Until the Federal Reserve Board of Governors makes a formal determination and publishes it, the staff will not recommend enforcement action against any bank that sponsors and consolidates an ABCP conduit under FIN 46 and chooses not to treat the CP as deposits under Regulation D or Regulation Q.

This notion was made clear by the Fed to the American Securitization Forum, said Jason Kravitt, ASF chair of the Legal, Regulatory, Accounting and Tax Committee.

Ironically, the threat of determining short-dated ABCP as deposits - which could substantially increase the required cash reserves of certain banks - is embedded in the capital relief package to ABCP sponsoring banks published in October by the Federal Financial Institutions Examination Council.

The "Interim Final Rule," as market players call it, allows banks to exclude from the capital adequacy analysis the consolidated ABCP assets and liabilities associated with the implementation of FIN 46, the yet-to-be finalized consolidation guidelines from the Financial Accounting Standards Board.

As previously reported, certain interpretations of the "Interim Final Rule" could deem commercial paper, especially in the seven-day-or-less range, as a deposit, subject to a reserve account under the "Rules Governing The Limited Offer And Sale Of Securities Without Registration Under The Securities Act Of 1933," or Regulation D. Further, under Regulation Q - which specifically prohibits banks from paying interest on commercial demand deposits - short-dated CP would be in violation if bearing interest.

In recent weeks, securitization parties have met with the regulators to express these concerns, which affected the temporary reprieve.

"The idea [of the Interim Final Rule] was to correct unintended consequences from FIN 46," said one source following the issue. "It would be a shame if there were unintended consequences from the corrections to the unintended consequences."

Last week, the ASF submitted its commentary letter on the Interim Final Rule, which does not mention the deposit issues. According to an ASF staffer, the deposit issues were not addressed in the comment letter because they deal with a different contingent of the regulators: i.e., the deposit reserve issue is not a capital adequacy issue, and is literally handled by a different set of people.

The ASF did, however, express its concerns to the Board of Governors of the Federal Reserve in a separate memorandum a few weeks back (see ASR 11/10).

As for comments on the Interim Final Rule, the ASF is pushing for delayed implementation for the proposed treatment of liquidity positions and early amortization provisions until the final Basle Accord is fully implemented. If not, the ASF offers up a "more appropriate" conversion factor in determining capital required against liquidity facilities, as well as the criteria for falling under the "eligible" liquidity definition, among other things.


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