APRA released a discussion paper yesterday updating us on their proposed approach to several issues on Basel II that remained open. These areas are:
- 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.
16 November, 2006 at 03:53
You mention the FSA’s CP06/03 in your post. I suggest you do any future comparisons with the final rules which the FSA have now published. They are largely unchanged (well the bits I’m interested in) but easier to understand in parts.
16 November, 2006 at 11:43
Thanks, Bruce. Looks like I have some reading to do today.
5 July, 2007 at 19:11
Basel 2 – Treatment of complex options (identifying the underlying)
I’ve been working on the intermediate approaches (delta plus and scenario matrix) to measure price risk of options. In the delta plus approach, we need to determine the delta, gamma and Vega weighted capital charge. The computation of gamma capital charge requires variation of the underlying as an input. I’m having difficulties in identifying the underlying in case of some complex options such as option on a bond future, option on a forex forward. If I take price of the bond future as the underlying and proceed further to calculate the gamma and Vega capital charge, then that won’t be according to Basel norms because Basel only defines time bands, bonds, equities, and commodities as underlying. (Refer to the new Basel amendment to accommodate market risks updated 2005, page number 32).
If I use a two legged approach and convert a complex instrument into two notional positions, then I’ll be able to determine the delta weighted capital charge. But again in case of gamma and Vega capital charge, what should go in as “variation (VU)” of the underlying?
For example going forward with the capital charge computation of option on a bond future, which variation of the underlying should be considered? Should it be variation of the price of a bond future, variation of market value of bond or variation of interest rates?
Any help in this regard would be highly appreciated. Thanks.