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Australia – APRA Refines Its Prudential Approach To Securitisation.

15 November, 2013


The Australian Prudential Regulation Authority (APRA) has given the Australian securitisation industry further insight on its proposed prudential reform for securitisation in Australia. In an opening address at this year’s Australian Securitisation Forum conference held in Sydney, Charles Littrell, Executive General Manager at APRA, outlined the following new principles in addition to the core principles under the current prudential arrangements and which together will underpin and guide its revised prudential standard for securitisation:


  • the securitisation prudential regime should explicitly allow for both funding-only and capital relief structures,
  • credit risks in securitisation should be both clearly assigned and, for APRA regulated entities, properly capitalised,
  • securitisation credit and liquidity risks should be distributed in a fashion that reduces rather than increases systemic risk,
  • the maturity profile of securitisations should appropriately match the maturity profile of the underlying assets, and
  • securitisation should be simple to understand, transparent and low risk.

APRA’s proposed revisions are based on its assessment of the securitisation and other financial markets before, during and after the GFC. While APRA endorses the underlying idea and value of securitisation, APRA acknowledges that a reform to its regulatory and supervisory approach to supervision is necessary to take on board the lessons discovered and learnt in recent years both here and overseas.


APRA’s main goals in its proposed reforms are:


  • Funding-only securitisation to be straightforward: A 2 class structure for funding-only securitisations is proposed:
    1. an A class which may contain a number of tranches including bullets and pass-throughs, and
    2. a B class in which essentially the entirety of the credit risk associated with the underlying assets is concentrated. This instrument must be held in its entirety by the originator.


The current 20% holding limit on instruments will be rescinded and a date-based clean-up call will be allowed.


  • Capital relief requirements to be simpler: Capital relief securitisation will continue to be allowed but relief will be at the proportion of B class irrevocably sold, subject to a ‘skin in the game’ cap of 80% (i.e. a 20% minimum capital retention). Where the B Class is split into multiple classes (which will be allowed and need not be pari passu), capital relief will be limited to the class of subordinated notes that is most retained by the originator.
  • Lessons from GFC incorporated: The new regime will incorporate features to address lessons learned from the GFC, including those specifically associated with agency risk, complexity and mismatched funding structures. One lesson is that the senior note paper in a simple securitisation is safe and can be held by an ADI under the relevant Basel risk-weightings. On the other hand, subordinated exposures or senior notes in complex securitisations (e.g. CDO2) would attract a CET1 deduction.
  • More efficient allocation of risks: Risks in a securitisation are to be efficiently allocated among those with more or less knowledge of the risk, and those with more or less ability to bear any losses.
  • Systemic risks addressed: APRA’s aspiration for securitisation under the reformed prudential arrangements is that Australia will end up with a large and active funding-only market. Unlike the current prudential arrangements, the aim will be to more explicitly integrate ADI liquidity within the securitisation framework by:
    1. including cash flows associated with securitisation vehicles in the net cash outflow calculation (with outflow assumed from the earliest date possible under the relevant calls or similar arrangements) for larger ADIs which are subject to the liquidity coverage ratio, and
    2. requiring only liquid asset backing for securitisation liabilities maturing in less than a year in respect of smaller ADIs which apply the minimum liquidity holdings test.
  • Compliance with Basel requirements: On the investment side of securitisation, APRA will be guided by the Basel Committee with appropriate Australian adjustments. 

The new APS 120 will also:


  • Warehousing: require warehouses to be term funded within 1 year. Any warehouse holdings in excess of 1 year will be treated as a whole loan sale by the originator to the warehouse provider,
  • No multi-seller structures: prohibit multi-seller structures,
  • ABCP: allow asset-backed commercial paper subject to the originator being able to demonstrate that it can carry the portfolio through the stress of a two-year CP market closure, and
  • Derivatives: remove provisions which allow for capital relief for credit derivatives.

APRA intends to issue a discussion paper on its proposed securitisation reforms in the near future, and to invite and consider industry and other submissions during 2014. Any revised prudential standard is not expected to apply until 2015.


herbert smith Freehills


For further information, please contact:


Vinh Huynh, Herbert Smith Freehills
[email protected]


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