The buy side and the sell side at the Securities Industry and Financial Market Association are in agreement and sticking to their guns on some issues that could shape how shelf eligibility for securitizations will take shape, including the issuer's certification, the role of a credit risk manager in transactions and arbitration.
SIFMA said that while it issued two separate sets of comments from the two sides of the market in response to the reproposal of shelf-eligibility conditions, both letters do stress some particular issues.
One is related to the issuer's certification, which SIFMA said it continues to believe should stick to disclosure included in the prospectus as opposed to an expectation about the future cash flows from the collateral pool's assets or the securitization's quality.
Another is related to the credit risk manager and a Securities and Exchange Commission refinement of last year's proposed move to make the credit risk manager a party to mortgage-backed securities transactions and possibly others. The group said the commission has adopted much of what it proposed in 2010 in this regard.
Among other points SIFMA is still pushing for are explicit requirements for arbitration, the group said.
In a letter representing the views of its dealer, sponsor and issuer members, the group said (as proposed in prior comment letters) investors whose interests in the securitization do not represent at least 25% of the collateral pool could direct the credit risk manager to pursue a claim for material breach of a representation and warranty “only if they agree to pay directly any costs associated with pursuit of the claim, including arbitration costs.”
While the commission has proposed what the letter calls unspecified dispute resolution procedures where the party with repurchase obligations would be required to agree to the dispute resolution mechanism selected by the party requesting the repurchase (if a repurchase request is unresolved for a specified period of time), the letter suggests modifying this.
More specifically, the letter suggests that at the option of either the credit risk manager or the obligated party the dispute could be referred to a binding arbitration proceeding before an independent arbitrator or panel of arbitrators, with proceedings of this type taking place semiannually to avoid excessive costs. The costs would be borne by the losing party.
In the case where the credit risk manager brought the claim on behalf of the trust and is the losing party, the trust would have to provide reimbursement. If the trust brought the claim on behalf of an investor group comprising less than 25% of the interests in the securitized asset pool the investor group would have to provide the reimbursement.
The asset managers' letter also calls for binding arbitration to be mandatory and involves a “loser pay” model.
Their letter notes that last year's negotiated compromise with the sell side “for the creation of an independent process to enforce representations and warranties to authorize arbitration” was a consensus that it was “no small feat” to reach given the divergence of interests involved.