The Securities Industry and Financial Markets Association (SIFMA) submitted comments to Federal regulators yesterday regarding the proposed Volcker rule provisions on ABS and insurance-linked securities (ILS).  The Volcker Rule was added by Section 619 of the Dodd-Frank Act.

SIFMA provided comments to the Comptroller of the Currency, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and the Commodity Futures Trading Commission on proposed rules implementing the Bank Holding Co. Act of 1956 (the Volcker Rule).

Earlier, the Financial Stability Oversight Council (FSOC), as mandated by the Dodd-Frank Act, conducted a study on how best to implement Section 619 of the Act. The Volcker Rule expressly requires the Federal agencies to consider the FSOC findings when implementing the rules.

The FSOC recommended that, in devising the proposed rules, the regulators carefully consider the range of such entities to narrow the statutory definitions of “hedge fund” and “private equity fund” where needed.

The Volcker Rule generally bans any banking entityfrom acquiring or retaining ownership interest in — or even sponsoring — a hedge fund or private-equity fund. It also does not allow financial institutions from entering into  “covered transactions” under Federal Reserve Act Section 23A. These transactions cover loans, guarantees or purchases of securities or assets with any hedge fund or private-equity fund for which it serves as sponsor, investment manager or investment adviser. It also prohibits these firms from engaging in proprietary trading.

Despite the securitization exclusion and the FSOC study recommendations, the regulators did not exclude ABS issuers from the proposed rules’ definition of “covered funds.”

SIFMA also has problems with the scope of the current exemptions from the proposed rules. Regulators have carved out exemptions for loan securitizations and for ownership interests that must be retained to comply with retention requirements under Section I5G of the Securities Exchange Act of 1934. The trade group said these exemptions are too narrow for the Volcker Rule to fully achieve the stated aim of excluding securitization.

Another issue for SIFMA is that under Section 13 of the Volcker Rule the definition of hedge fund and private equity fund covers entities that operate under a provision of the Investment Company Act of 1940 that is called Section 3(c)(1) or 3(c)(7). Issuers of ABS and insurance-linked products typically use Section 3(c)(1) or 3(c)(7) as an exemption from the Company Act. SIFMA argues that by availing themselves of these sections, securitization issuers become effectively defined as a hedge fund or private equity fund, and by extension, become subject to the Volcker Rule itself.

The trade group said that since issuers of ABS or insurance-linked securities are neither hedge funds nor private-equity funds, the agencies should, as intended by the securitization exclusion, exclude such issuers from Volcker’s definition of “covered funds.”

What is more, the proposed rules provide for banking entities that sponsor securitization issuers under those exemptions to be subject to Section 23A in terms of their loans to, asset purchases from, and other “covered transactions” entered into with such issuers, SIFMA stated

SIFMA also gave examples of how global regulators view securitization as a valuable source of financing. The trade group said that the Joint Forum of the Basel Committee on Banking Supervision recognized that re-establishing sustainable securitization markets has been a high priority of the G20, the Financial Stability Board and other international organizations and national governments since the onset of the financial crisis.

"We are concerned that the way the agencies have chosen to implement the securitization exclusion in the proposed rules risks undermining such agenda, not only in the United States but (because the Proposed Rules purport to apply to U.S. and non-U.S. banking entities on a worldwide basis) internationally as well," SIFMA stated in its comment letter.

To view SIFMA's entire commentary, please go to this link.

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