USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
Regulation The SEC regulates the offer and sale of securities issued by a synthetic securitisation and the issu - er’s Investment Company Act exemptions are the same as in a traditional securitisation. The derivatives underlying such securitisation are regulated by the SEC if they reference a single security, a single loan or a narrow-based security index and by the CFTC if they are deemed to be swaps (in which case the SPE may also be a commodity pool). Principal Laws and Regulations The offering of securities in a synthetic secu - ritisation is governed by the Securities Act. The SEC has generally indicated that CDSs, the most common type of derivative used in synthetic securitisations, are not self-liquidating financial assets. Consequently, one may conclude that the payments to the holders of the issued secu - rities do not depend primarily on the cash flow from self-liquidating assets, in which case the issued securities fall outside the “asset-backed security” definition in the Exchange Act. This means that risk retention and certain other rules applicable to asset-backed securities would not apply. The nature of the CDS may also impact the Investment Company Act analysis for the issuer. As noted in 4.7 Use of Derivatives , both the SEC and the CFTC have comprehensive regula - tions around entering into derivatives, and such instruments may be subject to clearing, settle - ment and margin requirements specified in the securities acts and the Commodities Exchange Act. A primary motivator for synthetic securitisations is regulatory capital relief, and whether a trans - action achieves that result hinges, in part, on whether it satisfies the “synthetic securitisation”
criteria under the applicable bank capital rules. The Board of Governors of the Federal Reserve System (the “Board”) also recently provided guidance (in a response to frequently asked questions under Regulation Q) that direct-issue credit-linked notes may satisfy those require - ments. Principal Structures In its simplest form, a synthetic securitisation will invest the proceeds from issuing securities in permitted investments and sell CDS protec - tion on a particular financial asset. The issuer will receive cash flows from the permitted invest - ments and the CDS protection premiums. If a credit event occurs under a CDS, then the SPE will fund its payment obligation with proceeds from the permitted investments. As noted above, the Board may also accept direct issue credit- linked notes (ie, which do not utilise an interme - diate SPE or CDS) as a form of synthetic secu - ritisation for the purposes of providing regulatory capital relief. 6. Structurally Embedded Laws of General Application 6.1 Insolvency Laws If a debtor becomes subject to bankruptcy pro - ceedings, creditors will, with some exceptions, be automatically stayed from collecting and enforcing against the debtor and any posted col - lateral. Lifting the stay may be time-consuming and costly, and subject to the broad statutory and equitable powers of the bankruptcy court. The court also has the power to: • release the creditors’ rights to excess collat - eral; • allow additional debt to be secured by the collateral;
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