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27 Nov 2015

APS 120 Securitisation: Light at the end of the tunnel - and it isn't a train!

The Australian Prudential Regulation Authority (APRA) released its draft amended Prudential Standard APS 120 yesterday, and in good news for the industry APRA has listened to and considered feedback on the previous Discussion Paper, of April 2014, and in many instances has responded favourably to the feedback. The Discussion Paper accompanying the new draft standard analyses the feedback to the April 2014 Discussion Paper and in most cases gives helpful and cogent responses.

In essence, the new draft is clearer and simpler than the current APS 120 or the previous proposals. As APRA notes in the Discussion Paper, APRA’s previous proposals regarding "skin in the game", the two credit class structure, funding-only securitisation and warehouse arrangements have all either been removed or adjusted. Master Trusts, too, now seem to be a viable proposition. Although not all concerns have been addressed, and some technical matters will need to be resolved or clarified during the consultation process, it would seem that the industry may now have a standard that will work practically for most transactions while still addressing APRA's concerns.

A key issue that will no doubt be the subject of submissions is APRA's proposed adoption of the Basel III securitisation revised framework. Particularly the proposal not to incorporate the IRB approach for calculating capital.

For ease of reference, we have prepared a table summarising the main proposals, and their effect (Good, Bad or Ugly) on issuing ADIs and investor ADIs.

Generally it appears that the proposals are "Good" ‒ only in some specific applications might they cause concern.

A few proposals, especially on the investor side, might have an adverse effect on demand or pricing. In relation to those we expect there will be scope for adjustment on the basis the proposals are a first draft and given APRA's favourable response to the feedback on its previous consultation. Those provisions will also be affected by Basel's proposed rules for simple, transparent, comparable securitisations once finalised.

Proposal

Assessment

The Good

The Bad

The Ugly

Issuer perspective

Funding only

Explicit recognition of funding only securitisation

No double counting of exposures

No tranching of junior notes in funding only transaction - no mezz funding permitted

How will this affect Master Trusts?

 

Flexibility to move from funding only to capital relief during life of transaction

Transaction must retain the same tranching as funding-only securitisation

 

 

Restrictions on repurchasing junior securities (other than self-securitisation) and repurchasing receivables - unclear why for a funding-only trade

 

 

All revolving securitisations must be treated as funding-only. Potential impact on trade receivable transactions

 

 

All ABCP securitisations must be funding-only regardless of who provides support

 

Master Trusts

Master trust features permitted including date based calls and early amortisation provisions

Seller's share can't be subordinate in respect of cashflows or because of scheduled/early am provisions

 

Capital relief

Capital relief requirement clarified and proposed pro-rata approach dropped

Limit on holding more than 20% of a single junior tranche to achieve SCRT limits compliance options available for offshore risk retention requirements

Use of term "holds" may cause issues as pool amortises

 

Cannot recognise credit protection on junior notes - must physically sell notes

 

Risk Retention

Proposed risk retention requirement dropped

 

 

Warehouses

Proposed 1 year rule for warehouses dropped

 

 

Warehouses might be able to qualify for capital relief

APRA remains open to submissions that adequately address the risks associated with warehouse arrangements

Need to meet the capital relief tests, i.e. tenor of assets and liabilities match

 

 

Transition

Transitional arrangements proposed for originating and servicing ADIs

 

 

Clarifications

Clarity on overlapping exposures, and capital charge caps and risk weight caps (subject to 15% floor)

 

 

Clarification of unfunded support when applying ECAI approach

 

 

APRA will have express power to exclude a requirement of APS 120 and must exercise powers or discretions in writing

Capital treatment of securitisations to be determined on the basis of economic substance rather than legal form

 

Current niggles retained

 

Manager continues to be treated as originating ADI and must meet requirements for capital relief

Originating ADI "must not maintain effective or indirect control" over exposures or "alter" exposures - what does this mean for a managing ADI (noting the carve out only relates to servicing)

 

Trust-back arrangements still not recognised for shared collateral

 

New issues

 

List of funding arrangements involving an interest in ADI's assets - are there any common funding mechanics missing from the list

 

 

Derivatives "must never be subordinated" - market standard to be subordinated when in breach

 

Status quo

Disclosure, separation, due diligence, risk management, requirements in relation to facilities and services largely unchanged

 

 

Investor ADI perspective

Capital requirements

 

CET1 deduction for all junior exposures

Aligning capital requirements for advanced and standardised ADIs

 

 

Increased capital burden of ABCP

Due diligence

 

Failure to implement due diligence results in CET1 deduction (previously 1250% risk weight)

 

Senior exposures

 

Only the most senior of retranched senior securities are senior, even though risk on all is necessarily senior

 

Resecuritisation

 

Resecuritisation more conservative than Basel III

 

Transition

 

No details on transitional relief for investor ADIs

 

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Disclaimer

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.