GlobalCapital: The SFA will have addressed a number of different industry issues this year, but what have been some of the key issues that have influenced and impacted the US structured finance market?
Shiny: One of the major issues for the industry, and for us at the SFA, has been the work required to pass a bill through Congress that provides a safe harbor for legacy structured finance contracts that have no no adequate fallback language (in terms of what rates can change on the contract in the absence of Libor). It has been a Herculean effort to craft legislation that essentially ensures that consumers can be smoothly moved away from Libor if they are on contracts with no fallback language.
That job involved working closely with the US Federal Reserve to draft the bill, which the House Committee for Financial Services passed unanimously earlier this year. It was a good win, but the bill still needs to pass the House of Representatives and the Senate before it hits the president’s desk. So there is still a long way to go, but we are making good progress.
Alongside this, the industry has focused on managing the economic repercussions of Covid-19, in particular forbearance plans and their impact on mortgage securitisations, as well as progressing work on standardizing information on ESG and sustainable investments.
This is a Herculean effort to craft legislation that essentially ensures that consumers can smoothly walk away from Libor if they have contracts with no fallback language.
Michael Bright, SFA
From our perspective, the securitization market faces an opportunity and a challenge to come together to develop some of the industry’s best practices for disclosure and minimum structural levels across all ESG categories. On our end, we actually convened a task force to investigate and report on what kind of information investors need to be able to credibly say that a particular securitization investment is a sustainable investment.
GlobalCapital: The discontinuation of Libor next year is an extremely important issue for the global financial industry. How prepared do you think the structured finance industry is for this event?
Shiny: A colossal amount of work has gone into preparing for this transition. Thus, the entire financial sector has prepared for it as much as it can, where it can. But on an issue like legacy contracts that don’t have the fallback language – and we estimate there’s between $10 and $15 trillion worth of contracts that don’t have that language – you can’t make much to prepare you for. This certainly puts the trustees in a very difficult position where they are expected to manage the agreement without being clear on what rate should be used. And that requires the involvement of Congress. On our end, we have done what we could with a global campaign to elevate this issue and make the progress we have.
GlobalCapital: Green and sustainable finance and investment have become the most important areas of global finance. How would you rate the structured finance industry’s embrace of green and sustainability issues?
Shiny: There is certainly positive energy behind this, which comes from investors, issuers and rating agencies. They all build tools to assess the sustainability of structured finance transactions. At the moment, however, I think the industry lacks good, credible data and basic standards that all participants can agree on. It is a work in progress. Where the industry needs to be particularly careful is – and there are many benefits to working together, collaboratively – in guarding against greenwashing. Success here is essential for consumers to have the confidence and faith they need to invest in ESG-related products. Part of our contribution to this is through the convening power we have by bringing everyone together to share their views and insights on best practices and data. This ultimately allows the industry to self-police to ensure that sustainable investment claims are backed by hard evidence.
GlobalCapital: Looking to 2022, what are some of the top macro risks you see?
Shiny: We would all like to control the Covid. There is the risk of another evolution of the virus causing our economy, and our economies, to shut down, which no one wants to see. I think there is also a risk of inflation as we strive to rebuild the economy and invest heavily in infrastructure. With respect to mortgages in particular, what constitutes a legal safe harbor through repayment capacity requirements under Dodd-Frank is both a risk and an opportunity for the industry. The CFPB, for example, probably does not want the safe harbor to be as wide as it was under the previous administration, which may open up some risk of litigation.
