Enhancing Transparency in the Structured Finance Market

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he structured finance market expe- Most structures provide general docu- rienced phenomenal growth and mentation about the type of underlying Tinnovation during the past decade. exposures and the credit ratings, if any, However, recent turmoil in the credit that have been assigned to the underly- markets has raised doubts about the ing exposures and the tranches of the future viability of some products that rely structure itself. However, most do not primarily on the securitization process to provide a significant discussion concern- derive value. Significant concerns have ing the specific risk drivers associated been raised about the lack of transpar- with underlying exposures, or how these ency of some securitization products. risk drivers may cause the valuation of In this paper we review the availabil- the underlying exposures and the struc- ity of information about some of these ture itself to change in response to vari- complex products. Our review supports ous economic conditions. For example, the conclusion that lack of transpar- a CDO or SIV investor would generally ency of these products is a significant find it difficult to determine whether problem. The paper contains a number an underlying exposure was subprime, of recommendations that we believe or if the underlying exposure was itself policymakers should consider to improve exposed to subprime obligors. the transparency of these products. We The lack of transparency in complex conclude with some reminders about securitization products has recently existing supervisory guidance that is affected local government investments. 1 relevant to these issues. News reports have stated that a number of state and municipal investment funds, Inherent Opacity in the such as Florida’s local government invest- Securitization Process ment pool and Orange County, Califor- nia, held significant investments in SIV Concerns about transparency in the debt, such as asset-backed commercial securitization process are not new. paper (ABCP), a common short-term Transparency concerns have existed and debt instrument issued by SIVs.4 This resurfaced on occasion since the securiti- debt was reportedly purchased because it zation business model was introduced in was AAA-rated and offered higher yields 1985. These concerns first centered on than that of other AAA-rated short-term the lack of standardized deal terms and securities. Many investors, especially documentation. Over time, a measure government investors, operate under of standardization has been introduced, investment policies that limit the choice especially to more “plain vanilla” securiti- of investment instruments to only those zation products, such as mortgage-backed that meet certain credit rating (for securities.2 However, standardization example, AAA- or AA-rated) and maturity and transactional transparency for more (often short-term) criteria. As a result, exotic forms of securitization, such as these investors saw an opportunity to structured investment vehicles (SIVs) and increase return within their investment collateralized debt obligations (CDOs), limitations. However, few investors fully remains inadequate.3

1 This article was commissioned by FDIC Chairman Sheila C. Bair and is intended to highlight policy issues associated with improving the transparency of certain securitization products for consideration by financial institution regulatory agencies and bank management. 2 For example, the Bond Market Association, now the Securities Industry and Financial Markets Association, or SIFMA, Mortgage Securities Research Committee, published the first Standard Formulas guidelines in 1990. 3 See Appendix A for an overview of the securitization process and selected definitions. 4 Daniel Pimlott, “Municipal SIV Advocates Fly into Turbulence,” Financial Times, December 16, 2007, http://www. ft.com/cms/s/0/cb60a480-ac0b-11dc-82f0-0000779fd2ac.html.

4 Supervisory Insights Summer 2008 understood the risks associated with The Securities and Exchange Commission the underlying SIV structures, which (SEC) has recently taken steps to increase have been labeled as “some of the most transparency through the implementa- confusing, opaque, and illiquid debt tion of Regulation AB8 (Reg AB) which investments ever devised.”5 imposes initial disclosure requirements on some types of asset-backed securities. During the summer of 2007, SIVs were the object of concern within the invest- Highlighting concerns in this respect, ment community when it became obvi- several large issuers of securitization ous that the opaque structure of these products have provided considerable instruments made it virtually impossible financial support to prevent investors in for investors to determine the structure’s highly rated securitization tranches from relative exposure to subprime mortgages, recognizing losses. These issuers, while much less appropriately assess the risk not legally compelled to provide support, profile of the underlying exposures. As a did so to manage reputational risk and result, investors began to shy away from bolster investor confidence in subsequent investments in SIVs, creating a liquidity securitization transactions. In addition, crisis in the securitization market, which issuers of investment products, such as began in August of 2007. money market mutual funds, have also chosen to bear losses or provided finan- Concerns also have been raised cial support beyond their contractual regarding the lack of transparency in requirements to protect investors from securitization products that are used by losses on commercial paper issued by corporations to achieve risk transference CDOs and SIVs. or as a means of off-balance sheet funding. Investors and industry watch groups Another transparency concern relates have voiced concern that the account- to investors’ ability to properly assess ing and disclosures for off-balance sheet the credit risk associated with the assets transactions, as well as the complexity of used to back securitization products. For many securitization structures, have left instance, a residential mortgage-backed them unable to assess whether risk has security (RMBS) can be collateralized by been significantly transferred away from thousands of individual mortgages. For the corporate issuer.6 Although changes this reason, certain short-cuts are often in accounting principles and the enact- used, such as accepting the reputation ment of the Sarbanes-Oxley Act of 20027 of various agents, for example, servicers, have lessened concerns about financial originators, and rating agencies, to disclosure, many investors believe that minimize the amount of due diligence issuers continue to bear undisclosed risk. performed.

5 David Evans, “Public School Funds Hit by SIV Debts Hidden in Investment Pools,” Bloomberg News, November 15, 2007, http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aYE0AghQ5IUA. 6 Congress held hearings soon after the failure of Enron to determine the extent to which banking entities assisted in concealing Enron’s true financial condition by arranging complex structured finance transactions. Senior staff at the Federal Reserve Board, Office of the Comptroller of the Currency, and the U.S. Securities and Exchange Commission (SEC) testified at these hearings. At these hearings and in subsequent correspondence, it was agreed that further guidance was necessary to ensure that banks maintain the proper controls for governing these activities in order to prevent abuses like those perpetrated by Enron, WorldCom, Parmalat, and others. On January 11, 2007, the federal banking agencies, along with the SEC (agencies), issued a final interagency statement (FIL-3-2007, “Complex Structured Finance Activities Interagency Statement on Sound Practices for Activities with Elevated Risk”) that describes some of the internal controls and risk management procedures that may help banks identify, manage, and address the heightened reputational and legal risks that may arise from elevated-risk Complex Structured Finance Transactions. The statement does not apply to products with well-established track records that are familiar to participants in the financial markets, such as traditional securitizations. 7 Pub. L. No. 107-204, 116 Stat. 745. 8 SEC Regulation AB (Registration Requirements for Asset-Backed Securities): 17 CFR 229.1100 through 1123.

5 Supervisory Insights Summer 2008 Transparency continued from pg. 5 In addition to these inherent character- active secondary markets to ensure the istics of the securitization process that risks associated with these securities are promote opacity, other external issues adequately captured in the examination further hinder transparency. process and in capital regulation. High credit ratings should not be viewed as a substitute for adequate due diligence Roadblocks to Transparency on the part of the bank or for adequate supervision by the examiner. Bank Lack of Secondary Market Trading management must have a thorough Information understanding of the terms and structural features of the structured finance Little price transparency is available products that they hold for investment. on most structured finance securities. For example, bank management should Market participants attribute this to the know the type of exposures that collater- lack of an established secondary market alize the product, the credit quality of the for these securities as most ABS and underlying exposures, the methods by CDO investors follow a buy-and-hold which the product is priced, and the key strategy, with trades executed bilater- assumptions affecting its value. ally between the investor and the dealer bank. As a result, for many product types, actual trade prices generally are Private Placements not reported in organized or centralized Historically, private placements of fashion, although market participants corporate bonds arose as a way to indicate that the dealer banks have reduce the cost of the securities regis- access to this information. Concerns tration process for companies with an about the lack of price transparency are established track record. The rationale growing as banks continue to increase for allowing private placements seems their presence in these markets as deal- less compelling with securitizations. In ers, arrangers, underwriters, and inves- contrast to corporate bonds, securitiza- tors. Further, with the increasing use of tions consist of various pooled securities, fair value accounting, the pricing of these including MBS and CDOs, that often complex securities directly affects bank have no track record and that require earnings and regulatory capital. an in-depth modeling and understand- Investors, regulators and other inter- ing of a highly segmented amount of ested parties need to focus attention on assets that comprise the collateral pool. the lack of liquidity in most structured For this reason, a lack of complete and finance offerings and work toward public dissemination of a securitization’s improving price discovery. Regulators loan-level data reduces transparency and should encourage market participants to hampers the investor’s ability to fully openly share trading information about assess risk and assign value. ABS and CDOs, such as daily volumes, The practice of private issuance creates bid/ask spreads, consensus prices, and difficulties in obtaining deal-specific price ranges and report this information information for many analysts, including to pricing services. Indeed, the industry regulators and academics. As an exam- should look to the publication of corpo- ple, most if not all CDOs typically are rate bond information in daily business issued in private offerings. These offer- newspapers, such as The Wall Street ings are exempt from registration and Journal and Financial Times, as an significant disclosure requirements of the example of transactional transparency. Securities Act of 1933. Regulators need to reevaluate the Because underwriters of structured supervisory treatment of ABS and CDOs finance products typically do not provide that are not liquid and do not trade on significant disclosure under Rule 144A

6 Supervisory Insights Summer 2008 issuances, there is a danger that nega- A more comprehensive definition of tive information may be muffled to interested parties should be considered. obtain the best market pricing for the Regulators are responsible for ensuring structure. This has the direct effect of the safety and soundness of financial improving the profitability of the security institutions—and the banking system underwriter and improving the market- generally. Therefore, regulators must be ability to both sides of the transaction: able to quickly collect information that the loan originators and security inves- cuts across an entire industry or segment, tors. As long as these securities perform, rather than just an individual bank. To investors are not likely to question their provide regulators with the tools needed transparency. to evaluate the capital markets as a whole, any restrictions that limit a regula- The SEC adopted new and amended tor’s ability to ascertain necessary market rules and forms to address the registra- information should be reevaluated. The tion, disclosure, and reporting require- SEC could—and should—modify its defi- ments for ABS, referred to as Reg AB. nition of a qualified institutional buyer Some consideration should be given to through rulemaking to include regulators. extending the disclosure requirements under Reg AB to all Rule 144A and private placement securities. Rating Agency Disclosure of Securitization Information Lacking Banking regulators should consider other approaches in concert with the Nationally Recognized Statistical review of securities registration and disclo- Rating Organizations (NRSROs) rate sure enhancements. For instance, banking securitization tranches to publish an regulators should consider whether the opinion about the creditworthiness of capital treatment of structured finance these instruments. Such ratings have products could be conditioned on the been criticized for being one dimen- granularity and the quality of information sional in a multi-dimensional securitiza- provided in prospectuses and offering tion world of risk. In the case of CDOs, circulars, even if the bank is considered to agencies rate the notes but may not be a qualified institutional buyer. provide complementary information. Table 1 (see p.8) provides a listing Vendor Product Shortcomings of a representative sample of CDOs Securitization documentation, such as reviewed by the FDIC in the course of offering circulars, indentures, and trustee its risk assessment activities relative to reports, are available only to dealers insured institutions. The table shows and certain qualified investors.9 For this that of 24 CDOs reviewed, slightly more reason, some vendors collect, pack- than half had a presale report that was age, and sell this information. However, made publicly available by an NRSRO. the price and complexity of vendor Further, for the same 24 CDOs, only 3 models and limitations to the informa- had robust performance data published tional disclosure do not eliminate the by an NRSRO. high hurdle to investors, analysts and The SEC should review the quality and academics—and regulators—wishing to granularity of information provided on analyze this sector. the rating agencies’ public Web sites.

9 Vendors of CDO and hedge fund data sometimes require that customers meet certain investment standards before gaining access to information. These rules in essence intend to keep smaller undiversified investors from accessing more sophisticated investments. However, the FDIC’s not meeting certain standard investor definitions may hamper its regulatory research efforts. Such definitions may be identified under some documents, such as the Securities Act of 1933 or the Investment Company Act of 1940, and may include the terms Accredited Investor, Accredited Institutional Investor, Qualified Purchaser, and Qualified Institutional Investor or Buyer. Links to some working definitions include http://www.sec.gov/answers/accred.htm and http://www.sec.gov/rules/proposed/33-8041.htm.

7 Supervisory Insights Summer 2008 Transparency continued from pg. 7 Table 1: NRSRO Disclosure about CDOs is Limited

Rating agencies should be strongly cized for assigning inconsistent ratings encouraged to provide information on all across different business sectors. At the aspects of a rated transaction, including extreme, during a recent event related loan-level information on the underlying to credit rating agency performance, a collateral. Surveillance reports should panel speaker suggested that for a given be issued regularly and should note any rating, CDOs were 250 times more risky material changes to the composition of when compared to municipal securities.10 the securitization vehicle. Even before problems with subprime mortgages emerged in late 2006, accord- Regulators also will need access to ing to a Moody’s presentation, all struc- more granular information as part of the tured finance securities were likely to be Basel II implementation process. Under downgraded on average by 3 notches, the Internal Assessment Approach and twice as severe as the 1.5 average down- the Supervisory Formula, regulators will grade for corporate securities. need to have loan- and portfolio-level information to evaluate the appropri- In addition, ratings assigned to struc- ateness of the capital requirements. tured finance products generally have The regulators should begin a dialogue a much worse credit track record than with the rating agencies to determine if corporate bond ratings. For instance, enhancements to the transparency of the as shown in Chart 1 on page 9, the esti- ratings process could also provide value mated 5-year loss rate for a Baa-rated to Basel II implementation efforts. (BBB-rated on the S&P scale) CDO is about 16 times the estimated loss Rating Agency Impact on rate for a Baa-rated corporate bond. Transparency Thus, two exposure types with identical ratings can have drastically different loss In many respects, NRSROs have expectations. contributed to transparency concerns. For example, NRSROs have been criti- Nonetheless, credit ratings do provide useful information to investors, as do

10 “Is the Rating Agency System Broken or Fine?” Presentation given by the American Enterprise Institute for Public Policy Research, November 15, 2007, http://www.aei.org/events/eventID.1605/event_detail.asp.

8 Supervisory Insights Summer 2008 Chart 1: Most Investment Grade Securitizations Performed Poorly Compared to Corporates

20% Estimate of the Baa-rated 5-year Loss Rate by Investment Type 19.1%

18%

16%

14%

12%

10%

8% 6.3% 6%

4% 3.4% 2.2% 2% 1.2% 0.4% 0% CMBS Corp. RMBS HEL ABS CDO Note: U.S. Commercial Mortgage-backed Securities (CMBS), Global Corporate Bonds (Corp.), U.S. Residential Mortgage-backed Securities (RMBS), U.S. Home Equity Lines of Credit (HEL), U.S. Asset-backed Securities (ABS), and Global Collateralized Debt Obligations (CDO). Source: “Default & Loss Rates of Structured Finance Securities: 1993-2005,” Moody’s Investors Service, April 2006. reports and other information provided sold into a securitization vehicle. Gener- by NRSROs. This information is espe- ally, the Moody’s proposal is intended cially useful in judging the loss expecta- to address the need for third-party loan tion of one instrument relative to another reviews, improve representations and within a specific product type. However, warranties, and enhance reporting for as discussed earlier in this article, it is increased transparency. especially important for investors to The enhancements proposed by understand the limitations of credit Moody’s would help increase transpar- ratings and to use them accordingly, ency. However, transparency cannot be as one component in the due diligence increased industry wide unless the SEC, process along with an independent analy- as the regulator of NRSROs, endorses sis of the risks associated with the pool of proposals such as this as a best practice assets used as collateral. and factors the standards into its supervisory oversight function. Ideally, all rating Rating Agencies’ Attempt at agencies would follow and provide more Improving Transparency and granularity on the underlying exposures Disclosure in their publicly available presale and surveillance reports so that investors, The rating agencies have recognized regulators, and other interested parties that the lack of transparency in the struc- can better assess the risks relating to tured finance market has contributed these securities. to current problems and have begun to reevaluate the ratings process. For example, on September 25, 2007, Moody’s President’s Working Group’s proposed a series of enhancements to the Objective to Improve Non-Prime RMBS Securitizations11 that Transparency they believe, if adopted, would improve In March 2008, the President’s Work- the transparency and oversight on loans ing Group on Financial Markets (PWG)

11 Nicolas Weill, “Moody’s Proposed Enhancements to Non-Prime RMBS Securitization,” Special Report, Moody’s Investors Service, September 25, 2007.

9 Supervisory Insights Summer 2008 Transparency continued from pg. 9 issued a report that included several and severity of the breached trigger. recommendations designed to address Uncertainty could result in confusion weaknesses in the financial markets— and panic; improved disclosures would weaknesses which the PWG believe to mitigate this confusion. be significant contributing factors to the Efforts should be made to require finan- recent market turmoil.12 In this report, cial firms to provide sufficiently detailed the PWG notes the need to improve information about triggers and other transparency and disclosure and develop events that could result in an unwinding better risk awareness and management of the securitization transaction or other to “mitigate systemic risk, help restore changes to the underlying economic investor confidence, and facilitate benefits. Any such changes to disclosure economic growth.”13 requirements would need to be addressed This call for greater transparency by the SEC through its regulatory rule- includes a challenge to credit rating making process; however, regulators and agencies to increase the transparency rating agencies could provide beneficial of the ratings and foster the appropri- support by encouraging firms to volun- ate use of ratings in the risk assessment tarily make such disclosures. process.14 Similarly, the accounting Further, investors should also take into profession is challenged to increase the consideration the amount of financial transparency of U.S. accounting stan- support that is expected to be provided dards as they relate to consolidation and by the financial firm that sponsors a securitization. structured finance transaction, regardless of whether it is contractually obligated to Investors Play a Key Role provide liquidity or credit enhancements. in Demanding Improved The risk exposure to financial firms that Transparency results from this activity may not be fully appreciated by investors in those firms, Investors need to look beyond the or by investors who rely on the ability of ratings and develop a better awareness those firms to provide the contractual of the risks to which they are exposed. support. Greater transparency in the They should demand exposure-level financial reporting of all firms engaged information on the performance and in structured finance could serve to composition of underlying assets as well enhance transparency of the full spec- as on the structural features that can trum of risks that are associated with the quickly alter the terms of the deal. For structured finance market. example, much concern has been raised about SIVs and the possibility that adverse events (“triggers”) could result Supervisory Considerations in the unwinding of several of these Regarding the Use of large funds and the dumping of tens of Investment Ratings billions of securities onto an already Two significant factors in the recent uncertain market. Yet, few people market turmoil have been the over- possess sufficient information on how reliance on credit ratings and a misun- the triggers work, how close they are to derstanding of what those ratings mean. being breached, or what action a spon- Longstanding supervisory guidance speci- sor would take, depending on the type

12 The President’s Working Group on Financial Markets, “Policy Statement on Financial Market Developments,” March 2008. 13 Henry M. Paulson, Jr., “Memorandum for the President, Regarding President’s Working Group on Financial Markets Policy Statement,” March 13, 2008. 14 The President’s Working Group on Financial Markets, p. 17.

10 Supervisory Insights Summer 2008 fies that while banks can consider credit difficult-to-measure risk factors, such as ratings as a factor in the risk manage- correlation. ment process, ratings should not be the Banks should conduct pre-acquisition sole factor considered when evaluating and periodic analysis of the price sensi- the risks of investing in securities. tivity of securities. Risk factors include, The FDIC’s Risk Management Manual but are not limited to, changing inter- of Examination Policies includes a sub- est rates, credit risk deterioration, and chapter titled Securities and Derivatives reduced liquidity and marketability. which references the banking agencies’ Banks should anticipate difficulty when 1998 Supervisory Policy Statement on attempting to price illiquid and complex Investment Securities and End-User securities, and should limit concentra- Derivatives Activities15 and the Inter- tions of such holdings. agency Policy on Classification of Assets The 1998 Supervisory Policy State- and Appraisal of Securities.16 FDIC- ment on Investment Securities and supervised banks should be familiar with End-User Derivatives Activities provides the Manual of Examination Policies and guidance and sound principles to bank- each of these policies, as they remain ers for managing investment securities in force. and derivatives risks. It makes clear Credit ratings should not be used as a the primary importance of board over- substitute for pre-purchase due diligence sight and management supervision, and or as a proxy for ongoing risk monitor- focuses on risk management, controls, ing for banks with positions in complex and reporting. Management should securities. Banks should understand that approve, enforce, and review policy and the loss expectations associated with the procedure guidelines that are commen- rating scales used by credit rating agen- surate with the risks and complexity of cies for various types of debt (corporate bank investment activities bonds, structured finance investments, The interagency Policy Statement and municipal debt) can differ. For emphasizes management’s need to example, the expected loss for a given understand the risks and cash-flow char- rating may vary across products as does acteristics of its investments, particularly the volatility of ratings (as reflected by for products that have unusual, lever- transition matrices) assigned. aged, or highly variable cash flows. The Credit ratings do not capture all of Policy Statement also states that banks the risks which should be considered must identify and measure risks, prior during the risk management process, to acquisition and periodically after the such as loss given default, the potential purchase of securities, and that manage- for downgrade (also known as ratings ment should conduct its own in-house volatility risk), market liquidity, and price pre-acquisition analyses, or to the extent discovery. In many types of structured possible, make use of specific third-party finance securities, these “other” risks analyses that are independent of the can be material and can be the source of seller or counterparty. a significant degree of losses. The analysis of complex securities, such as CDOs, Bobby R. Bean is particularly difficult, and potential Chief, Policy Section buyers should be aware that the rating Division of Supervision and agencies and others may underestimate Consumer Protection [email protected]

15 Federal Financial Institutions Examination Council (FFIEC), “Policy Statement on Investment Securities and End- User Derivatives Activities,” 63 FR 20191, April 23, 1998. 16 Federal Deposit Insurance Corporation, FIL 70-2004, Interagency Policy on Classification of Assets and Appraisal of Securities, June 15, 2004, at http://www.fdic.gov/news/news/financial/2004/fil7004.html.

11 Supervisory Insights Summer 2008 Transparency continued from pg. 11 This two-step process is followed to Appendix A legally separate the collateral from the general assets and obligations of the Overview of the Securitization originator. This separation ensures Process that the assets serving as securitization collateral cannot be consolidated with In general, a securitization is the issu- the general assets of the originator in ance of a financial instrument backed the event of bankruptcy. The bank- by the performance of identified assets ruptcy remoteness of the assets allows where the investor has no recourse to the securitization structure to achieve the originator or seller of the asset. The a higher credit rating than that of the typical securitization structure uses a originator. The issuer is able to achieve two-step process that involves an origi- its desired credit rating by incorporat- nator/seller establishing a bankruptcy- ing varying levels and forms of credit remote special purpose entity (SPE). The enhancement. originator then sells the assets that will serve as collateral for the asset-backed For issuers, the securitization process securities (ABS) to this SPE in order to removes assets from the balance sheet, attain true-sale accounting treatment and freeing equity capital that would other- remove the assets from its balance sheet. wise be required to support those assets. To meet the provisions of FAS 1401 the Issuers of securitizations are also able assets are often transferred to a second to manage credit risk and other risk entity, a Qualified SPE (QSPE) or trust, exposures, such as interest rate risk, that then issues the securities. Chart 1 by removing from the balance sheet illustrates this process for a simplified, assets that represent unwanted risk generic securitization transaction. and dispersing the risk to securitization

Chart 1: A Simplified Overview of the Securitization Process

Originator / Seller

Assets Cash for Purchase of Assets

Special Purpose Entity

Assets Cash for Purchase of Assets

Servicer QSPE/Trust Trustee

Credit Cash Flow Purchase ABS Enhancement of ABS Securities

Cash Flow from Assets Investors

1 FAS 140 provides that the assets and liabilities of a Qualifying Special Purpose Entity (QSPE) do not get consolidated into the financial statements of the transferor. For more information, see Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 140, September 2000, http://fasb.org/pdf/fas140.pdf.

12 Supervisory Insights Summer 2008 investors within the financial market. diversification, as the underlying assets The securitization process also provides include a number of different obligors issuers access to a new funding source that are geographically dispersed and and a vehicle with which to enhance often originated by a number of different income and return on assets. This is entities. When they are secured by appro- accomplished through the combination priately underwritten credit exposures, of receiving income from the sale of the securitizations can provide a high quality assets and the simultaneous reduction investment. in asset size. The securitization process provides Selected Definitions investors with several benefits over the Collateralized Debt Obligation (CDO). origination, or purchase, of the assets A CDO is a financial security that has individually. One fundamental benefit is collateral that consists of one or more the redistribution of risk. The tranching types of debt, including corporate process, which is made possible through bonds, corporate loans, and tranches of the pooling of assets, allows the various securitizations. risks and characteristics inherent in the individual assets to be segregated, manip- Structured Investment Vehicle (SIV). ulated, and tailored. At least in theory, An SIV is a special purpose entity investors are able to select the specific (including a business trust or a corpora- risk-and-reward profile that best matches tion) with assets that consist primarily their objectives, including maturity, inter- of highly rated securities. The assets est rate risk, prepayment risk, extension are financed through the proceeds of risk, and yield. Securitizations also offer commercial paper and medium-term note issuances.

13 Supervisory Insights Summer 2008