July29,2011

Ms.ElizabethM.Murphy OfficeoftheComptrolleroftheCurrency Secretary 250EStreet,S.W.,MailStop23 SecuritiesandExchangeCommission Washington,D.C.20219 100FStreet,N.E. DocketNumberOCC20110002 Washington,D.C.20549 RIN1557AD40 FileNumberS71411 RIN3235AK96 Ms.JenniferJ.Johnson Mr.RobertE.Feldman Secretary ExecutiveSecretary BoardofGovernorsoftheFederalReserveSystem Attention:Comments th 20 StreetandConstitutionAvenue,N.W. FederalDepositInsuranceCorporation th Washington,D.C.20551 55017 Street,N.W. DocketNumber20111411 Washington,D.C.20429 RIN7100AD70 RIN3064AD74 Mr.AlfredM.Pollard RegulationsDivision GeneralCounsel OfficeofGeneralCounsel Attention:Comments/RIN2590AA43 DepartmentofHousingandUrbanDevelopment FederalHousingFinanceAgency 4517thStreet,S.W.,Room10276 Washington,D.C.204100500 1700GStreet,N.W.,FourthFloor RIN2501AD53 Washington,D.C.20552 Re:CreditRiskRetention LadiesandGentlemen:
TheInvestmentCompanyInstitute1supportsthegoalofthejointproposaloftheSecurities andExchangeCommission(SECorCommission),OfficeoftheComptrolleroftheCurrency
TheInvestmentCompanyInstituteisthenationalassociationofU.S.investmentcompanies,includingmutualfunds, closedendfunds,exchangetradedfunds(ETFs),andunitinvestmenttrusts(UITs).ICIseekstoencourageadherenceto highethicalstandards,promotepublicunderstanding,andotherwiseadvancetheinterestsoffunds,theirshareholders, directors,andadvisers.MembersofICImanagetotalassetsof$13.3trillionandserveover90millionshareholders.
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July29,2011 Page2of12 (OCC),BoardofGovernorsoftheFederalReserveSystem(FederalReserve),FederalDeposit InsuranceCorporation(FDIC),FederalHousingFinanceAgency,andDepartmentofHousingand UrbanDevelopment(together,theAgencies)tobetteraligntheinterestsofsecuritizersofasset backedsecurities(ABS)withthoseofinvestorsinABS.Theproposalwouldimplementthecredit riskretentionrequirementsofSection15GoftheSecuritiesExchangeActof1934(ExchangeAct),as addedbySection941oftheDoddFrankWallStreetReformandConsumerProtectionAct(the DoddFrankAct),generallytorequireanABSsponsortoretainnotlessthanfivepercentofthe creditriskofanyassetthatthesponsor,throughtheissuanceoftheABS,transfers,sells,orconveystoa thirdparty.2AspurchasersofABS,registeredinvestmentcompanies(funds)haveastronginterestin ensuringthatsecuritizersofABSactconsistentlywiththeinterestsofinvestors.3 Weareconcerned,however,thattheproposedstandardsforriskretentionmaynotbe appropriateornecessaryforcertainclassesofABSinwhichfundsinvest.WecommendtheAgencies forrecognizingthatABShavediversecharacteristicsandforseekingtotailortheproposedrisk retentionrequirementsbasedonthecharacteristicsofdifferentABS.Wedonotbelieve,however,that theproposedrequirementssufficientlyreflectdifferencesamongcertainclassesofABSormarket practiceforthoseparticularsecurities.4Thisisparticularlysowithrespecttonotesissuedbyasset backedcommercialpaper(ABCP)programsandsecuritiesissuedbymunicipaltenderoptionbond (TOB)programs.Inaddition,weareconcernedthatcertainofthestandardsproposedwithrespect tomortgagebackedsecurities(MBS),inparticularcommercialmortgagebackedsecurities (CMBS),mayimpairtheviabilityofthosemarketsaresultinthebestinterestsofneitherinvestors, includingfunds,northeindividualsandfirmsthatobtainfinancingthroughthosemarkets.Finally,we supportaqualifiedresidentialmortgage(QRM)standardundertheproposedexemptionfromthe riskretentionrequirementsforresidentialmortgagebackedsecurities(RMBS)thatarebackedsolely byveryhighqualityloans,althoughourmembershavesomewhatdifferentviewsregardingthe appropriateQRMstandard.
CreditRiskRetention,SecuritiesExchangeActReleaseNo.64148(March30,2011),availableat http://www.sec.gov/rules/proposed/2011/3464148.pdf(Release). 3 FundsalsohaveaninterestinstrongdisclosurestandardsforABS,andwehave,inthepast,supportedtheCommissions effortstoimprovedisclosureandreportingforABS.SeeLetterfromKarrieMcMillan,GeneralCounsel,ICI,toElizabeth M.Murphy,Secretary,SEC,datedNov.15,2010;LetterfromKarrieMcMillan,GeneralCounsel,ICI,toElizabethM. Murphy,Secretary,SEC,datedAug.2,2010. 4 AsCongressstatedinthelegislativehistoryforSection15GoftheExchangeAct,aonesizefitsallapproachtorisk retentionmayadverselyaffectcertainsecuritizationmarkets....Accordingly,thebillrequiresthattheinitialjoint rulemakingincludeseparatecomponentsaddressingindividualassetclasseshomemortgages,commercialmortgages, commercialloans,autoloans,andanyotherassetclassthattheregulatorsdeemappropriate.TheCommitteeexpectsthat theseregulationswillrecognizedifferencesintheassetssecuritized,inexistingriskmanagementpractices,andinthe structureofassetbackedsecurities,andthatregulatorswillmakeappropriateadjustmentstotheamountofriskretention required.S.Rep.No.111176,at130(2010).
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July29,2011 Page3of12 Weaddresseachoftheforegoingconcernsinturnbelow. I. TheproposalincludesariskretentionoptionspecificallydesignedforABCPprogramsthat meetcertainconditions.5WeappreciatetheAgenciesrecognitionthatthisinstrumenthasunique characteristics,andrecognizethattheAgencieshavesoughttomakethisoptionconsistentwith existingmarketpractice.6Weunderstand,however,thatmostexistingABCPprogramscouldnotmeet theproposedrulesconditions.7Wethereforerecommend,inlieuoftheABCPriskretentionoption, thattheAgenciesexcludeorexemptfromtheproposalsriskretentionrequirements8thosebank sponsoredABCPprogramsthatmeetcertaincriteria,whichwebelievereflectthealignmentofinterests Section15GoftheExchangeActwasintendedtoachieve,ordeemsuchprogramstocomplywiththe riskretentionrequirements.9 A. Background ABCPprogramsareshortterm,seniorsecuredinvestmentvehiclesthatissueinstrumentsin themoneymarkets.Theyareusedbyawidevarietyofcorporationssuchasbanks,finance companies,andbrokerdealerstoobtainlowcostfinancingforadiverserangeoffinancialreceivables. ABCPisofferedcontinuouslyandcarriesrepaymentdatesthatusuallyrangefromovernightup to270days.ABCPprogramsarereferredtoasassetbackedbecausethebankruptcyremote,special purposevehiclesthatissuetheABCPown,orhavesecurityinterestsin,multiplepoolsofvarioustypes offinancialreceivables. ABCPprogramstypicallyaresupportedbycreditenhancementandcommittedliquidity facilities.TheliquiditysupportforanABCPprogramtypicallyequalsthefaceamountofABCP outstanding,toprotectinvestorsincaseofamarketinterruptionoranytimingdifferenceswithrespect
5

AssetBackedCommercialPaperPrograms

ProposedRule____.9. Releaseat41.

See,e.g.,LetterfromTomDeutsch,ExecutiveDirector,AmericanSecuritizationForum,totheAgencies,datedJune10, 2011,at99101,availableathttp://www.sec.gov/comments/s71411/s7141157.pdf. 8 Section15GoftheExchangeActstatesthattheriskretentionrulesadoptedbytheAgenciesshallprovideforatotalor partialexemptionofanysecuritization,asmaybeappropriateinthepublicinterestandfortheprotectionofinvestors... Section15G(c)(1)(G)(i). 9 ABCPissuedbystructuredinvestmentvehicles(SIVs)andsecuritiesarbitrageABCPprogramsexperiencedsignificant difficultiesduringthecreditcrisis.Generally,wedonotsuggestthatthesetypesofprogramsbeexcludedfromorexempt fromtheriskretentionrequirementsoreligiblefortheABCPriskretentionoptionundertheproposedrules.

7

July29,2011 Page4of12 torepayment.10ForABCPprogramsreferredtoasfullysupported,theliquidityfacilitiescanbe drawntofundallofthereceivablesheldbytheprogram,evenifsomeofthosereceivablesaredeemedto bedefaulted.ForpartiallysupportedABCPprograms,theliquidityfacilitieswillfundonly performingreceivables,i.e.,thosenotdeemedtobeindefault.Asameansofoffsettingthispotential sourceofrisk,partiallysupportedprogramshavecreditenhancementfacilitiesatboththepoollevel11 (supportingindividualtransactions,oftenintheformofovercollateralization)andattheprogram level.12Generally,investorsanalyzeABCPtransactionsprimarilyonthestrengthoftheABCP programsponsorandoftheseprogramscreditandliquidityarrangements,andlessonthereceivables beingfinanced. B. BankSponsoredABCPProgramsShouldNotbeSubjecttoAdditionalRiskRetention Requirements Webelievethatthealignmentofincentivesbetweenoriginatorandinvestorthatissoughtby theDoddFrankActlargelyhasbeenachievedforbanksponsoredABCPprograms.Accordingly,itis unnecessarytoimposeadditionalriskretentionrequirementsontheseprograms. OnJanuary28,2010, regulatorsincludingtheFederalReserve,theOCC,andtheFDICadoptedarulethatrequiresbanks sponsoringABCPprogramstoconsolidateABCPconduitsontotheirbalancesheets,aligning regulatorycapitalrequirementswithchangestogenerallyacceptedaccountingprinciples.13Thisrule reflectsthebankingregulatorsacknowledgementthatriskexposureinABCPprogramsgenerallyis bornebytheregulatedbanksponsor,whichmustreserveadequatecapitaltocoveranysuchrisk.14We believethisalignmentofinterestthatexistsinbanksponsoredABCPprogramsisanimportant prerequisiteforanABCPprogramtobeexemptedorexcludedfrom,ordeemedtocomplywith,the proposalsriskretentionrequirements.Wealsorecommendthefollowingascriteriatoidentifythose banksponsoredABCPprogramsthatareuniquelystructuredtoprovidesafeguardstoinvestorsandthe marketplace.Webelievethesecriteriaaligntheinterestsofsponsorswiththoseofinvestors,consistent withthepolicyobjectivesofSection15GoftheExchangeAct,suchthatimposingadditionalrisk

IntheeventthatmaturingABCPcannotberefundedinthemoneymarkets,theadministratoroftheprogram(whichis oftenthefinancialinstitutionsponsoringtheprogram)willdrawupontheliquidityfacilitiesinanamountsufficientto redeemallmaturingABCP. 11 Insomecases,theamountofpoollevelcreditenhancementforagiventransactionissetdynamically,inthatitincreasesto offsetdeterioratingpoolperformance. 12 Programlevelcreditenhancementisoftenintheformofaletterofcreditoracashcollateralaccount,effectivelyproviding afivetotenpercentsubordinatedcushionfortheABCP. 13 RiskBasedCapitalGuidelines;CapitalAdequacyGuidelines;CapitalMaintenance;RegulatoryCapital;Impactof ModificationstoGenerallyAcceptedAccountingPrinciples;ConsolidationofAssetBackedCommercialPaperPrograms;and OtherRelatedIssues,75FR4636(Jan.28,2010). 14 Id.at4643.

10

July29,2011 Page5of12 retentionrequirementswouldbeunnecessary.Thecriteriaarethefollowing: (i) thesponsoringinstitutionisaregulatedbankinginstitution; (ii) theissuingentityisbankruptcyremote; (iii) regulatedliquidityprovidershaveenteredintoalegallybindingcommitmenttoprovide 100percentliquiditycoverageforallissuedABCP,atleast95percentofwhichis providedbythesponsoringinstitution; (iv) atleastfivepercentprogramwide,firstlosscreditenhancementisprovidedbythe sponsoringinstitutionofanypartiallysupportedABCPconduitintheformofan irrevocableandunconditionalletterofcredit,cashcollateral,guaranteeorothersimilar facility,ornocreditenhancementisrequiredforanyfullysupportedABCPconduit; and (v) monthlyinvestorperformancereportsthatincludeloanleveldetailareprovidedona timelybasis. ThesecriteriaaligntheincentivesofthesponsorandinvestorsbyensuringthattheriskoftheABCP conduitremainswiththebanksponsor,andthatthesponsorisresponsibleforsubstantiallyallofthe liquidityandakeyportionofanycreditsupportfortheconduit.Inaddition,themonthlyinvestor reportsprovideanimportantmonitoringmechanism.Accordingtoanassessmentofthiscriteria performedbyaratingagencyforoneofourmembers,thecriteriawouldcaptureapproximately70 percentoftheABCPmarketintheUnitedStates.Importantly,thecriteriawouldexcludeSIVs,aswell asthosesecuritiesarbitrageprograms thatarenotsponsoredbyaregulatedbankinginstitutionanddo nothaveavailableliquidityequaltoatleasttheamountofABCPoutstanding. WethereforerequestthattheAgenciesexcludeorexemptbanksponsoredABCPprograms thatmeetthesestrictcriteriafromtheproposedriskretentionrequirements,ordeemtheseprogramsto satisfytheriskretentionrequirements.If,ontheotherhand,theAgenciesadopttheproposedrulesas written,itwillbeverydifficultforexistingABCPprogramstomeettheconditionsoftheproposedrisk retentionoptionforABCPprograms.ThiswillcauseABCPlendingtoslowsignificantly,and negativelyaffectbothbusinessesseekingfundingthroughthisfinancingmethodandinvestorsin ABCP. ShouldtheAgenciesconcludethatimposingfurtherriskretentionrequirementsonbank sponsoredABCPprogramsisappropriate,weurgeyoutoredefinetheparametersfortheproposed ABCPriskretentionoption,basedoncommentsreceived,tobetterreflectcurrentmarketpracticeand existingABCPstructures.Forexample,whileoriginatorsellerhorizontalriskretentionisamethod thatwouldworkforcertainABCPprograms,webelievethatotherriskretentionmethodsshouldalso

July29,2011 Page6of12 bepermittedaspartoftheABCPriskretentionoption.Suchmethodsshouldincludethoseotherwise permittedundertheproposedrules,aswellascreditenhancementsthatserveananalogousfunctionto theriskretentionrequirements,suchaslettersofcreditandcashcollateralaccounts,whicharestandard inthemarket. II. MunicipalTenderOptionBondPrograms TheproposalissilentregardingmunicipalTOBs.WerequestclarificationthatTOBsarenot withinthescopeoftheproposalor,alternatively,thattheybeexemptedfromitsrequirements.15 AlthoughTOBshavecertainfeaturesthataresimilartothoseofABS,marketparticipantsgenerallydo notperceiveTOBsasABS.NordowebelievethatTOBsraisetheconcernsthatCongressintendedto addresswhenitenactedSection15GoftheExchangeAct.ThestructuralcharacteristicsofTOB programswouldmakeitdifficultfortheirsponsorstosatisfytheproposedriskretentionrequirements. IfTOBsponsorswereforcedtorestructuretheirprogramssignificantlytocomplywiththeproposed rulesrequirements,theincreaseinthecostofTOBprogramsponsorshipcouldadverselyaffectthe stateandlocalgovernmentsthatindirectlyreceivefundingthroughtheseprograms. A. Background AmunicipalTOBprogramiscreatedbyasponsorbankthatdepositsoneormorehighquality municipalbondsintoatrustwhichissuestwoclassesoftaxexemptsecurities:ashorttermsecurity (thefloater)thatissupportedbyaliquidityfacilityandaninversefloatingratesecurity(the residual).16Thefloaterisavariableratedemandsecuritythatbearsinterestatarateadjustedat specifiedintervals(daily,weekly,orotherintervalsuptooneyear)accordingtoaspecificindexor througharemarketingprocess.Theliquidityfacilitysupportsaputordemandfeature,allowingthe floaterholdertotenderthesecurityandreceive,withspecifiednotice,facevalueplusaccruedinterest, typicallyeitherfromremarketingproceedsoradrawontheliquidityfacility.17Floaterholdersbear limitedandwelldefinedinsolvencyanddefaultrisksassociatedwiththeunderlyingbonds,andrely upontheirlargelyunfetteredputrighttomanagetheserisks.Taxexemptmoneymarketfundsarethe principalholdersofthefloaters.Theresidualsgenerallyareheldbytheentitythatselectsthe underlyingmunicipalbondsthatserveascollateralforthetrust.Holdersofresidualsaretypicallylong terminvestors,suchastheTOBprogramsponsorbankoranaffiliate,taxexemptbondfunds,closed endfunds,orotherinstitutionalinvestorsinmunicipalbonds.Residualholdersreceiveallinterest
15

Seesupranote8.

16

TOBsgenerallyarestructuredwithasinglelongtermmunicipalbondinthetrustbuttheymaybestructuredwithapool oflongtermmunicipalbonds. 17 Theliquidityfacilityissubjecttoterminationuponcertainmajorcrediteventsaffectingtheissueroftheunderlying municipalbonds(suchasbankruptcyandratingsfallingtobelowinvestmentgrade).Underthesecircumstances,theTOB trustwouldbecollapsedandthefloaterholderswouldbepaidfromthesaleofthecollateral,orwouldreceivethecollateral ifsuchproceedswerenotsufficienttopaytheholdersinfull.

July29,2011 Page7of12 paymentsfromtheunderlyingbondsthatarenotneededtopayinterestonthefloatersandexpensesof thetrust.Duetotheoperationoftheliquidityfacility,whichprovidesholdersofthefloaterspar amountsplusaccruedinterestupondemand,theresidualholderbearsallofthemarketriskassociated withtheTOBtrust.Accordingly,theresidualholderhasasignificantincentivetoensurethatthe underlyingmunicipalbondsareofhighcreditquality. B. TOBsAreNottheTypesofSecuritiesSection15GWasIntendedToAddress WedonotbelievethatCongress,inenactingSection15G,intendedthattheriskretention requirementsapplytosecuritizationsbackedbymunicipalsecurities,suchasTOBs.Thelegislative historyindicatesthatSection15Gwasdirectedtowardsecuritiesgenerallyconsideredbymarket participantstobetraditionalABS,andespeciallytowardmitigatingrisksassociatedwithABSbacked bymortgages.18 TOBshavemanyfeaturesthatdistinguishthemfromthetypesofsecuritiesthat15Gwas intendedtoaddress.Forexample,theunderlyingcollateralinaTOBtrustislimitedtomunicipal bonds,whichhaveverydifferentcharacteristicsthantheprivatelynegotiatedloansandtradereceivables thatserveascollateralformanytypesofABS.Thesemunicipalbondsareofhighquality,aretypically ratedinthetoptwolongtermratingcategoriesofnationallyrecognizedstatisticalratings organizations,andgenerallyarepubliclytraded.Inaddition,aTOBtrusttypicallyholdssecuritiesof onlyonemunicipalissuerforwhichinformationispubliclyavailable,resultingingreatertransparency thaninatypicalABStransaction.TOBtrustsdonotutilizetranching,andthereforehaveasimpler andmoretransparentstructurethantypicalABS. Importantly,TOBprogramsaredesignedtocreateashorttermsecuritywiththesamecredit characteristicsastheunderlyinglongtermcollateral.Infact,investorsinTOBfloatersandresiduals considerthemselvestobecoinvestorsintheunderlyingbondswhichcollateralizeaTOBtrustforboth creditqualityanddiversificationpurposes.ThiscontrastswithtypicalABS,inwhichtheinvestor considersitselftobeholdingthetrustforcreditqualityanddiversificationpurposes.Unliketypical ABSprograms,whicharecharacterizedbysignificantdiversityinstructures,TOBprogramsgenerally havethesamebasicstructure.TheTOBtrustdocumentationextensivelydescribestheprograms
18

SeeS.Rep.No.111176,at128(2010)(TheCommitteesinvestigationintothecausesofthefinancialcrisisidentified abusesofthesecuritizationprocessasamajorcontributingfactor.Twoproblemsemergedinthecrisis.First,underthe originatetodistributemodel,loansweremadeexpresslytobesoldintosecuritizationpools,whichmeantthatthelenders didnotexpecttobearthecreditriskofborrowerdefault.Thisledtosignificantdeteriorationincreditandloan underwritingstandards,particularlyinresidentialmortgages....Second,itprovedimpossibleforinvestorsinassetbacked securitiestoassesstherisksoftheunderlyingassets,particularlywhenthoseassetswereresecuritizedintocomplex instrumentslikecollateralizeddebtobligations(CDOs)andCDOsquared.Withtheonsetofthecrisis,therewas widespreaduncertaintyregardingthetruefinancialconditionof holdersofassetbackedsecurities,freezinginterbank lendingandconstrictingthegeneralflowofcredit.Complexityandopacityinsecuritizationmarketscreatedtheconditions thatallowedthefinancialshockfromthesubprimemortgagesectortospreadintoaglobalfinancialcrisis...).

July29,2011 Page8of12 structureandtheobligationsofeachofthetrustsparticipants(i.e.,liquidityprovider,remarketing agent,trustee),aswellasinformationregardingtheunderlyingcollateralinthetrust.Indeed,eachtrust isindividuallyratedwithalongtermratingbasedonthecreditqualityofthecollateralandashort termratingbasedonthatoftheliquidityprovider,unliketypicalABSwhichareratedonthebasisof theprogramsovercollateralizationandgeneralizedcharacteristicsoftheentirepoolofcollateral. NeitherSection15GoftheExchangeActnortheproposalmentionsTOBs,suggestingneither CongressnortheAgenciesintendedTOBstobesubjecttotheproposedriskretentionrequirements.19 TheexemptioninSection15GforABSissuedorguaranteedbystatesorlocalgovernmentsandthe AgenciesproposedimplementationofthisexemptionsupporttheviewthatCongressdidnotintend tocapturetheseandothermunicipalrepackagingsinSection15G.20TheAgenciesspecificallyrequest commentintheproposalregardingwhethertheirproposedexemptionisunderoroverinclusive.21We stronglybelieveitisunderinclusive,andthattheAgenciesshouldusetheirauthorityunderSection 15Gtoexemptfromtheriskretentionrequirementsmunicipalrepackagings,suchasTOBs,thatare collateralizedbyoneormoresecuritiesofthetypedescribedinproposedRule____.21(a)(3).22 C.ApplyingtheProposedRiskRetentionRequirementstoTOBsisnotinthePublicInterest Asnoted,TOBtrusts,becausetheypurchaseandholdlongertermdebt,areanimportant sourceofdemandforstateandlocalgovernmentbonds.ItwouldbeverydifficultforTOBsponsorsto meettheproposalsriskretentionstandards,duetothestructuralcharacteristicsofTOBprograms, whichdifferfromthetypesofABStheproposalclearlyisintendedtoaddress.Asaresult,imposing riskretentionrulesonTOBprogramsponsorswouldraisethecostsofTOBprogramsponsorship. ThiswouldlikelycausethedemandforTOBissuancetodecrease,potentiallyraisingthecostsof financingtostateandlocalgovernmentsatatimewhentheirfinancesarealreadyunderstress.
Asadditionalsupport,wenotethattheFederalReservesOctober2010reporttoCongressonriskretention,whichwas mandatedbytheDoddFrankActandofferssuggestedalternativesforrulemakingunderSection15G,considersapproaches forarangeofdifferenttypesofABS,butmakesnomentionofTOBsorothermunicipalrepackagings.FederalReserve, ReporttotheCongressonRiskRetention(Oct.2010),availableat http://www.federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf. 20 Section15GstatesthattheAgenciesriskretentionrulesshallprovideforatotalorpartialexemptionfor anyassetbackedsecuritythatisasecurityissuedorguaranteedbyanyStateoftheUnitedStates,orbyanypolitical subdivisionofaStateorterritory,orbyanypublicinstrumentalityofaStateorterritorythatisexemptfromtheregistration requirementsoftheSecuritiesActof1933byreasonofsection3(a)(2)ofthatAct...Section15G(c)(1)(G)(iii).To implementthisrequirement,theAgencieshaveproposedanexemptionfromtheriskretentionrequirementsformunicipal securities.ProposedRule____.21(a)(3).
21 19

Releaseat105. Section15G(c)(1(G)(i).

22

July29,2011 Page9of12 SubjectingsponsorsofTOBtruststotheproposedriskretentionrequirementsisunnecessary toachievetheAgenciesregulatoryobjectives.ItcouldalsosignificantlyreducetheavailabilityofTOBs fortaxexemptmoneymarketfundsandclosedendfunds,anddisrupttheoperationsoflongterm bondfundsthatinvestintheresiduals.Forallofthesereasons,werequestconfirmationthatTOB programsareoutsidethescopeoftheproposalorwillbeexemptedfromtheproposalsriskretention requirements. III. MortgageBackedSecurities FundsinvestinavarietyofMBS,includingagencyMBS(i.e.,MBSguaranteedbytheFederal NationalMortgageAssociation(FannieMae)ortheFederalHomeLoanMortgageCorporation (FreddieMac));RMBS;andCMBS.ICI,onbehalfofitsmembers,supportsmaintainingastrong securitizationmarketforMBSthatissubjecttohigh,clearlydefinedstandards.Atthesametime,we believeitisimportantfortheAgencies,intailoringtheproposedriskretentionrequirementsto differenttypesofMBS,tobemindfuloftheconsequencesofadoptingstandardsthatareoverly restrictiveordonotadequatelyreflectcurrentmarketpractice. A. ResidentialMortgageBackedSecurities Section15GprovidesthattheAgenciesriskretentionrequirementsshallnotapplytoRMBS thatarecollateralizedsolelybyQRMs.23Section15GincludesspecificstandardsthattheAgencies mustconsiderinjointlydefiningwhatconstitutesaQRM.ICI,onbehalfofitsmembers,supportsa QRMstandardthatwouldexemptfromtheriskretentionrequirementsonlyRMBSbackedbyvery highqualityloans.SomeofourmemberssupporttheAgenciesQRMstandardasproposed,and believethatonlythehighestqualitymortgagesshouldqualifyunderthestandard.Othermembers, however,areconcernedthattheAgenciesproposedstandardmaybesomewhattoorestrictiveand couldhavenegativeimplicationsformortgagefinancingtocreditworthyhouseholds.Theyare concernedthatanexcessivelystrictQRMstandardcouldresultinalackofliquidityintheQRM market,whichwoulddiscourageparticipationinthemarketbyinvestors,includingfunds,and,asa result,furtherlimitmortgagefunding.

23

Section15G(e)(4).

July29,2011 Page10of12 B. CommercialMortgageBackedSecurities Section15GoftheExchangeActstatesthat,withrespecttoCMBS,theAgenciesmayprovide foraspecialriskretentionoptioninwhichafivepercenthorizontal,firstlosspositionisheldbya thirdpartypurchaser,ifcertainspecifiedconditionsaremet.24TheAgencieshaveimplementedthis provisionbyproposingarulethatwouldpermitaCMBSsponsortosatisfyitsriskretentionobligation ifathirdpartypurchaseracquiressuchaninterest,subjecttocertainconditions.25Thisoption accuratelyreflectsthecommonmarketpracticeofallocatingthefirstlosspositioninaCMBS transactiontoathirdpartypurchaser,typicallyknownastheBpiecebuyer.Certainfundsthat investinCMBSmaybuytheBpieceandcould,undertheproposedrule,potentiallybeathirdparty purchaser.Ourmembersthatmanagefundsthatmayserveinthisrolehaveconcernsthatcertain aspectsofhowtheriskretentionoptionforCMBSwouldoperatemaydiscourageorprecludefunds fromservingintheroleofthirdpartypurchaser,aswellashavedetrimentalimplicationsforthe operationoftheCMBSmarketsasawhole,withconsequencesbothforinvestorsinthosemarketsand thebusinessesthatobtainfundingthroughthosemarkets. Oneoftheconditionsoftheproposedruleisthatathirdpartypurchasermaynotsellorhedge theinterestitisrequiredtoretainundertherule.26Whileweunderstandthisprovisionisintendedto placethethirdpartypurchaserinthesamepositionasifitwerethesponsorretainingthesame horizontal,firstlossriskretentionposition,27requiringtheBpiecebuyertoretainitsinterestforthe lifeofthetransactionwouldstronglydiscouragefundsfrompurchasingtheseinterests.Inlieuof requiringtheBpiecebuyertoretainitsinterestforthelifeofthetransaction,werecommendthatthe Agenciesproposethefollowingtieredapproach:(i)requiretheBpiecebuyertoretainitsinterestfora oneyearperiodinwhichitmaynotsellorhedgetheinterest;(ii)forthefollowingfouryears,permit theBpiecebuyertotransferitsinterestonlytoaqualifiedtransfereethatmustmeetthesamecriteria undertheruleastheBpiecebuyer;and(iii)fortheremainderofthetransaction,notimpose restrictionsontransferorhedging. UndertheAgenciesproposedCMBSoption,aBpiecepurchaserisintendedtostandinthe shoesofthesponsorforpurposesofcomplyingwiththeriskretentionrules.Underourrecommended approach,requiringtheBpiecepurchasertoholditsinterestforaoneyearperiodprovidesasufficient amountoftimetorevealwhetherthereareanysignificantdeficienciesorfraudintheunderwriting process.Permittingtransfertoaqualifiedtransfereethatsatisfiesthesamecriteriaunderthe proposedruleastheBpiecebuyerforthefollowingfouryearsseemsfullyconsistentwiththeAgencies
24

Section15G(c)(1)(E).

25

ProposedRule____.10. ProposedRule____.10(a)(6).

26

27

Releaseat47.

July29,2011 Page11of12 policyobjectiveofincludingthetransferrestrictionintheproposedCMBSoptionbecausethe qualifiedtransfereecouldhaveservedastheoriginalBpiecebuyer.28Webelievethisapproach,by imposingareasonableholdingperiodonthirdpartypurchasers,wouldaddressCongressandthe Agenciesconcernthatthesecuritizeror,inthiscase,anentitystandinginitsplace,notbeableto reduceitsexposuretothecreditriskofthesecuritizedassets.29 AnotherconditionoftheproposedrulewouldrequirethatasponsorutilizingtheCMBSrisk retentionoptiondisclosetopotentialinvestorsintheCMBStransaction(andtotheAgencies,upon request)theidentityofthethirdpartypurchaser,provideadescriptionofthethirdpartypurchasers experienceininvestinginCMBS,includeanyotherinformationregardingthethirdpartypurchaseror itsretentionofaninterestinthetransactionthatismaterialtoinvestorsinlightofthecircumstances oftheparticularsecuritizationtransaction,providetheamountoftheresidualinterestthatthe purchaserwillretainorhasretainedinthetransaction,listthepurchasepricepaidfortheinterest,and describethematerialtermsoftheinterestretainedbythethirdpartypurchaser,amongother information.30Weagreethatasponsorthatissatisfyingitsriskretentionobligationsbymeansofa thirdpartypurchasershouldprovidepotentialinvestorswithinformationrelatingtotheinterest retainedbythatthirdpartyandthereforesupportmostoftheproposeddisclosurerequirements,many ofwhichareconsistentwithcurrentmarketpractice.Webelieve,however,thattheproposed requirementtodisclosethepurchasepricepaidfortheinterestshouldbeeliminated.Suchdisclosureis inconsistentwithmarketpracticeandrequiringitwoulddiscourageinvestorsfromservingintherole ofthirdpartypurchaser.Thisinformationistypicallyconfidential,andisunnecessarytodisclose publicly,giventhatinformationwouldbedisclosedabouttheamountoftheinterestheld. * * * * * Weappreciatethattailoringriskretentionrequirementstoreflectthediversitythatexists acrosstheABSmarketsisasizableundertaking,especiallywhenitmustbedonejointlybysixfederal agencies.Thejointnatureofthisrulemakingmakesitallthemoreimportant,however,forthe Agenciestodevelopworkablestandardsforriskretentionpriortotherulesadoption.Theproposal statesthattheAgencieswilljointlyapproveanywritteninterpretations,writtenresponsestorequests fornoactionlettersandlegalopinions,orotherwritteninterpretiveguidanceconcerningthescopeor termsofsection15Gandthefinalrulesissuedthereunderthatareintendedtobereliedonbythe

WefurthernotethatBpiecebuyersareinstitutionalbuyers,andthattheseinterestsaretradedonlyintheRule144A
market.
29 SeeS.Rep.No.111176,at129(2010)(Theregulationswillprohibitsecuritizersfromhedgingorotherwisetransferring
thecreditrisktheyarerequiredtoretain.);Releaseat58.
30 SeeproposedRule____.10(a)(5).
30 SeeproposedRule____.10(a)(5).

28

July29,2011 Page12of12 publicgenerally.31Asaresult,addressinganyissuesraisedbytheproposalwillbeevenmoredifficult aftertherulesareadopted.IfthereisanywaywemayfurtherassisttheAgencies,pleasefeelfreeto contactmedirectlyat(202)3265815orSarahBessinat(202)3265835. Sincerely, /s/ KarrieMcMillan GeneralCounsel cc: TheHonorableMaryL.Schapiro TheHonorableKathleenL.Casey TheHonorableElisseB.Walter TheHonorableLuisA.Aguilar TheHonorableTroyA.Paredes

31

Releaseat17.