have returned to at various times over the course of the last year has concerned the true motivation of the U.S. regulators in proposing the various ABS regulations. As these pile up one by one, the cumulative burden placed on the securitization industry is very troubling, especially when combined with other prudential rule-making such as revisions to the Basel capital standards and the implementation of Basel III and the new accounting standards embodied in FAS 166 and 167.   I concluded my year-end piece with the observation that the final rules would reveal the SEC’s true intentions towards the securitization market; whether it wants to regulate a revitalized securitization industry or simply to make sure that it can never cause problems again. At that time, I promised to take stock again as matters develop. It appears that at least two of the heavyweights in the U.S. ABS market have decided that the proposed Dodd-Frank Risk Retention Regulations have in fact revealed those intentions clearly enough for them to take firm action now.

Despite the fact that SEC announced last week that it was extending the comment period until August 1, each of the American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA) chose to file massive comment letters on the original due date. In so doing, they have planted their standard in firm opposition to the Proposed Regulations, presumably hoping to thereby rally opposition around it. Each of them raise the alarm over the threat posed by the Proposed Regulations to the securitization market although they have come at it from slightly different perspectives. ASF’s main concern appears to be that the rules would unduly interfere in areas of the market which in fact continued to perform during the financial crisis (a mantra which, incidentally, has been chanted by us and many others in respect of the Canadian market as a whole). SIFMA, on the other hand, simply contends that the regulators have exceeded the mandate of the Dodd-Frank Act. Both of them see the result as being potentially devastating to the securitization market.

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Extension of comment period for CSA securitization proposals

The CSA has issued an extension for the consultation period for the draft securitization proposals that had been issued for consideration previously. In CSA Staff Notice 11-315 the end of the consultation period for the draft securitization rules has been extended from July 1, 2011 to August 31st. We continue to be available to discuss the draft securitization rules with interested parties and welcome hearing your own feedback on the draft proposals.

Department of Finance contemplates covered bonds legislation

Peter Hamilton -

On May 11, 2011, the Department of Finance issued a consultation paper dealing with covered bonds. This consultation paper contemplates the adoption of covered bonds legislation and seeks comments with respect to the content of that legislation. The enactment of covered bonds legislation would implement a proposal made by the federal government in the 2010 budget and would respond to requests made by many of the Canadian banks for such legislation. The Consultation Paper is open for comments until June 10, 2011.

A covered bond is a bond issued by an issuer (for our purposes a Canadian bank) and collateralized by a pool of assets that meet certain eligibility criteria. In Europe, this collateralization is often accomplished by designating certain assets as being allocated to a collateral pool. Legislation then provides that the holders of the covered bonds issued in relation to the designated pool have a priority claim upon the assets in the designated pool. In Canada, the assets are actually transferred to an SPV which, in turn, guarantees the covered bonds. The priority afforded by the Canadian structure is the result of the application of ordinary legal principles (much the same principles as are relied upon in the context of a securitization) and not specific legislation. In fact, there are currently no existing legislative or regulatory provisions or other regulatory guidance specifically dealing with covered bonds in Canada other than a letter issued by the Office of the Superintendent of Financial Institutions on June 27, 2007. This letter provided that covered bonds must not, at the time of issuance, make up more than four per cent of the total assets of the bank or other deposit taking institution. OSFI also stated at the time that it expected that the pledging policies of banks and other deposit-taking institutions would be amended to address the issuance of covered bonds. Since covered bonds are in substance a form of secured borrowing, it certainly makes sense that they would be addressed in the pledging policy.

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SEC and CSA restrictions on the exempt market for securitized products

Michael Rumball -

As reported earlier, the SEC has included in Reg AB II proposals relating to the private market.  These would require that, in order for a reseller of a “structured finance product” to sell a security in reliance on Rule 144A or in order for an issuer of a “structured finance product” to sell a security in reliance on Rule 506 of Regulation D (the so-called “safe harbors”), the underlying transaction agreement must grant to initial investors and transferees, as applicable, the right to request, both initially and on an ongoing basis, the same information that would have been required had the transaction been registered.

As formulated, these proposals could create significant contingent closing risk for issuers leaving them with no practical options but to assume the worst by preparing the necessary disclosure.  Given the enhanced disclosure requirements of Reg AB II, this could be a very difficult proposition, especially for issuers who have traditionally accessed the private market because they are unable to satisfy all public market requirements.  These provisions could be especially problematic for ABCP issuers. It is hard to imagine how an issuer of ABCP would set about complying with many of the requirements of Reg AB II, such as asset level disclosure and waterfall computer programs, in respect of each originator.

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Department of Finance issues covered bond consultation paper

The Department of Finance issued a consultation paper on May 11, 2011 outlining the major elements of the proposed legislative covered bonds framework and seeking comments by June 10, 2011. As our readers know, unlike some European jurisdictions, Canada does not have a specific legislative framework to address covered bond technology and principles including such items as guarantor asset segregation, protection in insolvency, priority among creditors and related matters.

Dodd-Frank proposed risk retention rules and safe harbour for foreign transactions

 Michael Rumball -

On March 29, 2011, the SEC together with a number of other federal regulators and agencies proposed rules relating to risk retention for securitizations which had been mandated by the Dodd-Frank Act in order to “provide a sponsor with an incentive to monitor and control the quality of the assets being securitized and help align the interests of the sponsor with those of investors in the ABS”.

The proposed rules, if adopted, will affect nearly every type of ABS transaction, including both registered and private offerings, and will also capture a wider variety of securities than have been regulated under Reg AB due to the expanded definition of asset-backed securities adopted by the Dodd-Frank Act.

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Comment period on IIROC short sale proposals coming to an end

As we discussed in our securities blog posts of February 25 and March 18, IIROC has requested comments on proposed amendments to the UMIR that would, among other things, repeal short sale price restrictions currently applicable on Canadian markets. The comment period for the proposed amendments is quickly drawing to a close and ends on May 26, 2011. IIROC's proposals would see the repeal of the tick test and introduce the requirement that all short sales be marked as such. However, orders from accounts meeting specific requirements (including certain arbitrage and institutional accounts) would qualify for a "short-marking exempt" designation.

Of particular interest in the notice are IIROC's comments regarding the disclosure of short sale activity. Specifically, in response to the IOSCO principle stating that short selling should be subject to a reporting regime that provides timely information to the market or market authorities, IIROC confirms that it recognizes the problems associated with current short position reporting. IIROC communicates its intention, therefore, to produce and publicly release, semi-monthly, short sale summaries based on aggregated trading data across all marketplaces regulated by IIROC for orders that are marked as short sales, to be implemented following the implementation of the proposed amendments. The nature and scope of this disclosure remains to be seen.

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The prescribed information memorandum requirements for short-term securitized products: the devil is in the details.

P. Jason Kroft   -
In previous blog entries, we introduced the CSA’s proposed information memoranda requirements that are part of the recent securitization proposals. As noted previously, a condition of the securitized product exemptions (permitting prospectus and registration exempt issuance to eligible securitized product investors) is the delivery of an information memorandum to the purchaser at the same time or before the purchase of the securitized instrument. The CSA proposals differentiate between short-term and longer term securitized products. This blog entry will focus on short-term securitized products only.

Unlike the disclosure requirements for products of greater than one year in duration, the CSA provides prescribed form requirements for short-term securitized products, which terms are contained in proposed Form 45-106F7 and, according to the CSA, were developed following a review of existing ABCP information memoranda, the information the Bank of Canada expects when reviewing whether to accept ABCP issued by an ABCP program as eligible collateral for its standing liquidity facility and comment letters from market participants as part of the October 2008 ABCP Concept Proposals. We would urge ABCP conduit sponsors and administrators in particular to consider the following requirements and read the provisions of proposed Form 45-106F7 carefully. We believe that the information memorandum requirements for short term securitized products require in many cases substantially more disclosure than what ABCP conduits currently provide to their investors and these requirements may raise considerable practical and operational challenges for ABCP conduit sponsors and administrators (among others). 

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CSA proposed Securitized Products Rules - contrast to U.S. approach

 Michael Rumball -

Pursuant to Reg AB II, the Dodd-Frank Act and the rules implementing that Act (the “U.S. Proposals”), U.S. authorities have proposed the most far-reaching substantive and procedural regulations ever applied to the ABS market.  In Canada, the CSA have chosen not to propose similar rules at this time but have instead focused almost entirely upon enhanced disclosure; in essence merely bringing Canadian ABS regulations to the standard existing under Reg AB prior to the U.S. Proposals. The implicit rationale for taking this approach is reflected in the third of the general principles which the CSA have indicated have guided them in developing the proposed rules:

“The rules should take into account the particular features of the Canadian securitization markets. In particular, rules should be proportionate to the risks associated with particular types of securitized products available in Canada, and should not unduly restrict investor access to securitized products. Canada experienced significant turmoil in the ABCP market in August 2007. However, for a number of reasons, the Canadian securitization market did not experience a sub-prime mortgage securitization bubble.”

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CSA Proposed Securitized Products Rules - Continuous Disclosure

   Jason Kroft   Doug Bryce

 As briefly discussed in prior blog posts, the securitized product rules published by the Canadian Securities Administrators (CSA) propose to significantly expand the continuous and periodic disclosure regime applicable to issuers of securitized markets in both the public and private markets. This is a significant departure from the current regulatory regime in the exempt market.

While National Instrument 51-102 Continuous Disclosure Requirements will continue to apply, the newly proposed National Instrument 51-106 Continuous Disclosure Requirements for Securitized Products (NI 41-106) would impose a number of new, additional disclosure requirements specific to issuers of any securitized product that is not a “covered bond” or a non-debt security of a “mortgage investment entity”. These disclosure requirements are largely based on the requirements of Reg AB and certain of the proposed rules from the SEC of April, 2010 relating to ABS and other structured finance products and, therefore, for our readers already familiar with the existing disclosure obligations in force under Reg AB the following summary will be strikingly similar to the disclosure regime that has been in effect for a number of years in the U.S.

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CSA proposed Securitized Products Rules - significant counterparties

 Michael Rumball

Under the proposed securitized product rules disclosure is also required in respect of certain significant counterparties in a transaction. For the most part the rules follow the pattern set out in Reg AB. The most significant feature of the proposed rule is it requires a certain degree of financial disclosure about the counterparties, depending upon whether the counterparty is considered to be, what will be called for present purposes, a “significant counterparty” or a “very significant counterparty”. For significant counterparties, such disclosure is limited to the selected financial information contained in the MD&A disclosure required of reporting issuers plus the same information for any subsequent interim period ended more than 60 days before the date of the prospectus. For a very significant counterparty, however, the financial statements that would have been prescribed under securities legislation had it been the issuer of securities under a prospectus will need to be provided. The calculation of the threshold levels varies according to the counterparty in question.

Significant Obligors

A “significant obligor” is, generally speaking, an obligor (or group of affiliated obligors) in respect of pool assets representing 10% or more of the asset pool. A very significant obligor is one whose assets represent 20% or more of the pool. In addition, if a significant obligor is an issuer of securitized products and the applicable pool assets are securitized products, then disclosure will need to be made about the underlying securitized products as if the significant obligor were the issuer.

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Proposed new CSA Exempt Distribution Rules - new playing field for securitized products not exactly a field of dreams

Mark McElheran

The proposed exempt distribution rules published for comment by the CSA on April 1, 2011, if enacted as proposed, will have a very significant impact on the exempt market for securitization transactions and would effectively transform the exempt market for securitized products into a quasi-public market. In addition to narrowing the scope of eligible exempt investors (creating a special category of “eligible securitized product investors”, which has been discussed in a previous post), the proposed amendments to NI 45-106 would also impose significant disclosure obligations at the time of issuance and on a continuous basis and create certification requirements as part of a broader statutory civil liability regime. The proposed changes to the exempt market are a significant departure from traditional securities regulatory policy and its emphasis on the protection of unsophisticated investors.

Information Memorandum Requirements

In order to qualify for the securitized product exemption, the issuer will be required to deliver an information memorandum (IM) to the purchaser, which must (i) disclose sufficient information about the securitized product and securitized product transaction to enable a prospective purchaser to make an informed investment decision; (ii) describe the rights of action that the issuer will have against, among others, the issuer, the sponsor and the underwriter for any misrepresentations in the IM; (iii) describe the relevant resale restrictions; and (iv) not contain a misrepresentation. For a short term securitized product, the IM also has to be in the prescribed form.

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Response to proposed CSA Securitized Products Rule

The Canadian Securities Administrators have recently published for comment proposed rules and rule amendments relating to securitized products. Through this blog we have circulated some of our thoughts on these proposals and will continue to do so over the next several weeks. By so doing we hope to stimulate and encourage a broader and more nuanced consideration and discussion of this significant development in the securitization market

Our ultimate goal is the preparation and submission of a comment letter on the proposals. While we appreciate that a portion of our readership will develop their own responses to the proposals or participate in a response made on their behalf by some sort of formal or informal association, there may be industry participants who, for one reason or another, will not be submitting a formal comment letter. Industry participants interested in consulting with us in the preparation of our comment letter are encouraged to contact us. We would be pleased to discuss our views and hear yours in the process, so that our comment letter represents the views of as broad a cross-section of our readership as is feasible and, should, at the conclusion of such process, you wish to be cited in the letter as supporting the views expressed in it, we would be pleased to do so.

Please feel free to contact any of the following:

CSA proposed Securitized Products Rules - parties, part II

 Michael Rumball -

As indicated in a previous piece, Item 1 of the proposed CSA rules deals with the various parties to a transaction and requires clear identification of each role that they play and the specific functions and responsibilities being performed in connection with each role. In the following, we continue to discuss issues raised by certain of the required disclosure elements relating to the parties to a securitized products transaction.

In Reg AB, disclosure is required in respect of “any provisions or arrangements included to address any one or more of the following issues:

(a) Whether any security interests granted in connection with the transaction are perfected, maintained and enforced.

(b) Whether declaration of bankruptcy, receivership or similar proceeding with respect to the issuing entity can occur.

(c) Whether in the event of a bankruptcy, receivership or similar proceeding with respect to the sponsor, originator, depositor or other seller of the pool assets, the issuing entity’s assets will become part of the bankruptcy estate or subject to the bankruptcy control of a third party.

(d) Whether in the event of a bankruptcy, receivership or similar proceeding with respect to the issuing entity, the issuing entity’s assets will become subject to the bankruptcy control of a third party.”

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CSA proposed Securitized Products Rules - exemptions

Jason Kroft and Doug Bryce -

The securitized product rules proposed by the Canadian Securities Administrators (CSA) seek to, among other things, narrow the class of investors who can buy securitized products on an exempt basis. In subsequent blog pieces, we will investigate the disclosure that is required for exempt offering under the new regulatory regime at the time of issuance as well as on a continuous basis post-issuance.

Item 3 of the proposed CSA rules deals with the various amendments to the current prospectus and registration exemption regime in now found in National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106), as well as the proposed new exemption which is specific to securitized products. In the following, we highlight the changes likely to have the largest impact on the Canadian securitized products market.

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CSA proposed Securitized Products Rules - Parties, part I

 Michael Rumball -

Proposed Form 41-103F specifies the supplementary prospectus disclosure requirements for distributions of securitized products. Item 1 deals with the various parties to a transaction and requires clear identification of each role that they play and the specific functions and responsibilities being performed in connection with each role.

The roles specified as being material and, where applicable, the related definitions are as follows:

  • Sponsor: the person who organizes and initiates a securitized products transaction by selling or transferring assets, either directly or indirectly, to the issuer.
  • Depositor: a person or company in a securitized product transaction who receives or produces pool assets from the sponsor and transfers or sells the pool assets to an issuer of securitized products.
  • Arranger: a person or company that arranges and structures a securitized product transaction, but does not sell or transfer assets, direct or indirectly, to the issuer of the securitized products, and in the absence of evidence to the contrary, includes the underwriters for a distribution of securitized products.
  • Originator: a person or company that originates receivables, loans or other financial assets that are pool assets.
  • Issuer
  • Servicer: a person or company responsible for the management or collection of pool assets or making allocations or payment distributions to a holder of a securitized product, that does not include a trust of an issuer of securitized products or for the securitized product that makes allocations or payment distributions.
  • Trustee
  • Any other party with a material role including, without limitation, a custodian, intermediate transferor or liquidity provider in the secondary market.
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CSA proposed Securitized Products Rules - definition of securitized products

Michael Rumball -

As indicated in our previous posting, the Canadian Securities Administrators have proposed a new framework for the regulation of securitized products which includes:

•enhanced disclosure requirements for securities issued under a prospectus

•enhanced continuous disclosure requirements

•certification requirements

•rules narrowing the class of eligible investors in the exempt market

•rules prescribing disclosure, both initial and ongoing, in respect of exempt distributions.

We will be providing regular commentary in this forum on the proposed framework and its potential implications for securitization market participants. This is our first such submission and touches upon the initial, threshold, issue of applicability. What all of these proposed rules have in common is that they apply to “securitized products”, which is the subject of a new definition.

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Proposed CSA Rules for securitized products create sweeping issuer disclosure obligations and new exempt market regime

On March 25, the Canadian Securities Administrators (the CSA) published for comment the proposed National Instrument 41-103 – Supplementary Prospectus Disclosure Requirements for Securitized Products and National Instrument 51-106 – Continuous Disclosure Requirements for Securitized Products (together, the Proposed Rules), along with proposed amendments to National Instrument 52-109 – Certification of Disclosure in Issuers Annual and Interim Filings, National Instrument 45-106 –Prospectus and Registration Exemptions (NI 45-106) and National Instrument 45-102 – Resale of Securities (collectively, the Proposed Amendments, and together with the Proposed Rules, the Proposal).

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Final Dodd-Frank ABS rules:representations and warranties and review of assets

Michael Rumball -

As described in a number of previous posts (see my posts of October 21, October 28 and November 4), in October, the SEC published two proposals for rules mandated by the Dodd Frank Act: (i) those related to representations and warranties in ABS securities offerings; and (ii) those requiring any issuer of registered ABS to perform a review of the assets underlying the ABS.

The final rules have now been published.

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Canadian asset performance - a relative story

Mark McElheran

It remains to be seen whether the reform fever that is presently sweeping through the US securitization market will continue unabated across the 49th parallel but there is no question that these monumental reforms have given rise to a considerable amount of discussion and debate over the appropriateness of similar reforms in Canada. This was perhaps inevitable given the degree of economic integration between the two countries and the fact that both have recently suffered through significant ABS-induced crises (albeit on entirely different scales).

Although these crises may have shared some of the same root causes, the US proposals for reform appear to have been heavily influenced by the US subprime mortgage meltdown and appear to be intended to address the lack of regulatory oversight that permitted the now much-maligned underwriting and product origination and distribution practices in the US subprime mortgage market that arose amid this regulatory vacuum; practices that were not prevalent (if even evident) in Canada. While a more extensive summation of these practices and the US reform proposals can be found in previous postings by Mike Rumball, given the insular nature of these problems, it is important to assess the Canadian market on its own merits in determining the scope and form of future Canadian reforms. We hope, in particular, that Canadian regulators will carefully consider the strong historical performance of Canadian financial assets in the course of determining the necessity, scope and nature of structural reform.

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My new year's wish list

P. Jason Kroft

It has long been a Kroft family tradition to spend a relatively significant amount of time discussing and documenting new year's resolutions (and it is also a long-standing tradition of discarding or ignoring the resolutions not long after January 2nd of each year). Each year at around this time I'll sit down to carefully draft my plans for the year in an attempt to chart out my year's goals, plans and objectives. The plans are, by design, ambitious, considered and comprehensive. As my final blog submission for the year, I thought I would share with our readers some of my own goals for next year in the hopes that they may entertain and potentially inspire.

In 2011, I would like to own a Bugatti sports car like Jay-Z, have one million Facebook friends and appear during an episode of HBO's 'Entourage'. I'd like to finally obtain that work/life balance that I've read about and find that the Loonie is well above par during my spring break trip to Miami. I'm hoping for sunny and dry summer months, peace and prosperity for my clients, contacts and friends and interesting and challenging work assignments. 

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SEC proposals on ABS: An overview

Michael Rumball

While we wait for the other shoe to drop, perhaps it would be worthwhile to review the general state of play and try to better understand what it may mean for the securitization industry. Previous postings reviewed the various SEC proposals for Reg AB II individually. Taken as such they are unsettling. Collectively, they are truly alarming. If implemented these proposals would, most notably, require all participants in the public ABS markets to:

  1. provide mandatory asset-level disclosure of an extraordinarily burdensome nature which may be inappropriate and/or unavailable in respect of several asset classes;
  2. perform or arrange for a third party to perform an asset review and disclose the findings and conclusions;
  3. disclose all demands for the repurchase of assets due to alleged ineligibility and arrange for related third party opinions on an ongoing basis;
  4. require a minimum 5% risk retention in a “vertical slice” across all issued securities;
  5. provide investors with a waterfall computer program capable of ABS modeling; and
  6. provide CEO certification regarding the sufficiency of the pooled assets to generate the scheduled payments to investors.


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SEC Order Extending Temporary Conditional Exemption for NRSROs from Requirements of SEC Rule 17g-5.

P. Jason Kroft -
On May 19, 2010, the SEC conditionally exempted until December 2, 2010 national recognized statistical rating organizations (NRSROs) from certain requirements in Rule 17g-5(a)(3) of the Securities Exchange Act of 1934 (the Rule), which had a compliance date of June 2, 2010. Under that May 19th order, the SEC provided that an NRSRO is not required to comply with the Rule until December 2, 2010 with respect to credit ratings where: (1) the issuer of the structured finance product is a non-U.S. person and (2) the NRSRO has a reasonable basis to conclude that the structured finance product will be offered and sold, upon issuance, and that any arranger linked to the structured finance product will effect transactions of the structured finance product after issuance, only in transactions that occur outside the U.S. On November 23, 2010, the SEC extended the temporary conditional exemption exempting NRSROS from complying with the Rule with respect to such non-U.S. transactions until December 2, 2011. Whereas some commentators had been hoping for a permanent exemption from application of the Rule for non-U.S. transactions, Canadian structured finance participants (arrangers in particular) now have an extra year to contemplate the operational, technical and legal ramifications of the Rule when applied to new rated transactions.

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Transfer and assignment of residential mortgage loans in the secondary mortgage market

Douglas J. Klaassen -

For those of us who follow the largely self-inflicted trials and tribulations of the US residential securitization business, the recent White Paper from the American Securitization Forum (Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market) is an interesting review of a couple of current legal issues associated with U.S. residential mortgage conveyancing that relate directly to the integrity of US securitization structures and foreclosure actions. These mortgage conveyancing practices are being raised daily in US residential foreclosure actions, and certain recent US Court decisions have raised some fundamental questions of concern to the securitization industry. One of these issues (the use of title nominees) is relevant to Canadian mortgage lending and securitization structures, so a short summary here is in order.

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SEC proposals on ABS: private placement

 Michael Rumball

After last week’s relatively optimistic note, its back to grim reality, in this case the Reg AB II proposals relating to the private market.  These would require that, in order for a reseller of a “structured finance product” to sell a security in reliance on Rule 144A or in order for an issuer of a “structured finance product” to sell a security in reliance on Rule 506 of Regulation D (the so called “safe harbors”), the underlying transaction agreement must grant to initial investors and transferees, as applicable, the right to request, both initially and on an ongoing basis, the same information that would have been required had the transaction been registered.

While the SEC acknowledges that this proposal is “significant” it claims it to be nonetheless necessary due to the fact that “the recent financial crisis exposed deficiencies in the information available about CDOs and other privately issued structured finance products”. While one can debate whether the financial crisis exposed deficiencies in the available information or rather deficiencies in the market participants’ sense of judgment, it seems at least to be clear that the crisis had something to do with RMBS and CDOs involving RMBS.  The latter transactions were unique in their capacity to magnify and, indeed, multiply the risks inherent in the RMBS market which, as it turns out, were copious and, as many have argued, unique to that market sector.  Nevertheless, the SEC has seen fit to once again visit the sins of the RMBS sector on the entire ABS market with significant adverse consequences.

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SEC proposals on ABS: risk retention Part II

 Michael Rumball

Finally some good news. It may be recalled that in April the SEC released its proposals for Reg AB II including proposals relating to risk retention.  These proposals generated heated responses from industry participants mostly due to the requirement that securitizers (other than in credit card transactions) retain a 5% interest in each tranche of offered securities (a so-called “vertical slice”).  The stated purpose of this proposal was to realign incentives among market participants in response to the abuses associated with the “originate–to–distribute” transaction model.  It was rightly remarked that several market sectors, most notably auto and equipment finance, never employed this model but did employ alternative risk retention models which performed as expected during the crisis.

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SEC proposals on ABS: review of assets

Michael Rumball

The second SEC release in response to the requirements of the Dodd Frank Act deals with the requirement of issuers to perform a review of the assets underlying an ABS and to disclose the nature of the review.  It too may have a dampening effect on private placements into the U.S.

One interesting aspect of this release is the apparent willingness of the SEC to interpret the statute narrowly when given the opportunity, in this case, the Act’s requirement that the SEC issue rules “relating to the registration statement”.  The SEC seized upon this to conclude that these rules were meant to apply to registered offerings only and not to unregistered offerings.

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Federal Deposit Insurance Corporation (FDIC) approves final rule regarding safe harbor protection for securitizations

On September 27, the Board of Directors of the FDIC approved a final rule (the Rule) that governs the rights of the FDIC, as conservator or receiver of a failed insured depository institution (a Bank), over financial assets previously transferred by such Bank in connection with a securitization or a participation transaction (a Transaction).
The FDIC, as conservator or receiver of a Bank, has the statutory authority to repudiate contracts to which such Bank is a party, where it deems the contract to be burdensome and such repudiation would aid in the orderly administration of the Bank’s affairs. In 2000, the FDIC adopted a safe harbour, which provided that the FDIC would not try to reclaim loans transferred in connection with a Transaction so long as an accounting sale had occurred. However, following changes to the sale accounting rules by the Financial Accounting Standards Board in November 2009 (the Old Accounting Standards), most Transactions no longer met the off-balance sheet standards for sale accounting and as a result no longer qualified for the safe harbour. The Rule extends a transition period (the Transition Period), initially put in place in November 2009, which effectively grandfathers safe harbour treatment of all Transactions in process before the end of 2010, that, among other things comply with the Old Accounting Standards. In addition, the Rule imposes further conditions for a safe harbour for Transactions issued after the Transition Period.

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SEC proposals on ABS: representations and warranties, Part III

Michael Rumball

As was reported last week, on October 4 the SEC issued a release to implement the provisions of the Dodd-Frank Act (the Act) relating to representations and warranties. In addition to the disclosure requirements imposed on securitizers, the Act also requires each nationally recognized statistical rating organization (NRSRO) to include in any report accompanying a credit rating with respect to an Exchange Act - ABS a description of (i) the representations, warranties and enforcement mechanisms available to investors, and (ii) how they differ from the representations, warranties and enforcement mechanisms of similar securities.

A few definitional points to begin with:  First, this provision applies to all Exchange Act - ABS which, as we have seen, is very broad and applies to all private as well as public ABS.  Second, it “applies to any report accompanying a credit rating for an ABS transaction, regardless of when or in which context such reports and credit ratings are issued”.  Third, a “credit rating” includes any expected or preliminary credit rating issued by an NRSRO.  This would include a pre-sale report.

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SEC proposals on ABS: representations and warranties, Part II

Michael Rumball

Well here’s one that potentially has direct bearing on the Canadian ABS market. In its original April proposals, the SEC had put forward rather modest disclosure requirements relating to assets that had been the subject of a demand to repurchase or replace for breach of the representations and warranties contained in the transaction documents.  On October 4, the SEC revisited these proposals in response to the Dodd-Frank Act which required the SEC “to prescribe regulations on the use of representations and warranties in the market for asset-based securities to require any securitizer to disclose fulfilled and unfulfilled repurchase requests across all trusts aggregated by the securitizer, so that investors may identify asset originators with clear underwriting deficiencies”.

The October 4 release is the first in a series of regulations relating to the ABS market which the SEC has been mandated to prescribe under the Dodd-Frank Act. There had previously been some doubt about how the SEC proposals and Dodd-Frank would fit together. Any such doubt has now been erased. The SEC will revise its proposals where necessary to comply with Dodd-Frank. Thus it says, almost in apology, “the Act requires us to implement the requirements discussed in this release”.

The SEC’s interpretation of the above direction and the resulting translation into regulation may well be a portent of things to come.

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SEC proposals on ABS: representations and warranties, Part I

Michael Rumball

The SEC has indentified, as a significant contributing factor to the RMBS collapse, the paucity of adequate information which would have allowed investors to make informed investment decisions and the resulting overreliance upon ratings. In a previous piece, we touched upon the SEC’s proposal to require significant asset level disclosure in shelf offerings. Today we will consider a further proposal which the SEC believes to be “an appropriate partial substitute for the investment grade ratings requirement.”

In the aftermath of the RMBS collapse, disgruntled investors attempted to probe the degree to which securitizers may have failed to comply with their representations and warranties relating to the assets in the pool and, more specifically, compliance with underwriting policies.  The investors suspected that there must have been widespread breaches of the representations and warranties but in some cases they were frustrated by what they perceived to be the stonewalling of those parties who were the only available source of the information.

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SEC proposals on ABS: Expansion of potential liability

Michael Rumball

In our previous piece on the proposed Waterfall Computer Program requirement, we touched upon the unprecedented extension of securities law liability to the functionality of the computer program. At least in the RMBS context, different people can have different views on the degree to which this is a concern. Contrast, for example, the concerns raised by the comments of the Committee on Federal Regulation of Securities and the Committee on Securitization and Structured Finance of the Section of Business Law of the American Bar Association, dated August 17, 2010, at page 61 with those elicited by our blog piece. Perhaps the main point to be gleaned from these differing views is the uncertainty surrounding the application of the proposals in various situations, which uncertainty is itself a potential problem. 

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SEC proposals on ABS: Asset-level disclosure

Michael Rumball

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.

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SEC Proposals on ABS: waterfall computer program

Michael Rumball

A number of the SEC Proposals on Asset-Backed Securities have attracted much criticism but perhaps none more so than the proposed requirement for issuers to file on EDGAR, as part of an ABS offering, a waterfall computer program of the contractual cash flow provisions of the securities being offered.  If enacted, it is not unreasonable to posit that this single aspect of the proposals might be sufficient to drive issuers out of the public market.

The proposed rule’s policy objective is to provide to potential investors the wherewithal to conduct their own evaluation of the securities so that they can make an informed decision on whether to participate in the offering without undue dependence on the opinions of credit rating agencies.  The underlying premise here appears to be that investors’ lack of understanding of complicated securitization structures resulted in poor investment decisions in the past.

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SEC proposals on ABS: risk retention

Michael Rumball

The market meltdown of 2007-2008 was a complex event and the causes will be debated for many years.  Nevertheless, one of the early frontrunners for the title of “the root cause” is the “originate-to-distribute model”.  In order to satisfy investors’ seemingly insatiable appetite for ABS or ABS derived securities in the years leading up to the meltdown, sponsors and originators needed vast amounts of assets.  As opposed to the existing model of established originators using securitizations as a means to finance their traditional lending, loans were originated for the sole purpose of providing fuel for the securitization machine.  In order to keep the machine running at capacity, assets further and further down the credit spectrum were sought out resulting in the calamities with which we are by now very familiar.

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The buzz on SEC release on securitization

Michael D. Rumball

Since the Securities and Exchange Commission issued a request for comments on its proposed rules on asset backed securities on April 7, market participants have weighed in with their comments.  Here are some of the things that ABS market dealers, investors, lawyers, accountants and originators have been saying (paraphrased of course).

1. The proposed asset-level disclosure requirements are inappropriate for many asset classes, such as auto loans and leases, and may deter securitizations and eliminate market access for some issuers.

2. The waterfall computer requirement takes two distinct aspects of securitization – monthly distribution reports and ABS modeling – and requires issuers to provide a single program that can do both.  Programs do not exist that would meet the proposal’s specifications and developing that sort of model would add a substantial burden to issuers.

3. The “one size fits all” risk retention proposal, which would require a 5% “vertical slice” of all issued securities to be retained, is not appropriate for many asset classes, such as auto loans and leases.

4. The proposal to require an issuer relying on one of the safe harbours for private placements to provide, upon request from an investor, the same information that would be required as if the products were issued in a registered transaction would significantly adversely affect this market.

In future postings we will return to a more detailed look at each of these issues and various other aspects of the SEC release and the elicited comments.

Securitization reform legislation approved by U.S. Senate

On July 15, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed by the House of Representatives on June 30.  The legislation is intended to overhaul the financial system in the U.S. by improving the supervision and regulation of federal depository institutions, providing transparency to derivatives markets and setting out obligations regarding corporate governance and executive compensation.

The legislation also contains provisions directed specifically at the securitization industry and its perceived inherent flaws.  Many of these provisions cover territory touched upon in April by the Securities and Exchange Commission (SEC) in its proposed rules, including, most notably, those dealing with a proposed mandatory risk retention requirement and increased disclosure and reporting requirements.  It remains to be seen how deeply the SEC proposals and the Dodd-Frank Act provisions will influence the Canadian Securities Administrators’ forthcoming proposals regarding securitized products, as related in CSA Staff Notice 45-307 Regulatory Developments Regarding Securitization.  To date, there have been no indications from any of the applicable Canadian legislative bodies that they may be contemplating legislation containing provisions relating specifically to securitizations comparable to those of the Dodd-Frank Act.

Delay announced for implementation for bank trading book capital rules

Jason Kroft

In a statement of June 18, 2010, the Basel Committee of central bankers and financial supervisors agreed to a one year delay in the effective date of the new capital rules on bank trading books. The Committee agreed to a coordinated start date of no later than December 31, 2011 for all elements of the trading book package including the securitization rules. The Office of the Superintendent of Financial Institutions Canada (OSFI) referred to this announcement in its own release on the same date. The Basel committee update has impacts for the Canadian implementation schedule as identified in the OSFI announcement in respect of same.  We will continue to monitor the Basel Committee’s activities and implications for banking practice and regulation in Canada.

CSA provide update on upcoming securitization proposals

The Canadian Securities Administrators (CSA) today published CSA Staff Notice 45-307 Regulatory Developments Regarding Securitization, in which they announced their intention to publish proposals respecting securitized products in the fall. The Notice follows work completed by the CSA subsequent to the publication of their consultation paper on ABCP in October 2008, and states that the CSA's focus "has broadened to encompass all securitized products". The CSA are also considering international regulatory developments in developing their proposals, including recent IOSCO and SEC reports and recommendations.

According to the Notice, the CSA are specifically contemplating changes to the current approach to the issuance of securitized products in the exempt market, enhancements to the disclosure requirements for securitized products distributed by prospectus and changes to continuous disclosure for reporting issuers that have distributed securitized products.

The CSA also announced that they expect to publish proposals relating to the regulation of credit rating organizations this summer.

Plenty of Good Cheer as Canadian ABS Industry Convenes in NOTL

Insight Information recently held the 13th Annual ABS 2010 Canadian Structured Finance Forum from Sunday, June 6 to Tuesday, June 8, 2010 at Queen's Landing in Niagara-on-the-Lake, Ontario.  Mark McElheran moderated a panel entitled "Evolution of Product Distribution: Private Placements" in which Mark put to a panel of market participants the thoughts presented in the analysis piece co-authored by Doug Klaassen, Mark and David Allan and posted here last week .  These other panelists included Yatendra Killer of Honda Canada Finance Inc., Marie-Claude Morrissette of Nissan Canada Inc. and Jonathan Zamir of Bank of America Merrill Lynch.

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The future of Canadian ABS: Public or private?

David Allan, Doug Klaassen and Mark McElheran

While the broader and more politically-charged aspects of the regulatory response to the debt crisis of 2008-09 remain largely unresolved, securities regulators have already begun the process of mapping out the implications of this crisis for the ABS market. The generalities of the recent recommendations of the International Organization of Securities Commissions (IOSCO) have already given way to the specific and detailed agenda set forth by the SEC in its reform proposals approved for public comment on April 7, 2010. While the main tenets of the reforms – greatly increased transparency, CEO accountability and risk participation by program sponsors – are interesting and merit discussion and debate, the proposed mechanism for mandating reform is intriguing in and of itself, and particularly so in the Canadian market context.

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Conditional exemptions to SEC Rule 17g-5((a)(3) relevant for Canadian structured finance issuers

P. Jason Kroft

Under the SEC’s Release 34-61050, published in December 2009, additional disclosure and conflict of interest requirements were imposed on nationally recognized statistical rating organizations (NRSROs) in the United States. The Release amended Rule 17g-5 of the Securities Exchange Act of 1934 (the Act) in an effort to address concerns of the SEC about the integrity of credit rating procedures and the methodologies of NRSROs. One of the goals is to facilitate unsolicited ratings in respect of a structured finance issuer from an NRSRO not otherwise engaged by such structured finance issuer as a counter-balance to the objectivity challenges that arise for rating agencies that receive fees from originators/sponsors in connection with the delivery of ratings. Where NRSROs that are not engaged by a structured finance issuer have reasonable access to information about a proposed rated issuance they will not be at a disadvantage in generating an unsolicited rating of the subject issuance when compared to the NRSRO that had been engaged by the structured finance issuer for that purpose.

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Canadian budget has implications for the structured finance market

Mark E. McElheran

The 2010 Canadian federal budget was delivered on March 4, 2010. The budget contains a number of interesting developments and implications for the Canadian structured finance market.

CSCF ends amid signs of life in the securitization market

The budget confirmed that the Canadian Secured Credit Facility (CSCF) provided by the Business Development Bank of Canada (BDC) will, as originally contemplated, conclude at the end of March 2010. In the view of the federal government, the CSCF is having a positive impact on the availability and cost of financing for vehicles and equipment. BDC has posted details of completed transactions (all of which have been completed by way of public prospectus offerings) on the BDC website.

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New bankruptcy law amendments may impact securitization

Mark E. McElheran and Philip J. Henderson

On September 18, 2009, a number of amendments to Canada's Bankruptcy and Insolvency Act (BIA) and Companies Creditors Arrangement Act (CCAA) came into force. The amendments were passed in 2005 and 2007 but, aside from a few provisions that became effective in July 2008, the amendments sat dormant, awaiting proclamation into force. Pursuant to Order in Council P.C. 2009-1207, almost all of these amendments have now been brought into force. Some of these provisions will be of interest to participants in the securitization market.

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Canadian withholding tax on interest - Recent developments

Kevin Kelly

As reported in Stikeman Elliott's April 12, 2007 Structured Finance Update, it was announced in the March 2007 Federal Budget that an agreement in principle had been reached between Canada and the U.S. that would update the Canada-U.S. tax treaty with the effect of eliminating withholding tax on interest paid on arm's length cross-border financings between Canada and the U.S. It was also announced in the Federal Budget that the Income Tax Act would be amended to eliminate Canadian non-resident withholding tax on interest paid by Canadian residents to all arm's length foreign residents, regardless of their country of residence. The amendments to the Income Tax Act were intended to be conditional on the implementation of the changes to the Canada-U.S. tax treaty and were initially proposed to be effective once the arm's length exemption in the Canada-U.S. tax treaty came into effect. The measures announced in the Federal Budget were welcome news as the proposed changes with respect to Canadian non-resident withholding tax will facilitate a Canadian resident's access to foreign debt financing without the structural limitations currently imposed by the so-called "5/25 exemption" contained in the Income Tax Act.

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