On October 5, the Federal Reserve Board announced two changes to the procedures for evaluating asset-backed securities (ABS) pledged to the Term Asset-Backed Securities Loan Facility (TALF). First, a proposed rule has been published that will set criteria for determining which national credit rating agencies’ ratings may be used in TALF to establish the eligibility of ABS to be pledged as collateral. The proposed rule, which requires a certain minimum level of experience in rating deals of any particular type, will likely result in an expansion of TALF-eligible rating agencies for ABS and is intended to promote competition among rating agencies and protection against credit risk.
Second, starting with the November subscription, the Federal Reserve Bank of New York (FRBNY) will conduct a formal risk assessment (similar to the risk assessment currently required for all commercial mortgage-backed securities) of all ABS as a part of the TALF review process. To facilitate the risk assessment, new rules require each issuer wishing to bring a TALF-eligible ABS transaction to market to provide certain information at least three weeks prior to the subscription date. The Federal Reserve believes that the risk assessment will help ensure that TALF collateral complies with the existing high standards for credit quality, transparency, and simplicity of structure. Instructions, timelines and a statement of principles describing the standards guiding the risk assessment of TALF collateral are available on FRBNY’s website.
FRBNY has also issued a number of updated documents for its TALF program, including a new due diligence document and Appendices 4A, 4B and 6 to the TALF Master Loan and Security Agreement, which are all available on FRBNY’s website.
The Federal Reserve press release is available here.