DBRS further clarified its interpretation of Securities and Exchange Commission (SEC) rule 17g-5. The credit rating agency disclosed its planned approaches for both exempt and non-exempt structured finance (SF) instruments in light of the changes to the said ruling.
Recently the SEC granted a temporary exemption from Rule 17g-5 for credit ratings provided to most ABS, MBS and other SF securities of non-U.S. issuers. This reprieve expires on Dec. 2 and extends from June 2, which is the rule's effective date for domestic firms.
The rule was adopted as part of the Credit Rating Agency Reform Act of 2006. It compels SEC-registered credit rating agencies or nationally recognized statistical rating organizations (NRSROs) to comply with certain limitations and procedures. These requirements were implemented to mitigate perceived conflicts of interest.
DBRS stated that it will recognize the six-month exemption period for SF instruments issued outside of the U.S. and before Dec. 2. These exemptions will be granted in cases where DBRS has reason to believe that the foreign SF instrument will not be sold into the U.S. DBRS added that it is prohibited from rating or maintaining non-exempt transactions if rules are not properly followed.
The rating firm is still formulating plans for operations after the December expiration of the SEC’s temporary exemptions.
It has also established a comprehensive protocol for non-exempt rating engagements issued on or before June 2. It defines the terms of engagement, the written criteria necessary for the rating of non-exempt instruments, and the consequences for noncompliance.
The agency instructed ABS issuers or arrangers to post all relevant information to a password-protected Internet Web site and bars the oral communication of new information.
DBRS further defines the products and instruments covered by the SEC’s temporary adjustment to 17g-5.
Under the new rule, the rating firm will consider structured finance instruments to include ABS, ABCP, RMBS, CMBS, CDOs, credit default swaps (CDS) (except single name CDS), multi-tranched insurance securitizations, structured investment vehicles (SIVs), and repackaged instruments whose underlying assets contain any structured finance instruments.
DBRS also included a list of instruments that will not be considered structured finance products. This includes covered bonds or similar dual recourse securities, government and mortgage agency financing (including Fannie Mae and Canada Housing and Mortgage Corp.), derivative product companies (DPCs), corporate/whole business securitizations, project financings, enhanced equipment trust certificates, first mortgage bonds, split shares, and bond funds.
The rating agency further stated that it may apply the Amended Rule to all ABCP including those that received an initial credit rating by DBRS prior to June 2, unless the conditions in the SEC’s order granting temporary conditional exemption are satisfied.
Aside from DBRS, only Fitch Ratings has commented on the SEC's reprieve for foreign issuers.