At times it seems that participants at ABS East are surprised by the lack of pain they’re feeling from Reg AB II, as if their relationship with this massive regulation had evolved to a workable, if not exactly cozy, marriage.
Or as Jason Kravitt, partner at Mayer Brown, put it, “nobody’s ecstatic, but no one’s furious.”
Maybe not furious exactly but there were apparently issuers out there that were mildly irritated.
Adopted by the Securites and Exchange Commission, Reg AB is a bundle of regulations covering the registration, disclosure and reporting for publicly offered asset-backed securities. The latest iteration expands requirements for residential mortgage-backeds, commercial mortgage-backeds, auto loan and lease-backed securities and resecuritizations.
In a poll of attendees at the Information Management Network conference, only 50% of issuers said that Reg AB II was an improvement over Reg AB I. Curiously enough, more investors — some 66% — thought it was indeed better than the prior iteration. That's despite the fact that investors didn't get as much disclosure as many were seeking.
A big question raised by Reg AB II was whether the disclosure requirements would steer issuers away from the public market and into private deals that are not registered with the SEC.
Sairah Burki, a director at the Structured Finance Industry Group, said that large structured finance issuers wouldn’t abandon the public market as it was important for them to maintain a presence there.
One thing’s for sure, however: the appetite among issuers for doing public deals has waned, with 60% of them in a conference poll saying that Reg AB II had, in particular, ratcheted up the appeal 144A deals, which are exempt from the rule.
Bob Behal, co-head of ABS/CMBS Investments at Vanguard Group, said that liquidity would suffer if the rule diverts issuance from the public to the private market.
But could the 144A market absorb the standard issuance volumes of the securitization industry? The answer, Burki added, is “a resounding no.”
Echoing the view expressed yesterday by Mayer Brown’s Stuart Litwin, Burki said issuers might end up tapping the public market with triple-A product and the 144A market with subordinated tranches.
Calvin Wong, chief credit officer at Morningstar Credit Ratings, said that Reg AB II, by introducing loan-level data, facilitates the application of consistent methodology throughout the life of a transaction. He suggested that this was a welcome change from earlier practices.
Before the crisis, Wong said, the methodologies that rating agencies used for assessing a deal at issuance were different than those employed during surveillance.
The new rule also sought to balance consumer privacy concerns with investors’ desire for deep, granular data. One example of this was truncating individual zip codes of borrowers to two digits from seven. Some investors would clearly like a little more. Wells Fargo Senior Vice President Peter Carroll said that the rule demonstrates the challenge of protecting a consumer’s identification while providing useful loan-level data.
“You can never eliminate” the possibility a consumer can be identified, he said. “You can only mitigate it.”
Reg AB II will take effect 60 days after it is published in the Federal Register; issuers will have another year to comply.