[Federal Register: October 8, 2009 (Volume 74, Number 194)]
[Proposed Rules]
[Page 51806-51813]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08oc09-19]
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FEDERAL RESERVE SYSTEM
[Regulation A; Docket No. R-1371]
12 CFR Part 201
Extensions of Credit by Federal Reserve Banks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board of Governors (Board) is publishing for public
comment a proposed amendment to Regulation A that would provide a
process by which the Federal Reserve Bank of New York may determine the
eligibility of credit rating agencies and the ratings they issue for
use in the Term Asset-Backed Securities Loan Facility, which is
maintained by the Federal Reserve Bank of New York and for which the
Board has expressly set a particular credit rating requirement for
collateral offered by the borrower. The proposed rule would not apply
to discount window lending or other extensions of credit provided by
the Federal Reserve System. In addition, the rule would only apply to
asset-backed securities that are not backed by commercial real estate.
This proposed amendment is designed to provide the Federal Reserve Bank
of New York with a consistent framework for determining the eligibility
of ratings issued by individual credit rating agencies when used in
conjunction with a separate asset-level risk assessment process. The
proposed amendment does not represent a change in the stance of
monetary policy. The Board solicits comment on all aspects of the
proposal, as well as specific aspects of the proposal as set out in the
preamble.
DATES: Written comments on this notice of proposed rulemaking must be
submitted on or before November 9, 2009.
ADDRESSES: You may submit comments, identified by Docket Number R-1371,
by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm, as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
[[Page 51807]]
FOR FURTHER INFORMATION CONTACT: William R. Nelson, Associate Director
(202/452-3579), Division of Monetary Affairs; Christopher W. Clubb,
Senior Counsel (202/452-3904), Legal Division; for users of
Telecommunication Devices for the Deaf (TDD) only, contact 202/263-
4869.
SUPPLEMENTARY INFORMATION:
I. Background
Credit rating agencies. Credit rating agencies assess the credit
risk of corporate or government borrowers and issuers of bonds, debt
securities, and other financial obligations.\1\ A credit rating is a
credit rating agency's opinion of how likely an issuer is to make
timely payments on a financial obligation, based on a variety of
information regarding the issuer, the market in which the issuer
operates, the overall economy, and the nature of the security. Because
issuers may issue different types of fixed-income securities, different
securities by the same issuer may have different credit ratings
according to their different risk profiles. Credit rating agencies
issue credit ratings for debt securities of public companies, sovereign
governments, and municipalities, and for structured products such as
asset-backed securities.\2\
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\1\ See International Organization of Securities Commissions,
Report on the Activities of Credit Rating Agencies, (Sept. 2003).
\2\ See Securities and Exchange Commission, Proposed Rule:
Oversight of Credit Rating Agencies as Nationally Recognized
Statistical Rating Organizations, 72 FR 6378-01 (Feb. 9, 2007)
(herein ``CRA Proposed Rule'').
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Some credit rating agencies emphasize quantitative models based on
statistical analysis of an issuer's financial disclosures to derive
their ratings, while other credit rating agencies review both
quantitative and qualitative indicators (including information that may
be provided by the issuer and other sources) to form an assessment that
is recommended to a rating committee, which then assigns the rating.
While the exact processes used by a credit rating agency to derive a
credit rating may be proprietary in some cases, credit rating agencies
generally provide public statements outlining their rating philosophy
or general methodology for a particular asset class. After the credit
rating is issued, the credit rating agency will generally continue to
monitor the issuer and/or its securities on an ongoing basis, although
the U.S. Securities and Exchange Commission (SEC) has found that such
monitoring tends to be less comprehensive than the initial review.\3\
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\3\ U.S. Securities and Exchange Commission, Office of Inspector
General, The SEC's Role Regarding and Oversight of Nationally
Recognized Statistical Rating Organizations (NRSROs), (Sept. 2009)
p. 44.
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NRSRO credit ratings. The term ``nationally recognized statistical
rating organization'' was originally adopted by the SEC in 1975 for use
in determining capital charges for broker-dealers on different grades
of debt securities.\4\ The concept of ratings by ``nationally
recognized statistical rating organizations'' has been incorporated
into a range of state and federal legislation and regulations.\5\
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\4\ U.S. Securities and Exchange Commission, Report on the Role
and Function of Credit Rating Agencies in the Operation of the
Securities Markets, (Jan. 2003) p. 6.
\5\ See, e.g., 12 U.S.C. 24a(a)(3)(A)(i) (financial subsidiaries
of national banks); 12 U.S.C. 1831e(d)(4)(A) (activities of savings
associations); 15 U.S.C. 78c(a)(41) (definition of ``mortgage
related security''); 15 U.S.C. 80a-6(a)(5)(A)(iv)(I) (exemption from
Investment Company Act provisions); and 29 U.S.C.
1341(b)(5)(B)(i)(I) (ERISA termination of single employer plans);
Cal. Gov. Code Sec. 53601 (West 2009); N.Y. Gen. Municipal Law
Sec. 10 (McKinney 2009).
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The Credit Rating Agency Reform Act of 2006 (CRARA) sets out a
statutory definition of ``nationally recognized statistical rating
organization'' (NRSRO) and provides the SEC with the authority to
implement registration and oversight rules with respect to registered
credit rating agencies.\6\ The CRARA's provisions, and the grants of
SEC rulemaking authority under these provisions, establish a voluntary
registration process and regulatory program for credit rating agencies
opting to have their credit ratings qualify for purposes of laws and
rules using the term ``nationally recognized statistical rating
organization.'' \7\ Such credit rating agencies are required to
register with the SEC; make public certain information to help persons
assess their credibility; make and retain certain records; furnish the
SEC with certain financial reports; implement policies and manage the
handling of material non-public information and conflicts of interest;
and abide by certain prohibitions against unfair, coercive, or abusive
practices. The CRARA also prohibits the SEC from evaluating the quality
of rating methodologies in making a determination about whether a
credit rating agency is an NRSRO. The SEC has promulgated regulations
to implement the CRARA statutory provisions.\8\
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\6\ CRARA (Pub. L. No. 109-291, 120 Stat. 1327) is primarily
codified at 15 U.S.C. 78o-7.
\7\ The CRARA replaced the existing SEC staff approval system
with ``a transparent and voluntary registration system that favors
no particular business model, thus encouraging purely statistical
models to compete with the qualitative models of the dominant rating
agencies and investor-based models to compete with fee-based
models.'' S. Rep. No. 109-326 at p. 7.
\8\ See 17 CFR 240.17g-1 through 240.17g-6.
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Like other participants in the financial markets, the Federal
Reserve System is an active user of NRSRO credit ratings. Credit
ratings are used to support the efforts of several System programs,
including discount window lending and recent specialized System
liquidity and securities lending programs in response to the financial
crisis.\9\ Reserve Banks make credit available to depository
institutions through the discount window to meet various liquidity
needs. Under the Board's Regulation A, the Reserve Banks have the
discretion to determine when a discount window advance to a depository
institution is adequately secured.\10\
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\9\ In addition to the use of ratings in helping to manage the
credit risk of the Federal Reserve's balance sheet, credit ratings
also play a role in the Federal Reserve's banking supervision and
regulation function.
\10\ Regulation A states that a Reserve Bank's advance to a
depository institution must be secured to the satisfaction of the
Reserve Bank. 12 CFR 201.3(a)(2).
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TALF. The Term Asset-backed Securities Lending Facility (TALF) is a
funding facility to help market participants meet the credit needs of
households and businesses by supporting the issuance of new asset-
backed securities (ABS) collateralized by loans of various types to
consumers and businesses of all sizes.\11\ The underlying credit
exposures of TALF-eligible ABS must be auto loans, student loans,
credit card receivables, equipment loans, floorplan loans, insurance
premium finance loans, receivables related to residential mortgage
servicing advances (servicing advance receivables), or commercial
mortgages.\12\ The TALF was established under section 13(3) of the
Federal Reserve Act, which permits the Board of Governors of the
Federal Reserve Board, in unusual and exigent circumstances, to
authorize Reserve Banks to extend credit to individuals, partnerships
and corporations that are unable to obtain adequate credit
accommodations. The Board has determined the terms and conditions for
TALF borrowing and eligible collateral, including minimum credit
ratings and the set of credit rating agencies whose ratings may be
accepted
[[Page 51808]]
for purposes of TALF by the Federal Reserve Bank of New York.
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\11\ For the terms and conditions and frequently asked question
of the TALF, refer to http://www.federalreserve.gov/monetarypolicy/
talf.htm.
\12\ Small business loans whose principal and interest payments
are fully guaranteed by the full faith and credit of the United
States are also accepted at the TALF, however, no credit rating is
required for ABS backed by such loans.
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In authorizing the TALF, the Board directed that TALF-eligible
collateral must be ABS denominated in U.S. dollars that has a credit
rating in the highest long-term or short-term investment-grade rating
category from two or more eligible NRSROs and does not have a credit
rating below the highest investment-grade category from an eligible
NRSRO. When TALF was established, the Board and the Federal Reserve
Bank of New York accepted credit ratings from three NRSROs (Standard &
Poor's, Moody's Investors Service, and Fitch Ratings). The Federal
Reserve put a high priority on making the TALF available expeditiously
while ensuring appropriate protection against credit risk for the U.S.
taxpayer. In its efforts to provide liquidity to TALF ABS sectors as
expeditiously as possible, the Board recognized that market
participants have continued to rely upon the ratings of these NRSROs,
generally to the exclusion of those with less experience rating ABS.
Since the establishment of TALF, the Federal Reserve has been
conducting a broader review of its approach to using rating agencies
encompassing the ratings of securities of all types accepted as
collateral at all of the Federal Reserve's recently established credit
facilities as well as collateral accepted to secure regular discount
window loans. In May 2009, the Board announced an extension of eligible
TALF collateral to include certain high-quality newly issued and legacy
commercial mortgage-backed securities (CMBS).\13\ Due to concerns about
the historical accuracy of CMBS ratings, the role of ratings in the
evaluation of legacy CMBS (which depend on the NRSROs continued
monitoring activities), and the presence of two additional NRSROs with
substantial experience rating CMBS, the Board and the Federal Reserve
Bank of New York conducted a review of the five NRSROs who expressed
interest in having their ratings accepted for CMBS pledged to the TALF.
The review concluded that the ratings of these five NRSROs were of
sufficient quality to provide useful information in the Federal Reserve
Bank of New York's verification of the credit quality on the most
senior classes of newly issued and legacy CMBS when used in conjunction
with a separate asset-level risk assessment process. As a result, the
Board amended the terms of the TALF to provide that TALF-eligible CMBS
must have a triple-A long-term rating from at least two of those five
NRSROs, and not have a lower rating from any of the other five NRSROs.
Due to the factors listed above, particularly the importance of
verifying the monitoring capabilities of the NRSROs that rate CMBS, the
rule proposed in this notice will not apply to the NRSRO ratings that
are accepted for CMBS pledged to the TALF.
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\13\ Only ABS issued on or after January 1, 2009 may qualify for
TALF funding except for ABS guaranteed by the Small Business
Administration, which can be issued on or after January 1, 2008. All
outstanding CMBS meeting the other TALF requirements may qualify for
TALF funding.
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II. Proposed Rule
The proposed rule presented in this notice is another step in the
Federal Reserve's process of reviewing the appropriate use of NRSROs in
its credit facilities. By this notice, the Board is proposing an
amendment to the Board's Regulation A to govern the Federal Reserve
Bank of New York's acceptance of credit ratings in connection with TALF
ABS other than CMBS. As noted above, the proposed rule would apply only
to the acceptance of credit ratings with respect to ABS pledged to the
TALF and does not apply to general discount window lending under the
primary, secondary, or seasonal credit facilities established in
Regulation A, or any other credit facilities. Extensions of credit
through the discount window are structured differently from those
extended under TALF and the approach presented in the proposed rule
would likely not be feasible in the discount window scenario. In such
cases, the Reserve Banks would continue to ensure that they are
adequately secured as otherwise provided in Regulation A.\14\ The
Federal Reserve will continue to review the use of credit ratings with
respect to its other credit facilities.
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\14\ 12 CFR 201.3(a)(2).
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The proposed rule adopts an objective minimal experience-based
approach specific to the types of assets accepted as collateral in
TALF. The proposed rule is intended to strike a balance between the
goal of promoting competition among NRSROs and the goal of ensuring
appropriate protection against credit risk for the U.S. taxpayer. As
explained below, an additional risk assessment by the Federal Reserve
Bank of New York with respect to TALF collateral is an important
complement to the proposed rule's broadening of the set of eligible
NRSROs.
As a threshold requirement, the proposed rule states that the
Federal Reserve Bank of New York may only accept a credit rating issued
by a credit rating agency that is registered with the SEC as an NRSRO
for issuers of asset-backed securities pursuant to the CRARA. The
proposed rule would leverage off of the NRSRO framework established by
CRARA and the SEC regulations. A registered NRSRO must comply with SEC
rules regarding the prevention of misuse of material nonpublic
information; conflicts of interest; and prohibitions against unfair,
coercive, or abusive practices. In particular, an NRSRO is expressly
prohibited from having certain types of conflicts of interest relating
to the issuance of credit ratings (such as the NRSRO being paid by
issuers to determine credit ratings with respect to securities they
issue) unless the conflicts are publicly disclosed in the NRSRO's
registration materials and the NRSRO establishes and enforces written
policies and procedures to address and manage the conflict of
interest.\15\ In addition, SEC rules prohibit NRSROs from having
certain enumerated conflicts of interest under any circumstances (such
as the NRSRO directly owning securities of the organization that is
subject to the credit rating).\16\ The Board believes that these
disclosure provisions and conflict of interest prohibitions are prudent
and relevant to the evaluation of credit rating agencies with respect
to TALF.
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\15\ SEC Form NRSRO (SEC 1541) (4-09) Exhibits 6 and 7. See also
17 CFR 240.17g-5(a) and (b); 15 U.S.C. 78o-7(h).
\16\ 17 CFR 240.17g-5(c)(2).
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Registration with the SEC as an NRSRO is not, however, a guarantee
of the quality of the credit ratings issued. The CRARA expressly
prohibits the SEC and any state from regulating the substance of credit
ratings or the procedures and methodologies by which any NRSRO
determines credit ratings.\17\ Therefore, the Board believes additional
criteria should be established to ensure that the Federal Reserve Bank
of New York only accepts credit ratings that are reasonably likely to
assist in the Federal Reserve Bank of New York's risk assessment to
determine eligibility of ABS pledged as collateral to the TALF. The
Board specifically solicits public comment regarding whether NRSRO
registration is an appropriate threshold requirement for being accepted
at TALF and whether NRSRO registration should be the sole requirement
for eligibility for use in TALF. In responding, a commenter should
explain how credit risk can be controlled with NRSRO registration as
the sole criterion.
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\17\ 15 U.S.C. 78o-7(c)(2).
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The Board is proposing a rule for reviewing the acceptability of a
particular NRSRO generally by reference to certain experience-based
criteria. The experience requirement is consistent
[[Page 51809]]
with the intent of CRARA, which requires a measure of market acceptance
for NRSRO designation as well as the SEC rules regarding the NRSRO
designation that require market acceptance within a defined asset
category. Rather than requiring attestations from a particular number
of Qualified Institutional Buyers (QIBs) that they rely upon an NRSRO's
ratings, the rule would require that the NRSRO had issued ratings on at
least ten transactions within a specified asset category. The asset
categories are:
Category 1--auto loans, floorplan loans, and equipment
loans TALF sectors;
Category 2--credit card receivables and insurance premium
finance loans TALF sectors;
Category 3--mortgage servicing advance receivables TALF
sector; \18\ and
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\18\ The proposed rule would permit an NRSRO to aggregate
ratings on residential mortgage-backed securities (not currently
included in the TALF) for purposes of meeting the ten-transaction
requirement for Category 3 (mortgage servicing advance loans TALF
sector).
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Category 4--student loans TALF sector.
The Board believes that experience in any of the TALF sectors
grouped together in an asset category provides similar experience for
each of the TALF sectors within that asset category. For example,
Category 1 includes the auto loans, floorplan loans, and equipment
loans TALF sectors. The Board believes that the ABS sectors within each
category are similar in terms of the types of collateral, the manner in
which the collateral is typically evaluated, and typical transactional
structures and legal features. Experience across asset categories would
not, however, be permitted to be aggregated under the proposed rule
because the Board believes that the competencies required for ratings
of ABS across different categories are not sufficiently similar.
The four asset categories defined in the rule are significantly
narrower than the ``ABS'' category in which a credit rating agency may
be approved as an NRSRO by the SEC. Relying upon the issuance of a
minimal number of ratings as opposed to attestations from QIBs in each
of the four asset categories should ensure a minimal level of expertise
in rating the types of assets for which the ratings will be accepted.
Furthermore, the Board believes that credit rating agencies' expertise
when rating collateral of any given type can increase considerably upon
reviewing a modest number of transactions. The experience requirement,
therefore, would ensure that TALF-eligible NRSROs have accumulated
sufficient knowledge of the specific asset category. The Board
specifically solicits comments on whether an experience-based approach
is appropriate for determining the suitability of NRSROs for the TALF
program.
In addition, the proposed rule would allow the Federal Reserve Bank
of New York to accept credit ratings only from a credit rating agency
that has a current and publicly available rating methodology specific
to ABS in the particular TALF asset sector (as defined in the TALF
haircut schedule) for which the credit rating agency wishes its ratings
to be considered for TALF. The Board believes that this is a prudent
requirement because it ensures that the NRSRO has carefully thought
about its approach to the TALF sector and that market participants are
aware of the methodology and have had an opportunity to provide
feedback to the NRSRO. The Board requests comment on whether a
published methodology specific to asset-backed securities in the
relevant TALF sector is an appropriate requirement for credit rating
agencies in the TALF program.
In specifying that only transactions denominated in U.S. dollars
would qualify under the experience requirement, the Board recognizes
that rating opinions rely heavily upon expert judgment regarding
conditions in the market within which the collateral is originated, the
legal environment in which lenders and borrowers operate (both at
origination and in the event of default), and complex transactional
features that have resulted as a response to legal and institutional
considerations specific to the United States.\19\
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\19\ Such legal and institutional considerations include: legal
standards for recognition of ``true sale'' of assets into a special
purpose vehicle; legal standards for determining substantive
consolidation and their impact on the rights of creditors and the
management of ``clawback risk''; treatment of issuer bankruptcies
across different regulators; and tax considerations.
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The Board considered both the number of transactions and period
within which they must have occurred in determining an appropriate
experience threshold for the rule. The Board believes that, while the
learning curve for rating ABS is relatively steep, developing expertise
in assessing the credit risk of an ABS transaction requires exposure to
a diversity of transactional features within a given asset category.
The types of collateral backing the securities within each of the TALF
ABS sectors is relatively more homogenous than other types of ABS (such
as CMBS), and therefore a threshold of ten transactions within
approximately a three-year period (a little more than three
transactions per year) appeared to be appropriate. Recognizing that ABS
has evolved and rating agencies have turnover that can degrade
institutional memory, a three-year window appeared to be an appropriate
amount of time within which past expertise would be generally
applicable in the present.
The Board requests comment generally on whether the experience
approach set out in the proposed rule is appropriate. In addition, the
Board invites comment on whether ten transactions within the
approximately three-year window is appropriate to achieve the goals of
the proposed rule. The Board also requests comment on whether the TALF
asset sectors grouped together in the asset categories set out in the
proposed rule are sufficiently similar that experience gained by
issuing ratings with respect to one of the TALF sectors in a asset
category can act as a substitute for experience gained by issuing
ratings with respect to the other TALF sectors in the category. The
Board also solicits comment on whether experience issuing credit
ratings with respect to residential mortgage-backed securities should
be treated as a substitute for experience in issuing credit ratings in
the mortgage servicing advances TALF sector. Finally, the Board
requests comment on whether the experience requirement is appropriately
limited to transactions denominated in U.S. dollars for the reasons set
out above.
The proposed rule also describes the process whereby the Federal
Reserve Bank of New York would determine whether an NRSRO becomes
eligible to have its ratings accepted for TALF ABS. Under the proposal,
a credit rating agency that wishes to have its ratings accepted for
TALF ABS transactions would send a written notice to the Credit,
Investment, and Payment Risk group of the Federal Reserve Bank of New
York and include the information addressing the factors listed above
(i.e., registered NRSRO for ABS, published methodology, and experience
issuing ratings in the TALF category) with respect to each TALF asset
sector for which it wishes its ratings to be accepted. The Federal
Reserve Bank of New York will review the submission and notify the
NRSRO within five business days as to whether any additional
information is necessary. After review of all information necessary to
determine the eligibility of an NRSRO pursuant to the factors in the
proposed rule, the Federal Reserve Bank of New York will notify the
NRSRO regarding its eligibility to have its ratings accepted at the
TALF. The Board
[[Page 51810]]
requests comment on whether this process will be efficient for purposes
of NRSROs wishing to have their ratings accepted at TALF and, in
particular, whether the proposed time frames are appropriate.
Under the proposed rule, the Federal Reserve Bank of New York
could, at any time, review the continued use of ratings from a credit
rating agency in one or more TALF ABS sectors and determine that such
credit ratings were no longer acceptable if the credit rating agency no
longer met the eligibility requirements or conditions. The NRSRO would
be notified by the Federal Reserve Bank of New York of its concerns.
Finally, the proposed rule sets out two conditions that the Federal
Reserve Bank of New York must ensure are met by an NRSRO in order for
an NRSRO to have its credit ratings accepted for TALF ABS. First, the
NRSRO must agree to discuss with the Federal Reserve its views of the
credit risk of any transaction within the TALF asset sector that has
been submitted to TALF and upon which the NRSRO is being or has been
consulted by the issuer. The Board recognizes that qualitative analysis
and expert judgment constitutes much of the value provided to investors
by credit rating agencies and therefore can assist the Federal Reserve
Bank of New York in the risk assessment process. In addition, issuers
typically consult with several NRSROs about a transaction, but request
formal ratings from only a subset. The condition will enable the
Federal Reserve to learn the views of NRSROs consulted but ultimately
not hired by the issuer to provide a rating. Second, the NRSRO must
agree to provide any information requested by the Federal Reserve
regarding the credit rating agency's continued eligibility for its
ratings to be accepted at TALF under the factors set out in the
proposed rules. Submission of this information is necessary to ensure
that NRSROs that are accepted for TALF continue to meet the eligibility
requirements for TALF under the proposed rule. The Board solicits
comment on whether these conditions are appropriate for NRSROs
submitting credit ratings for purposes of TALF.
Additional risk assessment. Expanding the set of NRSROs accepted at
TALF could increase credit risk in the program by increasing the risk
of less rigorous credit rating standards or by increasing the risk of
``rating-shopping.'' To address this and to protect against TALF
accepting excessive risk, the Federal Reserve Bank of New York will
implement an additional risk assessment process for TALF ABS
transactions.\20\ The business reasons for the additional risk
assessment process are independent of an expansion of the set of NRSROs
accepted for purpose of TALF, but the Board believes that such a risk
assessment could serve to mitigate any increase in credit risk to the
U.S. taxpayer that could potentially result from an expansion of the
set of NRSROs accepted at TALF.
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\20\ The additional risk assessment is being adopted to clarify
and make systematic the process whereby the Federal Reserve Bank of
New York determines whether a bond is acceptable as TALF collateral
based on the TALF terms and conditions. The Federal Reserve Bank of
New York already uses an additional risk assessment process to
determine whether CMBS is eligible for TALF. Satisfaction of the
Federal Reserve Bank of New York's risk assessment process for ABS
is being added to the TALF program terms and conditions.
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In order for the Federal Reserve Bank of New York to be able to
conduct the additional risk assessment in a timely manner, the TALF ABS
terms and conditions include a provision that each issuer wishing to
bring a TALF-eligible ABS transaction to market is required to provide
to the Reserve Bank, at least three weeks prior to the subscription
date of the transaction, a specific set of information, including, but
not limited to, all data the issuer has provided to any NRSRO regarding
the transaction. The Federal Reserve Bank of New York (along with the
TALF collateral monitor) will use that information to assist in its
risk assessment process. Issuers would also be required to submit an
executed waiver or consent for each prospective TALF transaction that
would authorize any NRSRO from which the issuer has sought preliminary
ratings or any other form of feedback on the transaction to share its
view of the credit quality of the transaction with the Federal Reserve
Bank of New York. This provision is intended to mitigate the credit
risk associated with ``rating shopping.''
III. Administrative Law Matters
A. Initial Regulatory Flexibility Analysis
Congress enacted the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
et seq.) to address concerns related to the effects of agency rules on
small entities and the Board is sensitive to the impact its rules may
impose on small entities. The RFA requires agencies either to provide
an initial regulatory flexibility analysis with a proposed rule or to
certify that the proposed rule will not have a significant economic
impact on a substantial number of small entities. Under regulations
issued by the Small Business Administration (SBA), a small credit
rating agency includes those institutions with $7 million in
assets.\21\ In accordance with section 3(a) of the RFA, the Board has
reviewed the proposed rule. An Initial Regulatory Flexibility Analysis
(IRFA) has been prepared in accordance with the RFA.\22\
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\21\ 13 CFR 121.201.
\22\ 5 U.S.C. 603.
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The Board encourages comments with respect to any aspect of this
IRFA, including comments with respect to the number of small entities
that may be affected by the proposed rule. Comments should specify the
costs of compliance with the proposed rule and suggest alternatives
that would accomplish the goals of the rules, including an estimate of
any cost savings. Comments will be considered in determining whether a
Final Regulatory Flexibility Analysis (FRFA) is required and will be
placed in the same public file as comments on the proposed rule.
Comments should be submitted to the Board at the addresses previously
indicated. The Board will determine whether a FRFA is necessary after
consideration of comments received during the public comment period.
1. Reasons for the Proposed Action
As discussed in the preamble above, the Board is proposing these
rules to govern the Federal Reserve Bank of New York's determination of
eligibility of NRSROs and their credit ratings for use in TALF ABS for
which the Board has established a requirement for collateral to be
rated by one or more NRSROs. The Board anticipates that implementation
of the proposed rule will permit an expansion of the set of NRSROs
accepted for TALF ABS, while maintaining appropriate protection against
credit risk for the U.S. taxpayer in connection with TALF.
2. Objective
As discussed in the preamble above, the objective of the proposed
rule is to govern the Federal Reserve Bank of New York's determinations
of eligibility of particular credit ratings for TALF ABS to meet a
Board requirement for collateral to be rated by one or more credit
rating agencies. The Board intends for the proposed rules to provide
for an objective, prudent, and reasonably consistent process for the
Federal Reserve Bank of New York to determine the eligibility of NRSROs
and their credit ratings for purposes of TALF ABS.
3. Legal Basis
Section 11 of the Federal Reserve Act (12 U.S.C. 248(j)) authorizes
the Board
[[Page 51811]]
to exercise general supervision over the Reserve Banks. The TALF is
authorized under section 13(3) of the Federal Reserve Act (12 U.S.C.
343).
4. Small Entities Subject to the Rule
The proposed rule would establish criteria and conditions governing
the acceptance of credit ratings by the Federal Reserve Bank of New
York for use in TALF. The Board has prepared this IRFA in order to
determine any impact on small entities in order to determine if there
is a more cost-effective manner to accomplish the goals of the
regulation.
At present, there are ten NRSROs registered with the SEC. Of those
ten, the Board's review of publicly available information indicates
that three NRSROs are not ``small entities'' under the RFA because
their asset size (or the asset size of the NRSRO's parent company) is
larger than the level set in the SBA regulation. The Board does not
have access to appropriate non-public information on the asset sizes of
the other NRSROs. For purposes of estimating costs for this IRFA, the
Board will assume that all seven of the NRSROs would qualify as a
``small entity'' under the SBA regulations and could be indirectly
impacted by the proposed rule.
5. Reporting, Recordkeeping, and Other Compliance Requirements
As noted above, the proposed rule would leverage off the SEC's
existing NRSRO registration process. The Board believes that the
proposed rule would not establish any reporting, recordkeeping, or
other compliance requirements that are not already part of the NRSRO
registration process or involve records that would not otherwise be
created in the normal course of an NRSRO's business. Other than that
which is normally required in the credit rating agency industry,
special expertise should not be required to compile the information
necessary to submit an eligibility request to the Federal Reserve Bank
of New York for use of an NRSRO's credit ratings in TALF. An NRSRO that
wishes for its credit ratings to be accepted for TALF would merely have
to supply its methodology for rating the relevant TALF asset sector and
document how it has the relevant experience issuing ratings in the TALF
asset sector. Most NRSROs should have this information readily
available in the normal and customary course of business. The Board
estimates that the costs of compiling this information and submitting a
notice to the Federal Reserve Bank of New York would be nominal.\23\
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\23\ As noted above, for purposes of this IRFA, the Board
assumes that there are no more than seven NRSROs that would qualify
as ``small entities. The Board estimates that compiling the
necessary information and submitting a notice to the Federal Reserve
Bank of New York should take no more than four hours per NRSRO.
Total cost was estimated using the following formula: percent of
staff time, multiplied by annual burden hours, multiplied by hourly
rate (30% Administrative or Junior Analyst @ $25, 10% Managerial or
Technical @ $55, 10% Senior Management @ $100, and 50% Legal Counsel
@ $144). Hourly rate estimates for each occupational group are
averages using data from the Bureau of Labor and Statistics (BLS),
Occupational Employment and Wages 2007, http://www.bls.gov/
news.release/ocwage.nr0.htm. Occupations are defined using the BLS
Occupational Classification System, http://www.bls.gov/soc/. The
total costs are estimated at $2,660 if seven small entity NRSROs
applied to have their ratings accepted for all TALF sectors.
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The conditions required for the Federal Reserve Bank of New York to
accept ratings from an NRSRO similarly also should require minimal
expenditure of resources. If requested by the Federal Reserve Bank of
New York, an NRSRO may be requested to provide information on its
continued eligibility under the proposed rule. Such information,
however, would be in connection with the eligibility criteria in the
proposed rule (such as continued NRSRO registration with the SEC) and
should be readily available in the normal course of business. An NRSRO
that has been consulted on a transaction in TALF may be requested by
the Federal Reserve Bank of New York to discuss its views of the
particular transaction, but it would not be required to conduct any
more analysis than it had already conducted in the course of its
business.
The Board requests comment on the description of burden for
compliance with the proposed rule described above. Commenters should
provide identify any potential burdens not discussed herein, as well as
any actual or estimated cost data.
6. Duplicative, Overlapping, or Conflicting Federal Rules
The Board believes that there are no federal rules that duplicate,
overlap, or conflict with the proposed rules.
7. Significant Alternatives
Pursuant to section 3(a) of the RFA, the Board must consider
certain types of alternatives, including: (1) The establishment of
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities; (2) the
clarification, consolidation, or simplification of compliance and
reporting requirements under the rule for small entities; (3) the use
of performance rather than design standards; and (4) an exemption from
coverage of the rule, or any part of the rule, for small entities.
The proposed rule does not establish any compliance or reporting
requirements, including any performance or design standards. Because
the proposed rule provides a process through which credit rating
agencies can have their credit ratings accepted by the Federal Reserve
Bank of New York for purposes of the TALF, the Board preliminarily
believes that small entities that wish to apply should be covered by
the rule. Like the NRSRO registration procedure, the process set out in
the proposed rule for a credit rating agency to have its ratings
accepted by the Federal Reserve Bank of New York is voluntary.
The Board considered two substantive alternatives to the approach
adopted in the proposed rule. First, the Board considered accepting for
TALF all NRSROs registered with the SEC without any further
requirements. The Board determined that this was not prudent as the
SEC's registration process did not address the quality of credit
ratings issued by registered NRSROs. In addition, the SEC ABS
registration does not sufficiently track the TALF asset sectors to
ensure that NRSROs would have experience to rate ABS transactions of
the type being pledged to TALF. The Board also considered an approach
wherein the Federal Reserve Bank of New York would conduct an extensive
review of the methodology and resources of each NRSRO applying to be
accepted at TALF in order to determine whether the NRSRO had the
expertise and facilities to issue ratings suitable for use in each of
the TALF asset sectors for which the NRSRO wished its ratings to be
accepted. The Board did not propose this approach because of the time
and resources that such in-depth reviews would require of the Federal
Reserve Bank of New York; these resources also would likely be diverted
away from the risk assessment process discussed above. The time and
resource issue would be significant as it would involve detailed
analysis of multiple NRSROs across seven different TALF asset sectors.
Even with unlimited resources, designing the in-depth reviews,
including the role that subjective judgment would play, would require
time to perfect. TALF is intended as a temporary facility and there is
the risk that the in-depth reviews would take longer than the remaining
life of TALF.
[[Page 51812]]
8. Request for Comments
The Board encourages the submission of comments on any aspect of
the IRFA. In addition, the Board specifically requests comments on the
estimate of the number of NRSROs that would be considered ``small
entities'' indirectly impacted by the proposed rule for purposes of the
RFA. Commenters that disagree with these estimates are requested to
describe in detail the basis for their conclusions and identify the
sources of any industry statistics they relied on to reach their
conclusions. The Board also requests comment on any alternatives to the
approach adopted in the proposed rule that would accomplish the goals
of the proposed rule in a more cost-effective manner.
B. Paperwork Reduction Act Analysis
Office of Management and Budget (OMB) regulations implementing the
Paperwork Reduction Act (PRA) state that agencies must submit
``collections of information'' contained in proposed rules published
for public comment in the Federal Register in accordance with OMB
regulations.\24\ OMB regulations define a ``collection of information''
as obtaining, causing to be obtained, soliciting, or requiring the
disclosure to an agency, third parties or the public of information by
or for an agency ``by means of identical questions posed to, or
identical reporting, recordkeeping, or disclosure requirements imposed
on, ten or more persons, whether such collection of information is
mandatory, voluntary, or required to obtain or retain a benefit.'' \25\
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\24\ 5 CFR 1320.11. The PRA is codified at 44 U.S.C. 3506 et
seq.
\25\ 5 CFR 1320.11(c).
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In accordance with the PRA, the Board reviewed the proposed rule
under the authority delegated to the Board by OMB. The Federal Reserve
may not conduct or sponsor, and an organization is not required to
respond to, this information collection unless it displays a currently
valid OMB control number, which will be assigned. The collections of
information that are proposed to be revised by this rulemaking are
found in subsection 201.3(e)(1)(ii) and (iii) of the proposed rule (to
be codified at 12 CFR 201.3(e)(1)(ii) and (iii)). This information is
required to permit the Federal Reserve Bank of New York to determine
eligibility of credit rating agencies to have their ratings accepted in
TALF in accordance with Board regulations. The respondents are NRSROs,
which may be small entities. There is no record retention requirement
in the proposed rule.
The estimated burden per response is two hours. It is estimated
that there will be ten respondents providing information on a one-time
basis. Therefore, the total amount of annual burden is estimated to be
20 hours.
The proposed rule in this notice implements a threshold requirement
of registration with the SEC as an NRSRO. As noted above, registration
with the SEC as an NRSRO requires, among other things, the completion
of the SEC Form NRSRO. This form includes exhibits regarding a general
description of the procedures and methodologies used by the credit
rating agency to determine credit ratings for the classes of assets for
which the credit rating agency is seeking registration. The SEC,
however, already budgets for paperwork burden connected with its NRSRO
registration program. Accordingly, it would be redundant for the Board
to budget additional paperwork burden for the SEC's registration
process.
In addition to NRSRO registration, the proposed rule would require
the NRSRO to submit to the Federal Reserve Bank of New York additional
information to demonstrate that it has sufficient expertise and
experience to provide credit ratings that would assist in the Reserve
Bank's risk assessment on the most senior classes of newly issued
asset-backed securities in a particular TALF asset sector. The
additional requirements includes an NRSRO (i) having a current and
publicly available rating methodology specific to asset-backed
securities in the particular TALF asset sector for which it wishes its
ratings to be accepted; and (ii) having made public or made available
to a paying subscriber base, since September 30, 2006, at least ten
ratings on U.S. dollar-denominated transactions within a particular
group of complementary ABS categories as set out in the proposed rule.
These requirements are found in subsection 201.3(e)(1)(ii) and (iii) of
the proposed rule (to be codified at 12 CFR 201.3(e)(1)(ii) and (iii)).
The Board believes that each of these requirements should require
minimal effort on the part of an NRSRO. Most NRSROs that issue credit
ratings for a type of asset make public their methodology. In addition,
it should be a relatively simple matter for an NRSRO to certify that it
has issued ten ratings in the appropriate asset category by enclosing a
list containing the CUSIP number and original and current rating of the
most senior tranche from at least ten transactions it has rated within
the appropriate asset category and timeframe.
Comments are invited regarding (a) whether the proposed collection
of information is necessary for the proper performance of the Federal
Reserve's functions, including whether the information has practical
utility; (b) the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collection, including the cost of
compliance; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; and (d) ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments on the collection of information should be sent to
Secretary, Board of Governors of the Federal Reserve System,
Washington, DC 20551, with copies of such comments to be sent to the
Office of Management and Budget, Paperwork Reduction Project,
Washington, DC 20503.
C. Plain Language
Each Federal banking agency, such as the Board, is required to use
plain language in all proposed and final rulemakings published after
January 1, 2000. 12 U.S.C. 4809. The Board has sought to present the
proposed rule, to the extent possible, in a simple and straightforward
manner. The Board invites comment on whether there are additional steps
that could be taken to make the proposed rule easier to understand,
such as with respect to the organization of the materials or the
clarity of the presentation.
IV. Statutory Authority
Pursuant to the authority set out in the Federal Reserve Act and
particularly section 11 (codified at 12 U.S.C. 248(j)), the Board
proposes the rules set out below.
V. Text of Proposed Rule
List of Subjects in 12 CFR Part 201
Credit.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR Chapter II to read as follows:
PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION
A)
1. The authority citation for part 201 continues to read as
follows:
Authority: 12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c,
348 et seq., 357, 374, 374a, and 461.
2. In Sec. 201.3, paragraph (e) is added to read as follows:
[[Page 51813]]
Sec. 201.3 Extensions of credit generally.
* * * * *
(e) Credit ratings for Term Asset-Backed Securities Loan Facility
(TALF).
(1) If the Board requires that a TALF advance, discount, or other
extension of credit be against collateral (other than commercial
mortgage-backed securities) that is rated by one or more credit rating
agencies, the Federal Reserve Bank of New York may accept the ratings
of any credit rating agency that:
(i) Is registered with the Securities and Exchange Commission as a
Nationally Recognized Statistical Rating Organization for issuers of
asset-backed securities;
(ii) Has a current and publicly available rating methodology
specific to asset-backed securities in the particular TALF asset sector
(as defined in the TALF haircut schedule) for which it wishes its
ratings to be accepted; and
(iii) Demonstrates that it has sufficient experience to provide
credit ratings that would assist in the Federal Reserve Bank of New
York's risk assessment on the most senior classes of newly issued
asset-backed securities in the particular TALF asset sector by having
made public or made available to a paying subscriber base, since
September 30, 2006, ratings on at least ten transactions denominated in
U.S. dollars within the particular category to which the particular
TALF asset sector is assigned as set out below--
(A) Category 1--auto, floorplan, and equipment TALF sectors;
(B) Category 2--credit card and insurance premium finance TALF
sectors;
(C) Category 3--mortgage servicing advances TALF sector; and
(D) Category 4--student loans TALF sector.
(2) For purposes of the requirement in paragraph (e)(1)(iii) of
this section, ratings on residential mortgage-backed securities may be
included in Category 3 (servicer advances).
(3) The Federal Reserve Bank of New York may in its discretion
review at any time the eligibility of a credit rating agency to rate
one or more types of assets being offered as collateral.
(4) Process.
(i) Credit rating agencies that wish to have their ratings accepted
for TALF transactions should send a written notice to the Credit,
Investment, and Payment Risk group of the Federal Reserve Bank of New
York including information on the factors listed in paragraph (e)(1) of
this section with respect to each TALF asset sector for which they wish
their ratings to be accepted.
(ii) The Federal Reserve Bank of New York will notify the submitter
within 5 business days of receipt of a submission whether additional
information needs to be submitted.
(iii) Within 5 business days of receipt of all necessary
information to evaluate a credit rating agency pursuant to the factors
set out in paragraph (e)(1) of this section, the Federal Reserve Bank
of New York will notify the credit rating agency regarding its
eligibility.
(5) Conditions. The Federal Reserve Bank of New York may accept
credit ratings under this subsection only from a credit rating agency
that agrees to--
(i) Discuss with the Federal Reserve its views of the credit risk
of any transaction within the TALF asset sector that has been submitted
to TALF and upon which the credit rating agency is being or has been
consulted by the issuer; and
(ii) Provide any information requested by the Federal Reserve
regarding the credit rating agency's continued eligibility under
paragraph (e)(1) of this section.
By the Board of Governors of the Federal Reserve System, October
5, 2009.
Jennifer J. Johnson,
Secretary.
[FR Doc. E9-24252 Filed 10-7-09; 8:45 am]
BILLING CODE 6210-01-P