Bank of England confirms eligible collateral changes and transparency initiatives
11 February 2011
By way of background, amongst other things, the changes refer to the adjustment of the eligibility criteria for ABS and covered bonds under the BoE's operations in general with a view to introducing certain disclosure, reporting and other transparency related requirements.
Notably, the BoE has provided for the implementation of a number of changes sooner rather than later, with certain provisions taking effect in 2011.
New eligibility criteria for ABS and covered bonds, transparency initiatives
The final market notice focuses primarily on and confirms the new eligible collateral requirements which apply to RMBS and covered bonds backed by residential mortgages under the BoE's operations. As expected, the new requirements refer to the provision of granular asset information in specified formats, the standardisation of investor reports and transaction summaries and the disclosure of offering documents, cashflow models and key transaction documents.
In general, the new collateral eligibility requirements will apply in respect of collateral submitted under the BoE's discount window facility operations and indexed long-term open market operations.
The BoE has confirmed that the transparency initiatives (other than the requirements related to the disclosure of cashflow models) will apply in respect of covered bonds (as well as asset-backed securities). The application of the new requirements to covered bonds is of particular concern given that European authorities (and investors) have consistently recognised the different nature of such products to date.
In general, the new requirements will apply with respect to both existing and new transactions. Consistent with previous statements, the BoE has provided for a one year implementation period and a further one year transition period (subject to higher haircuts) to allow some flexibility for necessary adjustments to existing operational and reporting systems etc. However, it should be noted that the costs of not meeting the criteria by the start of the transition period would appear to be potentially quite significant (based on the example additional haircuts set out in Annex C to the market notice).
New eligibility requirements for RMBS and covered bonds backed by residential mortgages
With respect to the new eligibility requirements, in particular, the market notice indicates that:
- Granular asset information - in general, anonymised loan-level information (including credit bureau score data) is required to be made available via a secure website to certain market participants at regular intervals (i.e. at least quarterly and within a one month period after the bond payment date) in a recognisable spreadsheet format and using a specified standardised template (including the corresponding published definitions). Such template provides for both mandatory and optional fields and, helpfully, the BoE has indicated that the mandatory fields should be completed on a "comply or explain" basis, with the BoE exercising some discretion with respect to the consequences of data not being provided. Use of non-published definitions may result in higher haircuts. The market notice indicates that the template has been designed to be, wherever possible, consistent with the requirements of other authorities (including the European Central Bank). However, given that the various authorities are working to similar (but slightly different) timelines, it is not clear that the comfort provided by the BoE in this regard will sufficiently address the industry's concerns. Lastly, in recognition of the potential data protection and bank confidentiality considerations which may be raised by the disclosure of loan-level information, the market notice stresses that such information should be anonymised and kept confidential by those accessing the information.
- Standardised transaction summary - for new issuances, a transaction summary describing the key features of the transaction is required to be produced and disclosed using certain standardised templates as a guide. While the market notice refers to disclosure of the transaction summary via a secure website, we assume that in practice the summary will be made available as part of the published prospectus (in the case of listed deals).
- Standardised investor reports - investor reports including certain minimum key information are required to be made available on a monthly basis. Consistent with the original consultation proposals, the reports are required to include information with respect to asset performance, cashflow allocation, transaction triggers, credit and liquidity support utilisation levels, account balances and the transaction counterparties. While the original proposals also referred to the provision of MTM swap information, this (controversial) point is not referred to in the final market notice, which is helpful. Any market notices related to the transaction are also required to be made available alongside the investor reports.
- Cashflow models - a waterfall cashflow model is required to be made available without charge to certain market participants in spreadsheet format or via a secure website or "in a proprietary format on the platform of a third party provider". The cashflow model must satisfy certain specifications. The market notice indicates that the calculations used by the model should be transparent to the user and the results of a cashflow run must be capable of being recorded and retained by such user. While the BoE has added provision for models to be made available in a proprietary format on a third party platform, this may raise separate considerations with respect to access and does not address the verification concerns raised by industry during the consultation process.
The final market notice also refers to a general requirement intended to take effect with respect to all transactions, irrespective of asset class and regardless of whether the relevant deal is public or private, from 1 July 2011. Under this requirement, certain transaction documents which govern the workings of the transaction must be published via a (secure) website (described below).
Access to information
In a departure from the original proposals put forward by the BoE, the market notice indicates that information disclosed under the new requirements is required to be made available via a secure website managed by or on behalf of the originator, arranger or cash manager, rather than being publicly disclosed. The market notice further indicates that loan level data is required to be made available via an appropriately protected "data room", involving an access registration procedure (requiring viewers to keep the information confidential, use it for limited purposes etc).
The BoE has indicated that relevant collateral (i.e. RMBS and covered bonds backed by residential mortgage loans) is required to satisfy the new requirements by the end of November 2011. Notwithstanding this, for a further transition period ending on November 2012, such collateral will remain eligible but be subject to higher haircuts.
With respect to the detailed new eligibility requirements which will apply to other relevant asset classes under the BoE's operations, further market notices will be published throughout the course of 2011 setting out the relevant requirements. The BoE has confirmed that provision for implementation and transition periods similar in length to those described above for RMBS etc. will be included in such requirements.