Long-awaited exposure draft on SPV consolidation released in US

Under the proposed interpretation in the exposure draft, all SPVs with 10% equity or less would be candidates for consolidation on the balance sheets of a special class of SPV investor called the 'primary beneficiary'. According to the exposure draft, the primary beneficiary holds the majority stake or the largest share of that class of SPV securities with the greatest variability in returns. In CDOs, that class would be the equity tranche, or first-loss piece.

One CDO analyst familiar with the exposure draft, speaking on condition of anonymity, was upbeat about the new document. When the consolidation issue was first being aired by the FASB in March, officials in the CDO business were concerned that stringent regulations would cut CDO volume by requiring consolidation of the structures on the balance sheets of publicly owned investors. The fear was that investors in these companies would penalise the companies for having their CDO investments on-balance sheet.

According to the CDO analyst, on a preliminary reading, the interpretation in the new exposure draft seems to allow managed CDOs to remain exempt from consolidation, regardless of the equity class comprising their capital structure. The analyst said it was unclear how the interpretation applied to synthetic CDOs, as there was no explicit reference in the exposure draft to derivatives.

The comment period for the new exposure draft concludes on August 30, 2002.

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