Mark Davies of Cedar Analytics hopes that high quality ABCP finds its way back onto the market under BCBS157

In the hubbub surrounding the newly published 'Basel 3', regulated entities run the risk of losing sight of a couple of additional pieces of the requirement as published under BCBS157 - the snappily titled 'Enhancements to the Basel 2 Framework' - in July 2009. While the requirement to comply with Basel 3 en masse has an eight-year timescale attached to it, the need to comply with BCBS157 is set to 31 December 2010. To put that in context, that's exactly 100 days away from date of writing (22 September 2010).

The most significant part of BCBS157 for those involved in securitisation is the additional capital cost contained within the granular to non-granular piece. While the current 'in stasis' nature of the securitisation industry would suggest that this is not an issue; the devil is, as always, in the detail.

A table describing the effect is shown here and the impact on hypothetical portfolios is shown below:

Assuming a hypothetical triple-A tranche of £1m, the following capital cost considerations exist:

• Senior, Granular = £7,000 (£1,000,000 * .007)
• Non-Senior, Granular = £12,000 (£1,000,000 *.012)
• Non-Granular = £20,000 (£1,000,000 *.02).

What else could your organisation do with the extra £13,000 per £1m?

Under the method chosen by BCBS157 to define resecuritisation exposures, much of the market for ABCP is captured. For reference, the definition from the document is:

"The definition of a resecuritisation exposure captures collateralised debt obligations (CDOs) of asset-backed securities (ABS) including, for example, a CDO backed by residential mortgage-backed securities (RMBS). Moreover, it also captures a securitisation exposure where the pool contains many individual mortgage loans and a single RMBS. In other words, even if only one of the underlying exposures is a securitisation exposure, any tranched position (eg senior/subordinated ABS) exposed to that pool is considered a resecuritisation exposure. Furthermore, when an instrument's performance is linked to one or more resecuritisation exposures, generally that instrument is a resecuritisation exposure. Thus, a credit derivative providing credit protection for a CDO tranche is a resecuritisation exposure."

Cutting to the chase, any ABCP that contains even a single securitised loan within it is a resecuritisation exposure for purposes of BCBS157. One of the (many) reasons for using securitisation in the past has been to utilise lower risk weights under the IRB approach. BCBS157 continues to allow this, but only where granular data is produced.

Self-guarantee through ABCP conduits is no longer considered to be effective, as defined by the new p565(g)(i) - (iii). Operationally what does this mean?

In the context of either approach to credit risk - standardised or internal-ratings based - more information will be needed and will need to be able to be accessed by the whole of the market. For example, p565(ii) indicates that:

"As a general rule, a bank must, on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on balance sheet or off balance sheet, as well as the risk characteristics of the pools underlying its securitisation exposures."

Furthermore, 565(iii) is more prescriptive still, suggesting that:

"Banks must be able to access performance information on the underlying pools on an on-going basis in a timely manner. Such information may include, as appropriate: exposure type; percentage of loans 30, 60 and 90 days past due; default rates; prepayment rates; loans in foreclosure; property type; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification. For resecuritisations, banks should have information not only on the underlying securitisations tranches, such as issuer name and credit quality, but also on the characteristics and performance of the pools underlying the securitisation tranches."

To further underline the importance of this, p565(iv) makes the following statement:

"A bank must have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the bank's exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers and deal-specific definitions of default."

In short, it appears that through BCBS157, Basel is finally getting to grips with the requirement for additional loan-level data for securitisations of all types. This is important as it requires there to be a repository for this data and - to reduce the cost of credit associated with securitisations - loan-level data to start being generated by the issuer community. This is one of the few ways in which we could expect movement in otherwise high quality ABCP of all types being returned to the market.