Market Structure & Dynamics

Regularly reviewing our market structure, processes and dynamics is a key component to achieving SFA’s mission of promoting a robust, liquid and healthy structured finance market as it grows and adapts to the consumers and businesses it supports.

It may surprise policymakers and regulators, as well as even some market participants, to know that it is currently very difficult – and sometimes impossible – for bondholders to communicate with the companies that issued the securities they own or for bondholders who own the same security to communicate with one another.

The current system is so unreliable that when evaluating potential solutions for the transition away from Libor, one of our financial markets’ most serious risk today, market participants view the option of soliciting bondholder consent for an amendment as largely unfeasible.

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“Market participants are keenly focused on and have rightfully questioned how – well into the digital age – the significant limitations of the current communication system remain.” – Kristi Leo, SFA, President

Market participants have rightfully questioned how – well into the digital age and long since record keeping transitioned from physical certificates to an electronic platform – the significant limitations of the current communication system remain. While there is certainly a complex chain of intermediaries that often separates the record-owner from the beneficial owner with only the final custodian retaining the record of the actual investor’s identity, today’s technology – including blockchain – provides viable solutions.

SFA is leading an effort within the structured finance market to identify the requirements for a robust and effective bondholder communication framework that could apply to all new bond issuance, if fully adopted.

Our Bondholder Communication Task Force has commenced a review of the current bondholder communication frameworks to identify operational, legal, economic and regulatory issues pertaining to those frameworks and drafted a specification document for an improved bondholder communication platform to address those issues. This project specification document will serve as the backbone for potential industry service providers to evaluate their ability to develop a platform meeting the industry’s needs at a cost point acceptable to the industry.

In February 2020, the Credit Ratings Subcommittee of the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) held a meeting in which they discussed their recent discussion document on credit rating agency compensation models and perceived conflicts of interest. In response to the SEC’s request for market feedback, SFA is forming a Task Force to monitor the ongoing discussions at FIMSAC, respond to the FIMSAC’s request for industry input and help inform engagement should a formal policy recommendation be put before the SEC.

To join our task force, please contact [email protected].

“Strong governance is a key pillar of a sustainable securitization market, but we can’t fully have strong governance without a mechanism for transaction parties to communicate with each other in a timely fashion when the circumstances so require. I’m very optimistic that with the Structured Finance Association’s leadership and the commitment of industry participants we will finally be able to overcome what has been a persistent obstacle to better governance in our industry for many years.”

- Francisco Paez, MetLife Investments

News

Industry News

May 13, 2020

Recent updates to the Federal Reserve’s (Fed) Term-Asset Backed Loan Facility (TALF) program could help clear some of the collateralized loan obligations (CLOs) stuck in limbo. The updates to the TALF program broadens the range of corporate loans CLOs can hold while still remaining eligible for the $100 billion in TALF.

Industry News

May 12, 2020

Amid a boom in the corporate debt market, the Federal Reserve started its highly anticipated corporate bond program last Tuesday. The central bank will kick off its Secondary Market Corporate Credit Facility in which it will buy exchange-traded funds (ETFs) that track the corporate debt market. The facility will purchase ETFs that hold “fallen angel” bonds of companies that were investment grade and have been downgraded to “junk” bonds due to the coronavirus crisis.

Industry News

May 10, 2020

Federal Reserve (Fed) officials have decided that they will not likely use negative rates to encourage economic growth during the pandemic after concluding that the costs of doing so outweighed its undefined benefits. The Fed’s decision comes as investors in the futures markets began betting that the Fed’s benchmark federal-funds rate would dip below zero by the end of the year, which would send yields on two-year Treasury securities to a record low.

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Contact

Jennifer Wolfe

Director, ABS and Investor Policy