Securitization industry experts speaking at yesterday's American Securitization Forum (ASF) sunset seminar asked for clarity on new regulation directly affecting the U.S. ABS market, specifically the Volcker rule.

They discussed the notice of proposed rulemaking (NPR) for the rule, which prohibits or restricts proprietary trading. The regulation covers investments in "private funds" such as hedge funds and private-equity funds by broker-dealers with commercial bank affiliates.

Much of the confusion comes over how the rule is applied to the ABCP market. The ABCP market has traditionally relied on exemptions provided under the Investment Company Act of 1940.

Under the proposed regulatory changes, these vehicles all get picked up as covered funds.
The NPR provides an exemption from the Volcker rule for certain conduit activities. An example is when structures comprise solely of loans, then these will not fall under the definition of a covered fund.

However, the Volcker rule undermines this exemption. It also prohibits banks from extending credit, including liquidity and credit enhancement facilities, to any ABCP conduit constituting “covered funds” that they sponsor, manage, or advise. This includes those conduits that invest only in “loans”.

The panelists at yesterday's seminar said that the rule still needs further clarification. The market needs to understand how to completely exclude ABCP from being defined as a covered fund via other exemptions. One such exemption comes via the Rule 3a-7 exclusion from
the Investment Company Act. This exempts ABS issuers that meet certain criteria specified in the act.

According to a recent Chapman and Cutler client alert, ABCP conduits historically have preferred not to rely upon or been ineligible to use these exemptions. The exceptions actually limit the types of assets that conduits can finance or restrict conduit asset transfers.

"The market can look for other exemptions like 3a-7 for typical multiseller conduits," said a panelist speaking at the event. "Because of the timing, people can speculate that they may not get the direction they need from regulators and may opt to move forward to avail themselves of these exemptions."

Another option banks may be willing to consider is looking into third parties that are well capitalized. These parties can take on the role of sponsor in ABCP transactions.

"Exemptions are very useful but the devil will be in the details," another speaker said. "The rules as they are may appear to be sufficiently clear, but the industry must make sure that the resulting rules provide enough clarity so we know exactly what we are talking about when it comes to each of these rules."

The speaker added that having the knowledge will also reassure the sponsor that there will not be any second-guessing by the government if anything goes wrong.

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