The SEC has approved a proposal that would prevent a lender from shorting an asset-backed securities product or from putting together a security with a third party if there was an intention to bet against the security. But the expectation is that even if the rules were introduced, it would have no effect on the severely reduced US ABS market.
"The rules appear to be addressing derivatives on asset-backed securities – and really those don’t exist anymore," says the head of ABS origination at a US bank. "There is no readily available way to short credit-card ABS or to short auto-loan ABS, so the proposed rule would have little impact on the current ABS market. The rules seem to be addressing the unique Abacus situation, and it is unlikely that could happen again."
Goldman Sachs was accused of packaging mortgage securities, via the Abacus CDO, to sell to a client without disclosing that those securities had been handpicked by another Goldman Sachs client – hedge fund Paulson – that was betting on a default. It resulted in Goldman paying a $550 million settlement in July last year.
| A shadow of its former self |
| Euro and USD denominated ABS issuance |
 |
| Source: Dealogic |
The ABS market is a shadow of what it was before the financial crisis now that the sub-prime market has gone. Up to September 21 this year just $81.5 billion had been issued in US dollars. That compares with more than $1 trillion in 2005 and 2006. The euro-denominated ABS market is even quieter: year to date €16.3 billion had been issued in 34 deals. For a start, asset-backed paper has a maturity of about 1.8 years to 3.5 years at the moment and the rules are not expected to be implemented until the second half of 2012 at the earliest, by which time most of the current issues will be far along in their lifespan.
The SEC approved the proposal, saying it "would prohibit securitization participants of an ABS for a designated time period from engaging in certain transactions that would involve or result in any material conflict of interest".
It’s a complex rule to enforce and one that has been laid squarely at the SEC’s door to resolve. While other parts of the Dodd-Frank legislation have been tackled by the Financial Stability Oversight Council and the CFTC, the SEC is working alone on this particular part of the legislation. One lawyer questions whether the SEC knows how to tackle the rule: "They were given 270 days from July 2010 to come up with a proposal. That was April. Not only are they late on that proposal, but now they are offering three months of comment period from the industry." Commenting on the proposals, Tom Deutsche, director of the American Securitization Forum said the body supported the intention to "eliminate incentives for market participants to intentionally design asset-backed securities to fail", but that it hoped that the rules would not prohibit "appropriate hedging, market making and other legitimate transactions, causing unnecessary adverse impacts on the markets for asset-backed securities".
