Although there are channels of liquidity in the securitization market such as autos and CLOs, areas of dislocation remain because of regulatory uncertainty, according to panelists at ASF 2012 being held in Las Vegas this week.
In his welcome address at the conference, Executive Director of the American Securitization Forum Tom Deutsch identified three crucial regulatory reforms that market players need to watch out for in 2012. These are: the Volcker Rule, Conflict of Interest Rules and Market Risk Notice of Proposed Rulemaking (NPR). Comments are for this NPR on Feb. 3.
He said that these regulations can create “enormous and irreparable damage to the market by locking out entire sections of our industry.”
At the opening panel called 2012 Securitization Market Outlook, panelists said that the industry should establish best practices and balance that out with the need for expediency. This is a way for “these regulations to move forward,” said Reginald Imamura, executive vice president at PNC.
Despite the proactive approach, however, panelists said that the intended consequences of current regulatory reforms are very different from their actual impact on the market.
Take the Volcker rule, for instance, which is a set of provisions in the Dodd-Frank Act that prohibits banking entities from engaging in proprietary trading and investing in or sponsoring private equity and hedge funds, although subject to certain exceptions and transition considerations.
The problem is that when dealers take a position they may be subject to the Volcker rule, and therefore be compelleted to either take it down or recognize the gain, said Ronald Mass, co-head of structured products at Western Asset Management Co.
He added that they cannot take positions now without a plan, which in the end hurts liquidity.
The speakers also asked conference participants to look closely at and comment on the amended notice of proposed rulemaking (NPR) from federal bank regulators regarding the market risk capital rules.
The updated NPR includes alternative standards of creditworthiness that will replace credit ratings as a basis for the capital requirements for certain debt and securitization positions covered by the market risk capital rules. Comments for the NPR are due Feb. 3.
Panelists said that the standards contained in the amended version are "too prescriptive" and are bound to hurt market liquidity even further.