News on Securitization: AIFMD exemption for Irish securitisation companies

November 29, 2013

The Central Bank of Ireland has recently clarified that:

  • securitisation companies that have registered with the Central Bank as “financial vehicle corporations” pursuant to Regulation (EC) No 24/2009 of the European Central Bank[1] (the “FVC Regulation“); and / or
  • securitisation companies funded by way of debt or other non-equity instruments,

are outside the scope of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU)[2] (the AIFMD) and the Commission Delegated Regulation[3] (EU) No 231/2013 as transposed into Irish law under the European Union (Alternative Investment Fund Managers) Regulations, 2013 (the “AIFM Regulations“).Consequently they do not need to seek authorization as, or appoint, an AIFM. The Central Bank of Ireland does not intend to do that at least for so long as ESMA continues its current work on this matter.

Section 110 of the Irish Taxes Consolidation Act 1997[4] creates the legislative framework for securitisation companies in Ireland. Such companies are commonly called “Section 110” companies. Many existing and newly established section 110 companies would be required by the FVC Regulation to register with the Central Bank as “financial vehicle corporations”, by virtue of the fact that they carry out, or intend to carry out, one or more “securitizations” (within the meaning of the FVC Regulation). Following the clarifications, it is now clear that AIFMD and the AIFM Regulations do not apply to such companies.

AIFMD and the AIFM Regulations also do not apply to section 110 companies that are not required to register as FVCs, provided they are not engaged in the activity of issuing shares or units. This would include, section 110 companies that are not FVCs, where they are funded by entering into loans, issuing debt securities, and / or issuing non-debt instruments (such as certificates, warrants and derivative instruments) that do not convert into, and are not convertible into, shares or units giving an ownership interest in the company.

News on Securitization: Bank of England speaks pro-securitisation once again

November 29, 2013

The latest issue of Financial Stability Report[1], released by the Bank of England, speaks  a lot once again by the needed initiatives to revive securitisation.

It notes, of course, that there are visible signs of positive investor interest in the sector in the recent past, evidenced by several proxy measures. First, the volumes of CLOs has been around USD 75 to 80 billion this year, which is close to the pre-Crisis levels. Second, there have been innovative deals – such as residential rental securitisation, securitisation of peer to peer loans, etc. However, with all this, the reduction of securitisation volumes in Europe has been alarming – coming from $ 1.2 trillion in 2008 to $ 322 billion in 2012.

The Report notes: “Better functioning and safe and robust securitisation markets have the potential to diversify banks’ funding sources and create securities that are better tailored to the needs of non-bank investors, such as insurers and pension funds. Securitisation can also transfer risk outside the banking sector. For example, banks that have the expertise to originate loans may not always be best placed to bear the risk of those loans. In those circumstances, banks can free up capital for new lending by securitising loans and selling them to other investors. This process diversifies sources of finance available to the real economy and potentially increases its stability”[2].

The Committee notes the useful purpose served  by “shadow banking” – a term applied to paralller alternative non-banking financial system supplying money to the financial system.

“The provision of finance from outside the traditional bankingsystem can play an important role in the financial system and wider economy but it can also be a source of systemic risk”, notes the Report. The Committee will focus on mitigating these risks, rather than curbing shadow banking.

Vinod Kothari adds: The CLO/CDO volumes, for the first 10 months of this year, is reportedly about $ 68.5 billion, which compares with $ 39.4 billion for the same period in 2012. This is surely a substantial increase. However, considering that there has not been much pick up in traditional asset classes, the aggregate ABS/MBS issuance for 2013 may end up lower than that for 2012.

News on securitization: China resumes Securitization

September 25, 2013:

Historical Developments:

Asset securitizations in China were halted since 2009 after the credit crisis in US markets started developing. However in May 2012, the activity gained round after the PBoC, CBRC and Ministry of Finance jointly issued a Notice on Matters Concerning Further Expansion of Credit Assets Securitization Pilot Program and planned for the launch of its third pilot program with RMB 50bn limit in the interbank market. A year later, in March 2013, as a part of its deregulation objectives, the CSRC upgraded asset securitization activity to a routine business process by issuing Securities Company Asset Securitization Regulations. The following table outlines the historical developments in the Chinese Securitization market:

Current Reforms:

Further to increasing market activity, the State Council executive meeting on August 28, 2013 decided to expand the trial program for securitization of credit assets to make it a more commonplace activity. The Council has allowed the trading of high-quality asset-backed securities on stock exchanges for the first time. The following graph shows that NBFIs in China were acting as virtual conduits for the banks. The move by the State Council to allow securitization activity only legitimizes what is currently happening informally:

Souce: PboC, CEIC, SG Cross Asset Research/Economics

The State Council has called for strict supervision of securitizing credit assets and that the functions and responsibilities of trust companies and accounting firms should further be made clear in this regard. The Chairman of the China Banking Regulatory Commission Shang Fulin has also said that detailed measures should be put in place to enable the expanded credit asset securitization trial to benefit more small and medium enterprises which are cash-strapped. According to the statistics from the CBRC, by the end of July 2013, the outstanding balance of SME loans nationwide amounted to RMB 16.5 trillion. The reforms should also help participating banks expand their funding options. It should also help the government meet funding requirements for infrastructure projects. In addition to this, the CBRC has sent out a circular to insurers to make them actively participate in the pilot. Currently, credit assets that may undergo securitization include credit loans, guarantee loans, small and micro-sized business loans and auto loans.

Remaining Challenges:

Some analysts feel that although the reforms may boost liquidity through stock exchange trading and improve regulatory oversight over the banking sector, it may not spurge activity in this sector, given the illiquid nature of these products and that large scale transfer of NPLs from banks may not be easy because of pricing issues. If volume of issuances increases in the future and the cost of issuances falls, then products will become more liquid.

TIMELINE OF MAJOR SECURITISATION EVENTS

Year

Interbank Market regulated by CBRC

Securities Companies regulated by CSRC

2005

Initial Pilot program launched by PBoC and CBRC; Limit of RMB 15 bn for interbank market

Pilot securitization program launched with the CICC’s securitization program China Unicom

First issue of ABS made by China Development Bank

2007

 Second Pilot Program launched with limit of RMB 60 bn

2009

Activity halted due to financial crisis

CSRC issued Manual for Securities Company Corporate Assets Securitization Pilot Program

2012

Third Pilot Program launched with RMB 50 bn limit

2013

PBoC, CBRC and Ministry of Finance jointly issued the Notice on Matters Concerning Further Expansion of Credit Assets Securitization Pilot Program.

State Council issued Guidelines on Financial Support for Adjusting, Transforming and Upgrading the Economic Structure

** The information has been prepared from information in CSRC, CBRC website and Nomura Research Institute.

To read more on the China Regulations please click here

Reported by: Shambo Dey

News on Securitization: Islamic Finance Growing

October 6, 2013:

With the backdrop of conventional financing methods going bust and investors burning their hands, global markets are seemingly wanting to get a taste of Islamic finance. Further, ever since the sub-prime crisis of 2007, time and again there have been discussion on need for finding alternative modes of financing and Islamic finance has been ever increasingly accepted as the next best alternative known.

The need of funds for infrastructural development are one of the factors leading countries to scout for funds and are now wanting to attract Middle East investors by adopting Shariah compliant products. From business perspective as well Islamic structures are gaining popularity because ownership structures offered in Shariah compliant products are less risky and more ethical following the proponents of Islam.

In Africa, several countries have made sukuk issuances in 2012 for infrastructural development. The need for development in the continent demands funds and African nations are looking to tap investors from Middle East [1]. Being in the embryonic state of developing capital markets, the intent of tapping funds through Shariah compliant products may establish the Islamic Finance industry in the continent.

African governments are beginning to address the legal obstacles to Islamic finance by putting in place the necessary regulatory measures. However, having appropriate regulations in place alone is not sufficient. For any African country looking to establish itself as an Islamic finance hub of the future, that country must overcome a number of other challenges to create an environment conducive for Islamic finance to take root, including investing in education, capital markets infrastructure and political stability.

India too has opened gates for Islamic Finance with the recent decision of Reserve Bank of India to allow Kerala based non-banking financial company to develop Shariah compliant business. With a large Muslim population, India embracing Islamic finance was a no brainer.

On the other hand, Scotland is positioning itself to be potential hub for Islamic Finance. Scotland is becoming the niche market for Shariah compliant products with an estimated growth of 15-20% annually. Acceptance of the Shariah compliant products is well established in Scotland and its popularity is increasing particularly in the limited access to conventional sources of funding in the market. With a strong fundamental to Islamic Finance in Scotland and growing demand of Islamic finance products amongst businesses and consumers in Scotland, the country may indeed be the centre for Islamic finance activity.

With U.K hosting the World Islamic Economic Forum, setting up an Islamic Finance Task Force and eyeing to become the Western Capital of Islamic Finance, Islamic Finance is increasing gaining recognition and is here to become the next big thing in the capital markets.

[ 1 : According to a Reuters report on Oct 2, 2013, Nigeria’s Osun State issued a 10 billion naira ($62 mn) sukuk yielding 14.75 percent. It is the first Islamic bond from a major economy in sub-Saharan Africa. ]

 Reported by Nidhi Bothra

 

News on Securitization: US Federal Agencies Propose “Revised” Risk Retention Requirements

October 7, 2013:

Right after the financial crisis the regulators had geared up to tighten the regulatory noose for securitisation transaction. The retention of skin in the game was considered to be critical for sustenance of securitisation transaction. In this pretext, in the U.S., the risk retention requirements were coined in 2010 and were deliberated upon. The proposed rules (“Original Rules”) formed a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In the Original Rules, it was proposed that the excess proceeds from the sale of commercial mortgage through securitisation should remain in a “premium capture cash reserve account” and shall remain subordinated to other bonds to be captured over a period of time. Thereafter several countries took cue from the proposal and either adopted the risk retention requirements or made a proposal for a regulatory amendment.

Several of the industry players had expressed concerns on the Original Rules stating that the rules will lead to increase in cost for sponsors significantly discouraging new securitisation transactions. Considering the industry players concerns, very recently, in August, 2013 the six federal agencies — Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency, and the Securities Exchange Commission in the U.S. proposed an amendment to the risk retention requirements and have relaxed the rules governing risk retention in certain ways.

Comparative Analysis of the Original Rules and Revised Proposal:

Original Proposal

Revised proposal

Issuer to retain a 5% piece at par value and could be a vertical or horizontal piece or L-shaped piece in 50-50 proportion

The residuary interest is to be calculated on fair value instead of par value and the residuary interest can be held in any combination of vertical and horizontal piece. The fair value calculation would be determined as of the day on which the price of the ABS interests to be sold to third parties is determined [1]

The retained piece to be held for the life of the transaction

The parties will be able to trade in the retained piece after 5 years [2]

For a residential mortgage loan to be treated as a QRM, it would have to have a maximum 80% loan-to-value (“LTV”) ratio, a minimum 20% down payment, front-end and back-end debt-to-income(“DTI”) ratios of 28% and 36% or less respectively, and meet certain credit history requirements.

The proposed rule links the definition of QRMs to the definition of a “qualified mortgage” as defined by the Consumer Financial Protection Bureau. The QM rule does not include underwriting based on credit history, loan-to-value (LTV), or down payment. It does, however, include an analysis of the borrower’s ability to repay, with a maximum DTI of 43 percent. Loan terms could not exceed 30 years. The QM definition also prohibits interest-only loans, balloon payments, and negatively amortizing loans. The new proposal also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the qualified mortgage criteria. [3]

ABSs to be excluded from the proposed rule’s credit risk retention requirements include (1) commercial loans, (2) commercial mortgages, and (3) low credit risk auto loans,

Same as original proposal

Unsecured REIT loans not be classified as commercial real estate loans

Same as original proposal

Full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government.

Same as original proposal

Only CLO manager to retain risk

Lead arranger in the underlying loan also permitted to retain risk. [4]

Several of the industry players had expressed concerns on the proposed rules stating that the rules will lead to increase in cost for sponsors significantly discouraging new securitisation transactions. Considering the industry players concerns, very recently, in August, 2013 the Federal regulators in the U.S. proposed an amendment to the risk retention requirements and have relaxed the rules governing risk retention.

The revised rules are open for comments till 30th October, 2013.

Notes :

  1. To read more on this, see http://www.crenews.com/top_stories_-_free/federal-regulators-relax-proposed-risk-retention-rules.html
  2. http://www.fdic.gov/news/board/2013/2013-08-28_notice_dis_a_res.pdf
  3. See, http://www.fdic.gov/news/board/2013/2013-08-28_notice_dis_a_res.pdf
  4. See, http://www.federalreserve.gov/newsevents/press/bcreg/20130828a.htm

Reported by: Shambo Dey

News on Securitization: Is Britain the new capital for Islamic Finance?

November 3, 2013 :

London recently hosted the 9th World Islamic Economic Forum at Excel Center, where UK revealed its plans to become the first country outside the Muslim world to sell Shariah-compliant Islamic bonds (sukuk) as early as 2014.[1] Sukuk would be valued at about 200 million pounds ($320 million).[2] In addition, the London Stock Exchange will be creating an Islamic Market Index.

Approximately 40 percent of the world’s 25 fastest growing markets are within Muslim-majority countries.[3] About 60 percent of the world’s sukuk is issued from Malaysia.[4] Outside the Islamic world, London is ranked as the number one centre for Islamic finance- it is the European base for several Middle East banks and a major centre for Middle East investors.

Britain first announced plans for a sovereign sukuk 5 years ago, but that issue never materialised as the country’s Debt Management Office decided the structure was too expensive and would not going to be value for money.[5] However, several projects in the UK in the recent years such as Thames Water, Barclays, Sainsburys, Harrods and the Olympic Village had significant contributions by Islamic financiers. The government established an Islamic financial task force in March 2013 to review subjects ranging from banking regulation to standards for Islamic finance education.[6] Britain also has more banks compliant with the principles of Islamic finance than any other Western country.[7] Britain has taken steps to support new businesses to grow across the Islamic world such as the formation of government partnership with the Shell Foundation to create a new 4.5 million pounds grant to boost the work of the Nomou initiative,[8] a growth fund that provides skills and finance to small businesses across the Middle East and the Gulf.

Through sukuk issuances, UK might come at par with Dubai and Kuala Lumpur in Islamic finance.

Notes :

  1. https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech
  2. https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech
  3. http://www.aawsat.net/2013/10/article55320863
  4. http://www.bnm.gov.my/index.php?ch=en_speech&pg=en_speech_all&ac=281&lang=bm
  5. http://www.thedailybell.com/printview/params/id/34707/printview/
  6. https://www.gov.uk/government/news/government-launches-first-islamic-finance-task-force–2
  7. https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech
  8. .http://www.9thwief.org/CMSPages/GetFile.aspx?guid=e30e987a-54eb-4024-a4df-337ad71bcdf6

Reported by: Shambo Dey