The simplicity embraced by E.U. regulators should be an example to their U.S. counterparts, according to panelists at ABS East’s Global Regulatory Initiatives and the Broader Impact on U.S. Securitization Practices session. Moderator Jason Kravitt, senior partner at Mayer Brown, pointed to risk retention requirements, saying E.U. regulators addressed the issue with a 20-page rule mandating a 5% slice.
U.S. regulators are proposing a document roughly 300 pages long, with many troubling and complex extra provisions. A Qualified Residential Mortgage definition, to lay out what type of underlying loan will make securitizations exempt from risk retention, is one such snag, Kravitt said. “With a 300-page rule you end up with that, and with a 20-page rule you don’t,” he noted.
Regulators were noticeably absent from the session, as slated panelist Bobby Beane, chief of the policy section at the Federal Deposit Insurance Corporation, canceled at the last minute. Beane spoke with Kravitt before the conference, however, and gave him some remarks to share with the audience.
The premium capture cash reserve account provision, a contentious initiative included in the draft risk retention rule, has sparked strong industry backlash. Beane told Kravitt regulators are aware of problems in the measure, but don’t see flexibility in the original Dodd-Frank statute, which directs them to write the rule. The premium capture cash reserve account proposes to make issuers hold a premium to use as credit enhancement on a first loss piece. John Arnholtz, partner at Bingham McCutchen, questioned if Beane could possibly be arguing the cash capture account was included in Dodd-Frank, saying it was not the case.
In a separate meeting with SI, market officials questioned regulators’ communication with the market. “When the administration was doing the [Term Asset-Backed Securities Loan Facility], we would be on the phone with regulators every week, talking about how best to implement TALF,” said a syndication official at a major U.S. investment bank. Throughout Dodd-Frank rulemakings, he said, such calls have not occurred. He credited the success of TALF, and what he sees as the floundering of Dodd-Frank, to the close industry involvement.
The overarching differences between U.S. and E.U. regulations will continue to stymie the market, panelists concurred. “You have to look at the transactions that have not taken place,” said Vishwanath Tirupattur, head of structured product research at Morgan Stanley. “For [collateralized loan obligations], new issuance in the U.S. has taken place. But there is zero E.U. issuance. This is because of the difference in risk retention requirements. Dodd-Frank doesn’t recognize asset classes have had very different performance.”