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Monday, 13 January 2020

Shifting from Post-Crisis Regulation to Fresh Policy Challenges in 2020

This year's policy slate will shift from the Dodd-Frank policymaking cycle to some major headline issues, including the Libor transition, reform of the government-sponsored enterprises and relief for lenders complying with the anti-money laundering Beneficial Ownership requirements.

By Lisa Pendergast, David McCarthy, Christina Zausner and Raj Aidasani

Nearly 10 years after its enactment, the Dodd-Frank rulemaking cycle will be winding down. With that, the 2020 policy slate will shift to some major headline issues, including the Libor transition, reform of the government-sponsored enterprises (Fannie Mae and Freddie Mac) and relief for lenders complying with the anti-money laundering Beneficial Ownership requirements.

To be fair, a lingering Dodd-Frank/Basel III rule is slated to be finalized this year. The second of two liquidity requirements called the net stable funding ratio (NSFR) is targeted for adoption by all three bank regulatory agencies (Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency) in the first quarter. Once the NSFR enters this final stage, the policy challenges facing the commercial real estate (CRE) finance community will largely shift toward broader-based issues that generally apply homogeneously to all asset classes.

This is significant, because many of the Dodd-Frank requirements apply asymmetrically across asset classes and often treat CRE finance products relatively more harshly than residential mortgages and other commercial products. The 2020 policy season portends significant change with outsized execution risks.

With respect to the Libor transition alone, there is roughly $220 trillion in dollar-denominated exposure and $370 trillion globally.

A poorly planned exit for Fannie and Freddie from conservatorship could roil markets around the globe, while anti-money laundering compliance is increasingly tricky and violations can carry stiff fines and reputational risks. And while policy-related risks are inordinately high this year, they don't threaten to weigh more heavily on CRE finance than on other asset classes, as had many of the previous accounting, capital, liquidity and securitization regulations of the Dodd-Frank era.

The Big Bang in Benchmarks: The Global Transition from Libor to SOFR

Libor, or the London Interbank Offered Rate, has been called the world's most important number. Yet, Libor-related scandals and concern that this floating-rate benchmark is based on an inadequate number of underlying transactions led the UK's Financial Conduct Authority in 2017 to announce it would no longer compel banks to submit Libor quotes after 2021. Not surprisingly, the FCA's pronouncement galvanized global efforts to transition to new reference rates.

In the United States, where some $200 trillion of dollar-denominated Libor contracts and $1.3 trillion in CRE debt indexed to Libor are outstanding, the Board of Governors of the Federal Reserve and the New York Fed formed the Alternative Reference Rates Committee (ARRC) to identify a replacement rate for U.S. Libor. In June 2017, the ARRC selected the Secured Overnight Financing Rate (SOFR) as the replacement. SOFR is produced by the N.Y. Fed and is a broad measure of the cost of borrowing cash collateralized by Treasury securities on an overnight basis.

The Commercial Real Estate Finance Council (CREFC) is a member of the ARRC and co-chair of the Securitization Working Group (SWG), along with the Structured Finance Association (SFA). In the CRE structured-debt space, there is an estimated $200 billion in securitized floating-rate debt outstanding, comprised...


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