Citigroup Global Markets analysts said that they expect a spurt of regulatory activity after the Nov. 6 elections.
In CMBS, for instance, they explained that there are quite a few key outstanding issues for the sector such as risk retention rules that have yet to be resolved.
Even though regulators have had most of the responsibility for finalizing the securitization reform for many months, analysts stated that the presidential and Congressional election season has probably slowed down the rulemaking process and put on hold some internal regulatory debates. As as result, the elections can serve as a "watershed' for securitization regulatory reform, Citi analysts stated.
The presidential election result could have a signficant impact on the direction and timing of the rulemaking effort. According to analysts, a victory by President Barack Obama will probably leave the ball in the regulators’ court, and they expect limited legislative intervention. They think that rulemaking will happen more quickly if the incumbent wins.
On the other hand, Governor Mitt Romney has explicitly said that he will be repealing and replacing Dodd-Frank. if he wins, this might mean renewed legislative activity aside from the regulators’ ongoing efforts. This would probably prolong securitization reform's finalization, analysts said.
Citi analysts also enumerated several factors that are key aside from the identity of the U.S. president.
They mentioned leadership changes in terms of regulators and legislators. These shifts in power can influence outstanding regulatory issues, they said.
A notable example is Treasury Secretary Timothy Geithner, who has been widely expected to resign after the elections even with an Obama victory. The Secretary is leading the Financial Stability Oversight Council or FSOC, which coordinates the Dodd-Frank rulemaking process among the different regulators. As such, the Secretary has a lot of influence on the rules direction, analysts said.
There are also the legislators’ leadership changes. In the Congress, the influential House Financial Services Committee has Republican Spencer Bachus and Democratic Barney Frank leaders retiring. Analysts said that the committee’s new leadership should play a key role in the implementation of Dodd-Frank, regardless of who wins the presidential elections. Even though Obama's win will probably mean no legislative revisit of Dodd-Frank, the legislators can still influence the regulators’ implementation efforts, they stated.
This can specifically be the case when Congress views the regulators as diverting away from the mandate given to them in the legislation. The premium capture requirement is a case in point, Citi analysts noted.
Citi analysts also mentioned the Court challenges to Dodd-Frank. Recent court decisions have introduced perhaps an unexpected challenge to the implementation of the Dodd-Frank. In the latest case dated Sept. 28, a U.S. District Court struck down a Commodity Futures Trading Commission (CFTC) Dodd-Frank-mandated rule on position limits. The court highlighted the importance of conducting a costbenefit analysis as part of the rulemaking.
The court challenges to Dodd-Frank thus far have not been directly related to securitization provisions. However, the decisions are still relevant to the market, analysts stated. Court-imposed elevation of the cost-benefit analyses standard could influence the securitization rules’ direction, and delay their finalization, Citi analysts sadi.
According to Citi analysts, the uncertain elements include last-minute exemptions or changes that regulators provide to the market. The latest example is the partial exemption the CFTC offered to some securitization vehicles from new commodity pool regulations, analysts cited. The exemption was given on Oct. 11, a day before the new rules were set to take effect.
Although the exemption was a positive for the market, analysts were concerned about the uncertainty staying until the very last minute.
More emphasis on the various rules interplay. With the implementation of more securitization rules approaching completion, analysts said there should be more scrutiny on how the different new regulations interact with each other. They said that regulators have mostly addressed the conflicts earlier in the reform process such as the tension between Basel rules and Dodd-Frank over the use of ratings or the several conflicting risk retention regimes. However, a concern still remains over the accumulating effect of several new regulation layers. An example is the potential impact of retention requirements aside from new capital requirements, they said.
The results of the presidential elections should remove major uncertainty that has stalled the Dodd-Frank implementation activity in recent months, analysts said. Obama's victory should take out the prospects of Dodd-Frank repeal and encourage the regulators to press on with finalizing the rules. A Romney victory could be a game-changer, specifically if Romney vigorously acts to roll back Dodd-Frank via legislation or pressure on regulators.
Citi’s political analyst’s base case, which they formed after the third presidential debate on Oct. 25, is for the political status quo to continue after the U.S. election. This means: Obama in the White House, Republicans in the U.S. House, and Democrats in the Senate. At the same time, the analysts aknowledge that the race is tight.
Assuming a status quo, Citi securitization analysts think that the regulators will move ahead and finalize the key issues still pending. There has been comparatively little pubic regulatory communication on the key issues in recent months, analysts stated. This was specifically the case for risk retention regulation and the Volcker rule. On these issues, Citi analysts noted that regulators are now exercising a so-called “dark period.” This is when they do not offer any formal guidance on the path they plan to take.