Desk Reference: Post-Financial Crisis Statutory and Regulatory Initiatives Affecting ABCP Conduits
As we are all too aware, there are many regulatory developments affecting asset-backed commercial paper conduits and their sponsors. Keeping track of these is a daunting task. We hope this desk reference will be helpful.
The primary sources for the regulatory initiatives affecting the ABCP market are the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the comprehensive set of reform measures developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector known as “Basel III.”
Reliance on short-term wholesale funding by banks is widely viewed by financial system regulators as one of the main contributors to the financial crisis. Not surprisingly, therefore, like other forms of wholesale funding, ABCP has attracted the specific attention of regulators in many contexts. For example, the prudential bank regulators have eliminated most of the regulatory capital advantages of funding customer securitization transactions through ABCP conduits and have imposed liquidity coverage requirements on banks that sponsor or otherwise support ABCP conduits. Also, the Securities and Exchange Commission has enacted amendments to Rule 2a-7 of the Investment Company Act of 1940 that would further restrict the ability of money market funds—historically, major purchasers of ABCP—to invest in the ABCP of a single ABCP conduit or a single ABCP conduit sponsor.
In other contexts, the activities of ABCP conduits are being regulated as part of the broader regulation of securitization. Risk retention rules, the Volcker Rule, credit rating agency reform and other regulatory initiatives arising out of Dodd-Frank affect both activity at the ABCP conduit level and most of the underlying securitization transactions with bank customers. Often, these regulations were designed without specific consideration of the ABCP conduit structure and therefore do not fit neatly with market practices in that sector. Even where specific rules and exemptions from rules have been established for ABCP conduits, many of these specific rules and exemptions fail to accommodate existing ABCP structures and practices and, therefore, force ABCP conduits to seek other solutions.
When we first delivered this Desk Reference earlier this year (March 2015), many, but not all, of the regulations affecting ABCP conduits had been finalized. Since then and as of the time of this update (November 2015), several additional proposed and final regulations have been issued. Further, there have been a few informative interpretations of existing regulations by the applicable regulators and for several regulations, market consensus has developed as to their interpretation and implementation. We hope this update proves useful and we look forward to being of assistance to you in interpreting these regulations and analyzing how best to conduct your business going forward.