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Feb 11 (Reuters) - (The following statement was released by the rating agency)
Proposed changes to the Italian securitisation and covered bonds law can reduce counterparty risk in some instances, but uncertainty about the status of segregated accounts in relation to the draft Banking Recovery and Resolution Directive (BRRD) may mean account bank exposure is not fully mitigated, Fitch Ratings says.
Article 12 of Decree Law 145 (Destinazione Italia) allows for both collection accounts and Special Purpose Vehicle (SPV) accounts to be opened on a segregated basis. This would potentially mitigate the risk posed by a servicer or account bank default to a structured finance transaction or covered bond programme. In these transactions and programmes, cash funds due to a SPV are typically deposited first into a collection account and then transferred into the SPV’s account before being distributed to investors. If the servicer is named as the collection account holder then any funds in such account may be exposed to the risk of a servicer default (i.e. commingling risk).
However, Fitch believes there is still legal and operational uncertainty with respect to the ability of funds in a segregated account to survive a default of an account bank, given the fungible nature of cash. Furthermore, in the event of an account bank default, there is a risk that money held in segregated accounts would be liable to be “bailed-in” at the same level as senior unsecured liabilities under the BRRD (see Counterparty Criteria not Affected by Draft European Resolution Directive, 2 December 2013). While the BRRD is expected to exclude amounts held as client funds from “bail-in”, it is not clear whether the proposed segregated accounts would be treated as client funds. These points may be clarified by secondary legislation if and when the decree law is converted into ordinary law.
As long as this uncertainty remains we believe that credit exposure to account banks remains and will be analyzed in line with Fitch’s Counterparty Criteria. Nevertheless, segregated accounts may potentially mitigate the risk of a servicer default, as long as the account bank is a different entity and does not default simultaneously. Under the new legislation if a servicer (but not the account bank) defaults, amounts credited to segregated accounts may be excluded from the servicer’s bankruptcy estate. This may effectively mitigate servicer-related commingling risk in some cases, such as where the account is held with a third-party account bank and some operational features, such as debtor’s payments being made by direct debit, are in place.
This structure would be similar to the “specially dedicated account” (“compte specialement affecte” in accordance with Articles L. 214-173 and Article D. 214-228 of the French Monetary and Financial Code) that has been frequently used in French securitisations.
Fitch will analyze such potential mitigants to servicer-related commingling risks on a case-by-case basis, taking into account the legal structure of the collection account as well as supporting legal opinions.
The decree law will become ordinary law if approved by the Italian Parliament within 60 days of its publication in the Italian Official Gazette (ie, before 21 February 2014). Parliamentary discussions are ongoing. The agreed text will then be published in the Official Gazette. We will monitor developments and comment further, if appropriate.