The European Central Bank has published amendments to its rules on money market operations that will increase the number of asset-backed securities eligible to be used as collateral for repo operations.
The new rules, which are slated to go into effect on May 1, broaden the ABS/CDO eligibility. The rules previously did not apply specific eligibility criteria to asset-backed securities, which fall under the category of tier one debt instruments, according to the ECB. The previous rules on tier one debt instruments stipulated that bonds must have "fixed, unconditional principal amounts," thus excluding asset-backed securities in which the credit risk has been transferred to a special purpose vehicle using credit derivatives.
The amendments will increase the overall transparency of the collateral framework by specifying the precise criteria that must be fulfilled by asset-backed securities, in addition to the criteria applicable to debt instruments in general. The "fixed, unconditional principal amount" requirement will no longer apply to asset-backed securities. This is because the principal amount of all asset-backed securities is usually dependent on the performance of the underlying assets, the ECB said.
The new criteria for ABS relate to the following five aspects: the structure of the transaction, in particular, the bankruptcy remoteness of the assets; the composition of the pool of assets that should not consist of credit-linked notes or similar claims resulting from the transfer of credit risk by means of credit derivatives; the seniority of the tranches, with only senior and nonsubordinated tranches eligible; the issuer's country of residence, with ABS issued by SPVs in the U.S., Canada, Japan and Switzerland not eligible; and the eligibility assessment where the national central banks reserve the right to request additional information to assess the eligibility of ABS.
According to analysts at Deutsche Bank, most cash securitizations under the new rules - including cash CDOs - will be eligible in ECB repo funding. However, synthetic securitizations remain ineligible.
"Synthetic securitizations have been ruled out for a number of reasons," a spokesman at the ECB said. "The underlying assets in synthetic transactions are generally [although not always] more complex and less granular than in the case of more traditional true sale ABS transactions."
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