USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
to the calculation of credit risk weights for secu - ritization exposures, as well as a new operational risk capital charge on certain fees and commis - sions. These changes would often require banks investing beyond the senior most securitization tranche to hold significantly more regulatory cap - ital for securitised assets than what is required under the current Basel III rules or in other Basel III “Endgame” proposals made by banking regu - lators in other developed economies. US market participants are concerned that the implementa - tion of US B3E would reduce the ability of banks to participate in the loan securitisation market or to make markets in securitisation bonds. On the other hand, US B3E continues the favourable capital treatment of senior-most securitisation exposures while otherwise increasing the capi - tal requirements for many other bank exposures, thereby incentivizing increased use of securitisa - tion structures. Insurance Companies Insurance companies’ capital requirements are subject to state regulation. The National Asso - ciation of Insurance Commissioners (NAIC) has adopted a risk-based capital (RBC) methodol - ogy intended to be a minimum regulatory capital standard based on the insurance company’s risk profile and is one of the tools that give regulators legal authority to take control of an insurance company. The specific RBC formula varies depending on the primary insurance type and focus on asset risk, underwriting risk and other risk. The formu - lae are focused on capturing the material risks that are common for the particular insurance lines of business. The NAIC has its own credit rating scale that largely ties to ratings from NRSROs, except for an alternative methodology applied to non-
agency RMBSs and CMBSs. As such, the map - ping of ABS assets to an NAIC rating will often dictate the attractiveness of a particular asset- backed security for an insurance company. 4.7 Use of Derivatives Title VII of the Dodd-Frank Act Title VII of the Dodd-Frank Act establishes a comprehensive regulatory framework for OTC derivatives to address a number of aspects of OTC derivatives that were identified as causing vulnerabilities in the financial system; in par - ticular, the complexity, lack of transparency and interconnectivity of the OTC market and the lack of consistent margin requirements. This frame - work is built around the principles of: • requiring clearing of standardised OTC derivatives through regulated central counter - parties; • requiring trading of standardised transactions to occur on exchanges or electronic trading platforms when appropriate; • increasing transparency through regular data reporting; and • imposing higher capital requirements on non- exchange-traded OTC derivatives. In addition, Title VII imposes registration, over - sight and business conduct standards for deal - ers and large participants in the derivatives mar - ket. Regulatory Authorities The regulatory authority is primarily divided between the Commodity Futures Trading Com - mission (CFTC) and the SEC, with the US bank - ing regulators setting capital and margin require - ments for banks. The CFTC has authority over most OTC derivatives, referred to as “swaps” in the Commodity Exchange Act (CEA), whereas the SEC has authority over OTC derivatives
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