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AMERICAN SECURITIZATION FORUM
July 19, 2004
Ms. Jennifer J. Johnson
Secretary
Board of Governors of the
Federal Reserve System
20th Street and Constitution Ave., N.W.
Washington, D.C. 20551
Docket No. OP-1189
Robert E. Feldman
Executive Secretary
Attn: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Office of the Comptroller of the Currency
250 E Street, SW
Public Information Room
Mailstop 1-5
Washington, DC 20219
Attention: Docket No. 04-12
Jonathan G. Katz, Secretary,
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
Attention: File No: S7-22-04
Regulation Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
Attn: 2004-27
Re: Interagency Statement on Complex Structured Finance Activities
The American Securitization Forum (the “ASF”)1 would like to take this
opportunity
to thank the agencies listed above (the “Agencies”) for this opportunity
to comment
on the proposed Interagency Statement on Sound Practices Concerning
Complex
Structured Finance Activities (the “Statement”) published in the Federal
Register on
May 19, 2004.
We strongly agree with the goal of the Agencies to provide a
framework for risk
management within financial institutions involved in complex structured
finance
transactions. The goal of implementing and refining comprehensive risk
management systems long has been, and will continue to be, a primary
focus of member institutions of the ASF involved in these transactions.
Therefore, we appreciate this opportunity to work with the Agencies to
adopt guiding principles in this important area for financial
institutions.
As the Agencies are aware, structured finance transactions,
particularly securitization, have become a large and important segment
of our economy. The securitization industry has developed as a large
market that provides an efficient funding mechanism for originators of
receivables, loans, bonds, mortgages and other financial assets. The
industry performs a crucial role by providing liquidity to nearly all
major sectors of the economy including the residential and commercial
mortgage industry, the automobile industry, the consumer credit
industry, the leasing industry, the insurance industry, pension funds,
the bank commercial loan markets and the corporate bond market.
Additionally, securitization has provided a means for banks to
effectively manage credit and other risks by transferring those risks to
other regulated and non-regulated institutions.
To provide an overall sense of the size and importance of the
securitization market
activity in the United States, over $3 trillion of mortgage-backed
securities and $584
billion of asset-backed securities were issued in 2003. As of December
31, 2003,
total MBS outstanding was $5.3 trillion and total ABS outstanding was
$1.69
trillion.2
Because of the importance of securitization to our economy, changes
to existing
rules and implementation of new guidance must be carefully measured to
promote
sound risk management practices with sufficient flexibility so as to not
unduly or
unnecessarily restrict the operation and growth of this important
market. As the
Agencies noted in the Statement, a limited number of questionably
structured
finance transactions have led the Agencies to propose this new policy.
We are
concerned that, in responding to the problems seen in these few
transactions, the
Agencies have not struck the appropriate balance in this Statement. We
would like
to address several areas of high level policy concerns in this letter.
First, we are concerned that the scope of transactions that would be
picked up under
the proposal is far too broad—arguably any transaction with an SPE or
that is reliant
on the cash flows of financial assets could be subject to heightened
scrutiny. Within
the securitization market, the vast majority of transactions, such as
securitizations of
auto loans, credit card receivables, mortgages and home equity loans,
trade
receivables and equipment loans and leases, are very routine
transactions structured
to well-accepted market standards. Additionally, most securitization
transactions are
subject to rating agency review, providing an independent third party
review of the
fundamental soundness of a structure. To require heightened scrutiny of
routine
transactions, especially those that are rated, would not only be an
administrative
burden, causing increased delay and costs, but would also be
counterproductive in
that the volume of transactions being reviewed would be overwhelming and
lessen
the likelihood of the more thorough and comprehensive review
contemplated by the
Statement. We believe it is more appropriate, efficient and, in the end,
conducive to
better risk management, to separate the wheat from the chaff prior to
subjecting
transactions to heightened review. We encourage the Agencies to focus
more
sharply on the scope of the Statement such that only those more complex
transactions that merit heightened scrutiny—because they in fact embody
a heightened level of legal and reputational risk to the financial
institution—are covered.
Second, we are concerned that rather than simply providing a
framework for risk
management, the policies set forth in the Statement actually serve to
create
additional, and we feel inappropriate, risks and liabilities for
financial institutions.
We are most concerned that the Statement appears to make financial
institutions
responsible in all cases for the accounting and tax treatment and
financial reporting
and disclosure of a transaction by a customer. There is already in place
a well developed
body of law and jurisprudence addressing the legal duties and
responsibilities of financial institutions in connection with their
clients’ transactions, including liability for direct participation in
fraudulent or other illegal conduct. The proposed guidance, however,
goes far beyond these established legal principles and could make
financial institutions responsible for their customers’ structured
finance transactions and related accounting and tax treatment and
financial statement disclosures, no matter the nature or degree of their
participation therein.
To substitute the judgment of a financial institution for that of its
customers, as we feel the proposed Guidance does, is inappropriate. A
financial institution is simply not in a position to police each
transaction in the market, and is not and cannot be made responsible for
compliance by its customers with applicable law and
regulation. While we do believe that it is appropriate for financial
institutions to
make themselves available to a company and its auditors to discuss
questions
relating to the structure of a transaction, financial institutions do
not have access to
the individual facts and circumstances of each customer that are
necessary to make
judgments concerning the appropriate treatment of each transaction.
Ultimately, that
is the responsibility of the management and auditors of the customer who
do have
access to the relevant information necessary to make informed decisions.
As proposed, by placing this burden on a financial institution, we
believe that it is
likely to result in a financial institution’s being viewed as a de facto
guarantor for a
customer’s compliance with applicable law and regulation. This shift of
responsibility for customer compliance to financial institutions is
directly counter to
the notion that companies directly engaging in structured finance
transactions are,
and should remain, primarily responsible for ensuring the legality and
appropriateness of the transactions in which they engage. We are
concerned that the new and unwarranted legal duties and responsibilities
could result in a diminution of the beneficial market activity of
securitizations, as financial institutions will not want to assume the
additional risks imposed by this Guidance. If this were to occur,
issuers would lose a valuable source of financing for their business,
the effects of which will ultimately be borne by consumers who are the
beneficiaries of a strong securitization market.
We ask that the Agencies reconsider the level of responsibility of a
financial
institution relating to a customer’s treatment of a transaction. We note
that in the
limited questionable transactions cited by the Agencies, it is clear
that both
individuals and regulators already have sufficient means to address the
actions of
financial institutions in transactions when appropriate. Furthermore,
since the
occurrence of these transactions, many institutions have strengthened
their review
systems related to securitizations and other structured finance
transactions. These
internal policies are both robust and sufficiently flexible to permit a
bank to assess
all relevant risks of a transaction. We hope that any Guidance actually
implemented
will be less rigid than the draft Guidance and will not continue to
contain the
specific requirements that could potentially do more harm than good in
this
important market.
Third, we believe that the proposals in the statement are overly
rigid in that they do
not appear to distinguish levels of responsibility based on the role of
a financial
institution in a particular transaction. For instance, the role of a
trustee of
securitization is much more limited in scope that that of an underwriter
or investor in
such a transaction. Trustees largely become involved in a transaction
long after the
structuring and negotiation have occurred and assume a role that is
largely
ministerial that commences upon the closing of a transaction. To place
upon a
trustee the scope of practices and procedures contemplated by the
Statement is
unwarranted and would significantly increase the cost and burden of
transactions
with marginally increased risk management. We encourage the Agencies to
refine
the Statement to make clear that the level and type of scrutiny required
for a
transaction is flexible and should be tailored to the role that a
financial institution
actually plays in that transaction.
As indicated, our intent was to address several high level policy
concerns with the
Statement. In addition to these concerns, we also endorse the more
comprehensive
and detailed comment letter that is to be submitted by a joint working
group of The
Bond Market Association, the International Swaps and Derivatives
Association and
the Securities Industry Association.
Again, we thank you for this opportunity to comment on the proposed
Statement and
look forward to working with the Agencies to adopting a balanced policy
for risk
management procedures that will serve to strengthen the integrity of
financial
institutions and the markets in which they conduct structured finance
transactions.
* * * *
We appreciate this opportunity to comment on the these proposals.
Vernon H.C. Wright
Chairman, American Securitization Forum
(MBNA America Bank)
Greg Medcraft
Deputy Chairman,
American Securitization Forum
(Société Générale Securities Corp.)
Jason H.P. Kravitt
Secretary, American Securitization Forum,
Chairman of the Legal, Regulatory
Accounting and Tax Committee of the ASF
(Mayer, Brown, Rowe & Maw LLP)
American Securitization Forum
360 MADISON AVENUE
NEW YORK, NY 10017
TELEPHONE 646.637.9200
FAX 646.637.9132
www.americansecuritization.com
1 The American Securitization Forum is a broad-based
professional forum through which participants in the U.S. securitization
market advocate their common interests on important legal, regulatory
and market practice issues. The ASF also sponsors a wide range of
informational and educational conferences, seminars and workshops for
securitization market participants. ASF members include securitization
issuers, investors, financial intermediaries, legal and accounting
firms, rating agencies, financial guarantors, and other professional
market participants. Additional information concerning the ASF,
including its full membership and activities, may be found at
www.americansecuritization.com.
2 The Bond Market Research Quarterly, May 2004. |
