The Bank of England (BoE) has introduced additional eligibility and disclosure requirements for ABS and covered bonds to be accepted in its operations. It has also extended the range of collateral eligible for its discount window facility (DWF) to include portfolios of loans to individuals and non-banks. The extension will take place in 2011.
These initiatives, which were announced via a market notice, are a result of recent industry consultation. Further information regarding the criteria and timescales will be announced later this year.
To be eligible for the BoE's operations, the individual loans would have to be residential mortgages, consumer loans (excluding credit cards), commercial real estate loans, or corporate loans to a non-bank (including small and medium sized enterprises.)
The BoE additional eligibility requirements for ABS and covered bonds include a mandatory public distribution of loan level information on no less than a quarterly basis and within the relevant bond payment date for the following: RMBS, covered bonds, CMBS, CLOs, and auto, consumer, lease, and private student loan securitizations.
Additionally, the prospectus and other closing transaction documents must be made freely and publicly available to be eligible. This covers, although not limited to, the asset sale agreement, servicing, administration and case management agreements, among other things. Additionally, transaction documentation updates should also be freely and publicly available.
The BoE is also requiring a transaction summary that is freely and publicly available in a standardized format for any new issuance. Further requirements include a cash flow model freely publicly available or on behalf of the originator as well as standardized monthly investor reports. These reports should contain information such as asset performance, a detailed cash flow allocation, a list of triggers, etc.
The bank, which currently only accepts securitized loans from banks and building societies, should start accepting the new collateral during 2011. It will be applying its full requirement to RMBS initially followed by covered bonds, for which detailed requirements will be finalized over the summer.
The BoE will also establish small working groups composed of market participants in coordination with the relevant industry bodies to refine requirements for the following: loan level information, cash flow models, standardized investor reports and standardized transaction summaries. Meanwhile, the requirements for other asset classes will be announced at a later date.
The additional requirements for ABS will cover all existing and any newly issued securities and there will not grandfathering. The bank will be temporarily accepting securities that do not fully meet its requirements, but will be applying increasing haircuts to these submissions.
There will be a 12-month implementation period for each asset class after the publication of detailed requirements.
In the market notice, the BoE noted the current lack of standardization in the use of credit bureau scores, adding that the public availability of this information would be a benefit to the market. It has endorsed the suggestion of issuers and originators to establish a task force on how standardized scores will be made publicly available and incorporated in loan and portfolio level reporting. The BoE also noted the widespread support for greater pricing transparency and standardization of definitions.