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French Banking Federation

We support the proposal to align the risk mitigation of OTC derivatives hedging STS securitisations with the risk mitigation requirements that apply to derivatives used to hedge covered bonds.

However, we do not support the requirement that the derivative counterparty rank pari passu with the most senior securitisation tranche. In our opinion, the requirement for securitisations should be for the counter-party to the OTC derivative to rank at least pari passu with the investors of the relevant tranche being the subject of the OTC derivative.

Furthermore we are in favour of also applying the waiver of the pari passu rank to securitisations under exceptional circumstances. For example, it is current market practice that the payment of breakage fees are subordinated in case of a default of the swap counterparty (and credit rating agencies require this).

Regarding the requirement of a credit enhancement of 2% of the most senior securitisation tranche, it is impossible to guarantee it on an ongoing basis, as there could be defaults on the underlying portfolio. A securitisation is an auto-liquidating structure, to the contrary of a covered bond that has a cover pool that can be replenished on a regular basis. Moreover, this requirement would not be consistent with the current market practice that derivatives are pari passu with the relevant tranche hedged by the derivative. We suggest removing this requirement or rephrasing it in following terms: “the securitisation will provide initial credit enhancement to each securitisation tranche to which the OTC counterparty is at least pari passu (as applicable)”
However, we do not support the requirement that the derivative counterparty rank pari passu with the most senior securitisation tranche. In our opinion, the requirement for securitisations should be for the counter-party to the OTC derivative to rank at least pari passu with the investors of the relevant tranche being the subject of the OTC derivative.

Furthermore we are in favour of also applying the waiver of the pari passu rank to securitisations under exceptional circumstances. For example, it is current market practice that the payment of breakage fees are subordinated in case of a default of the swap counterparty (and credit rating agencies require this).
We do not support the requirement that the derivative counterparty rank pari passu with the most senior securitisation tranche. In our opinion, the requirement for securitisations should be for the counterparty to the OTC derivative to rank at least pari passu with the investors of the relevant tranche being the subject of the OTC derivative.

Furthermore we are in favor of also applying the waiver of the pari passu rank to securitisations under exceptional circumstances. For example, it is current market practice that the payment of breakage fees are subordinated in case of a default of the swap counterparty (and credit rating agencies require this).

Regarding the requirement of a credit enhancement of 2% of the most senior securitisation tranche, it is impossible to guarantee it on an ongoing basis, as there could be defaults on the underlying portfolio. A securitisation is an auto-liquidating structure, to the contrary of a covered bonds that has a cover pool that can be replenished on a regular basis. Moreover, this requirement would not be consistent with the current market practice that derivatives are pari passu with the relevant tranche hedged by the derivative. We suggest removing this requirement or rephrasing it in following terms: “the securitisation will provide initial credit enhancement to each securitisation tranche to which the OTC counterparty is at least pari passu (as applicable)”
Wilfrid SCHERK
+33148005082