It looks like the Financial Accounting Standards Board (FASB) is dropping the "exempt-SPE" guidelines from the consolidation project exposure draft, which should be out for commentary later this month or in early July. Instead, FASB is considering the addition of a new class of SPEs called "financial SPEs." These would fall under definitional requirements similar to those for QSPEs in SFAS 140, and would not be subject to the 10% outside equity requirement or primary beneficiary analysis, according to Deloitte & Touche, which has been distributing informal commentary following the subsequent FASB meetings on consolidation.

Financial SPEs might be more conducive to non-QSPE securitization structures. A likely difference is that, unlike a QSPE - which has assets transferred into it - the FSPE would be able to purchase assets, Deloitte said.

In order to avoid consolidation, the entity's relationship with the FSPE would be subject to limitations in the following areas: the discretion the entity has over the purchasing and selling activities of the SPE; the guarantee and/or liquidity arrangements of the entity with the SPE; and the characteristics of the fees received by the entity from the SPE (market-based or service-based). Apparently, the entity would need to fall below the thresholds in two of the three characteristics to avoid consolidation.

As has been discussed over the last few months, FASB is looking at multi-seller arrangements, such as CP conduits, as having individual "silo" SPEs, which should be able to be structured as financial SPEs meeting the non-consolidation criteria, an accounting source monitoring the developments said.

One new caveat for CDOs with SPEs subject to the 10% outside equity rule is that the 10% might need to be sustained over the life of the deal - FASB will likely propose that the 10% equity be retested at each reporting period. This new criteria could be difficult as equity tends to decline early in a deal, and the 3% equity criteria currently used allows for the equity to shrink as it absorbs losses.

"Even if a CDO is going well, equity, or the market value of the equity, declines pretty rapidly," said one CDO analyst.

The accounting source agreed with that assessment, but added "When it falls below 10%, if it is still sufficient to absorb all expected (as opposed to reasonably possible) losses, it should be okay."

FASB is not expected to meet again before releasing the exposure draft, which will be out for comment for 60 days. SPEs created after the planned December 2002 inception will be immediately subject to the new rules. Pre-existing SPEs will be subject to the new guidelines in second quarter 2003.

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