ABS conflict rule creates prohibited trades uncertainty

Author: Danielle Myles | Published: 29 Sep 2011

The Security and Exchange Commission (SEC) has taken an unusual approach in its rule banning conflicts in asset-backed security (ABS) transactions. It risks leaving market participants unsure of what trades could be deemed prohibited at any time.

The proposed rule has not resolved a fundamental tension in the Dodd-Frank mandating-provision over prohibitions application to credit derivatives in synthetic ABS structures.

Last week’s proposal does little more than restate section 621 of Dodd-Frank which prohibits sponsors, underwriters, initial purchasers and placement agents from short selling, for one year, transactions they have packaged and sold.

Despite being a 118-page document, the proposed rule starts on the second last page, with the rest consisting of the SEC’s supporting proposing release. This method sees the regulator propose a very broad rule, but through examples and comments in the proposing release assert it will interpret and enforce the rule more narrowly.

There normally...