A Treasury report recommending a relaxation of Reg AB II disclosure requirements has raised hopes that burdensome reporting required of SEC-registered covered bonds – which has seen that market segment dry up – could ultimately be lifted.

In the report to president Donald Trump, A financial system that creates economic opportunities – capital markets, the Treasury puts forward recommendations to meet core principles of an executive order signed in February.

“More than seven years after Dodd-Frank’s enactment, it is important to reexamine these rules, both individually and in concert, guided by free-market principles and with an eye toward maximizing economic growth consistent with taxpayer protection,” says the report, which was released on Friday.

An unintended consequence of Reg AB II has been that, to be SEC-registered, covered bonds have to meet onerous reporting requirements – such as loan level data with many, often inapplicable fields among some 272 for mortgage loans. The result has been that banks – exclusively Canadian – who previously issued SEC-registered covered bonds have ceased to do so.

However, the Treasury recommends a “review and recalibration” – interpreted by market participants as a relaxation – of the requirements introduced under Reg AB II.

“The number of required reporting fields for registered securitizations should be reduced,” it says. “Additionally, the SEC should continue to refine its definitions to better standardize the reporting requirements on the remaining required fields.

“Additionally, the SEC should explore adding flexibility to the current asset-level disclosure requirements by instituting a ‘provide or explain regime’ for pre-specified data fields,” it later adds, and, further: “Finally, the SEC should signal that it will not extend Reg AB II disclosure requirements to unregistered 144A offerings or to additional securitized asset classes. ABS collateralized by equipment loans or leases, floorplan financings, student loans, and revolving credit card debt lack uniformity across the underlying loans and loan terms. As such, while disclosure remains an important tool to bolster investor confidence and provide sufficient market transparency, cohort-level or grouped account disclosures as currently provided should suffice for these additional asset classes.”

Jerry Marlatt, senior of counsel at Morrison & Foerster, was among those welcoming the initiative, and said that the ultimate goal should be for covered bonds to be explicitly exempted from the requirements that apply to securitisations.

“All told, the package of recommendations around securitisation will force some rethinking at the SEC,” he says, “and it may be that out of that we can get the SEC to agree that covered bonds are not classed as securitisation but perhaps in a class by themselves. In particular, they have a dynamic asset pool with multiple series issued, and that’s not characteristic of ABS.

“The closest ABS analogy is credit cards, and they long ago made a special exception for receivables that they don’t make for any other asset class. So it may be that they move on from the requirement of asking covered bonds to make loan level disclosure about the underlying mortgages – but it’s very, very early days.”

Photo: Swearing in ceremony of Secretary of the Treasury Steve Mnuchin