* New EBA risk transfer guidelines penalise call options, risk creating uncertainty
* Master trusts, structuring process could come under pressure
By Anna Brunetti
LONDON, July 11 (IFR) - Guidelines set out this week by the European Banking Authority to regulate the role of securitisation as a risk transfer tool could create new hurdles and uncertainty for those originators that support their programmes through call options.
Industry representatives fear it could be hard for these issuers to demonstrate they have offloaded the credit risk under the rules proposed in the Significant Risk Transfer paper, and thus claim capital relief.
Under the guidelines, national authorities would get the power to determine if, and to what extent, originators will be spared from setting aside capital buffers to cover for headwinds on their ABS exposures when calculating their own expected losses on their assets.
Supervisors would assess deals on a case-by-case basis, and have the clout to deny or reduce banks’ capital relief for any deals with call options that indicate risk could return to balance sheets. This includes time based-calls, market value calls or step-up call options and “other structural arrangements”.
The ability of originators to structure their securitisation deals into various levels of risk, or tranches, is currently one favourable aspect of the market.
“This is where ABS can be increasingly beneficial, against asset classes such as covered bonds or other schemes that are still cheaper [funding tools] for banks, by additionally providing capital relief,” said Dipesh Mehta, securitisation analyst at Barclays.
But that might be more difficult given the EBA text, he said.
Moreover, the absence of a hard set of rules could discourage prime RMBS and master trust bank originators from selling the entire capital structure in order to apply for capital relief, without which ABS would remain a mere funding tool.
Restricting call options would hit the rationale of UK master trusts - one of the biggest markets within European securitisation - “which are very much about giving certainty to investors, through calls, bullet payments and scheduled amortisation,” Mehta said.
Depending on which way national authorities will decide to implement the guidelines, UK master trust issuers could opt for stand-alone deals instead.
“It will be very interesting to see how UK regulators, which have been one of the best proponents [on securitisation], will go about it,” Mehta added.
One treasury official at a UK institution said UK authorities have already indicated that they would not allow banks to claim any capital relief on their master trust deals.
And the new restrictions could put a strain on the way banks in general structure their deals.
The EBA text calls on them to ensure that investors are not led to expect any additional contribution from the originator, Mehta said.
The EBA paper is trying to clamp down on the practice of banks calling deals to meet investors’ expectations even when it is uneconomic. This would also mean that supervisors should analyse past performance of other deals from the originator, to assess to what extent they intervened to support or call their deals.
But while regulators’ efforts to reduce “the moral hazard and the implicit support issues evident in the later stages of the global financial crisis...is understandable” said Jonathan Walsh, head of securitisation at Baker & McKenzie LLP, structuring deals in a way that does not imply future guarantees could prove tricky in practice.
“The market will need to think carefully how to structure deals so as to satisfy the relevant competent authority that an included feature does not fall foul of this rule,” Walsh said.
The EBA has simply requested national authorities step up their scrutiny of deal structures. But this could threaten the market due to uncertainty around what degree of regulatory risk it would incur.
“The vagueness of the language means that it is highly likely that [these guidelines] will lead to uncertainty of application,” Walsh said.
It would also raise some doubts as to what stage originators should seek confirmation from the relevant supervisors and how long it would take to get answers.
“This would introduce further delay in already extended structuring lead in times,” Walsh said.
The EBA guidelines also asks lenders, seeking capital relief, to notify and report to national supervisors on the exposure they’ve transferred out on a quarterly basis, throughout the life of the transaction, and explain any change to the level of risk transferred.
Banks will also have to set up operational units to comply with the new procedures and maintain a constant level of control and reporting on their securitisation transactions. They could asked to demonstrate, at any given time, the level of risk transfer and the impact of this on their expected loss calculation.
They will also need to ensure that, over the lifetime of the securitisation, they have no other financial activity with the third party which took on the credit risk of the transaction, such as financing and refinancing lines.
The EBA will decide within the next three years whether to advise the European Commission to turn the new guidelines into binding rules at an EU level under the Capital Requirements Directive. (Reporting By Anna Brunetti, editing by Anil Mayre and Alex Chambers)