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Carl Baker

Yes the data broadly corresponds with what I am seeing of SRT market activity in the EU, although as the discussion paper notes there are a significant amount of similar credit protection arrangements being transacted in the market which are not required to be reported by competent authorities to the EBA (either due to a full deduction option being applied or because the transactions use untranched credit derivative technology).

In relation to the risk retention statistics, my only comment is that some transactions take both a horizontal and vertical slice approach. In other words, the originator retains a slice of each tranche, as well as the first loss position for each exposure in the portfolio. The pie chart as presented in the discussion paper doesn’t appear to cater for this dual approach.
No, although I note in passing that the hyperlink at footnote 9 of the discussion paper incorrectly links to the out-of-date 2013 version of SS9/13 rather than the 2017 version.
I broadly support standardising the SRT assessment process as described since this should enhance certainty for the market. Some specific observations:

Proposal (a): The 1 month timeframe should be flexible in the exceptional case where an originator is able to execute a transaction in a shorter time frame. It must also be recognised that in many cases details of the structure could change following the ex ante notification. Key documentation may not be available for submission 1 month prior to closing, for example if investors are still negotiating terms.

Proposal (b): Agree.

Proposal (c)(i): As expressed this is a vague concept. Ideally additional guidance would be forthcoming from regulators on the thresholds for a notification under this limb. For example, would a change in general market conditions, or an event such as Brexit, need to be disclosed? Clarity on the consequences of notification would also be appreciated, for example whether it triggers a formal review process, of whether the notifications should be viewed more as part of the business-as-usual interactions between market participants and their regulators. In the case of true sale securitisations, I query whether the originator would be in the best position to provide the notifications as opposed to the asset servicer and/or issuer. Aside from the question of which entity has the information, it is desirable to ensure that the notification obligation doesn’t undermine the true sale characterisation by giving the impression that the originator has not truly disposed of the relevant assets.

Proposal (c)(ii): Agree.

Proposal (c)(iii): In principle this seems fine, although there is a cost aspect to consider for originators in developing the process for this.

Proposal (c)(iv): My comments on (c)(i) above apply equally to this limb.

Proposal (d): This notification seems to overlap with the obligation in (c)(iv) to report “without undue delay”, and the obligation in (c)(i). Clarity on the timing requirements for notifications and avoiding duplication of notifications is desirable.
No comment.
Yes a standardised template would be helpful to facilitate the notifications and enhance the usefulness of the information. It can be an inefficient use of resources for regulators to have to locate all of the relevant features within transaction documents. A standardised template will shift this burden more on to the originator, ensuring that the relevant information is all presented in an accessible way and in a format which facilitates comparisons across different transactions. The templates for traditional and synthetic securitisations would have some differences because of the different structures of the two types of deal.
No comment.
I broadly agree, however do have a reservation about including restructuring as a mandatory credit event in synthetic securitisations as proposed in paragraph 151 of the discussion paper. Paragraph 370 of the discussion paper suggests that restructuring must be a credit event in order for a credit derivative to be eligible as unfunded credit protection. However this does not reflect the final sentence of article 216(1) CRR which allows for a more flexible approach set out in art 233(2) CRR. In addition I would note that there is no such requirement where a guarantee or bespoke protection agreement is used to transfer credit risk in a synthetic securitisation rather than a credit default swap.

I submit that “business-as-usual” restructuring in accordance with a servicer’s standard servicing guidelines should not be a mandatory trigger for losses to investors if this takes the form of a postponement/viable forebearance of repayments rather than material forgiveness of amounts owed. If regulators do require a mandatory restructuring credit event, I submit that this should permit the approach whereby at the end of the term of the securitisation transaction any postponed amounts which remain unpaid are treated as in default (that is, a mandatory failure to pay credit event will occur at that time). This approach does increase the risk of back-loaded losses. However the flexibility is valuable to allow a more nuanced range of risk transfers in the synthetic securitisation market thereby giving access to a broader range of potential investors and enhancing market liquidity. In addition, it recognises the fact that in the real word loan exposures need to be managed dynamically to account for idiosyncratic events impacting borrowers. For example, mortgage borrowers may need to move to an interest only repayment model for a short period of time, or may need to agree an interest rate reduction, an extension of maturity, a debt reconsolidation and so on. Partial or total debt forgiveness in the context a “full and final settlement” with a borrower should also be countenanced, provided that such forgiveness is made in accordance with “business-as-usual” specific policies and procedures of the relevant servicer.

Forgiveness is an option to be used carefully and subject to strong controls, and perhaps could be subject to a regulatory cap on volume for SRT purposes. Measures to address back-loaded losses as discussed in the paper relating to amortisation options could also be relevant in this context. It must be borne in mind that if the portfolio is a blind pool then servicers following their business-as-usual servicing standards (as required under art 408 CRR) will not be in a position to intentionally back-load securitised losses. On the contrary, a mandatory credit event for postponement/forebearance could complicate a servicer’s bau process because there is a greater risk of double recovery, in the event that investors pay out under the securitisation and the servicer subsequently recovers the postponed debt from the relevant debtor.
Yes.
Limb (i) of the regulatory call option proposal could be interpreted to mean that any regulatory call option in a transaction must cover the aspects described therein. If this is the intention, then I submit that this is overly prescriptive. In my experience the definition of “regulatory event” is often subject to heavy negotiation since it is a key aspect in the allocation of legal risk as between issuer and investor. I submit that it is appropriate to set the perimeter of a regulatory event definition as proposed in paragraph 102(a) of the discussion paper, but that parties should have the flexibility to exclude some of the factors referred to in paragraph 102(a)(i). For example, it should be permissible for parties to agree that the regulatory event definition excludes changes in accounting rules, and it should be permissible for parties to agree that a regulatory event is only triggered if there is a law change which negatively impacts regulatory capital treatment.

I agree with the statements set out in paragraphs 102(b), (c) and (d) of the paper, although note that in the case of a traditional securitisation it could be the issuer rather than the originator which has the option.
Yes.
Yes, I generally agree that a trap mechanism for excess spread is appropriate for the reasons set out in the discussion paper. This approach should help to bolster the credibility and resilience of synthetic securitisations as it “shines light” on an aspect of cashflows that have often not been a focus for all stakeholders. The discussion paper proposes a cap on the committed excess spread, it would be useful to clarify whether originators could commit a zero fixed nominal amount of excess spread in a transaction if they so wish.
Yes.
Treating the unfunded component of excess spread as an asset for Pillar 1 purposes seems to be the logical outcome of originators contractually fixing an excess spread commitment in synthetic securitisations. The more difficult question is the correct calibration of the risk weight arising from this given that there has been a significant risk transfer of the underlying exposure.
No comment.
No comment.
In my view the clause does not need to be banned although the limitations of such a clause must be appreciated by relevant stakeholders. Such an early termination clause interacts with the resolution regime in a number of ways in both traditional and synthetic securitisations. From the English law perspective there are two moratoria which are relevant. Section 48Z of the Banking Act 2009 (transposing art 68 BRRD) provides for a general stay in relation to, inter alia, crisis management measures and crisis prevention measures. This prevents the application of a default event provision in any contract or other agreement entered into by, inter alios, a banking group entity.

Assuming that the originator is a banking group entity, the general stay will prevent any agreement to which it is a party being terminated due to relevant measures being taken by a resolution authority to stabilise and resolve the originator. Such measures would aim to stave off a bankruptcy so that the early termination clause would not be triggered. Such contracts will need to stay on foot for so long as the originator continues to perform. In the case of a synthetic securitisation, this means that the credit protection agreement, financial guarantee or credit derivative entered into by the originator with the SPV cannot be terminated. In the case of a traditional securitisation, if the originator is acting as servicer or account bank then such agreements will also be affected by the general stay. In effect a termination clause referencing the originator’s bankruptcy is something of a dead letter.

The second moratorium to consider is the temporary stay in sections 70C and 70D of the Banking Act 2009 (transposing art 71 BRRD). If the Bank of England is exercising a stabilisation power in respect of the originator then the Bank may, inter alia, suspend certain termination rights for two days. Again, the effect of this is to temporarily render a termination clause referencing the originator’s bankruptcy which is contained in a contract to which the bank or a bank subsidiary is a party, unenforceable. An extension of this temporary stay from two days to five days is currently under discussion by European legislators.

Aside from the moratoria another way in which an early termination clause may interact with the resolution regime is via section 75 of the Banking Act 2009. This permits HMT to change law for the purpose of enabling resolution powers to be used effectively, having regard to the special resolution objectives. Use of this power could result in an early termination clause being rendered unenforceable.
Yes, although additional guidance from regulators would be beneficial to assist originators to determine some of the proposed elements.
Yes. There are numerous types of structured risk transfer transactions which do not come within the definition of “securitisation”. One common example is single tranche repackaging transactions which fall outside the definition of securitisation in CRR Art 4 because there is no tranching. In addition there are a large number of financing and risk transfer transactions being done involving OTC derivatives and SPVs which are structured to ensure there is no tranching.
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Yes I broadly agree.
The NPL securitisation market depends on the presence of investors who are willing to assume the risks of an NPL portfolio. This is driven to a large extent by prevailing market conditions as well as a legal regime which supports the enforcement of security interests and debt claims by servicers which are servicing NPL portfolios. A supportive legal regime should include at a minimum clear conflict of law rules relating to the assignment of legal claims in a securitisation context, and a strong legal foundation for the enforcement of security interest financial collateral arrangements with a minimum of formalities. This latter requirement is achieved in the EU through the Collateral Directive insofar as that is applicable. However the conflicts of law rules in relation to assignments are not uniform throughout the EU and this is an area that would benefit from more legislative focus.

Further to my point in question 7 above, I submit that restructuring in accordance with standard servicing policies (that is, postponement/forebearance and selective debt forgiveness) are important measures in the range of workout options for NPLs. Viable forebearance in the short to medium term in accordance with a servicer’s standard policies should not be a mandatory credit event trigger.
In my view the proposals on selected structural features are equally valid for NPL securitisation transactions. The essential question is whether SRT has been achieved with respect to an exposure. Whether the underlying assets are performing or non-performing at the outset of a transaction should not be a relevant factor in this analysis.

As noted earlier in my response I have a reservation about consensual restructuring being a mandatory credit event for SRT purposes. My reservation is brought into stronger focus in the NPL context since there is a greater likelihood that a servicer may need to restructure non-performing loans throughout the term of a securitisation transaction. I submit that business-as-usual restructuring in accordance with a servicer’s standard servicing guidelines should not be a mandatory trigger for losses to investors. Rather, at the end of the term of the securitisation transaction, any postponed amounts which remain unpaid could be treated as in default at that time (that is, a mandatory failure to pay credit event will occur at that time).
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Carl Baker
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