APRA clears most blockages to new securitisation rules

Since the previous appearance of Charles Littrell, the Australian Prudential Regulation Authority's executive general manager at the Australian Securitisation Forum's annual conference last year, the regulator has released a consultation paper.

Looking at some structural issues that have been highlighted through "feedback from industry and interested stakeholders", Littrell said a balance needed to be found between the industry's desire to promote master trusts to create a much larger securitisation market, on the one side, against APRA's desire not to increase risks for ADIs and degrade the protection available to depositors on the other.

This is "probably the trickiest policy question remaining" - now that two other issues over master trusts are on the way to being resolved: the treatment of seller interests in the securitisation vehicle, and the rules regarding date-based calls and bullet maturities.

Littrell suggested that the tranches retained by the seller in a securitisation structure must rank "at least pari passu" with the most senior investor class in the vehicle, but these are only in play when considering priority of repayments in a wind-up. At other times, APRA is considering allowing the seller repayment to flow after other creditors, and in a less predictable fashion.

"This approach should substantially facilitate master trust structuring - but we have yet to fully satisfy ourselves that this facilitation is sufficiently safe, so more work remains," he said.

On the other hand, looking at the second big question left over from last year, Littrell said APRA has not yet determined its final position on bullet- or date-based calls. He said the problem had parallels with the preference equity and subordinated debt issued by many banks between 1998 and 2008. These capital instruments were also contractually long term or perpetual but generally had a strongly signalled maturity date that was not always applied.

Likewise, the uncertainty over bullet transactions, which can be extended if there are insufficient funds available to repay them in full, remains a sticking point for master trusts, although APRA "remained hopeful" of finding a balance that grows the market, without threatening ADI or depositor safety.

Turning to RMBS warehouse arrangements, Littrell said the problem for APRA is that current arrangements "may allow a small ADI to sell loans to a large ADI, [yet] no third party securities are issued, [so] neither ADI holds substantial capital against the loans".

What concerns APRA is that this arrangement allows the industry to retain the loans but artificially lose the capital requirement.

An alternative he raised was to consider warehousing as simply a loan sale from a smaller to a larger ADI.

"We consider that APRA already has satisfactory capital arrangements outside securitisation that covers such transactions," he said.

Littrell then set out APRA's proposed approach to credit risk retention, or 'skin-in-the-game' as follows:

•    funding-only transactions: the originator is to hold all the subordinated instruments and all the capital requirements;
•    capital relief transactions: the originator should never reduce below 20 per cent risk and capital for skin-in-the-game; and
•    regulatory capital relief should tie to the least-sold subordinated tranche.

The likelihood that other jurisdiction will adopt less conservative approaches "is not an argument for APRA to adopt weaker rules on skin-in-the-game," he said.

Similarly, APRA has proposed that the capital treatment for ADIs holding anything other than the most senior tranche in a securitisation is to treat is as a 100 per cent Common Equity Tier 1 deduction.

"APRA is inclined towards a reformed securitisation framework that should set the simplest workable rule, and resist any move towards additional complexity," Littrell said.

"In this context simple usually equates to conservative, and this is likely to best serve the diverse interests of the banking sector, the securitisation industry and, importantly, end-investors."