APRA’s proposed new securitisation rules

On 13 November, the Australian Prudential Regulation Authority (APRA) released its proposed new rules relating to both traditional and synthetic securitisation by authorised deposit-taking institutions (ADIs).

The draft APS 120, discussion paper on Basel II implementation and credit derivatives as well as a prudential practice guide represent APRA’s implementation of the Basel II framework and a general updating of its existing rules relating to securitisation. Comments on the draft proposals must be submitted to APRA by 19 January 2007, with the expectation that the prudential standards will be finalised later in 2007 and will come in force on 1 January 2008.

The draft proposals can be found on the APRA website.

The proposed new rules will be subject to a separate detailed article, our initial observations are as follows, with significant changes highlighted.

• The discussion paper provides important policy explanations and should be read together with the prudential practice guide. 
• The existing APS 120 and related guidance notes will be consolidated with aspects of APS 112 in the new APS 120 and its attachments.
• Participants need to consider these provisions immediately as APRA expects any new or amended securitisations undertaken after 13 November to be 'broadly in line with the new proposed requirements'. No transitional arrangements have been outlined in the papers released this week.
• The attachments deal with disclosure and separation; capital adequacy principles, the standardised approach; the internal ratings-based approach; facilities and services; acquisition of exposures from asset pools or originating ADI securities; and revolving structures and amortisation clauses.
• In contrast to the existing APS 120, the new draft APS 120 sets out a number of key definitions which apply.
• The existing coverage of funds management has been removed and will be the subject of a separate prudential standard.
• APRA will only permit ADIs to be involved in 'securitisation' as defined in this new prudential standard and has confirmed that covered bonds are not considered by APRA to be 'securitisation' for these purposes. APRA specifically states in the new proposals that covered bonds are not permitted by an ADI.
• The prudential standard also covers securitisation of assets originated by an ADI but not recorded on its balance sheet.
• Specifically APRA states that the board and management of an ADI are expected to have some minimum risk management, monitoring and assessment policies and procedures in relation to securitisation by the ADI.
• APRA has removed the restriction on ADIs acting as a securitisation manager and will treat separate ADI subsidiaries which currently conduct those functions as being part of the consolidated ADI group. This would suggest that those subsidiaries may in future be able to relinquish existing financial services licences and rely instead on being a 'bodied regulated by APRA' under section 911A(2)(g) Corporations Act 2001 (Cth).
• APRA has said that it will require all trustees of securitisation trusts to be independent and has noted that it is tightening up its oversight of trustee roles in securitisations.
• The separation criteria relating to securitisation SPVs and ADIs have also been strengthened somewhat.
• In relation to implicit support (a new concept introduced by the revised prudential standard), ADIs which write basis swaps in relation to securitisations are expected to be able to show that the ADI will not be a net payer over the life of the swap.
• As regards repurchases of pool assets, clean-up calls and early redemption provisions will only be available where they relate to 10 per cent or less of the original pool assets.
• Where an ADI is servicing pool assets, the ADI will be permitted to repurchase or replace pool assets and the 10 per cent limit will not apply.  However, any such repurchase or replacement must apply to non-defaulted assets and must be for the purpose of providing further finance to the borrower. 
• ADIs are prohibited from acquiring securities issued by a securitisation SPV where that ADI’s assets form part of the pool of that securitisation SPV.
• Certain Basel II supervisory discretions are also covered by the new draft proposals.
• In relation to liquidity facilities covering market disruption events, APRA has declined to apply a zero credit conversion factor, leaving exposures under those facilities to be dealt with under the standardised or internal ratings based rules.

For further information in relation to these new proposals please contact

Name : Tessa Hoser
Title : Partner
Office : Sydney
Phone : +61 2 9225 5049
Fax : +61 2 9322 4000
Email : tessa.hoser@freehills.com

Name : Lachlan Roots
Title : Partner
Office : Sydney
Phone : +61 2 9225 5337
Fax : +61 2 9322 4000
Email : lachlan.roots@freehills.com