Response to draft Guidelines on the STS criteria for ABCP securitisation

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Q5. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

There is a concern with regard to a situation where an original lender is no longer in existence and the subsequent buyer of the portfolio may not be in a position to provide the relevant representations and warranties. This could exclude a portfolio of assets from being securitised and attaining the STS designation.

A possible solution would be to include a “sunset provision” and for the existing seller to make a full disclosure. A sunset provision, in relation to the original origination, could come into effect after a reasonable period of time, such as 36 months, and be contingent on a positive credit performance of the underlying loans. Credit issues related to the original quality of underwriting of the loan should become apparent within a 36-months of the loan drawdown.

Q6. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

There is some concern with regard to guidelines in relation to “the eligibility criteria to be applied to exposures transferred to the SSPE after the closing as part of substitution, repurchase, replenishment and ramp-up periods in accordance with paragraph 18, should be no less strict than the eligibility criteria applied to the initial underlying exposures. Eligibility criteria to be applied to such exposures should be specified in the transaction documentation. This criterion refers to eligibility criteria applied at exposure level.” The concern here is that the eligibility criteria could refer to the original underwriting criteria as the guidelines state “this criterion refers to eligibility criteria applied at exposure level.” This would imply that the original underwriting would continue to apply to new assets added to the collateral pool after closing, under the conditions outlined above.

This provision makes sense for a short and limited period where assets are being ramped-up and there is a desire to ensure a homogeneity of the pool. However, underwriting criteria evolve with the market overtime and such a strict application of fixed eligibility criteria at the exposure level could prevent the addition of assets to the pool substitution, repurchase and replenishment reasons. One issue for ABCP is that once the Programme has been established then individual transactions can be issued at any time and therefore although the transaction may be an issue, the Programme has most likely been in existence for a considerably longer time. In such an instance the original underwriting criterion could be seen as the relevant eligibility criteria and thus prevent the issuance of a newer deal based on revised underwriting criteria.

Traditionally the addition of new assets to a collateral pool, for these reasons, have been governed by the maintenance of certain collateral pool level criteria, for example, a cap on the maximum weighted average LTV rate, a maximum exposure size or a maximum maturity profile. Changing the criteria from exposure level to pool level would be in keeping with market practice.

Q7. Do you agree with the techniques of portfolio management that are allowed and disallowed, under the criterion of the active portfolio management? Should other techniques be included or excluded?

See 6 Above.

Q8. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

The use of the phrase “material damages” is open to interpretation and could result in some parties taking contrary vires on the same credit exposure. A tighter definition would ensure consistency in the interpretation of this element.

Q9. Do you agree with the interpretation of the criterion with respect to exposures to a credit impaired debtor or guarantor?

The guidelines interpretation of excluding exposures “to a credit-impaired debtor or guarantor” as “neither the debtor, nor the guarantor, should be credit-impaired”. It is unclear what the aim of this restriction is, traditionally there has been a role for guarantors to provide guarantees to weaker debtors or even credit impaired debtors. This provision goes against standard market practice where by guarantees are provided for credit-impaired debtors. Indeed for exposure to suffer a loss there needs to be a double default whereby the debtor needs to default and the guarantee enforced and then the guarantor needs to default.

It is suggested that this is adjusted to allow a credit-impaired debtor to be guaranteed by a non-credit impaired guarantor which appears to be in the spirit of Article 24 (9).

Q10. Do you agree with the interpretation of the criterion with respect to the exposures to credit-impaired debtors or guarantors that have undergone a debt-restructuring process?

We agree with this interpretation.

Q11. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q12. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q14. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

The stipulation that interest rate and currency risks need not be perfectly hedged to be considered “appropriately mitigated” but can be mitigated through the use of reserve funds or other measures with the mitigation considered from an economic rather than accounting point of view.

However, the conditions attached to the use of traditional interest rate and foreign exchange rate derivatives is significantly more onerous than those for non-derivative based mitigants. For derivatives the guidelines state that “the appropriateness of the mitigation of interest rate and currency risks through the life of the transaction must be demonstrated through quantitative information including the fraction of notional amounts that are hedged, as well as a concise sensitivity analysis that illustrates the effectiveness of the hedge under extreme but plausible scenarios”. However, for risk mitigation not carried out through derivatives, there is no requirement to provide quantitative information and sensitivity analysis. But there is a requirement that these measures should be fully funded and available at all times. From an information disclosure and transparency perspective, it would be appropriate for similar quantitative information and sensitivity analysis to be carried out and disclosed to facilitate investors, in particular, to fully understand the risks and the mechanisms used to mitigate these risks.

Q16. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q17. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q19. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

The guidelines are considerably more restrictive than the STS Regulation in relation to the use of sectoral rates reflective of the cost of funds allowable reference rates. The guidelines require institutions to provide sufficient data to allow investors to assess their relation to other market rates. While some institutions disclose the factors which they use in setting their variable rates, the actual data and formula are not actually published.

Indeed, there is an additional issue in relation to the proposed definition of a “complex formulae” which is determined by meeting the definition of an exotic instrument by the Global Association of Risk Professionals (GARP). It defines a financial asset or instrument as one with features making it more complex than simpler, plain vanilla, products. But this is a definition by exception and relies on the concept of a plain vanilla product, which is not defined! It is likely that the formula used in setting bank variable rates would be defined as complex formulas!

The more restrictive approach adopted by the guidelines relative to the STS Regulation means that deals back by loans linked to bank variable rates would be precluded these deals from achieving an STS certification, which would seem contrary to the aims of the STS Regulation.

Q20. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q21. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q22. Do you agree with this balanced approach to the determination of the expertise of the seller? Do you believe that more rule-based set of requirements should be specified, or, instead, more principles-based criteria should be provided? Is the requirement of minimum of 5 years of professional experience appropriate and exercisable in practice?

We agree with this interpretation.

Q24. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q25. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q26. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q27. Do you agree that the external verification should only cover the criteria referenced in paragraphs (9), (10) and (11) of Article 24, or should it cover all criteria mentioned in Article 24? Do you agree with the approach on determining the frequency of the external verification?

We agree with this interpretation.

Q29. Do you agree with the interpretation of this requirement, and the aspects that the interpretation is focused on? Should other aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q31. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q33. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q34. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

See Q14 Above.

Q35. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning. Should the “specified events” referred to in Article 26(7)(e) be specified in more detail e.g. as including triggers with regard to the creditworthiness of the sponsor?

We agree with this interpretation.

Q36. Do you agree with the interpretation of this criterion, and the aspects that the interpretation is focused on? Should interpretation be amended, further clarified or additional aspects be covered? Please substantiate your reasoning.

We agree with this interpretation.

Q37. Do you agree that no other requirements are necessary to be specified further? If not, please provide reference to the relevant provisions of the STS Regulation and their aspects that require such further specification.

We agree with this interpretation.

Name of organisation

Irish Debt Securities Association (IDSA)