(Finance) – More than 14 years after the great financial crisis and 12 after the approval of the Dodd-Frank Act – the main reform intervention of Wall Street after the crash of 2008 – the main regulator of the US financial markets has proposed the introduction of a rule that prevents operators from betting against the same asset backed securities (ABS) they sell to others investors.
ABS are financial instruments whose flows (in terms of interest and principal) are linked to the cash flows associated with a pool of segregated instruments. ABS are issued instruments against securitization transactions.
The Securities and Exchange Commission (SEC) today unveiled a rule that aims to prevent the sale of ABSs that are “tainted by material conflicts of interest”. Specifically, the rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an ABS in a way that puts the interests of the securitization participant ahead of those of the investors in the ABS.
The SEC had initially proposed a rule to implement the proposal, provided for in the Dodd-Frank Act, in September 2011. The Dodd-Frank Act, named for Sen. Chris Dodd of Connecticut and Rep. Barney Frank of Massachusetts, passed in 2010. Today’s bill is now subject to public comment for at least 60 days.
“I am pleased to support this revived rule as it fulfills the Congressional mandate to address conflicts of interest in the securitization market, which have contributed to the 2008 financial crisis“said the SEC chairman, Gary Gensler.
“This revived rule is designed to help address conflicts of interest that arise with market participants who take positions against the best interests of investors. Additionally, as required by the Dodd-Frank Act, the revived rule provides exceptions for risk mitigation activities, good faith market making and certain liquidity commitments. These changes, taken together, will benefit investors and our markets.”
If adopted, the new rule would prohibit an underwriter, placing agent, initial purchaser or sponsor of an ABS, including affiliates or subsidiaries of such entities, fromengage, directly or indirectlyin any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in such ABS.
According to the proposed rule, such transactions include, for example, one short sale of the ABS or the purchase of a credit default swaps or another credit derivative that entitles the securitization participant to receive payments upon the occurrence of specific credit events in relation to the ABS.
(Photo: Photo by Nick Chong on Unsplash)