On November 24th, the Structured Finance Industry Group (“SFIG”) submitted a comment letter[1] to the Board of Governors of the Federal Reserve System and other prudential regulators (the “Prudential Regulators”) and to the Commodity Futures Trading Commission (“CFTC”) relating to proposed margin requirements for securitization transaction swaps.
The Prudential Regulators and the CFTC both issued re-proposed rules for uncleared swap margin in September.[2] Under both sets of rules, the majority of securitization special purpose vehicles (“SPVs”) would constitute “financial end users,” which is defined to include, inter alia, private funds and entities that raise money from investors primarily for the purpose of investing in loans, securities, swaps, funds or other assets for resale and other disposition or otherwise trading in loans, securities, swaps, funds or other assets. Financial end users party to uncleared swaps would be subject to: (i) initial margin requirements if they have “material swaps exposure” (generally, an average daily exposure over the previous June, July and August of over $3 billion on all swaps), subject to certain conditions; and (ii) variation margin requirements satisfied in cash on a daily basis, subject to certain conditions.
The SFIG comment letter highlights the challenges that the securitization industry would face if such requirements were imposed. It also argues that variation margin is unnecessary because substantial overcollateralization and priority of payment requirements already address swap counterparty credit concerns that such margin is intended to address. Among other things, the comment letter points out that securitization SPVs are bankruptcy-remote, and that investors invest in assets transferred by the originator to the SPV in a “true sale” that are legally isolated from the originator and its creditors. The comment letter further notes that structural safeguards that address bankruptcy risks of a securitization SPV benefit all of the SPV’s secured creditors, including swap counterparties (which are generally entitled to payments at a senior level in the payment waterfall and, therefore, generally bear a low risk of non-payment).
Moreover, securitization SPVs are not structured to have the intra-month cash requirements necessary for the payment of daily variation margin. According to the comment letter, requiring daily variation margin from securitization SPVs would result in a significant reduction in the securitization market because, among other things, obtaining funding for margin calls (whether through a committed loan facility or from cash reserves) is not practically or economically feasible. Preserving the ability of securitization SPVs to enter into swaps is of significant importance to the securitization industry and, by extension, the larger consumer economy. Specifically, the comment letter notes that a reduction of the securitization market would negatively impact the availability of consumer and commercial funding in core segments of the economy.
[1] The comment letter may be found at http://www.sfindustry.org/images/uploads/pdfs/SFIG_Comment_Letter_Margin_Requirements.pdf.
[2] For a detailed description of the re-proposed rules, see “Prudential Regulators and CFTC Re-Propose Rules for Uncleared Swap Margin”, Posted on October 29, 2014.