Prohibition Against Conflicts of Interest in Certain Securitizations

As previously announced by the U.S. Securities and Exchange Commission (SEC) on November 27, 2023 (EventID 24177), the Commission has now published in the Federal Register its final rule to prohibit asset-backed securitization participants including sponsors, underwriters, or placement agents to engage in certain transactions that may cause a conflict of interest between themselves and investors in an ABS. As outlined in the rule, such transactions include short sales and transactions in credit default swaps where participants benefit from a decline in the value of the ABS. Some exceptions will apply, e.g. for market making activity or hedging purposes and for ABS issued by foreign entities, provided that certain conditions are met. The final rule takes into account the feedback the Commission has received, but in large reflects the provisions as proposed by the SEC.
The changes to the final rule compared to the draft version are outlined in the above noted Event. The draft version as it was consulted on may be found in EventID 19373.
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The final rule will come into force on February 5, 2024 and apply from June 9, 2025 for any ABS sold on or after that date.