On Thursday the Emerging Issues Task Force will discuss whether - or, perhaps, to what extent - CDOs with trading constraints should be eligible for sale treatment under existing Financial Accounting Standard 140, assuming the CDO is not structured as a QSPE.
Most non-Q CDOs are structured with fairly rigorous trading limitations imposed by the rating agencies. Paragraph 9(b) of FAS 140 requires that a transferee in a securitization obtain control over the pledging or exchanging of the transferred assets, and that control cannot be limited for the benefit of the transferor in order for the transaction to qualify for sale treatment.
FAS 140 describes a situation in which the transferor relinquishes all continuing involvement to the transferred assets as satisfying 9(a). That would preclude the transferor from participating in a transaction as a beneficial interest holder.
Following the initial transfer of the assets into a typical CDO, trading is generally constrained to a predefined basket (a proportion of the par total), and to assets that become credit-impaired. Essentially, to swiftly satisfy 9(a), a collateral manager would need to have the ability to pledge the entire portfolio of assets at any given time.
According to Jim Mountain of Deloitte & Touche, Paragraph(9) was probably not considering a portfolio transfer, but rather the sale of assets individually.
"Paragraph 9(b) seems to be written as a question of black and white, and we don't know how to interpret a gray answer," Mountain said. "And that what it's all about: shades of gray."
One view under consideration is that the transferor in CDOs should only partially derecognize the assets, according to some yet-to-be defined factor.