Securitisation of Derivatives andAlternative Asset Classes
Yearbook 2005
by
Jan Job de Vries Robbe
Structured Finance Counsel, FMOThe Hague, The Netherlands
Paul U. Ali
Associate Professor, Faculty of LawUniversity of New South Wales, Sydney, Australia
KLUWERLAWNTERNATIONAL
Contents
Foreword v
Preface vii
1. Synthetic Squares, or the Securitisation of Russian Dolls 1Jan Job de Vries Robbe
1. INTRODUCTION 11.1 Definition 11.2 Market 21.3 Goodbye CDO? 21.4 Hello CDO Square! 41.5 Limitations and Opportunities 5
2. DOCUMENTATION 72.1 General Structure 72.2 Documentation 102.3 Credit Default Swap 102.4 Credit Events 112.5 Credit-Linked Notes 142.6 Management Agreement 172.7 Collateral Arrangements 182.8 Rating Agency's Perspective 18
3. LEGAL AND REGULATORY ISSUES 203.1 Regulatory Capital Relief 21
4. GOING FORWARD 22
xiv Securitisation of Derivatives and Alternative Asset Classes
2. Modelling Credit Risk in Synthetic CDO SquaredTransactions 23Kai Gilkes
1. INTRODUCTION 23
2. STRUCTURE AND RISK CHARACTERISTICS OF CDOSQUARED TRANSACTIONS 24
3. THE DRILL-DOWN APPROACH 263.1 Modelling Standalone Assets 263.2 Bespoke CDO Structure 283.3 Bespoke CDO Default and Loss-Given-Default 303.4 Bespoke CDO Correlation 333.5 Creating the CDO Squared Net Loss Distribution 34
4. CDO SQUARED TRANCHE RISK MEASURES 37
5. RECENT MARKET DEVELOPMENTS 405.1 CDOs of'Baskets' 405.2 CDOs of Equity Default Swaps 415.3 CDO Cubed 415.4 Fungible Subordination 41
6. SUMMARY" ..._--.• ̂ •---...-
3. Synthetic Securitisation Platforms Established by KfW 43Stefan Krauss
4. Commercial Mortgage Backed Securities in Italy: theCurrent Issues and the Synthetic Route 49Giuseppe Schiavello
1. INTRODUCTION 49
2. ITALIAN LEGISLATION ON CASH FLOW SECURITISATION:AN OVERVIEW 50
2.1 Structures Available Prior to Law 130 512.1.1 Civil Code Assignment of Receivables 512.1.2 Law 52 Assignment of Receivables 522.1.3 The Use of Mutual Funds 53
2.2 Law 130 542.3 The Italian Regulatory Concerns on CMBS: The Current
Legislation 57
Contents
2.4 The Nature of the Concerns and their Confutation2.4.1 The Absence of Any Explicit Prohibition
3. SYNTHETIC CMBS: AN OVERVIEW3.1 The Innovative Elements3.2 Application of Article 58 of the 1993 Consolidated Banking Act
3.2.1 General3.2.2 Conflict of Law Issues3.2.3 Restrictions Generated by the 'Block' (Blocco) Concept
and by the Nature of the Parties3.3 Payments from the Credit Protection Buyer to the Credit
Protection Seller under the CDS3.4 The Servicing Arrangements3.5 Redemption and Legal Final Maturity of the Notes
5. Securitising the Weather: Temperature Swaps andWindstorm Bonds 73
Paul U. Ali
1. INTRODUCTION 73
2. TEMPERATURE SWAPS 752.1 Managing Volumetric Risk 752.2 Legal Structure of Temperature Swaps 753. WINDSTORM BONDS 773.1 Securitisation of Weather-related Risks 773.2 Pylon Transaction 78
4. INSURANCE ISSUES4.1 Consequences of Insurer Status4.2 Legal Characterisation of Weather Derivatives
4.2.1 NAIC White Paper on Weather Derivatives4.2.2 Essential Attributes of Insurance Contracts4.2.3 Insurable Interest and the Anti-Gaming Laws4.2.4 Insurable Interest and Pecuniary Interests4.2.5 Insurable Interest and Proprietary Interests
4.3 Investors in the Securities issued by the SPV
5. CONCLUSION
xvi Securitisation of Derivatives and Alternative Asset Classes
6. Equity Default Swaps and the Securitisation of Risk 89Michael J. Logie and John-Peter Castagnino
1. INTRODUCTION 89
2. THE DEVELOPMENT OF EQUITY DEFAULT SWAPS 912.1 The Basic Terms of Equity Default Swaps 912.2 The Economics of Equity Default Swaps 922.3 The Uses of Equity Default Swaps 942.4 Documenting Equity Default Swaps 963. THE SECURITISATION OF EQUITY DEFAULT SWAPS 1003.1 The Synthetic Collateralised Debt Obligation 1003.2 The Inclusion of Equity Default Swaps in CSO Portfolios
(ECOs and Hybrid CSOs) 1023.3 The Response of the Rating Agencies 104
3.3.1 Moody's 1053.3.2 S&P 1073.3.3 Conclusion 108
3.4 Specific Documentation Issues 109
4. THE EXPANDING MARKET FOR SECURITISATIONS OFEQUITY DEFAULT SWAPS 112
4.1 Managed ECO Issues 1124.2 The Wider Consumer Base 112
5. CLOSING REMARKS AND CONCLUSION 115
7. Securitisation in Japan 117
Peter Kilner, Paul Avanzato, Lucy Oddy and Gina Hartnett
1. 'HISTORY'OF SECURITISATION IN JAPAN 117
2. DISCUSSION OF COMMON STRUCTURES 1172.1 Double Cayman Island Entity Structures 1182.2 Kabushiki Kaisha Structure 1203. TMKS AND THE ASSET SECURITISATION LAW 121
4. JAPAN LAW TRUSTS 122
5. LEGAL AND REGULATORY FRAMEWORK - SPECIFIEDCLAIMS LAW, PERFECTION LAW, SERVICER LAW, ETC. 124
5.1 Perfection of Transfers 1245.1.1 Article 467 of the Civil Code 1245.1.2 Specified Claims Law 124
Contents xvii
5.2 Perfection Law 1255.3 Servicing 1265.4 Money Lending 1265.5 Asset Securitisation Law 126
6. CREDIT RISK AND OTHER STRUCTURED PRODUCTS 1276.1 Credit Products 1276.2 CDO Structure 1286.3 Other Structured Products 129
7. THE FUTURE 1307.1 Changes in Law 130
7.1.1 Bankruptcy Law Reform 1307.1.2 Amendments to the Trust Business Law 1307.1.3 Proposals to Modernise Japanese Company Law 1317.1.4 Proposals to Amend the Public Notice System on the
Transfer of Movables and Claims 1317.2 Asset Classes 132
7.2.1 Intellectual Property 1327.2.2 Future Flow 1327.2.3 Synthetics 1327.2.4 Whole Business Securitisations 1337.2.5 Other Asset Classes 134
8. Trends and Innovations in the US CDO Market 135Miroslav Visic
1. INTRODUCTION 135
2. A SNAPSHOT OF THE PRIMARY AND SECONDARYMARKETS 136
2.1 Primary Market 1362.2 Secondary Market 137
3. RELATIVE VALUE 138
4. RISKS IN THE CDO MARKET-'TITANIC-CLASS'ANYBODY? 140
5. WHICH CDO PRODUCTS ARE'HOT'? 1425.1 Collateralised Fund Obligations 143
5.1.1 Introduction, Structure, Mechanics 1435.1.2 Some Notable CFO Transactions 145
5.1.2.1 Man Group CFO 1455.1.2.2 Silver Leaf CFO 1455.1.2.3 Diversified Strategies CFO 147
xviii Securitisation of Derivatives and Alternative Asset Classes
5.2 Structured Finance CDOs 1515.2.1 CRE (CMBS) CDOs 1515.2.2 ABS CDOs 151
5.3 Municipal Bonds CDOs 1545.4 Trust Preferred CDOs (TruPS) 154
5.4.1 Structure 1565.5 Repacks and Combo CDO Notes 160
5.5.1 Structure 1605.5.2 Amortisation Schedule of the Assets 161
5.5.2.1 Bonds 1615.5.2.2 Loans 1615.5.2.3 ABS 161
5.5.3 Combination CDO Notes - 'Composite Obligations' 161
6. STRUCTURAL FEATURES 162
7. CONCLUSION 165
9. Covered Bonds in Europe 167Sergio Nasarre-Aznar and Otmar Stocker
1. WHAT ARE COVERED BONDS? 167
2. ECONOMIC MEANING OF COVERED BONDS IN EUROPE 169
3. LEGISLATION ON COVERED BONDS IN EUROPE 1704. DIFFERENT STRUCTURES AND LEGISLATION OF
COVERED BONDS IN EUROPE 1754.1 Structures 175
4.1.1 French Model 1754.1.2 Specialised Bank with Own Staff but Partially
Outsourcing Administration 1774.1.3 Centralised Funding Institutions 1784.1.4 Specialised Bank without/with Small Non-eligible
Business 1794.1.5 Specialised Bank with Large Non-eligible Business 1804.1.6 Universal Bank with Qualified Covered Bond Licence 1824.1.7 All Credit Institutions can issue Covered Bonds without
Previous Licence or with a Licence without Requirements 1834.2 Legislation of Covered Bonds in Europe 184
5. THREE CORNERSTONES OF COVERED BONDS: SECURITY,LIQUIDITY AND TRANSPARENCY 184
5.1. Security and Bankruptcy Remoteness 190
Contents xix
5.1.1 Security in Covering During the Life of the Issue toEnsure that Covered Bonds are Covered Always 1915.1.1.1 What Does'Covered'Mean? 1915.1.1.2 How to Identify the Cover 192
5.1.2. Bankruptcy Remoteness 1945.1.2.1 A New Trend: No Acceleration! 1945.1.2.2 How to Segregate the Cover from the Bankruptcy
Estate 1945.2. Liquidity 1995.3. Transparency 199
6. OUTLOOK 2006.1. Which Covered Bond Structure is the Most Efficient? 2006.2. Covered Bonds versus or together with MBS 201
7. CASE STUDIES 2027.1 Spanish AyT or a Way of Mixing Covered Bonds and ABS 2027.2 English HBOS: Issuing Covered Bonds without Backing
Legislation 204
10. Residential Pre-Sales Securitisation: A New Methodof Project Finance 207
Larry Mahaffy
1. SYNOPSIS 207
2. BACKGROUND 2082.1 WhatisRPS? 2082.2 When, Where and Why did RPS Develop? 210
2.2.1 Walsh Bay 2112.2.2 Quadrant Off Broadway 2112.2.3 Bullecourt Place 2122.2.4 Peridot Investments 2122.2.5 Jasmine Investment Corporation 2132.2.6 Waterina Condominium 213
3. ADVANTAGES AND DISADVANTAGES OF RPS FORDEVELOPERS AND FINANCIERS 214
3.1 Advantages for Developers 2143.1.1 Working Capital Conservation 2143.1.2 Another Flexible Source of Funds 2143.1.3 Off-Balance Sheet Finance 2153.1.4 Less Scrutiny than Other Forms of On-Market Capital
Raising 216
xx Securitisation of Derivatives and Alternative Asset Classes
3.1.5 Risk Transfer to Institutional Investors 2163.1.6 Earlier Income Recognition 216
3.2 Advantages for Debt Financiers 2173.2.1 Diversification of Sources of Fee Income 2173.2.2 Loan Assets taken Off-Balance sheet 2173.2.3 Risk Transfer to Institutional Investors 217
3.3 Disadvantages for Developers 2173.3.1 Establishment Cost 2173.3.2 Only High Quality Developers with High Quality Projects
Need Apply 2183.4 Disadvantages for Debt Financiers 218
3.4.1 Limited Pipeline of Suitable Projects 2183.4.2 Limited Appetite of Capital Markets 218
4. RATING NOTES BACKED BY PRE-SALE CONTRACTS 2184.1 Key Credit Risks 219
4.1.1 Sponsor/Developer Risk 2204.1.2 Project and Construction Risk 2204.1.3 Market Risk 2214.1.4 Financial, Cash Flow and Repayment Risk 2224.1.5 Documentation and Legal Risk 2244.1.6 Credit Enhancement 2254.1.7 Quality of the Servicing Entity 226
5. MIRVACMOPS 2275.1 MOPS Transaction Structure Key Aspects Diagram 2275.2 Purpose, Description and Programme Size 2285.3 Application of Proceeds 2295.4 Approved Project Delivery 2315.5 Repayment of Notes 2325.6 Liquidity Facility 2325.7 Payment of Interest after the Scheduled Maturity Date of Notes 2335.8 Security 2335.9 Qualifying Pre-Sales Criteria 2345.10 Support Facilities 2355.11 Portfolio of Approved Projects 2365.12 Tests 2375.13 Mirvac Events of Default 2385.14 Payment Waterfall 2395.15 Performance Analysis 239
6. FUTURE DEVELOPMENTS IN RPS 240
7. CONCLUSION 240
Contents xxi
11. Issues in Cross-Border CMBS 243Sarah Smith
1. INTRODUCTION 243
2. REGULATION OF LENDING AND SERVICING; IMPACT OFREGULATION ON SECURITISATION OF LOANS 245
3. CONFIDENTIALITY AND DATA PROTECTION LAWS 252
4. ENFORCEMENT OF COMMERCIAL MORTGAGE LOANS;SPECIAL SERVICING 255
5. LANDLORD AND TENANT RIGHTS 261
6. WITHHOLDING TAXES 263
7. CONCLUSION 265
12. Commercial Mortgage Backed Securities in Europe 267Sander Beekwilder
1. INTRODUCTION 267
2. WHAT IS CMBS? 2672.1 Generic European CMBS Structure 268
2.1.1 Notes 2682.1.2 Issuer/SPV 2702.1.3 Seller/Originator 2712.1.4 Sponsor/Borrower/Property Manager 2722.1.5 LoanServicer 2732.1.6 (Cross Currency) Interest Rate Swap Counterparty 2732.1.7 Liquidity Facility Provider 2742.1.8 Note (Security) Trustee 275
2.2 European CMBS Analysis 2762.2.1 Property Pool 2772.2.2 Lease 2772.2.3 Tenants 2782.2.4 Structural Analysis 279
2.2.4.1 Legal Issues: Transfer of Loan and Security 2792.2.4.2 Bankruptcy Remoteness, Borrower and
Enforceability of Security 2802.2.4.3 Loan Terms and Conditions 281
2.3 Rationale for CMBS 2822.3.1 Property Owner/Property Lenders 2822.3.2 CMBS Rationale for Investors 284
xxii Securitisation of Derivatives and Alternative Asset Classes
3. RECENT DEVELOPMENTS IN EUROPEAN CMBS 2843.1 CMBS Conduits and Information Disclosure 2843.2 The European CMBS Market 2873.3 European CMBS Credit Spreads 289
4. TWO EUROPEAN CMBS TRANSACTIONS 2914.1 Self Storage Securitisation BV 291
4.1.1 Sponsor/Borrower/Property Manager 2914.1.2 Properties /Leases /Tenants 2924.1.3 Structure 2934.1.4 Conclusion 295
4.2 Paris Residential Funding pic 2954.2.1 Sponsor /Borrower /Property Manager 2954.2.2 Properties/Leases/Tenants 2964.2.3 Structure 2974.2.4 Conclusion 297
5. SUMMARY AND EXPECTATIONS FOR THE EUROPEANCMBS MARKET 299
13. Securitisation of Private Equity 301Olav Koenig
1. INTRODUCTION 301
2. AN OVERVIEW AND BACKGROUND TO PRIVATE EQUITY 3022.1 History 3022.2 What is Private Equity 3022.3 Differences between Private Equity and Public Equity 3033. SECURITISING PRIVATE EQUITY 3043.1 'Plain'Vanilla Securitisation 3053.2 Potential Benefits of Applying Securitisation Techniques 306
3.2.1 Tax 3063.2.2 Regulatory 3063.2.3 Retention of Relationships to Fund Managers 306
3.3 Application of the Securitisation Techniques 3073.3.1 Private Equity Fund-of-Funds 3073.3.2 Portfolio Securitisation 3083.3.3 Exchange Funds 3083.3.4 Seller Financing in Secondary Transactions 3083.3.5 Private Equity Fundraising using Securitisation 309
3.4 Securitisation vs. Secondaries 309
Contents xxiii
4. CONCLUSION 310
5. CASE STUDY SECURITISATION: PINE STREET ILLC 3105.1 Summary 3105.2 Rationale 3115.3 Execution 3125.4 Conclusion 313
14. Public Sector Securitisation in Europe 317Pedro Cassiano Santos, Paula Gomes Freire and Andre Figueiredo
1. INTRODUCTION 317
2. MOTIVATION 318
3. PUBLIC SECTOR SECURITISATION IN EUROPE 3204. EUROSTAT RULES: THE ACCOUNTING TREATMENT OF
PUBLIC SECTOR SECURITISATIONS 321
5. CASE STUDY: THE EXPLORER DEAL 3235.1 The Structure of the Deal 3235.2 Setting the Stage: Changes to the Securitisation Legal
Framework 3255.3 Specific Legal Issues 326
5.3.1 Taxpayers' Rights and Guarantees 3275.3.2 Common Representative of the Noteholders 3295.3.3 Bankruptcy Remoteness of the STC 331STC - Legal Segregation Principle 3325.3.4 The Rating Approach 332
6. FINAL REMARKS: PUBLIC SECTOR SECURITISATION INTHE FUTURE 334
15. Securitisation of Auto Leases in the Netherlands 337Mariette van't Westeinde
1. INTRODUCTION 337
2. RATING PROCESS 338
3. OUTLINE OF TRANSACTION STRUCTURE 339
4. DESCRIPTION OF THE LEASES 3414.1 The Leases 3414.2 The Lease Payments 344
xxiv Securitisation of Derivatives and Alternative Asset Classes
4.3 Nature of Lease Agreements 3444.4 Nature of Operational Lease Receivables 346
5. HIRE PURCHASE AND TRANSFER OF THE VEHICLES 3475.1 Legal Requirements 3475.2 Fiduciary Prohibition 348
6. TRANSFER OF THE LEASES 3496.1 Automatic Transfer 3496.2 Takeover of Contracts 350
7. COLLECTION OF LEASE PAYMENTS/ADMINISTRATIONAND SERVICE AGREEMENT 351
7.1 General 3517.2 Collection Arrangements and Application of Amounts 3527.3 Sale of the Vehicle upon Termination or Expiration of the Lease
during the Amortisation Period 3537.4 Remuneration of the Administrator and Servicer 354
8. INSOLVENCY OF THE SELLER 354
9. CERTAIN RISK FACTORS 3569.1 Location of the Vehicles 3569.2 Retention of Title by Car Dealer 3579.3 Cool Down Period 3579.4 Right to Retain Property 3589.5 Right to Suspend Performance 3589.6 Lessee Set-off Risk 359
10. CONCLUSION 359
16. Shariah, Sukuk and Securitisation 361lamara Box and Mohammed Asaria
1. INTRODUCTION 361
2. SHARIAH 362
3. INTRODUCTION TO ISLAMIC FINANCING 362
4. ISLAMIC FINANCING STRUCTURES AND SUKUKS 3644.1 Murabaha 3644.2 Mudarabah and Musharaka 365
4.2.1 Mudarabah 3654.2.2 Musharaka 366
4.3 Ijara 366
Contents xxv
4.4. Sukuk 3674.5 Sukuk Case Study - Qatar Global Sukuk 370
4.5.1 Introduction 3704.5.2 Structure 370
5. SECURITISATION 3725.1 Securitisation - An Overview 3735.2 Shariah Securitisation 3735.3 Structuring Shariah Securitisations 3735.4 Securitisation Case Study - Hanco Vehicle Fleet Securitisation 375
5.4.1 Introduction 3755.4.2 Structure 376
5.5 Securitisation Hurdles 3785.5.1 Derivative Contracts 3785.5.2 Absence of Regulation 3785.5.3 Unstable Tax Environment 378
5.6 Future Deal Flow 3795.7 Rating Agencies 379
6. CONCLUSION 380
17. Whole Business Securitisations in Civil LawJurisdictions: The French Example 381Patrice Doat and Philippe Nugue
1. COPYFIRST AND EUROTRUCK TRANSACTIONS 381
2. OVERVIEW OF THE FRENCH SECURITISATIONFRAMEWORK 386
18. Accounting for Securitisations: A World of Change 391Timothy J. Coyne
1. INTRODUCTION 391
2. SECURITISATION: A UK PERSPECTIVE 393
3. SECURITISATION: AN AUSTRALIAN PERSPECTIVE 3934. IMPLICATIONS OF THE ADOPTION OF IAS IN AUSTRALIA 3964.1 Application of UIG 112 3964.2 Application of AASB 139 398
4.2.1 General Rules - Sales with 'Strings Attached' 398
xxvi Securitisation of Derivatives and Alternative Asset Classes
4.2.1.1 Should the Derecognising Principles be Appliedto Part or All of a Financial Asset? 398
4.2.1.2 Have the Rights to the Cash Flows Expired? 3984.2.1.3 Has the Entity Transferred Substantially all
Risks and Rewards? 3994.2.1.4 Has the Entity Retained Substantially All Risks
and Rewards? 4004.2.1.5 Has the Entity Retained Control of the Asset? 4004.2.1.6 Continue to Recognise the Asset to the Extent
of the Entity's Continuing Involvement 4004.2.2 Recognition of Gains and Losses on Transfer 4014.2.3 Securitisations 401
4.2.3.1 Consolidation of SPEs 4034.2.3.2 Has the Entity Transferred its Rights to Receive
the Cash Flows from the Assets? 4034.2.3.3 Has the Entity Assumed an Obligation to Pay
the Cash Flows from the Assets that Meet thePass-through Criteria? 403
4.2.3.4 Risks and Rewards 4044.2.3.5 Control 4054.2.3.6 Continuing Involvement 405
4.2.4 Transition 405
5. ACCOUNTING ANALYSIS OF CERTAIN FINANCINGSTRUCTURES USING SPES 405
5.1 Example 1: Collateralised Debt Obligations 4065.1.1 Overview of Structure 4065.1.2 Accounting Analysis - Applying the Flow Chart 4075.1.3 Consolidation of the SPE? 4075.1.4 Has the Entity Transferred its Rights to Receive Cash
Flows from the Assets? 4075.1.5 Have the Pass-through Conditions been Met? 4085.1.6 Has the Entity Transferred Substantially All the Risks
and Rewards? 4085.2 Example 2: Residential Mortgage-Backed Securitisations 408
5.2.1 Overview of Structure 4085.2.2 Accounting Analysis - Applying the Flow Chart 4095.2.3 Consolidation of the SPE? 4095.2.4 Has the Entity Transferred its Rights to Receive Cash
Flows from the Assets? 4095.2.5 Have the Pass-through Conditions been Met? 4095.2.6 Has the Entity Transferred Substantially All the Risks
and Rewards? 410
Contents xxvii
5.3 Example 3: Trade Receivables 4105.3.1 Overview of Structure 4105.3.2 Consolidation of the SPE? 4115.3.3 Has the Entity Transferred its Rights to Receive Cash
Flows from the Assets? 4125.3.4 Have the Pass-through Criteria been Met? 4125.3.5 Has the Entity Transferred Substantially All the Risks
and Rewards? 4125.3.6 Has the Entity Transferred Control of the Asset? 412
5.4 Example 4: Credit-linked Notes 4125.4.1 Overview of Structure 4135.4.2 Consolidation of the SPE? 4135.4.3 Has the Entity Transferred its Rights to Receive Cash
Flows from the Assets? 4135.4.4 Have the Pass-through Criteria been Met? 413
6. SECURITISATION: A US PERSPECTIVE 4146.1 US Accounting Overview 4156.2 Sale Criteria 416
6.2.1 Legal Isolation 4166.2.2 Right to Pledge or Exchange 4176.2.3 Effective Control Criteria 418
6.3 Current Developments Impacting the Sale Criteria 4196.4 Consolidation 4196.5 Qualifying Special Purpose Entities (QSPEs) 419
6.5.1 Demonstrably Distinct Nature of a QSPE 4206.5.2 Activities of a QSPE 4206.5.3 Assets a QSPE may hold 4206.5.4 Selling of Non-cash Financial Assets held by a QSPE 420
6.6 Current Developments Impacting QSPEs 4216.7 Variable Interest Entity 4216.8 VIEs and Consolidation 4226.9 Determining Consolidation of VIE based on Variability 4236.10 Initial Accounting / Gain-on-Sale Calculation 423
Decision Tree to Determine if Sale or Secured Borrowing 4246.11 Subsequent Accounting 4276.12 Impact of Proposed Changes 428
7. CONCLUSION 428
xxviii Securitisation of Derivatives and Alternative Asset Classes
19. The Asset Securitisation Framework in Basel II 431Stefan Hohl
1. THE NEW CAPITAL FRAMEWORK FOR ASSETSECURITISATION 431
2. OPERATIONAL REQUIREMENTS FOR THE RECOGNITIONOF RISK TRANSFER 433
2.1 Operational Requirements for Traditional Securitisations 4332.2 Operational Requirements for Synthetic Securitisations 4342.3 Operational Requirements and Treatment of Clean-up Calls 4342.4 Operational Requirements for External Ratings Assignments 4352.5 Operational Requirements for the Internal Assessment
Approach 435
3. MINIMUM CAPITAL REQUIREMENTS IN PILLAR 1 4363.1 Off-balance Sheet Items - Some Specifics 4393.2 Standardised Approach - Some Specifics 4413.3 Internal Ratings Based Approach - Some Specifics 443
3.3.1 Supervisory Formula 4443.3.2 The Internal Assessment Approach and the Treatment of
Liquidity Facilities 445
4. REQUIREMENTS IN PILLAR 2 445
5. REQUIREMENTS IN PILLAR 3 447
6. ADDITIONAL VIEWS ON THE SECURITISATIONFRAMEWORK 447
6.1 Example - Residential Mortgages 4506.2 Example - Synthetic Securitisation 451
7. APPENDIX I 453
8. APPENDIX 2 455
20. Regulatory Capital Standards for Securitisationin Basel II 457Eric Elvers
1. THE BASEL II FRAMEWORK 4571.1 International Convergence: the Basel Capital Framework 457
1.1.1 The Basel I Framework 4581.1.2 The Basel II Framework 460
1.2 Development of Securitisation Framework in Basel II 4631.2.1 Regulatory Capital Arbitrage 464
Contents xxix
2. SECURITISATION FRAMEWORK IN BASEL II 4642.1 Scope 4642.2 Risk Transfer Requirements 4662.3 Determining the Capital Charges for Investments and Retained
Exposures 4682.4 Exposures with a Recognised External Credit Assessment 470
2.4.1 Recognition of External Ratings 4722.4.2 Industry Criticism 474
2.5 Implicit Support 4742.6 Pillar 2 4772.7 Pillar 3 478
3. SYNTHETIC SECURITISATION IN BASEL II 4803.1 Effective Risk Transfer Requirements 4803.2 Operational Requirement for Credit Derivatives 4813.3 Solvency Treatment of Collateral and Guarantees 4833.4 Maturity Mismatches 4853.5 Supervisory Formula Approach 489
3.5.1 Capital Neutrality 492
4. POSSIBLE EFFECTS ON THE SECURITISATION MARKET 4924.1 Implementation of the Basel II Framework 4924.2 Possible Changes in the Market 493
Contributors 497
