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.



Interbank Market regulated by CBRC

Securities Companies regulated by CSRC


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


 Second Pilot Program launched with limit of RMB 60 bn


Activity halted due to financial crisis

CSRC issued Manual for Securities Company Corporate Assets Securitization Pilot Program


Third Pilot Program launched with RMB 50 bn limit


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
  3. See,
  4. See,

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 :

  8. .

Reported by: Shambo Dey

News on Covered Bonds: Covered Bonds-The Canadian Coverage

28th December, 2012:

Covered Bonds are seen as an effective alternative to securitisation and the world seems to be all promoting the instrument by making necessary regulatory amendments or devising new enactments[1].

Canada too is set to follow the trend globally. Canada Housing and Mortgage Corporation (CMHC), the country's national housing agency has announced the details of the legal framework for Canadian covered bonds[2].

The National Housing Act (the Act) in Canada is the legislation governing the construction of new houses, the repair and modernization of existing houses, and the improvement of housing and living conditions. As part of the 2012 Federal Budget[3], amendments were made to the National Housing Act charging CMHC with administering a legal framework for covered bonds. The provisions relevant to covered bonds are contained inPart I.1 Section 21.5-21.66 of the Act.

The important provisions are:

  • Eligible Issuer: A Federal Financial Institution
  • Eligible Assets:  Loans made on the security of residential property that is located in Canada and consists of not more than four residential units; or any prescribed assets.
  • Assets to be excluded: Certain loans cannot be held as covered bond collateral, e.g. a loan made on the security of residential property if the loan is insured by the CMHC.
  • Registry: CMHC is to establish and maintain a registry containing details of registered issuers, registered programs, other prescribed information
  • Regulations: The Ministry of Finance has been conferred power to make Regulations to carry out the provisions of the Part, including modifying the definition of covered bonds or covered bond collateral.

     CMHC feels that the framework will support financial stability by helping lenders diversify their sources of funding and attract more investors from off shore markets as well.

The issuers of covered bonds will have access to an alternative source of funding and will gain a broader investor base since some international investors are restricted from purchasing bonds issued under a non-legislative framework. For the investors, the benefits come in the form of high standards of disclosure in tune with international best practices; statutory protection, dual recourse to the issuer as well as the cover pool. The ultimate beneficiary will be the market.

CMHC has issued a Covered Bonds Guide for easy understanding of the framework.

The step by the Canadian Regulators comes as an incentive to boost the global covered bonds market, where financial regulators of some countries like Norway are seeing covered bonds as risk accelerators for banks[4].

[1] As for example, in India, recently a Working Group constituted by National Housing Bank, the apex housing agency, submitted its Report that suggests a unique structure for introducing covered bonds in India: the NHB-intermediated structure. The Working Group report can be viewed here

Vinod Kothari was a member of the Group, also see Covered Bonds with NHB intermediation coming, by Vinod Kothari.


[3] Chapter 3.2


Reported by: Sikha Bansal

News on Covered Bonds: DBS all set to issue first covered bonds of Singapore

January 7, 2013

Monetary Authority of Singapore (MAS) came out with a consultation paper on guidelines for issue of covered bonds by the banks of Singapore. The paper titled "Covered Bonds Issuance by Banks Incorporated in Singapore" was issued in March last year. Since then the paper was put up for public and industry comments for almost a year.

DBS bank is already preparing and pressing for structural reforms to issue covered bonds once the regulations are approved and are in line. DBS working closely with Deutsche Bank and Barclays are all set to be the first to issue the first covered bonds of Singapore. DBS is likely to face tough competition from the Australian banks which are pricing their covered bonds at a cheaper rate. Thus, penetrating the market with a tight pricing policy seems to the primary objective of DBS. The currency denomination is yet to be determined for the issue. Europe is speculated to be the favorable buyers of the covered bonds with their vast experience in this area and familiarity of the structure.

Singapore banks are eagerly waiting for the final guidelines to be approved. Due to their little experience in securitisation, structural standardization of the loans to be used as collaterals need to paid heed with a constant supervision.

Reported by: Piyush Sinha

News on Covered Bonds: Covered Bonds volume declines in 2012 as European banks rely on alternative liquidity sources

Covered Bonds volume declines in 2012 as European banks rely on alternative liquidity sources

February 2, 2013

The world witnessed a steep fall in the issuance of covered bonds during the last year. The main reason behind this is assumed to be the consumer behavior- which in due course had resorted to cheaper liquidity available from the central banks. However, international rating agency Standard & Poor's (S&P) opines that lower issuance costs and a host of maturing bonds in 2013 will keep the volume of covered bonds at par. Based on their analysis, Standard & Poor's came out with a report on covered bond's performance captioned "Covered Bonds face another tough year" on January 24, 2013.

The report consists an overview and a critical analysis about the performance of covered bonds last year along with the predictions of 2013. S&P evaluated and analyzed the following pointers:

  1. European covered bonds issuance benchmark: S&P placed its analysis on data available from J P Morgan which showed a fall in the issuance volume in the European countries.
  2. Bonds maturing in 2013: Bonds amounting to approximately 160 billion Euros are scheduled to mature this year which may drive many players back into the market.
  3. Participation from new jurisdictions such as Australia and Belgium.
  4. Sudden increase in the credit risk related to a certain mortgage covered bonds programs in the European market.
  5. Effect of the Asset Default Risk and its subsequent Overcollateralization Levels
  6. Effect of degradation of sovereign creditworthiness on the covered bonds market.

Changing Figures

Covered bond issuance started well in the beginning of 2012, with transaction volumes already exceeding Euro40 billion[1]. But increasing funding pressures forced the banking regulatory bodies to press for better legislations for covered bonds as a secure source. In this mounting pressure many have continued working on (e.g., the U.S. and Belgium) or finally implemented (e.g., Australia) new covered bond laws in 2011. However, from the short-term viewpoint, due to the euro-zone fallout risks started creeping up and brought

covered bonds issuance to a standstill. There was a 20% drop in the total volume of covered bonds issued in 2012 as compared to 2011. Investor placed volumes had a dip of approximately 40% in most of the European countries as compared to 2011. The graph below depicts the fall in global issuance of covered bonds as compared to unsecured bank debt.

S&P published a special report titled "Global Demand for Covered Bonds is Growing" wherein it stated that 2011 symbolized enough dynamism for the covered bonds market. Global issuance touched about 300 billion Euros with a very diverse set of issuers. Unfortunately, this acceleration was somehow hindered and the global turnout stated declining in 2012. An immense stress in credit markets in the second half of 2012 stalled new issues. Better and diversified options available to the investors from banks have changed the course of this asset backed security to a large extent but the market players are hopeful that the situation will be soon restored.

S&P Report Covered Bonds Outlook 2012: Is the Shine Coming Off?


Reported by: Piyush Sinha

News on Covered Bonds: The Fall of Covered Bonds in the US

The Fall of Covered Bonds in the US

October 17, 2013

The sale of covered bonds in the US has fallen to $17bn this year, down from $45 bn in 2012 and $40 bn in 2011. [1]

Covered bonds being widely perceived as the alternative on-balance sheet option for RMBS, several countries have sought legislation to regulate covered bond issuances.[2] In response to mortgage market turmoil in 2007 and 2008, the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) considered rulemaking to encourage the use of covered bonds as an alternative to mortgage securitization.[3] However, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) have yet to recognize covered bonds as a valid source of bank capital. Legislation on covered bonds does not exist as of now, although efforts have been underway for over three years.

Presently, covered bonds are issued under the Securities and Exchange Commission (SEC) 144(a) Private Placement Rules or under Rule 3(a) 2 provisions. This has limited the number of prospective buyers and made covered bonds less attractive for issuers who are seeking large number of bidders to lower their financing costs. This slump is mainly the result of lack of interest by large US banks in the absence of regulation. Since Federal Housing Administration insurance is easily available and there is heavy participation of GSEs in the housing market, there seems to be little incentive for banks to float a market for covered bonds. It is also possible that some banks may not have sufficient collaterals.

The slump in the market was experienced outside the US as well. In Europe also, the recent efforts at reduction of bank’s balance sheets and cheap liquidity available from central banks have caused the demand for funding to slump.[4] Globally, issuances stand at $130 bn, which has decreased by 40 % year on year. Issuances of unsecured bonds have also decreased by 2%. [5]


  1. See,
  2. Canada recently amended its National Housing Act to bring about a legal framework for covered bonds. Last year, Singapore, South Korea, Australia and New Zealand also developed legislation to regulate covered bonds.
  4. .
  5. .,Authorised=false.html?

Reported by: Shambo Dey

News on Covered Bonds: Negative Outlook On Covered Bonds To Continue

Negative Outlook On Covered Bonds To Continue

October 22, 2013

Negative outlooks on covered bond ratings have not seen any change over the past quarter but there has been an increase in the number of covered bond issuers with negative outlooks. Mortgage covered bonds of Greek banks received negative outlook from Fitch.[1] Portugese covered bonds programmes also received negative outlook from Fitch.[2] S& P lowered its outlook on Danish banks causing outlook of its covered bonds to fall.[3] Although a downgrade or any change in the outlook by a rating agency on an issuer of covered bonds does not automatically cause a downgrade in the rating of the covered bond issue, there is still a high correlation between the issuer’s ratings and the covered bonds ratings. Thus, unless the negative ratings on the banks show a reversal of trend, covered bonds may continue to get affected. In addition, there are interest rate risks and country risks which are preventing the outlook on covered bonds from improving in the short run. Covered bonds are also exposed to market value risk. If there are unmatched cash flows, it might cause an asset sale. Although there are enough cushions by way of overcollateralization, which has slightly increased by 2% in the last quarter, some issuers have reportedly shown high degree of fluctuations in overcollateralization. In Sweden, overcollateralization provided by covered bond issuers increased by 10.4% whereas in Portugal it decreased by 6.3%. [4] Issuers must continue to manage these fluctuations to maintain a stable rating.

Notes :

Reported by: Shambo Dey