The European Central Bank (ECB) made changes to the language in its guidelines on monetary policy instruments and procedures last week.
"This further tightening in ECB repo collateral rules announced earlier this week is consistent with the central bank’s gradual exit from the extraordinary liquidity support provided to banks via their securitization activity, and is in keeping with other more restrictive ABS rules announced since last year," Royal Bank of Scotland (RBS) said last week.
From here on in, only securitized assets from an originator / seller or any issuing intermediary incorporated in the European economic area (EEA) will be eligible. This means that euro-denominated foreign asset securitizations, which are often dual-SPV structures, have become ineligible for ECB funding.
Any securities from originators or intermediaries in the EEA, but outside the Eurozone and the U.K. (therefore Denmark, Sweden, Iceland, Norway and Lichtenstein), and are deemed to potentially have asset “claw-back” risks will need to evidence its legal integrity before repo eligibility is granted.
Existing eligible securities will be grandfathered for one year.
The restrictions on synthetic or credit-linked exposures forming part of the underlying assets have been broadened to generally refer to "credit-linked notes, swaps or other derivatives instruments or synthetic securities". A grandfathering period of one year was also granted for this restriction.
RBS analysts think that the impact of this particular requirement is to further limit any non-cash or synthetic ABS (re-securitizations are automatically prohibited), although the technical effect is probably going to be very isolated.
"While the language appears in spirit to exclude yield maintenance-based hedge agreements as well, we cannot see how any such exclusion can be enforced without forensically de-constructing basis swap agreements in each deal," RBS analysts said. "We assume therefore that yield-maintenance agreements do not fall within these new ECB restrictions."
Tap issues out of existing shelfs or trusts will be subject to a full audit, which is enforceable over all existing issues. This new requirement would lessen any “quality drift” risks in tap issues, they said.
Bonds must not be subordinated in the payment waterfall under any acceleration as well as enforcement events. In other words, according to RBS, these bonds would be disqualified if senior bond time-tranching applies post-acceleration, and equally if pro-rata pay structures do not switch to sequential after an acceleration event occurs.