Industry Gets Regulatory Relief From CFTC

It looks like asset-backed bond issuers can breathe a sigh of relief about a Commodity Futures Trading Commission rule that threatened to regulate many securitizations as commodity pools starting Oct. 12.

Responding to lobbying by the American Securitization Forum, the CFTC’s five-member board is expected to issue a no-action letter on Oct. 11, effectively staying the disputed rule. Such a move would constitute a big win for the trade group, which has argued that treating securitizations as commodity pools was both unreasonable and potentially harmful to the industry. And in any case, few if any issuers were in a position to meet the Oct. 12 deadline.

“All five commissioners currently agree with the perspective that most securitizations should not be roped into commodity-pool regulations,” ASF executive director Tom Deutsch said. “We are cautiously optimistic that we’ll receive some form of interim relief prior to next Friday.”

At issue is a Dodd-Frank Act provision that broadly defined commodity pools to encompass any type of swap transaction — including contracts that allow securitized-product issuers to sell floating-rate paper backed by fixed-rate assets or create bonds denominated in multiple currencies.

The ASF has spent the past couple of months pressing the CFTC to carve out an exception for securitization pools. Aside from the logistical hurdles of complying with the Oct. 12 deadline, the trade group expressed concern about the costs involved in meeting new reporting requirements and other rules designed to tighten regulation of futures and options traders. There also was concern about how the measure might interact with the so-called Volcker Rule, which would place strict limits on the ability of banks to run hedge funds, private equity vehicles and commodity pools.

“This was an accidental application of a Dodd-Frank rule, and the commission is exercising due care in addressing our concerns,” Deutsch said. “There are still outstanding issues and we are working them through, but the expectation is that in the next couple of months they will provide more permanent relief to get a securitization exemption.”

The CFTC adopted the Dodd-Frank measure on July 10, but it wasn’t until September that industry professionals realized the deadline for registering with the commission was Oct. 12. Following the issuance of a no-action letter, the CFTC’s board would meet in December to rejigger the definition of commodity pool — presumably in a way that wouldn’t capture securitizations’ “embedded” swap transactions.

Meanwhile, some asset-backed bond issuers have accelerated deals in an effort to close the transactions before Oct. 12, while others have put their issuance plans on hold. For example, Fannie Mae and Freddie Mac delayed issuing new risk-bearing bonds pending a decision by the CFTC. The expectation is that issuers will resume their normal routines once the commission acts to stay the swap rule on Oct. 11.

“People are expecting this order to come, but it isn’t here yet — and until it’s here, people will not be really comfortable and don’t want to think about swap alternatives for their transactions,” a securitization attorney said.

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