Australia: APRA's proposed new securitisation rules: some wins for the industry

Last Updated: 6 December 2015
Article by James Morris

APRA's discussion paper and proposed new APS 120 provide some welcome clarification and concessions for Australian market participants. Released on Thursday 26 November 2015, the proposals will be open for comment until 1 March 2016. The proposed effective date for these rules in 1 January 2018.

Amongst the more important proposals are:

De-facto master trust approval

A range of proposed changes seem to point the way for de-facto approval of master trusts. These changes could provide a further boost for funding profiles of banks and other authorised deposit-taking institutions (ADIs) and a likely increase in the potential size of the term securitisation market because of lower funding costs for banks and a broadening of the potential investor base. Master trust structures involve different tranches of notes being issued through a single trust, all of which are collateralised by a shared pool of receivables. The new proposals do not expressly reference master trusts but APRA's implicit support for these structures seems reasonably clear because of the change from APRA's previous positions on the following proposed rules. Each of these points had previously been identified by both market participants and ratings agencies as barriers to the creation of an Australian master trust market:

  • Date-based calls: While emphasising the overriding prudential objective to ensure that investors have no recourse to the originating ADI, APRA has opted for flexibility around date-based calls by removing its previous condition that the call date set at inception be based on the originating ADI's projection of when the pool would amortise by 90% or more. Rather, any such call is subject to, among other things, the following conditions:
    • the call date must be set at inception of the securitisation transaction;
    • the exercise of the call must be at the full discretion of the originating ADI; and
    • the call must not be structured to avoid allocating losses to credit enhancements provided to the securitisation vehicle or its investors, or positions held by investors, or otherwise structured to provide credit enhancement.
  • Early amortisation provisions: APRA has dropped its previous prohibition on such provisions which, if triggered, accelerate the reduction of the investor's interest in the underlying pool of exposures and allow investors to be paid out prior to the originally stated maturity of the securities. Taking the view that an ADI's funding and liquidity risk will not increase if an amortisation provision simply involves the flow through of principal payments to investors and the seller on a pro rata basis, APRA has decided to allow these types of provisions.
  • Subordination of a seller's interest (seller notes): APRA has also reversed its position such that it will now allow a seller's interest in the revolving period to vary to facilitate structural cashflows only, provided that the seller's interest must not be subordinate with respect to any cash flows (eg, interest payments and expenses) or losses associated with the underlying exposures.

Removing "skin-in-the-game" requirements

As APRA notes, credit risk retention (otherwise known as "skin-in the-game") requirements are intended to address potential misalignment of incentives, namely between an originating bank's interests and investor's interests. This could result in lenders lacking motivation to originate higher quality loans, since they would not have credit exposure to those loans once they are securitised. In other words, these requirements are based on the premise that if banks have 'skin in the game' they will be less likely to originate dubious receivables and seek to transfer the risk of those receivables to a securitisation vehicle. This was a key issue that arose in some offshore securitisations during the financial crisis and caused offshore regulators to require originators to have "skin in the game".

APRA has now dropped its "skin-in-the-game" requirement; something of a reprieve for the Australian market. This requirement, if implemented, would have required an originating bank to retain a minimum of 20% of the subordinated (ie, junior) notes in a securitisation.

In doing so, APRA is seeking to ensure that it continues to follow its objective of creating a simplified framework that enhances competition and competitive neutrality, particularly from the perspective of Australian ADIs seeking to issue internationally. Equally, it has been noted that the 20% requirement would have put ADIs at a competitive disadvantage when compared with non-ADI originators in the local market. APRA has also emphasised both the current Australian ADI preference against 'originate-to-distribute' business models (whereby lenders write the vast majority of their loans with the intention of selling them to investors, as opposed to holding the loans to maturity) as well as the linkages that Australian ADIs have to their securitisation programmes (including servicing roles and residual income benefits). Each of these arguably reinforces incentives amongst the banks to maintain the quality of lending standards.

As a leading provider of securitisation advice services, our team will be working with clients and industry bodies to provide feedback on the proposals.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
James Morris
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.