Regulatory change the Aussie securitisation market can actually look forward to

February 2014 | LEGAL & REGULATORY | BANKING & FINANCE

Financier Worldwide Magazine

On 11 November 2013 the Australian Prudential Regulation Authority (APRA) released long-anticipated details of the proposed changes to its rules relating to securitisation during a speech by Charles Litrell, Executive General Manager (Policy), at the industry’s annual conference in Sydney. The rewrite of the rules had been flagged a year earlier by Litrell at the prior year’s event. The tone of the recent speech, and mood generally at the conference, was decidedly positive. This calendar year, the domestic industry has set a post-financial crisis record for RMBS issuance and it is clear from APRA’s statements that the regulator is looking to encourage a large and liquid Australian securitisation market, particularly for high-grade product. At the same time, APRA will seek to balance this strategy by discouraging practices associated with what it terms “unacceptable risks” at a systemic and individual entity level.

Interestingly, if one compares Litrell’s speeches at consecutive conferences, not much has actually changed in terms of the regulator’s proposals; some of the detail and thinking has been refined and some additional topics were covered. The industry, which has traditionally relied on standalone issuance structures, had been eagerly awaiting APRA’s views on master trusts. These are hoped to provide better access to offshore investors by facilitating bullet and controlled amortisation securities (and bringing down swap costs) and encourage diversification in asset classes. APRA’s response to the topic was generally supportive, in fact Litrell suggested that there was nothing stopping master trusts being established under the current rules. The changes flagged that would assist master trust issuance include the removal of the current rule preventing an originator from holding more than 20 percent of the securities in the securitisation (where capital relief is not being sought) and APRA’s proposal to allow date-based clean-up calls. Interestingly, APRA will require that the seller’s share must rank at least equally to the most senior instruments in the structure meaning that non-asset triggers, which accelerate repayment of investor’s funding of a typical RMBS master trust structure, will not be a feature of Australian master trusts.

The other focus of industry lobby over the last year was a formal distinction between funding only and capital relief transactions. Currently, deposit-taking institutions are required to comply with all of the requirements of APS 120 whether or not they are seeking capital relief. APRA has accepted the distinction and will rewrite the rules to facilitate easier execution for funding only trades and establish clear principles that will apply where capital relief is sought. This is welcomed by the industry. In line with comments initially made last year, APRA will mandate the structures appropriate for both funding only and capital trades. For the former, APRA will require that the entirety of the credit risk be represented by a single B class instrument which will be retained by the originator. For capital relief transactions, multiple classes of subordinated notes will be permitted but a floor on the maximum available capital relief will be imposed (20 percent).

It had been widely anticipated that, following a cap on covered bond issuance, APRA would seek to place a cap on securitisation by deposit-takers or a broader cap on secured funding generally. Although APRA considered the issue, APRA expects the industry to comply with the general principal of diversification of funding sources and, accordingly, no cap is proposed. Since the financial crisis most deposit-taking institutions have been working towards increasing their deposit-base and, to the extent not previously tapped, accessing unsecured wholesale funding sources. The low credit-growth environment has also relieved pressure on funding models.

There were a number of other aspects of the proposed new rules covered only very briefly in APRA’s announcements where further detail will be required. APRA made it clear it did not like the capital arbitrage that had been occurring by Australian major banks providing access to their balance sheet through securitisation warehouse arrangements to smaller deposit-taking institutions. Interestingly, rather than switching-off capital relief for those transactions (which would be a more logical approach), APRA proposes that warehouses not refinanced in the term market within a year will be treated as a whole loan sale from the funder’s perspective. This could provide opportunity for offshore regulated warehouse providers to whom this treatment would not apply. On this investor side, APRA also flagged that it will follow any proposals that come out of the Basel Committee, which is expected to issue additional standards in 2014, following a December 2012 consultative document which received significant comment from the industry globally.

For once, it seems, the Australian securitisation industry is looking forward to details of the regulation, and for implementation sooner rather than later. Unfortunately there is not a clear timetable on when a discussion paper with more detail will be available, although it is expected early in the new year with implementation likely for 2015.

Sonia Goumenis and Andrew Jinks are partners at Clayton Utz. Ms Goumenis can be contacted on +61 2 9353 4378 or by email: sgoumenis@claytonutz.com. Mr Jinks can be contacted on +61 2 9353 5818 or by email: ajinks@claytonutz.com.

Sonia Goumenis and Andrew Jinks

Clayton Utz