Global Securitisation Markets in 2020: A Year of Highs in the midst of Turmoil

-Vinod Kothari (

[Revised March 2021]

Even as the pandemic disrupted life and economies across the globe, securitisation activity in different countries scaled new highs, at least in certain asset classes.

Securitisation in USA

Agency and non-agency RMBS

Agency RMBS was the star performer, at least in terms of new issuance volumes. Data available till Nov 2020 suggests that the new issuance volumes for 2020 will be about double of what it was in 2019, and the highest ever achieved in history. There are two reasons primarily responsible, of which the first one is quite obvious – historically low mortgage rates, particularly for refinancing activity. Second reason is that during the pandemic, there was extensive use of technology in mortgage origination and documentation, which led to far faster and simpler turnarounds for the borrowers.

Non-agency RMBS, however, is expected to end about 40% lower than 2019 volumes. Origination levels were halted because of shut-downs and the prevailing economic situation. Lenders put caution on the forefront as 30-day delinquencies continued to soar up.

Figure 1: US RMBS Issuance [By author, based on SIFMA data]

As may be clear, the issuance of agency MBS in 2020 was almost double of last year, whereas as non-agency securities were 45% lower or almost half of the number in 2019.

Asset-backed securities

The issuance volumes across all other classes of asset backed securities were down – from about 6% in case of auto-ABS to about 90% in case of credit cards ABS.

Figure 2: ABS issuance in USA

The CLO market was among the asset classes very badly affected, with the 2020 issuance less than 40% of the number in 2019. The decline in origination volumes of asset classes like credit cards is attributed to tighter lending standards by banks, and of course, lesser spending by individuals on travel or amusement, due to lock down.

Securitisation in Europe

Euro area will end with a GDP contraction estimated at 7.7% in 2020[1].

As per data prepared by AFME, new issuance in 2020 in Europe was down by about 11.9% compared to 2019[2].

EU regulators proposed some amendments to securitisation regulations, by amending Capital Requirements Regulations. “Securitisation can play an important role in enhancing the capacity of institutions to support the economic recovery, providing for an effective tool for funding and risk diversification for institutions. It is therefore essential in the context of the economic recovery post COVID-19 pandemic to reinforce that role and help institutions to be able to channel sufficient capital to the real economy.”[3] Accordingly, three amendments are proposed to securitisation regulatory framework: more risk-sensitive treatment for STS on-balance-sheet securitisation; removal of regulatory constraints to the securitisation of non-performing exposures; and recognition of credit risk mitigation for securitisation positions.

Figure 3: European securitisation issuance

Securitisation in China

Securitisation in China is expected to be about 10-15% lower than the volumes in 2019. A report from S&P recorded first half of 2020 to be almost the same as first half of 2019, but given the concerns and tightened lending by banks, it is expected that lower RMBS issuance will keep overall issuance levels low in 2020[4].

Figure 4: Securitisation Issuance in China – from S&P report

Securitisation in India

Indian securitisation statistics are typically collated on April-March basis. For Q2, Q3 and Q4 of calendar year 2020, securitisation activity [in Indian parlance, securitisation also includes bilateral portfolio transfers, called direct assignment] was highly subdued, as shadow-banking entities which are the major originators of transactions had stopped lending due to the prevailing lock-down. In addition, there were moratoriums imposed by the RBI whereby payments under existing loans were permitted to be withheld for a period of 5 months.

However, once the lockdowns have gradually been lifted, there is a very strong resurgence of economic activity. The Govt. had provided a sovereign guarantee for an additional 20% lending on existing lending facilities, subject to limits. While the non-banking financial entities are not needing significant funding by way of securitisation, there is a strong investor appetite.

This period has also been associated with defaults or credit events by some of the originators, and sale of the ABS investments held by some mutual funds. Hence, the market has seen servicer transitions, as also tested the (il)liquidity of investments in securitisation transactions.

Rating activity

As may be expected, there have been major rating actions during the year as performance of most asset classes was disrupted due to the pandemic. Rating agency S&P reported 2551 structured finance rating actions, which included 1950 downgrades owing to the impact of the pandemic[5]. Moody’s, in a report, states that once Covid-led payment holidays abate, there will be increasing pressures on retail-focused ABS transactions. RMBS transactions, consumer ABS etc are likely to see rising delinquencies.

Moody’s also forecasts the default rates in non-investment grade corporates to increase to 9.7% (trailing average of 12 months) by March, 2021. This will be the highest default rate after 2009. This will result into substantial pressure on CLOs.[6]


[1] Moody’s estimate






Link to related articles:


Evolution of securitisation – Genesis of MBS

Securitisation as a concept, has a history of over 50 years. In this write up, the author traces the events leading up to the evolution of securitisation in 1970 with the issuance of the first MBS program by Ginnie Mae.

Fifty years of global securitisation – list of chapters

List of chapters for the anthology on fifty years of global securitisation –

Go back to fifty years of securitisation page.

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Fifty years of global securitization

Vinod Kothari

Some people love it; some love to hate it, and some just live it. No matter which one of the clubs one belongs to, but there is no doubt that securitization is a major financial phenomenon.

Year 2020 marks 50 years of the inaugural mortgage-backed pass-through transaction done in 1970 by Ginnie Mae. Securitization has turned fifty.

The world is not in exactly right environment to do either a champagne party or otherwise – however, one should not gloss over the massive change that securitization has made, to the financial landscape of the world, over these five decades. Irrespective of the jury verdict on whether it was responsible for the Global Financial Crisis, the fact is that it had such a major impact that its short-lived absence from the scene could put world’s financial system into doldrums. And now, there are regulators’ reports looking at this very instrument with optimism to lead the recovery out of the COVID disruption.

To commemorate 50 years of securitization, we propose to bring an anthology of write-ups by senior securitization professionals, particularly those who have seen its boom and bust. The write-ups may be along the following lines:

  • Historical write-ups, recounting the development of early MBS by the agencies, the way it was perceived then and major economists’ remarks about this instrument
  • Contribution of securitization to mortgage markets globally, particularly in mortgage availability and affordability
  • Contribution of securitization to financial inclusion, making smaller and community lenders reach out to capital markets through larger intermediaries
  • Securitization and emerging markets
  • Lessons learnt from the GFC and how regulatory systems have evolved thereafter
  • Legal robustness of securitization – has it proved itself over decades of crises?
  • Off-balance securitization – development of accounting standards over the years, and does off-balance sheet securitization have any relevance left?
  • Significant risk transfers and capital relief
  • Market reports from major countries.

List of Chapters

For a work-in-progress list of Chapters, see here.

Publication details

The anthology is proposed to be a compilation in e-book form. We will be in touch with some publishers to seek interest in publication.

Structure of the Chapters

The anthology will be collaborative effort of several leading authors, experts, researchers and practitioners from all over the world. Each of the contributors are leading luminaries in their own field. So while substantial discretion will be used by the contributors, some pointers for contributors are as follows:

  • This e-book will hopefully have a very long shelf-life. Hence, the stance of the write-ups is not contemporaneous state of the market. Rather, the write-ups trace developments over time, to identify trends. The contributors deploy their wisdom to think of the trends that will continue, wither away, or strengthen. The commemorative is all about continuity and change.
  • We are wanting to minimise current market data or statistics, for reasons discussed above.
  • Each of the write-ups may provide a larger, macro view before narrowing down on micro aspects.
  • One of our very important objectives is to have the contribution of securitization to development of financial markets, financial inclusion, stability and robustness of systems, etc. It is not merely a historical account, but an important document on lessons to be learnt, and to provide a place from where one may look at the decades to come.
  • For scholars/practitioners who have been watching the industry grow over the years, if there are details of one’s personal association with the industry – as to how it developed and changed over time – that may of interest to readers. This may be added with generalisation of the market.

Invitation for contributions

Needless to say, it is a massive project – it has to be collaborative. We need the support of scholars, authors, stakeholders – those who have been practising, teaching, consulting or regulating securitization over the years. Hence, if you are one such contributor, or you know one who may be such a contributor, your contribution/assistance is most welcome.

For interest in contribution to the anthology, please do write to Please indicate your background, proposed contents, length of the article, etc. After hearing from us positively, you may start writing your article, for submissions by end of August, 2020.

Sponsoring/advertising opportunities

From our side, this project is completely non-pecuniary. We just felt that we can steer this effort which may be valuable for a long time.

However, this project will involve massive research effort, editing, and production. Hence, there may be substantial expense.

If you want to sponsor in any manner, or want to put up a befitting advertisement about your company/products, the same is welcome. Please feel free to discuss with

Timeline for publication

Tentatively, we may put the e-publication in public domain by November, 2020.

High Level Forum (EU) makes recommendations to further boost securitisation market

Data shows that the European securitisation market never rebounded after the 2008 crisis, even after the implementation of STS framework. Securitisation however, plays a key role in boosting the capital markets. This role has been recognised by the High Level Forum (EU) in its final report released on 10th June, 2019.

Seven recommendations were made by the HLF with respect to securitisation. The intent is to ultimately boost securitisation markets and help it pick up in the years to come.

In this write up, the author attempts to explain in brief the recommendations with respect to securitisation of the High Level Forum.

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Draft Guidelines on Securitisation & Sale of Loans with respect to RMBS transactions

Presentation on Draft Directions on Securitisation of Standard Assets

Our related research on the similar topics may be viewed here –

  1. New regime for securitisation and sale of financial assets;
  2. Originated to transfer- new RBI regime on loan sales permits risk transfers;
  3. Comparison of the Draft Securitisation Framework with existing guidelines and committee recommendations;
  4. Comparison of the Draft Framework for sale of loans with existing guidelines and task force recommendations;
  5. Inherent inconsistencies in quantitative conditions for capital relief;
  6. Presentation on Draft Directions Sale of Loans;
  7. YouTube video of the webinar held on June 12, 2020.

Inherent inconsistencies in quantitative conditions for capital relief

Abhirup Ghosh

– Updated as on 16th June, 2020

On 8th June, 2020, RBI issued the Draft Framework for Securitisation of Standard Assets taking into account existing guidelines, Basel III norms on securitisation by the Basel Committee on Banking Supervision as well the Report of the Committee on the Development of Housing Finance Securitisation Market chaired by Dr. Harsh Vardhan.

With this, one of the main areas of concern happens to be capital relief for securitisation. The concerns arise not just for new exposures but also existing securitisation exposures, as Chapter VI (dealing with Capital Requirements) shall come into immediate effect, even for the existing securitisation exposures.

Earlier, due to the implementation of Ind-AS, concerns arose with respect to capital relief treatment as most of the securitisation exposures did not qualify for derecognition under Ind-AS. However, on March 13, 2020, RBI came out with Guidance on implementation of Ind-AS, which clarified the issue by stating that securitised assets not qualifying for derecognition under Ind AS due to credit enhancement given by the originating NBFC on such assets shall be risk weighted at zero percent. However, the NBFC shall reduce 50 per cent of the amount of credit enhancement given from Tier I capital and the balance from Tier II capital.

Once again, the issue of capital relief arises as the draft guidelines may cause an increase in capital requirements for existing exposures.

Capital requirement under the Draft Framework

The Draft Framework lays down qualitative as well as quantitative criteria for determining capital requirements. As per Para 70, lenders are required to maintain capital against all securitisation exposure amounts, including those arising from the provision of credit risk mitigants to a securitisation transaction, investments in ABS or MBS, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement. For the purpose of capital computation, repurchased securitisation exposures must be treated as retained securitisation exposures.

The general provisions for measuring exposure amount of off-balance sheet exposures are laid down under para 71-78 of the Draft Framework.

The quantitative conditions are however, laid down in paragraphs 79 (a) and (b). The intention here is to delve into the impact of the quantitative conditions only, keeping aside the qualitative conditions for the time being.

Substantial transfer of credit risk:

The first condition (79(a)) is that significant credit risk associated with the underlying exposures of the securities issued by the SPE has been transferred to third parties. Here, significant credit risk will be treated as having transferred if the following conditions are satisfied:

  1. If there are at least three tranches, risk-weighted exposure amounts of the mezzanine securitisation positions held by the originator do not exceed 50% of the risk-weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation;
  2. In cases where there are no mezzanine securitisation positions, the originator does not hold more than 20% of the exposure values of securitisation positions that are first loss positions.

Taking each of the two points at a time.

The first clause contemplates a securitisation structure with at least three tranches – the senior, the mezzanine and the equity. Despite the presence of three tranches, the condition for risk transfer has been pegged with the mezzanine tranche only, however, nothing has been discussed with respect to the thickness of the mezzanine tranche (though the draft Directions has prescribed a minimum thickness for the first loss tranche).

If the language of the draft Directions is retained as is, qualifying for capital relief will become very easy. This can be explained with the help of the following example.

Suppose a securitisation transaction has three tranches, the composition and proportion of which has been provided below:

Tranche Rating Proportion as a part of the total pool Retention by the Originator Effective retention of interest by the Originator
Senior Tranche – A AAA 85% 0% 0%
Mezzanine Tranche – B AA+ 5% 50% 2.5%
Equity/ First Loss Tranche – C Unrated 10% 100% 10%

As may be noticed, both the senior and mezzanine are fairly highly rated as the junior most tranche has a considerable amount of thickness and represents a first loss coverage of 10%. Additionally, it also retains 50% of the Mezzanine tranche. Therefore, effectively, the Originator retains 12.5% of the total pool, yet it will qualify for the capital relief, by virtue of holding upto 50% of the Mezzanine tranche, despite retaining 10% in the form of first loss support.

The second clause contemplates a situation where there are only two tranches – that is, the senior tranche and the equity tranche. The clause says that in absence of a mezzanine tranche, the retention of first loss by the Originator should not be more than 20% of the total first loss tranche.

Given the current market conditions, it will be practically impossible to find an investor for the first loss tranche, hence, the entire amount will have to be retained by the Originator. Also, it is very common to provide over-collateral or cash collateral as first loss supports in case of securitisation transactions, even in such cases a third party’s participation in the first loss piece is technically impossible.

Also, there is a clear conflict between this condition and para 16 of the draft Directions, which gives an impression that the first loss tranche has to be retained by the originator itself, in the form of minimum risk retention.

Therefore, in Indian context, if one were to take a holistic view on the conditions, they are two different extremes. While, in the first case, capital relief is achievable, but in the second case, the availing capital relief is practically impossible. This will make the second condition almost redundant.

In order to understand the rationale behind these conditions, please refer to the discussion on EU Guidelines on SRT below.

Impact on the existing transactions

As noted earlier, this part of the draft Directions shall be applicable on the existing transactions as well. Here it is important to note that currently, most of the transaction structures in India either have only one or two tranches of securities, and only a fraction would have a mezzanine tranche. In all such cases, the entire first loss support comes from the Originator. Therefore, almost none of the transactions will qualify for the capital relief.

In the hindsight, the originators have committed a crime which they were not even aware of, and will now have to pay a price.

The moment, the Directions are finalised, the loans will have to be risk-weighted and capital will have to be provided for.

This will have a considerable impact on the regulatory capital, especially for the NBFCs, which are required to maintain a capital of 15%, instead of 9% for banks.

Thickness of the first loss support:

This requirement states that the minimum first loss tranche should be the product of (a) exposure (b) weighted maturity in years and (c) the average slippage ratio over the last one year.

The slippage ratio is a term often used by banks in India to mean the ratio of standard assets slipping to substandard category. So, if, say 2% of the performing loans in the past 1 year have slipped into NPA category, and the weighted average life of the loans in the pool is, say, 2.5 years (say, based on average maturity of loans to be 5 years), the minimum first loss tranche should be [2% * 2.5%] = 5% of the pool value.

In India, currently the thickness of the first loss support depends on the recommendations of the credit rating agencies (CRAs). Typically, the thresholds prescribed by the CRAs are thick enough, and we don’t foresee any challenge to be faced by the financial institutions with respect to compliance with this point.

EU’s Guidelines on Significant Risk Transfer

The guidelines for evidencing significant risk transfer, as provided in the draft Guidelines, are inspired from the EU’s Guidelines on Significant Risk Transfer. The EU Guidelines emphasizes on significant risk transfer for capital relief and states that a high level, the capital relief to the originator, post securitisation, should commensurate the extent of risk transferred by it in the transaction. One such way of examining whether the risk weights assigned to the retained portions commensurate with the risk transferred or not is by comparing it with the risk weights it would have provided to the exposure, had it acquired the same from a third party.

Where the Regulatory Authority is convinced that the risk weights assigned to the retained interests do not commensurate with the extent of risk transferred, it can deny the capital relief to the originator.

Under three circumstances, a transaction is deemed to have achieved SRT and they are:

  1. Where there is a mezzanine tranche involved in the structure: the originator does not retain more than 50% of the risk weighted exposure amounts of mezzanine securitisation positions, where these are:
  • positions to which a risk weight lower than 1,250% applies; and
  • more junior than the most senior position in the securitisation and more junior than any position in the securitisation rated Credit Quality Step 1 or 2.
  1. Where there is no mezzanine tranche involved in the structure: the originator does not hold more than 20% of the exposure values of securitisation positions that are subject to a deduction or 1,250% risk weight and where the originator can demonstrate that the exposure value of such securitisation positions exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin.
  2. The competent authority may grant permission to an originator to make its own assessment if it is satisfied that the originator can meet certain requirements.

In case, the originator wishes to achieve SRT with the help of 1 & 2, the same has to be notified to the regulator. If as per the regulator, the risk weights assigned by the originator does not commensurate with the risks transferred, the firms will not be able to avail the reduced risk weights.

Underlying assumptions behind the SRT conditions

The underlying assumptions behind the SRT conditions have been elucidated in the EU’s Discussion Paper on Significant Risk Transfer in Securitisation.

  1. Mezzanine test: This is applicable where the transaction has a mezzanine tranche. Usually the first loss tranches are meant to cover up the expected losses in a pool and the mezzanine tranches are meant for covering up the unexpected losses, irrespective of whether the equity/ first loss tranche is retained by the originator or sold off to a third party. The mezzanine test is indifferent with regard to the retention or transfer to third parties of securitisation positions mainly or exclusively covering the EL — given potential losses on these tranches are already completely anticipated through the CET1 deduction/application of 1250% risk weight if they are retained.
  2. First loss test: This is applicable where the transaction does not have a mezzanine tranche. In such a situation, the first loss tranche is expected to cover up the entire expected and unexpected losses. This is clear from the language of the EU SRT guidelines which states, that the securitisation exposure in the first loss tranche must be substantially higher than the expected losses on the securitisation exposure. In this case, due to the pari passu allocation of the actual losses to holders of the securitisation positions that are subject to CET1 deduction/1250% risk weight (irrespective of whether these losses relate to the EL or UL), the first loss test may effectively require the originator to transfer also parts of the EL, depending on the specific structure of the transaction and, in particular, on which portion of the UL is actually covered by the positions subject to CET1 deduction/1250% risk weight

The following graphics will illustrate the conditions better:

In figure 1, the mezzanine tranche is thick enough to cover the entire unexpected losses. If in the present case, 50% of the total unexpected losses are transferred to a third party, then the transaction shall qualify for capital relief.







Unlike in case of figure 1, in figure 2, the mezzanine tranche does not capture the entire unexpected losses. The thickness of the tranche is much less than what it should have been, and the remaining amount of unexpected losses have been included in the first loss tranche itself.

In the present case, even if the mezzanine tranche does not commensurate with the unexpected losses, the transaction will still qualify for capital relief, because, if the first loss tranche is retained by the originator, it will have to be either deducted from CET1/ assign risk weights of 1250%




In figure 3, there is no mezzanine tranche. In the present case, the first loss tranche covers the entire expected as well as the unexpected losses. In order to demonstrate a significant risk transfer, the originator can retain a maximum of 20% of the securitisation exposure.






Currently, the draft Directions do not provide any logic behind the conditions it inserted for the purpose of capital relief, neither are they as elaborate as the ones under EU Guidelines. Some explicit clarity in this regard in the final Directions will provide the necessary clarity.

Also, with respect the mezzanine test, in the Indian context, the condition should be coupled with a condition that the first loss tranche, when retained by the originator, must attract 1250% risk weights or be deducted from CET 1. Only then, the desired objective of transferring significant risks of unexpected losses, will be achieved.

Further, as pointed out earlier in the note, there is a clear conflict in the conditions laid down in the para 16 and that in the first loss test in para 79, which must be resolved.

US Federal Reserve provides support to senior ABS securities

Timothy Lopes, Executive, Vinod Kothari Consultants

Measures to maintain and strengthen credit flow to consumers is an important part of regulatory initiatives to contain the effects of the COVID crisis. Asset-backed securities and structured finance instrument are recognised as important instruments that connect capital market resources with the market for loans and financial assets. Underscoring the relevance of securitization to the flow of credit to consumers, the US Federal Reserve has set up a USD 100 billion loan facility, called Term Asset-backed Securities Loan Facility, 2020 [TALF] for lending against asset backed securities, issued on or after 23rd March, 2020.

Note that equivalent of TALF 2020 was set up post the Global Financial Crisis (GFC) as well, in 2008[1].

It is also notable that global financial supervisors have attempted to help financial intermediaries stay firm, partly by helping structured finance transactions. The example of the Australian regulators setting up a Structured Finance Support Fund (SFSF)[2] is one such regulatory measure. Another example is the Canada Mortgage Bond Purchase Program initiated by the Bank of Canada[3].

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