APRA released a discussion paper yesterday updating us on their proposed approach to several issues on Basel II that remained open. These areas are:

  • Securitisations;
  • Credit derivatives under the standardised approach; and
  • A few regulatory discretions

The section on securitisations is particularly important, considering their popularity in the Australian market and also for the changes proposed.


The new drafts of APS 120 and APG 120 are particularly interesting, in that, if they carry through into the final version, the changes as a whole may actually reduce the regulatory burden – at least on their face.

From the discussion paper, the changes are:

  • Notification – APRA are proposing that, rather than getting full pre-approval from APRA for a securitisation ADIs would be able to internally assess the deal, supply that assessment to APRA and then have APRA have a look at it as part of their normal visits. This is a good idea and should speed the evaluation process. The other alternative mooted is that external legal advice could be sought.
    I would have thought that advice from an accounting firm would be more appropriate, as then the advice could package in a discussion of de-recognition of the assets as well. It really comes down to whether this is legal or regulatory advice. If it is legal advice then the accounting firm could not do it.
  • Role of the manager – this is simple recognition of the reality that ADI staff are actually running a lot of the securitisations, while formally being seconded to the management vehicle. The proposal is that ADIs be able to assume management of a securitisation in their own name. APRA are using the fig-leaf of the Basel II operational risk charge to cover this change, but, if it help to get them across the line it does not matter. This should assist to reduce the paperwork around a normal securitisation.
  • Seperation requirements – as a result of the introduction of AIFRS many (if not most) securitised assets reappeared on banks’ balance sheets as they did not meet the more restrictive criteria for de-recognition. As a result there have been several questions raised about the regulatory treatment. Attachment A to the draft APS 120 strengthens the requirements for seperation without going as far as AASB 139 – which will therefore leave the different accounting and regulatory treatment.
  • Basis swaps – essentially, where these are entered into between and ADI and a securitisation SPV the ADI will need to demonstrate it is on an arm’s length basis.
  • Repurchase of securitised exposures – the restrictions on amounts have been removed and replaced with qualitative restrictions – only non-defaulted exposures can be repurchased.
  • Purchase of securities – here again APRA is recognising common practice (this is getting to be a habit). ADIs will be able to purchase securities issued by a securitisation with the sole exception of the ADI doing the securitisation. This should reduce funding costs.

Supervisory Discretions under Basel II

These exercises were not unexpected so, while they probably consumed much time in discussion, no more needs to be said.

Credit Derivatives – Standarised Approach

I will need a bit more time to study these – particularly to look at the differences to the FSA’s proposed approach in CP 06/3. APRA seem to have made some fairly blunt statements in the discussion paper and I will be interested to see the detail when

it comes out.