12.01.2016, 08:53
Fitch: Key Aspects of Continuity Analysis of the Australian Covered Bonds Framework
OREANDA-NEWS. In a new special report, Fitch Ratings highlights the key aspects of the Australian legislative covered bonds framework. The legislative framework sets out the main features and requirements for Australian covered bond programmes and supports the contractual features contained within the programmes that mitigate certain risks for covered bond holders. While the legal framework is weaker in some aspects compared to other issuing jurisdictions, Fitch believes that, along with the contractual obligations underpinning the programmes, it provides sufficient protection for covered bond holders in the event of recourse switching to the cover pool.
Fitch's discontinuity risk assessment for Australian covered bonds focuses on: (i) ring-fencing of the cover pool assets, (ii) liquidity protection to meet timely principal and interest payments on the covered bonds, (iii) regulatory oversight (iv) cover pool management and servicing, and (v) counterparty risk analysis of the derivative providers.
Australia's Banking Act 1959, amended in 2011, established the first legislative covered bond framework in the APAC region, enabling Australian Deposit-taking Institutions (ADI's) to issue covered bonds. The legislation addresses the requirements for ADI's issuing covered bonds which include: an 8% cap on assets used as cover assets; the use of a special purpose vehicle (SPV) to segregate the cover assets; Australian Prudential Regulation Authority's (APRA) powers to regulate the issuers; the eligibility of cover assets; the role of the cover pool monitor; the maintenance of the cover pool including minimum levels of collateralisation; and the privileged ranking applicable to covered bondholders.
Excess cover assets held in the cover pool that are not required for the repayment of outstanding covered bonds, will belong to the ADI in accordance with the legislation. APRA has the power to re-direct these assets from the SPV by written notice, where an ADI has received a regulatory direction issued from APRA in accordance with Section 11CA of the Banking Act.
Liquidity gap risk mitigation measures for Australian covered bonds are not addressed in the legislation; instead, they are outlined in each issuer's programme documentation and/or covered bond issuance - terms that Fitch relies on in its analysis. These mitigants are usually in the form of a 12 month pre-maturity test for hard bullet bonds and a 12 month extension period for soft bullet bonds, plus a three-month liquidity reserve.
In Fitch's assessment of the liquidity gaps and systemic risk component of its Discontinuity-Caps (D-Caps) analysis, where there is sufficient liquidity gap risk mitigants, a moderate risk assessment will apply. This component is the main driver of the D-Cap for Australian covered bonds.
Fitch's discontinuity analysis and relevant aspects of the framework are described in the report entitled, "Australian Covered Bonds Framework - SPV Template Legislative Framework Supporting Contractual Obligations", available at www.fitchratings.com.
Fitch's discontinuity risk assessment for Australian covered bonds focuses on: (i) ring-fencing of the cover pool assets, (ii) liquidity protection to meet timely principal and interest payments on the covered bonds, (iii) regulatory oversight (iv) cover pool management and servicing, and (v) counterparty risk analysis of the derivative providers.
Australia's Banking Act 1959, amended in 2011, established the first legislative covered bond framework in the APAC region, enabling Australian Deposit-taking Institutions (ADI's) to issue covered bonds. The legislation addresses the requirements for ADI's issuing covered bonds which include: an 8% cap on assets used as cover assets; the use of a special purpose vehicle (SPV) to segregate the cover assets; Australian Prudential Regulation Authority's (APRA) powers to regulate the issuers; the eligibility of cover assets; the role of the cover pool monitor; the maintenance of the cover pool including minimum levels of collateralisation; and the privileged ranking applicable to covered bondholders.
Excess cover assets held in the cover pool that are not required for the repayment of outstanding covered bonds, will belong to the ADI in accordance with the legislation. APRA has the power to re-direct these assets from the SPV by written notice, where an ADI has received a regulatory direction issued from APRA in accordance with Section 11CA of the Banking Act.
Liquidity gap risk mitigation measures for Australian covered bonds are not addressed in the legislation; instead, they are outlined in each issuer's programme documentation and/or covered bond issuance - terms that Fitch relies on in its analysis. These mitigants are usually in the form of a 12 month pre-maturity test for hard bullet bonds and a 12 month extension period for soft bullet bonds, plus a three-month liquidity reserve.
In Fitch's assessment of the liquidity gaps and systemic risk component of its Discontinuity-Caps (D-Caps) analysis, where there is sufficient liquidity gap risk mitigants, a moderate risk assessment will apply. This component is the main driver of the D-Cap for Australian covered bonds.
Fitch's discontinuity analysis and relevant aspects of the framework are described in the report entitled, "Australian Covered Bonds Framework - SPV Template Legislative Framework Supporting Contractual Obligations", available at www.fitchratings.com.
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