Collateralized loan obligations - Mod FE

[SujathaP-SF]

Hello,
Are CLOs subject to modified filing exempt process? We invested in a CLO bond that is S&P BBB rated, NAIC 2.
The security went through the Modified FE process and since the book price was 100.09, which if we reference the NAIC designation breakpoints for LBaSS then the initial NAIC 2 converts to an NAIC 3.
I wanted to understand if CLOs qualify for any exclusions from the Mod FE process and whether we could use the initial NAIC 2 rating for reporting?

Thanks for your thoughts.

Sujatha

[BarryW]

I an unaware of any specific guidance for CLOs in this respect. Therefore, I would follow the attached flowchart.

The first question is: does the security in question meet the definition of SSAP 43R?

If yes, is the security considered an "Exempt Obligation"? (Doesn't seem to be the case in your situation).

If no, is the security modeled? (I'm assuming the security is NOT modeled in your case)

Assuming the security is not an Equipment Trust Certificate, a Credit Tenant Lease, or an IO rated by the SVO, this would suggest you follow the instructions for Modified FE

[SujathaP-SF]

Thank you for your response. Given that a CLO is neither an RMBS nor a CMBS, and is usually classified as an ABS, why do they go into the modified filing exemption process flowchart in the first place? Why doesn’t it get an automatic exemption, as it seems most other non-RMBS and non-CMBS bonds do?
If you look at Part 7 of the PPM, it seems to imply that RMBS and CMBS bonds would have a NAIC designation dictated by the modified filing exemption discussed in Section 6. In turn, Section 6 describes the methodology, including the price points grid. The specific focus on RMBS and CMBS was called out in several other places as well, including the NAIC itself http://www.naic.org/cipr_topics/topic_structured_securities.htm.
The next section discusses filing exemptions for ABS, and basically says you follow the usual filing exemption described in part two, section 4(d), which would not invoke this grid.
So going back to the question – why doesn’t CLO get an automatic exemption like all non-RMBS and non-CMBS.

Thank you for your thoughts!
Sujatha

[SujathaP-SF]

Thank you for your response. Given that a CLO is neither an RMBS nor a CMBS, and is usually classified as an ABS, why do they go into the modified filing exemption process flowchart in the first place? Why doesn?t it get an automatic exemption, as it seems most other non-RMBS and non-CMBS bonds do?
If you look at Part 7 of the PPM, it seems to imply that RMBS and CMBS bonds would have a NAIC designation dictated by the modified filing exemption discussed in Section 6. In turn, Section 6 describes the methodology, including the price points grid. The specific focus on RMBS and CMBS was called out in several other places as well, including the NAIC itself http://www.naic.org/cipr_topics/topic_structured_securities.htm.
The next section discusses filing exemptions for ABS, and basically says you follow the usual filing exemption described in part two, section 4(d), which would not invoke this grid.
So going back to the question ? why doesn?t CLO get an automatic exemption like all non-RMBS and non-CMBS.

Thank you for your thoughts!
Sujatha

[BarryW]

As I read SSAP 43R, a CLO meets the definition of a security that falls under the auspices of SSAP 43R. If a security falling under the auspices of 43R is not deemed to be an "Exempt Obligation", is not modeled, is neither an Equipment Trust Certificate, Credit Tenant Lease, IO security or a security rated by the SVO, then SSAP 43R, paragraph 26a requires use of Modified FE.

I would suggest you contact the NAIC for their rationale for taking this approach.

[SujathaP-SF]

Will do. thanks.