APS120: APRA’s final draft rules for securitisation

On 11 July 2007, APRA released a final draft of its proposed rules for securitisation by authorised deposit-taking institutions (ADIs), which is to have an effective commencement date of 1 January 2008.

This final draft of APS 120 (Final Draft) was released together with an APRA paper detailing the key issues raised in submissions made to APRA in response to its first re-draft of APS 120 (Initial Draft), the nature of the submissions and APRA’s response to those submissions.

APRA has made some important changes to its Initial Draft in this Final Draft, which are outlined below. Freehills’ securitisation team has been actively involved in the ASF prudential committee’s submission to APRA.  Our summary comments on the Initial Draft can be found here.

Responses on the Final Draft are due by 10 August 2007.

The main changes from the Initial Draft

In the Final Draft, APRA has made a number of changes to its Initial Draft, including:

• separation requirements: securitisation SPVs will be required to be financially and operationally independent from the relevant ADI but will not have to have separate staff; the range of SPV types has been expanded; ADI ownership of securitisation SPVs has been clarified; and there are now some reasonableness requirements in relation to replacement of service providers to securitisation SPVs
• self-assessment: ADIs will no longer need to consult with APRA prior to entering into a securitisation but will need to perform self-assessment of compliance with APS120 and produce written evidence of that compliance if required by APRA; APRA will be able to apply a capital charge on a flexible basis in the event of substantial non-compliance; additional quarterly information may be required by APRA; and a risk based review process is to be developed by APRA
• international prudential capital consistency: APRA maintains its view that liquidity facilities provided by ADIs to ABCP conduits should be deducted from capital because it considers those facilities to be more risky than equivalent facilities made available to RMBS issuers; other capital weighting anomalies relating to private or implied credit ratings have not resulted in any significant changes by APRA, but APRA has stated that it will review those issues in light of any market impacts arising from the Final Draft
• scope and definitions: APRA has clarified that it did not intend to include in the term ‘originating ADI’ all facilities provided by an ADI to a securitisation; included within the scope of this definition though are securitisation management activities, and facilities provided to ABCP programs (excluding derivatives)
• repurchase of securitised exposures: an ADI will only be able to repurchase securitised exposures that it has originated if 10% or less of the pool of exposures are still outstanding; date-based call options by ADIs will not be permitted if the securitisation is to achieve regulatory capital relief (other than if the date-based call falls within a period when 10% or less of the pool of exposures are still outstanding), although true 3rd party ADIs will be able to purchase securitised exposures through date-based options without this additional restriction applying
• maximum capital requirements: ADIs will be able to choose whether or not securitised exposures are to be treated under APS120 or under other APRA prudential standards (falling then to be treated under a standardised or internal ratings-based approach, depending upon the status of the relevant ADI); it is to be noted that regardless of which election is made by an ADI, the disclosure and separation requirements under APS120 must be met
• credit risk transfer: APRA is stressing its principles-based approach and is not proposing to apply a quantitative approach to credit risk transfer assessment; no capital relief will be obtainable where APRA considers that the securitisation transaction has been entered into purely as a funding mechanism and not as a true risk transfer transaction, and
• drafting changes: a number of drafting changes have been made and will be included in a more detailed follow-up note.

Additional items

Additional issues or changes incorporated in the Final Draft include:

• transitional arrangements: APRA has declined to grandfather all existing securitisations but has recognised the difficulty for ADIs under existing programs to comply with the new APS120 by the expected 1 January 2008 implementation date; APRA has urged those ADIs who may suffer significant capital increases to bring those programs into compliance within 2 years from that effective date by using provisions permitting amendments; APRA will otherwise consider ‘hardship pleas’ on a case by case basis
• cash collateral: APRA has not included specific provisions applying a capital charge in relation to collateral posted to support credit or liquidity risk of ADIs provided that collateral cannot be used to support the general financial position of the ADI or block the ADI’s ability to terminate those facilities
• redraw facilities: a pool of mortgages with redraw facilities will not be treated as a revolving exposure if the extent of the redraws is not material in relation to the pool as a whole and arise only from redraws, and
• warehouse facilities: APRA has decided against retaining the existing approach or producing specialised rules for warehouse facilities and has determined that warehouse facilities will be treated as securitisations regardless of whether or not they are single or multi-tranche facilities; APRA will have the ability to decide whether or not any particular warehouse facility should be treated as a securitisation.

The transitional arrangements, treatment of ABCP support facilities, warehouse facilities, repurchases under date-based call options and some aspects of self-assessment are likely to remain contentious for many securitisation participants, as forthcoming submissions on this latest draft of APS120 may reveal.

Revised APS120 materials

Full details of the Final Draft and APRA’s explanatory note can be found on the APRA website by clicking on the following links:

• Final Draft
• APRA’s response to submissions

APRA has not produced a revised Securitisation Prudential Practice Guide—APG120—pending finalisation of the Final Draft.

Submissions and timing

Submissions on this Final Draft should be made to APRA by 10 August 2007.  Freehills will continue to be involved with the ASF in framing its submission to APRA. APRA expects the new APS120 to apply from 1 January 2008.

For more information on this or other securitisation matters, 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