It was an interesting week in securitization accounting, to say the least.

The Financial Accounting Standards Board released the proposed modifications to Financial Interpretation No. 46 - a relative non-event given the content, though anticipated nonetheless (see p. 3). Also, a sneak peak at the Emerging Issues Task Force 03-15, which addresses sale treatment of CDOs, passed through the market's hands (see p. 3). The topic will be discussed at the EITF meeting on Thursday.

All the while, several U.S. industry organizations, including the American Securitization Forum and the Commercial Mortgage Securities Association, submitted commentary to the federal regulators regarding the Aug. 4 Advanced Notice of Proposed Rulemaking (APNR), which is, essentially, the U.S. regulators' version of the Basle capital adequacy guidelines.

After Basle's implementation (the date of which has yet to be finalized but was recently pushed into 2006), individual countries will set their own regulations that fit into the international framework. As such, Basle's developing capital adequacy guidelines are closely watched by U.S. regulators and the banks that will be impacted. Like their European counterparts, U.S. securitization professionals are concerned that Basle's approach penalizes securitization, rather than favoring it as a tool for risk dispersion.

"We continue to support the goal of matching regulatory capital with risk," said Dwight Jenkins, executive director with the ASF. "But if the guidelines are adopted as proposed, the regulatory capital requirements will diverge from the economic capital calculations."

"The result of this will motivate a bank to make decisions that are not based on a sound economic analysis of transactions or consistent with the risk management frameworks used by regulated entities and supervised by the regulators pursuant to Pillar 2," the ASF writes in its commentary. "Simply put, we believe the U.S. Proposal would perpetuate, albeit in a different form, capital arbitrage issues that were among the primary reasons for the currently contemplated reforms."

Among other suggested changes, the ASF proposes that the U.S. regulators recognize FIN 46-driven expected loss tranches as true risk transfers, thereby changing the risk-based capital requirements against ABCP conduits that have issued expected loss trances.

The securitization component of Basle 2 is viewed as onerous by many U.S. regulators. "There are a lot of dissenters in the regulatory environment, and there is concern on Capitol Hill that Basle 2 will hurt the economy," according to a Washington-based source.

Will CP become a deposit?

Meanwhile, comments on a September regulatory release - a Notice of Proposed Rulemaking to provide relief against ABCP assets consolidated as a result of FIN 46 - are due out next Monday, so letters should start circulating this week.

Sure to be a hot item, imbedded in the FIN 46 capital package is the possibility that consolidated commercial paper dated less than seven days will be deemed a deposit under Federal Regulation D. In fact, certain Federal Reserve examination staffers have been notifying banks that this is the case. "If something is declared a deposit, it will be subject to demand deposit reserves," said a source familiar with the situation.

The issue is that if consolidated conduit assets are treated as

liabilities of the sponsor banks, there is a possibility that these liabilities will be treated as deposits, and that the short-dated paper would be treated as transaction accounts, under Regulation D and Q, according to a memorandum submitted to the Board of Governors by the ASF.

Under Regulation Q, short-dated CP would not be able to bear interest.

"These consequences would place bank-sponsored ABCP conduits that are required to consolidate for purposes of FIN 46 at a competitive disadvantage in comparison to ABCP conduits sponsored by other institutions, such as investment banks, that are not subject to deposit-reserve or similar bank-regulatory requirements," the memorandum states.

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