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On 29 April 2014, Australia's bank regulator, APRA, released its long anticipated discussion paper on securitisation: "Simplifying the prudential approach to securitisation". Since 2011, APRA has progressively released details of its vision for the prudential framework for securitisation in Australia. To a large extent, the discussion paper builds on those themes.

The discussion paper encapsulates APRA's intention to adopt a principle-based rather than a prescriptive, rule-based approach for the prudential regulation of securitisation, taking into account lessons learned during the global financial crisis and warning against "creative" applications of the framework. APRA reiterates its preference for simplicity. This includes simple and transparent securitisation structures, as well as a simple and straightforward prudential framework to apply to such structures.

However, the complete picture (including a draft prudential standard and practice guidelines) will not be available for some time. APRA has set out a lengthy timeline with its response to submissions, a draft standard and draft practice guidelines not expected to be released until the first half of 2015. APRA expects that the new framework will be implemented in 2016. We briefly describe below some of the practical implications of the revised prudential framework.

Capital relief securitisations

APRA proposes to continue to allow ADI's to achieve capital relief using securitisation, however, such securitisations must adhere to a specific structure. In order to achieve capital relief, the securitisation must be comprised of two credit classes for prudential purposes only. Notes must be designated as falling within either a senior "A" class bucket or a subordinated "B" class bucket. Both classes may be comprised of multiple sub-classes.

APRA has also proposed two differing approaches to recognising capital relief. The first approach is maintaining the status quo – the ADI must be satisfied that there has been a transfer of significant credit risk. The second approach is more formulaic and referred to in the discussion paper as the "pro rata" approach. An ADI's capital requirements will be reduced based on the extent to which the ADI has sold the "B" class notes to third parties and, importantly, the maximum capital relief available under this approach will be 80%. APRA seems ambivalent as to which of the two approaches is ultimately adopted and has invited submissions on their merits. In addition, date-based calls will not be permitted in capital relief securitisations and an ADI will not be able to claim capital relief for synthetic securitisations.

Funding-only securitisations

APRA is also proposing to expressly recognise ADIs undertaking a securitisation for funding purposes only without achieving capital relief. Funding-only securitisations may include warehouses, master trusts, short-term funding using assetbacked commercial papers and selfsecuritisations. Consistent with the proposed capital relief securitisation structure, a funding-only structure would need to be comprised of two credit classes only. However, in contrast, the subordinated "B" class may not be comprised of multiple sub-classes; the intention being that the ADI holds.

Date-based calls will be permitted in funding-only securitisations provided that such calls satisfy a number of criteria, including that the date set is no earlier than the date at which it is projected that the principal outstanding of the pool of receivables will have amortised down to 10% of its original value.

Other noteworthy points

  • Removal of 20% holding limit
  • ADI holding subordinated notes of other ADIs or other types of issuers
  • Risk retention – The APRA has proposed that originating ADIs be required to retain at least 20% of the "B" class notes, such that if there are multiple sub-classes of "B" class notes, the ADI will be required to hold 20% of each sub-class of the "B" class notes. Neither a randomly selected representative sample nor excess spread will be recognised as an acceptable means of risk retention.
  • Warehouses – The discussion paper reiterates that warehouses are intended to be temporary arrangements only and provides that a capital charge will be imposed on an ADI warehouse provider if assets remain in a warehouse after a period of one year (regardless of whether the warehouse is being provided to another ADI or some other non-ADI entity).
  • Master Trusts –APRA specifically considers master trusts in its discussion paper and is proposing to include such structures as fundingonly securitisations in its revised framework.
Legal and Regulatory Risk Note