pwc publications due diligence

8/4/2019 Pwc Publications Due Diligence

http://slidepdf.com/reader/full/pwc-publications-due-diligence 1/8

Securitisation –new due diligencechallenges

www.pwc.com/securitisation

The securitisation industry

has taken major steps to

improve transparency and

due diligence. In this article

we discuss some of the

new challenges to restore

investor confidence.



2 PwC Securitisation – new due diligence challenges



Transparency and duediligence – the new challengesMost studies of the financial crisis and of the measures needed to restore investorconfidence in the securitisation market indicate that enhanced disclosure of informationand the ability of investors to analyse and understand risks in more detail are key issues.

The industry itself has taken majorsteps, the European SecuritisationForum (ESF) initiative on astandardised loan data template beingone example. The Basel Committee andregulators have also responded to theG-20 conclusion that incentives foreffective risk management of securitisations with new requirementson both originators and regulatedinvestors which are now coming intoeffect. These in turn will place muchgreater focus on due diligence practices

within the industry, which will affectmost of those involved with

securitisation and structured finance.

The measures are designed to improvetransparency, ensure standardisation of information available to investors andto give investors the ability toundertake more sophisticated analysisof risk both before and after investing instructured finance entities. Investors

will now be expected to perform somestress testing of the key factors effectingsecuritisation cashflows and therepayment of individual note tranches,

which the new requirements on thepublication of both loan level data andbond cashflow models will facilitate.

This added reliance on data is causingoriginators and sponsors to re-assesstheir own procedures for ensuring thatdata they put into the public domain iscomplete and accurate, both in relationto loan level data and the summarisedasset pool information appearing ininvestor reports.

Banks which fund asset pools either

themselves or via commercial paper(CP) conduits are increasingly insistingon accountants periodically checkingthat the asset performance andcashflow data they receive from theservicer is complete and accurate, and itis likely that lead managers on repeatissuing securitisation programme will

want comfort on the accuracy of investor reporting as part of their owndue diligence procedures. Experience inthe US has also led to an increasedfocus on ensuring that loans have been

originated in accordance with thestated policies and lending criteria.

Recent Changes

The G-20 stated “the Basel Committeeand authorities should take forward

work on improving incentives for risk management of securitisation,including considering due diligenceand quantitative retentionrequirements by 2010”.

Since January 2011 there has beenmuch change in the data and duediligence requirements forsecuritisation and in response to thestatement above by the G-20, the

Committee of European BankingSupervisors (CEBS) issued their muchanticipated guidance on Article 122A of the EU Capital Requirement Directive(CRD), the Bank of England(BoE) has

PwC Securitisation – new due diligence challenges 3




issued final guidance on the rules forthe Discount Window Facility (DWF)and the European Central Bank (ECB)has finalised its asset-backed securities(ABS) loan-level initiative. Each of these three sources of new rules willhave a major impact on the level of information that is required to beproduced on new and existingsecuritisations going forward.

Discount Window Facility The DWF is a bilateral facility designedto be able to address short-termliquidity shocks without distortingbanks' incentives for prudent liquidity management. At the BoE discretioneligible banks and building societiesmay borrow gilts, for 30 or 364 days,against a wide range of collateral inreturn for a fee, which will vary withthe collateral used and the total sizeand maturity of borrowings.

The BoE set out its requirements foraccepting Residential Mortgage-BackedSecurity (RMBS) and Covered Bondsinto the DWF in its market notice of 30November 2010. The implementationperiod for complying with theserequirements is open and will end on30 November 2011, although may beextended by one year at a penalty of greater haircuts for those notcomplying. The rules will apply toRMBS and Covered Bonds backed by

collateral from non-UK jurisdictions as well as UK collateral.

The bank has provided details of atemplate for which the loan level date

must be reported and this must beprovided on a quarterly basis. The Bank has adopted a ‘comply or explain’ basis

whereby although expected to have theinformation the transactions will not beautomatically rendered ineligible if theinformation is unavailable althoughadditional haircuts may be applied.

A waterfall cash flow model will berequired to be made available to

investors, potential investors andcertain other professional. Thesemodels must accurately represent howcash is applied through the waterfall.Full specifics are given in Annex B of the market notice. There is a choice of how to present the cash flow modelsbut the calculations used by the cashflow model must be transparent to theuser and the results must be capable of being recorded and retained by theuser. The cash flow model requirement

is unlikely to apply to covered bonds atthe moment.

ABS Loan-Level InitiativeThe ECB has finalised its ABS loan-levelinitiative which establishes specificloan-by-loan information requirementsfor ABS accepted as collateral inEurosystem credit operations. It willincrease transparency and makeavailable more timely information onthe underlying loans and theirperformance to market participants in a

standardised format. In the past,assessments of ABS have beenhampered by the lack of standardised,timely and accurate information on

single loan exposures. The Eurosystembelieves that the new datarequirements will help both investorsand third-party assessment providers

with their due diligence. Ultimately,more transparency will help to restoreconfidence in the securitisation market.

Article 122a

Article 122a of the CRD provides newrequirements to be fulfilled by creditinstitutions when acting in a particularcapacity, such as originator or sponsor,and also when investing insecuritisations. These include retentionon an on-going basis of a material neteconomic interest of not less than 5%(so called ‘skin in the game’), duediligence and disclosure.

Article122a mandates that certaindisclosures are to be made available to

the investor. The investor must then beable to demonstrate that they have ‘acomprehensive and thoroughunderstanding of their positionscommensurate with the risk profile of their investments’, and failure to do so

will result in additional risk weights of up to 1250%, being applied to theirinvestment.

The areas that the due diligence mustcover include:

a) The structure, including the riskcharacteristics of:i) the securitisation position

ii) the underlying exposures

iii) structural features

b) The originator and sponsor;including, as applicable:i) the reputation and loss experiencein earlier securitisations of theoriginators or sponsors in the relevant

exposure classes underlying thesecuritisation position;

ii) their due diligence on the securitisedexposures and collateral

This added reliance on data is causing originatorsand sponsors to re-assess their own procedures forensuring that data they put into the public domain iscomplete and accurate, both in relation to loan leveldata and the summarised asset pool informationappearing in investor reports.



iii) valuation approach for collateral,including valuer independence

c) Additional considerations

Whilst all of these areas are in scope forboth trading and non-trading books,the "intensity" of the review should beappropriate to these drivers.

Investors should also perform analysisthat reflects the risk profile of theposition it has taken, includingconcentration risk, impact on capitalin stressed scenarios.

The guidance is also clear that duediligence is not a one off exercise, and

should be reconsidered if there is achange in this risk profile.

InterrelationshipSome of the high level points requiredby article 122a, can most efficiently be

met through compliance with the ECBor BoE detailed rules such as the loanlevel information and cash flowmodelling. There are exampledatatapes provided by both the ECBand BoE that have resulted from

working extensively with industry practitioners developing something

which is achievable and moves towardsthe aim of transparency.

Loan Level InformationThe loan level data tape required for

covered bonds is the same as that forthe discount window facility, althoughthere are more mandatory fields. As thecash-flow model stresses prepayments,interest payments etc., there are

relevant fields on this data-tape whichare not normally considered for thepurposes of an issue. So we would do agap analysis and discuss with clientsextending our asset pool procedures onexisting programmes in order tofacilitate a smooth and efficient transferto the new requirements. We wouldalso perform some procedures toensure that the data-tape we use for ourasset pool procedures is the same as theloan level data-tape supplied to theFinancial Services Authority (FSA) orthe investors.

PwC Securitisation – new due diligence challenges 5



Cash-flow modelsThere is no standard template for the

cash-flow model but the industry hasstarted the move to standardise thedevelopment of these models, the key elements are that the models reflect theunderlying mechanics of the structureand we are able to independently rebuild the models and verify back tothe documents or to independently reperform calculations and compareour results.

How we can help

The PwC Structured Finance Group(SFG) offers a wide range of services tooriginators who are consideringsecuritisation for the first time or areexperienced repeat issuers. SFGprovides independent advice andpractical solutions using a multi-disciplined team of capital markets,corporate finance, accounting, tax, ITand industry experts who specialise insecuritisations.

We perform asset pool due diligenceand other transactional support work

for a large percentage of the issuancefrom the UK and Europeanprogrammes and have a number of

year’s experience which goes back tothe very first European transactions.

Now that the guidelines have beenissued for each of these variousschemes we are able to perform

walkthroughs and to look at themanagement information that is beingproduced alongside the transactionaldocuments and provide guidance as to

whether sufficient information is beingproduced and whether it is in line withthat specified under thedocumentation. We are also able tooffer insights into how the generalmarket is responding to thesedevelopments through our involvement

with the large volume of issuances.




This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication

without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the

extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in

reliance on the information contained in this publication or for any decision based on it.

ContactsTo discuss any of the issues raised in more detail, please speak to your usual PwC contactor one of our structured finance leadership team listed below:

Global & European

Peter Jeffrey

+44 (0)20 7212 [email protected]

UK

James Hewer+44 (0)20 7804 9605

[email protected]

Australia

Colin Heath+61 (2) 8266 [email protected]

Americas

Frank Serravalli+1 646 471 [email protected]

David Lukach+1 646 471 [email protected]



www.pwc.com/banking © 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL),

or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entit y and does not act as agent of PwCIL or any other member firm. PwCIL does not

provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in

any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another

member firm or PwCIL in any way.

pwc publications due diligence

Documents