22 Dec 2011

APRA emphasises importance of written self-assessments for securitisations

by Louise McCoach, Alex Chernishev

Self-assessments for securitisation must be rigorous, of a high quality and consider economic substance over the form of the transaction.

On 18 November 2011, the Australian Prudential Regulation Authority re-emphasised, in an open letter to authorised deposit-taking institutions, the importance of compliance with the written self-assessment requirements for each securitisation in which the ADI participates and that these self-assessments must be rigorous, of a high quality and consider economic substance over the form of the transaction.

This requirement for self-assessment is provided for under paragraph 18 of Prudential Standard 120 Securitisation (APS 120) (paragraph 20 from 1 January 2012) and requires ADIs to demonstrate their compliance with APS 120.

APRA stated that if a securitisation satisfies all requirements of APS 120 it does not need the prior written approval of APRA. Similarly, prior written approval is not required where the ADI retains the subordinated tranche of the securitisation so that the securitisation meets all the requirements of APS 120 except the significant risk transfer requirement or where the ADI intends to treat the securitised loan as on-balance sheet.

In its letter, APRA has also clarified a number of other securitisation related issues, as outlined below.

Regulatory capital treatment

APRA confirmed that it will continue to adopt the alternative capital treatment in respect of subordinated tranches outlined in its letter of 10 December 2010. Under this alternative capital treatment, originating ADIs are allowed to hold subordinated tranche(s) in a securitisation provide these are deducted from their Tier 1 capital. APRA has indicated that this treatment will apply until it has completed its proposed review of APS 120 during 2012.

APRA has also reminded ADIs that the alternative capital treatment will only be permitted where:

  • an ADI obtains APRA's prior written approval (reflecting the fact that APRA does not require the securitised loans to be treated as if on-balance sheet); and
  • the securitisation complies with all the requirements of APS 120 apart from significant credit risk transfer, due to the ADI holding subordinated tranche(s).


In addition to the above, APRA has clarified under what circumstances it will consider that transferred mortgages to a securitisation vehicle with prevent the assignment of a risk-weight of less than 100% for the purposes of APS 112. APRA confirmed that prior to conducting it review of APS 120 during 2012, it is willing to treat a securitisation structure as consistent with a risk-weight of less than 100% where:

  • the securitisation is a contingent liquidity securitisation arrangement; or
  • the securitisation complies with all aspects of APS 120, including the requirements for capital relief but the ADI is electing to treat the securitised loans as if on-balance sheet; or
  • the securitisation complies with all aspects of APS 120 except for significant credit risk transfer due to the ADI holding notes in subordinated tranche(s).

Subordinated tranches issued by other entities

APRA has also reaffirmed its consideration of a proposal to modify APS 120 to require that where an ADI holds subordinated tranche(s) in a securitisation originated by another entity, the amount of such holding will be deducted from Tier 1 capital (Tier 1 from 1 January 2013).

For these purposes, APRA intends to define a subordinated tranche as any tranche that has an exposure to the first 10% of credit losses of a securitisation and is not the most senior tranche. The 10% threshold is to be assessed at the time of the securitisation.

This proposal was developed as a result of concerns expressed by APRA in respect of ADIs purchasing subordinated tranche(s) of securitisations from third-party originators. Industry has, however, responded to this proposed modification by arguing that the reference to "an exposure to the first 10% of credit losses of a securitisation" is unclear and requires clarification prior to implementation, in particular in relation to the operation of this modification to warehouses and the ability of ADIs to provide warehousing facilities.

The Australian Securitisation Forum (ASF) in its submission to APRA on this proposed modification has suggested that APRA facilitate a capital neutral outcome to this issue. The ASF argues that requiring a Tier 1 capital deduction of 10% of the capital structure of a securitisation will likely result in a misalignment between the aggregate risk weight the securitisation exposures and the risk weights of the securitised assets.


APRA has written to all authorised deposit-taking institutions to advise that implementation of APRA’s proposal on capital treatment of subordinated tranches of non-originated securitisations will be deferred until early 2012.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.