The Financial Accounting Standards Board (FASB) officially released the highly anticipated SPE consolidation project exposure draft last week, sending rumbles through the ABS community.

As anticipated following FASB's June 5 meeting on the project, the situation, for the most part, is looking fairly manageable for the securitization markets - particularly, of course, for structures already employing FAS 140 QSPEs, which are exempt from the consolidation analysis.

"I think FASB has fixed a lot of the problems with regard to abuses, but there is very little that is currently being done [in the securitization markets] that won't be able to be adapted to the new rules," a securitization attorney said, after reading the draft.

One issue that concerned a few market participants on first glance is that FASB seemed to have dropped the "Financial SPE" term from its definitions. This is apparently more cosmetic than meaningful. What was coined the FSPE - which can qualify as exempt from consolidation, and which is similar to a QSPE (with a few differences that make it more conducive to other areas of securitization, such as ABCP conduits) - is referred to in the draft as "SPEs That Hold Certain Financial Assets."

These are defined as QSPEs that do not hold equity, or SPEs that meet all the conditions of a QSPE except for the following three (abbreviated from the draft):

*They may hold equity securities only temporarily and then only if those equity securities are obtained as a result of collecting financial assets held by the SPE.

*They are not necessarily restricted to acquiring their assets by transfer from a transferor as described in FAS 140.

*They are not necessarily subject to the restrictions on sales of assets described in FAS 140.

An accounting source noted that FASB does not seem to be providing relief for FSPEs from QSPE limitations on derivatives.

Similar to earlier indications, an enterprise would not consolidate the FSPE if it failed two of the three conditional tests. The first test is associated with the enterprise's authority over the purchase and sale of assets and the significance of its discretion in impacting the SPE's finances. The second condition asks whether the enterprise is providing a guaranty, back-up lending arrangement, or other liquidity or credit support that is subordinate to the other parties' interests. The third condition asks whether or not the enterprise receives fees that are market based (to fail this test, fees need to be deemed market based).

If these conditions somehow point to more than one primary beneficiary, the enterprise with either the majority variable interest, or an interest significantly greater than the other enterprises in question, would consolidate.

According to preliminary commentary circulated last week, a major issue for CBOs qualifying as FSPEs will be to demonstrate that the collateral manager fees are in fact market-based, given FASB's criteria.

Also, for securitization vehicles that may not be able to be structured as FSPEs and are not deemed economically substantive - such as synthetic CDOs - consolidation is based on variable interests, or, if there is not enough outside equity investment, voting interests, an accounting source stated.

It is also clear that FASB is continuing with the "silo" approach to SPEs that would be associated with multi-seller ABCP conduits, although the language and guidance on silos is somewhat elusive, sources said.

The attorney commented that "The most incomprehensible part of the draft is where it talks about silos.' You read that sentence, and you can't make heads or tails of it. By the fifth read, you kind of get an idea of where they're going with this."

From the draft: "If contractual or other legal provisions or agreements substantially restrict an enterprise's rights and obligations to specifically identified assets of an SPE and the interests of the creditors of the SPE apply equally to all of the SPE's assets, that enterprise shall treat those assets and the portions of the SPE's liabilities attributable to those assets as a separate SPE [or silo]."

The draft is out for commentary until Aug. 30, and newly created SPEs would be subject to the guidelines immediately following the "Final Interpretation." Existing SPEs will be subject to the new guidelines as of the beginning of the fiscal year (following implementation) or in reporting statements filed after March 15, 2003.

In the coming weeks, expect industry associations such as the American Securitization Forum and the Bond Market Association to publicly post their comments/proposals to FASB (as the BMA has done in the past). According to one lawyer, because of the heightened awareness of this issue, law firms are likely to send memos out to their clients in a more timely fashion than is usually the case with FASB exposure drafts and regulatory guidelines.

Community issues

What's notable, perhaps, is that the securitization industry has been unusually attentive to the FASB developments on consolidation. One source commented that in the past, FASB exposure drafts with fairly weighty implications have come and gone, barely making headlines, with only a handful of parties actually publicly following and/or commenting.

Though it was the shortened holiday week, almost immediately after word spread that the draft had been released, both ASR and IFR Markets had solicited calls from various sources seeking early word-of-mouth commentary. A common inquiry: "Has Marty put anything out yet?"

Marty Rosenblatt - lately the CNN of securitization accounting - founder of the structured finance group at Deloitte & Touche, has been distributing informal commentary following the subsequent FASB meetings on the consolidation project. Rosenblatt is also Chair of the Accounting & Tax Subcommittee at the ASF.

Meanwhile, just before the (exposure) draft was released, Standard & Poor's took the first step in getting the global securitization community primed to express their views on the SPE consolidation project, the rating agency said.

Last week, in the debut of S&P's SF Market Opinion - a new quarterly survey sent to thousands of securitization professionals globally - S&P elicited feedback from the market on the progress of the FASB SPE project.

"We queried thousands of participants about their general views regarding the scope, potential impact and fairness of FASB's proposals as they related to securitized product," said Adam Tempkin, S&P's spokesman for structured finance. "By eliciting these perspectives from the global securitization community, and then presenting our findings to them, we hope to encourage discourse within the market and give market participants insight into what their peers are thinking."

Each SF Market Opinion questionnaire will canvass market professionals about key issues affecting the sector. S&P will release highlights from the FASB edition of SF Market Opinion along with a commentary once all the surveys have been received, Tempkin said.

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