As the end of the month nears, the ABCP market awaits the introduction of new eligibility requirements for liquidity facilities under the FIN 46 capital relief provisions, which are also set to take effect on Sept. 30. Speaking at the American Securitization Forum Sunset Seminar, JPMorgan Securities' Debbie Toennies reiterated concerns over whether U.S.-sponsored securities arbitrage programs were viable under the rule as it now stands.
"Liquidity must now be eligible to attract liquidity capital," Toennies said. "The primary problem lies in the definition of eligibility."
The investment grade ratings cut off is too tight for rating agencies without significant credit enhancement within the vehicle, Toennies said. "The arbitrage is not there to support both credit enhancement and liquidity in these vehicles."
Conduit administrators have a year to meet the new eligibility requirements. Should it prove too costly for securities arbitrage vehicles to do so, the consequences for the ABS market could be far reaching.
"If securities arbitrage conduits don't make economic sense under new liquidity eligibility requirements, it could have a major impact on the bid for triple-A ABS, of which they are a significant investment base," one source said.
Meanwhile, the regulators failure to address the nuances across asset classes will make it difficult for U.S. conduits to compete with foreign conduits and term issuers, Toennies said. The new requirements will not allow for the funding of assets that are 90 days past due, she noted. However, credit card charge-offs are enacted at 180 days past due. "If term and foreign issuers are offering to fund at 180 days past due, U.S. conduits being forced to move to a 90-day standard will be at a competitive disadvantage," Toennies said.
In addition, many in the market lament the proposal's narrow focus. "It is too singularly focused on one component, the eligibility criteria, while ignoring the structural protections proved through credit enhancement," Toennies said.
The issue is further complicated by the fact that the FIN 46 capital relief as proposed bears very little resemblance to the treatment for ABCP conduit vehicles under Basel II, Toennies added. An ABCP facility as risk weighted under Basel II's Internal Assessment Approach may yield better economics.
In any event, the full U.S. implementation of Basel II will follow at least one quantitative impact study and one or two rounds of notices of proposed rule makings, which are followed by commentary periods. The regulators have pegged U.S. implementation as far away as 2008.
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