A Guide to the Law of Securitisation in Australia - Clayton Utz

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From 1 January 2005, however, Australia has adoptedInternational Financial Reporting Standards (IFRS) and this hasfinally allowed the accounting firms to take a uniform view oftransactions across jurisdictions. As a result, it is now moredifficult for ADIs to comply with the separation requirements ofAPS 120 (and to a lesser extent the clean sale requirementsdiscussed below).However, APRA has stated that it will not be making any IFRSrelatedchanges to its prudential standards before 1 July 2005and until then the separation requirements (and clean salerequirements discussed below) should continue to be applied forthe purposes of APS 120 based on the accounting standards inplace as at 31 December 2004.7.1.3 Provision of facilities by ADIsAPS 120 permits an ADI to provide various facilities and servicesto a securitisation vehicle without adverse capital consequencesif certain requirements are satisfied. The treatment of this areais exhaustive and covers, for example, ADIs providing creditenhancements, liquidity facilities, underwriting commitments,advice to investors, the purchase of securities, the purchase (orrepurchase) of assets from a securitisation vehicle, the provisionof management and servicing functions and the entering into ofderivatives with a securitisation vehicle.Although the requirements differ depending on the type offacility or service to be provided, there are some broadly uniformpreconditions.In particular, a facility or service should be provided on an arm’slength basis and on market terms and conditions and should besubject to the ADI’s normal internal approval procedures. Thereshould also be no recourse to the ADI beyond its fixedcontractual obligations and the ADI should obtain a legal opinionto this effect.The treatment by APS 120 of credit enhancements warrantsparticular comment. In this context, the relevant provisions applynot only to traditional credit enhancements but also include othertypes of facilities (eg. some liquidity facilities or where an ADIfunds a spread or reserve account). APS 120 divides creditenhancements into two categories: a first loss facility and asecond loss facility. As its name suggests, a first loss facilityrepresents the first level of credit enhancement to asecuritisation vehicle. Because of the greater risks associatedwith a first loss facility, an ADI providing this should, for capitaladequacy purposes, deduct the full amount of the facility from itscapital base, up to a maximum of the amount of capital that itwould normally be required to hold against the full value of thesecurities issued by the vehicle. On the other hand, a second lossfacility can be treated as a normal credit facility for capitaladequacy purposes. A second loss facility credit enhancementshould be protected by a “substantial” first loss facility andshould only be capable of being drawn after the first loss facilityhas been completely exhausted. In this context, “substantial”should be sufficient to cover a multiple of historical or worst caselosses.7.1.4 Transfer of assetsAPS 120 sets down the conditions that must be satisfied if anADI wishes to be relieved from the requirement to hold capitalagainst assets it has sold to a securitisation vehicle. Significantly,APRA states that in supplying assets to a securitisation vehicle,ADIs should ensure that this will not lead to a deterioration inthe average quality of assets remaining on its balance sheet.In order to qualify, a transfer of assets must be a clean sale.APS 120 sets down a number of prerequisites for this to occur.In particular, the beneficial ownership of the assets must betransferred (although the ADI may retain legal ownership) andthe risks and rewards of the assets must also be fully transferredto the vehicle. External audit and appropriately qualified internalor external legal opinions should be obtained confirmingcompliance with these and various additional requirements.In recognition of some structures, APS 120 permits an ADI tocontinue to receive surplus or excess income generated bysecuritised assets and, where the assets are revolving, to retainan interest in them, provided certain additional requirements aresatisfied.As noted above, the introduction of IFRS has made thederecognition tests set out in the Australian accountingstandards more difficult to satisfy but APRA is still consideringthe implications of IFRS for APS 120 and until it does so APS 120will continue to apply on the basis of accounting standards inplace as at 31 December 2004.7.1.5 APRA’s new conglomerate capital adequacy regimeAPRA introduced revised prudential standards for ADIconglomerates on 1 July 2003. Amongst the revised prudentialstandards is Prudential Standard APS 222 – Associations withRelated Entities which can impact upon securitisationtransactions in which an ADI provides funding to thesecuritisation vehicle. Under APS 222, an ADI’s intra-groupexposure is subject to certain limits prescribed by APRA. Suchlimits will not apply to an ADI’s exposure to subsidiaries whichform part of closely held companies that are part of the ExtendedLicensed Entity (ELE). Whether a subsidiary is eligible for45
inclusion within the ELE depends on factors such as the ADI’sextent of control over, and integration with the subsidiary as wellas the existence of any third party liabilities of the subsidiary.Generally securitisation vehicles will not form part of the ELE andthe ADI will be subject to limits on exposures to the vehicleunder APS 222 if the vehicle is a related entity of the ADI.7.2 The grant of collateral by Australian ADIsWhen an ADI participates in securitisation structures, it is oftena requirement of the rating agency that the ADI provides, oragrees that it will in the future provide, collateral in support ofits obligations. This is particularly required where the ADI doesnot have the requisite rating commensurate with its role and therating of the relevant securities.The provision of collateral by Australian ADIs as security for theirobligations is a problematic issue. The reason for this is section13A(3) of the Banking Act which replaces the former section16(1). This provides as follows:“If an ADI becomes unable to meet its obligations or suspendspayment, the assets of the ADI in Australia are to be available tomeet that ADI’s deposit liabilities in Australia in priority to allother liabilities of the ADI.”Section 13A(3) is often characterised as prohibiting AustralianADIs from granting security (or collateral). Strictly speaking thisis not correct. An ADI can grant security, but to the extent that itis over the Australian assets of the ADI the effect of section13A(3) is that the security (or collateral) is postponed behind theclaims of the ADI’s depositors.Section 13A(3) therefore is more in the nature of a statutory firstranking security in favour of the ADI’s depositors rather than aprohibition on the ADI granting securities to others.Nevertheless, it is the practice of Australian ADIs not to granta security for the performance of their banking obligations.Section 13A(3) poses difficulties in the context of a ratingagency’s requirement for an ADI to provide collateral. Clearly thiscannot be in the form of a security in the legal sense. Instead,Australian securitisers have developed, in conjunction with therating agency, alternative arrangements which replicate theeconomic (and legal) effects of a security, but which do notinfringe the limitations imposed by section 13A(3). Oneparticular method, which was developed by Clayton Utz, hasbeen approved by APRA. This has been crucial to thedevelopment of the ADI-sponsored securitisation market inAustralia.7.3 Covered bondsCovered bonds are full recourse debt instruments secured by aparticular pool of assets. “Traditional” covered bonds aregenerally issued in certain European countries under specificenabling legislation eg. Pfandbriefe in Germany and ObligationFonciere ‘ in France. In July 2003, HBOS completed its firststructured covered bond issue in the United Kingdom. Thestructured covered bonds issue by HBOS generated interestamong Australian ADIs as a result of the lower costs of fundingassociated with such issues and the access that they give towider and new investor bases.Although APRA’s current prudential standards do not prohibitADIs from issuing covered bonds, APRA has taken the view thatthe issuance of covered bonds by ADIs would be inconsistentwith Australia’s depositor preference regime. Therefore, APRAwill not allow the issuance of covered bonds (or structures withequivalent effect) by ADIs in Australia.7.4 Basel IIAs a general rule, APRA’s prudential standards follow the current1988 Basel Accord to the extent that it is applicable. The 1988Basel Accord has since been revised and a new accord, Basel II,was published in June 2004 and is scheduled for implementationin 2007.APRA will implement Basel II from 2007 and will issue draftprudential standards by early 2005. At the time of writing nodraft prudential standards on Basel II have been issued by APRA.Among some of the changes for securitisation as result of BaseII are:• securitised instruments will no longer be 100 percent riskweighted but will be risk weighted dependent upon theirexternal credit rating. This will encourage greaterinvestment in securitised instruments by ADIs;• the current zero percent risk weighting applied to liquidityfacilities of less than one year will be modified, resulting inan increase in the cost of providing liquidity to conduitsecuritisation vehicles;• the current 50 percent risk weighting that applies toresidential mortgage lending will be reduced to 35 percentunder the standardised Basel II approach thus reducing theregulatory capital requirements for certain ADIs. As such,there may be less incentive for ADIs to securitise theirresidential mortgages;46
Page 6: 12.7.3 Euroentitlements............
Page 9 and 10: 1 General overview of the nature of
Page 12: An interest in a managed investment
Page 15 and 16: 142.3.4 Provision of a financial se
Page 17 and 18: 3 The disclosure and civil liabilit
Page 19 and 20: 18The statutory source for this ste
Page 21 and 22: The implication of this approach in
Page 23 and 24: Interestingly, the majority then we
Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29 and 30: 4.10 ConclusionStamp duty is a very
Page 31 and 32: Despite the absence of an express a
Page 33 and 34: 32share of the profits of the compa
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
Page 45: 7 The regulation of the participati
Page 49 and 50: 8 Set-off and securitisation8.1 Int
Page 51 and 52: 50However, this result and the prin
Page 53 and 54: 9 Insolvency and securitisation529.
Page 55 and 56: 54• if the trustee has not limite
Page 57 and 58: Section 588FG provides a measure of
Page 59 and 60: 10 Issues relating to debt securiti
Page 61 and 62: 60indemnity existed) and had no han
Page 63 and 64: The effect of the decision has been
Page 65 and 66: the ASX has discretion to ask the e
Page 67 and 68: • Public Trustee Members - for pr
Page 69 and 70: When Austraclear receives notificat
Page 71 and 72: have been completed in relation to
Page 73 and 74: Some CMBS transactions allow the is
Page 75 and 76: 14.3 GamingIn the past, another con
Page 77 and 78: 16 Clayton UtzOur securitisation te

A Guide to the Law of Securitisation in Australia - Clayton Utz

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