NEW YORK, July 21 (Reuters) - A U.S. financial regulatory overhaul signed into law on Wednesday has brought sales of asset-backed securities to a halt, but the impact is likely a “temporary speed bump,” Barclays Capital said.
At issue are provisions of the reform measure that impose new liabilities for rating agencies if they consent to the use of their ratings in public offering documents.
Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have indicated they would not consent to the use of their ratings because of their increased liabilities. Their pullback has seized up the new issue market for asset-backed securities, which are required by Securities and Exchange Commission regulations to have ratings in public offering documents, Barclays said.
“It seems clear to us that the intent (of financial reform) was not to halt securitization in its tracks,” Barclays said. “As such, we view the effects ... as an unintended consequence of the legislation that the industry and the SEC will likely work to solve in a mutually beneficial way.”
Consent to use ratings in offering documents was not required in the past under Rule 436(G), which effectively shielded rating agencies from liability for their ratings, Barclays said. However, the new financial reform measure repeals Rule 436(G), exposing agencies to new liabilities and requiring consent for ratings to be used in SEC filings.
“The repeal was ostensibly intended to make rating agencies more accountable for the quality of the ratings they give, without causing the securitization process to seize,” Barclays said.
“However, given the position of Moody’s, Fitch and S&P, it appears that issuance of public securitizations is likely to grind to a halt in the near term,” the bank said.
Issuers may move to the private market, where they are not required to make public filings with the SEC, Barclays said.
“Alternatively, the SEC and the industry could proactively work together to alleviate the obvious unintended consequence of repealing Section 436(G),” the bank said.
The new law is more of an issue for consumer ABS, as residential ABS issuance has generally been done in the private market, Barclays said. The ABS market has been a key source demand for consumer credit such as auto, credit card and student loans, though ABS issuance has slowed since the global credit crisis. (Reporting by Dena Aubin; Editing by Padraic Cassidy)