APRA releases final APS120: rules for securitisation

On 30 November 2007 APRA released the final version of its revised rules for securitisation (Final APS120) by authorised deposit-taking institutions (ADIs) which has an effective commencement date of 1 January 2008, subject to some transitional provisions which are discussed below. 

Background

The main chronological events leading to the release of the Final APS120 are as follows:

Freehills’ Securitisation team has been actively involved in the ASF Prudential Committee’s submissions to APRA on each stage of the development of APS120. Our summary comments on the Initial Draft can be found here and on the Second Draft can be found here.

The main features of Final APS120

In the Final APS120, APRA has confirmed its position on a number of aspects contained in the Second Draft and has made some further changes to the Second Draft.

It is important to note that the Final APS120 should be read in conjunction with APG120, as APG120 sets out APRA’s guidance and thinking on particular aspects of the Final APS120.

While APG120 makes clear that the actual requirements are as set out in APS120 and that, subject to APS120, ‘ADIs have the flexibility to configure their risk management framework for securitisation’, it nonetheless contains statements as to APRA’s intention and interpretation of APS120 and will relevant to any consideration of the corresponding provisions of the Final APS120.

The main changes from the Second Draft

The main changes are:

Threshold rate mechanisms

The prohibition on threshold rate mechanisms has been removed from Final APS120. However, APRA has indicated that it would not expect an ADI to actively seek to refinance loans where the rate on loans owned by a securitisation SPV are to be increased by that SPV above the ADI’s general loan rates as this may constitute ‘implicit support’.

Date-based call options

While date-based call options are not expressly prohibited by APS120, APG120 indicates that APRA will expect that any date-based call either falls within a period when a clean up call could be exercised (ie any period during which 10 per cent or less of the pool of exposures are still outstanding) or will be exercised in a manger which means the pool exposures are acquired by a true third party or an SPV which is not in any way funded by the ADI.

Uncertain capital requirement

In relation to both the standardised and internal ratings based approaches, if the nature of a particular securitisation exposure cannot be determined with certainty, APRA retains ultimate discretion in determining the amount of regulatory capital to be held against that exposure, including the method for calculating the relevant regulatory capital amount.

Repurchase of securitised exposures

The requirement that an ADI repurchase or replace exposures (which it has committed to repurchase or replace) be completed within six months of the commitment being made has been removed.

Second Draft matters which have been confirmed

In addition, through APG120, APRA has stressed a number of principles which it sees as essential to its supervision of ADIs undertaking securitisation:

Separation requirements

Securitisation SPVs will be required to be financially and operationally independent from the ADI. Securitisation must result in a real transfer of risk in the relevant exposures being securitised.

It is to be noted that APRA does not expect a securitisation SPV to have its own staff or operational infrastructure, but it would need this in circumstances where any services provided to it by the ADI in this regard were withdrawn or unavailable.

Another important factor is the ability of an ADI to withdraw from any service arrangements it provides to a securitisation and which APRA expects will not be contingent on the appointment of a replacement service provider.

It is to be expected that many securitisation programs will need to undergo some structural adjustment in this regard to comply with APRA’s intentions in this area. This may require a combination of amendments to existing documentation to better align certain clauses with the APRA requirements as well as additional back-up service arrangements to be documented to ensure that the SPV ‘financial and operational’ independence.

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 requested by APRA.

APRA has indicated that it would be most useful to it if the self-assessment addressed each relevant provision of Final APS120 with cross-references to the relevant provision in the securitisation programme documentation. While this is obviously APRA’s preferred approach, ultimate discretion as to form and layout is left to each ADI.

APRA expects this compliance self-assessment to be undertaken for any and every role undertaken by an ADI in a securitisation, no matter how small.
It is not anticipated that APRA will provide letters confirming compliance with APS120 to the ADI after review of any self-assessment report provided to APRA, except where the securitisation arrangement raises unique or novel concerns.

Liquidity facilities

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.

APRA has also confirmed that unrated facilities which are not eligible facilities will be subject to a capital deduction under both the standardised and internal ratings-based approaches unless certain exceptions apply—for example, under the standardised approach it would need to be the most senior exposure or if in connection with an ABCP conduit, in a second loss or better position.

Warehouse facilities

These facilities will be treated as securitisations regardless of whether or not they are single or multi-tranche facilities provided they satisfy the base facility requirements in APS120 (eg be documented in writing, be separate from any other facilities, be on arm’s length terms, be limited in amount and duration) but in addition must:

• be fully secured
• only relate to funding of the initial acquisition of exposures, and 
• be repaid as soon as the warehouse SPV receives funds from the sale or transfer or exposures.

Implicit support

ADIs are to refrain from providing implicit support to a securitisation. If it does so it runs the risk of being required to hold capital against the exposures to which the implicit support relates in an amount determined by APRA commensurate with that risk. In addition APRA may require the ADI to disclose any such implicit support publicly.

Transitional arrangements

APRA has confirmed that it will not allow a blanket grandfathering of existing securitisation exposures entered into prior to 1 January 2008.

However, in recognition of the late release of Final APS120 coupled with an effective commencement date of 1 January 2008, APRA has granted transitional relief for ‘existing exposures’ in the following terms:

• where the existing exposure will mature before 1 January 2009: the transitional period is from 1 January 2008 until the earliest maturity of that exposure, including where the existing exposure matures by termination or cancellation, and
• otherwise: the transitional period is from 1 January 2008 until 30 June 2008 for any existing exposures.

APRA will grant further transitional relief if APRA is satisfied after the above transitional periods have expired, there would be a significant increase in the regulatory capital an ADI is required to hold in relation to existing exposures and the increase would be due to the inability of the ADI to satisfy the Final APS120 other than at an unreasonable cost.

An ‘existing exposure’ is any facility, service or other securitisation exposure of an ADI in force immediately prior to Final APS120 coming into force, and which exposures are outstanding on or before the day Final APS120 comes into force.

Final APS120 materials

Full details of the Final APS120 and APG120 can be found on the APRA website by clicking on the following links:

• Final APS120
• APG120

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