USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
that fall within the Exchange Act definition of “security-based swaps”, which covers deriva - tives linked to single-name loans or securities, narrow-based indexes of loans or securities, events relating to such loans or securities, or their issuers. The Dodd-Frank Act had the effect of causing swaps to be included in the definition of “commodity pool” under the CEA and under the definition of “security” for the purposes of the Securities Act and the Exchange Act. The industry has been focused on obtaining per - manent relief against those aspects of the new regulations that are particularly burdensome for securitisation SPEs. For example, the CFTC has issued no-action letters exempting certain securitisation entities, which are operated consistent with SEC Regula - tion AB or Investment Company Act Rule 3a-7, from the definition of commodity pool. To be eligible for the relief provided under these no- action letters, the securitisation issuer must: • hold primarily self-liquidating assets; • make payments based on cash flows and not based on changes in the issuer’s assets; • not acquire or sell assets primarily for the purpose of realising market gains or minimis - ing market losses; and • only hold derivatives for uses permitted under Regulation AB, such as credit enhancement and to alter the payment characteristics of the cash flow. The CFTC has also issued various interpreta - tions that allow certain securitisation SPEs that are wholly owned subsidiaries of non-financial entities to avail themselves of certain excep - tions from otherwise applicable clearing and margin requirements available to non-financial end users.
It is also worth noting that the non-recourse language typically included in agreements with SPEs, including derivative agreements, would cause such derivatives to fall outside the standard terms for derivatives that are cur - rently centrally cleared and traded, although that may change should swaps with such terms be included as part of a traded standard. Finally, in November 2023, the SEC finalised Securities Act Rule 192, intended to address conflicts of interest inherent in synthetic secu - ritisations. Under Rule 192, a “securitization participant” (ie, underwriters, placement agents, initial purchasers or sponsors of asset-backed securities (including synthetic ABS) and cer - tain of their subsidiaries and affiliates) may not directly or indirectly, before a year has passed after the closing of the sale of the relevant ABS, engage in any transaction that would involve or result in any “material conflict of interest” (as defined by the SEC) between the securitisation participant and an investor in such ABS. A mate - rial conflict of interest occurs if the securitisation participant engages in a “conflicted transaction” for which “there is a substantial likelihood that a reasonable investor would consider the transac - tion important to the investor’s investment deci - sion, including a decision whether to retain the ABS”. Rule 192 provides for a number of excep - tions, including for certain risk-mitigating hedg - ing activities, liquidity commitments, and bona fide market-making activities. Compliance is required for any ABS offering closing 18 months
or more after the rule’s publication. Enforcement and Penalties for Non- Compliance
Violations of rules pertaining to security-based swaps promulgated by the SEC will be subject to similar enforcement and penalties as other violations of securities laws, as discussed in 4.2
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