In commentary, the European Securitisation Forum targeted generalization and overly broad definitions/criteria as some of the more problematic issues associated with the securitization section of the Bank of International Settlements Proposal, the international guidelines for risk based capital weighting.

Specifically, while the ESF welcomes risk-based capital treatment, the Forum "strongly believes that the use of a greater number of credit buckets than the five proposed... is called for in order to ensure a closer correlation to the differing default probabilities at different rating levels."

For example, the ESF feels that the added risk associated in a ratings slip from double-A-minus to single-A-plus is not in line with the 30% increase in capital weighting that the proposed guidelines would demand.

The European Securitisation Forum's comments, which were submitted to the Basel Committee on March 31, are a good indicator of where the Bond Market Association will stand with respect to the securitization section of the domestic guidelines for risk-based capital weighting, market sources said.

The domestic guidelines, drawn by the Federal Financial Institution Examination Counsel, were publicly issued on March 6, thereby entering a 90-day commentary period which will end June 7. The FFIEC aided in the development of the securitization section of the BIS proposal, which accounts for the similarity in the securitization section of the two documents.

"I think what you see in terms of the tone and direction in response to Basel really does foreshadow what you'll see in response to the FFIEC," said George P. Miller, executive director of the ESF. Miller is also a senior vice president with the Bond Market Association.

364 Days and Under

One of the more controversial issues of the BIS proposal is the provision to add a 20% risk weighting (or conversion factor) to liquidity facilities with maturities less than one year.

Though this hasn't been part of the domestic guidelines, it is likely that it will be down the line, one source said: "Since it was written by the same regulators, there's a good indication that it's coming."

As is, regulators put a 50% risk weight on a facility with firm commitments of 365 days or more, and a zero risk weight on commitments 364 or less. With this in place, asset-backed commercial paper programs are generally 364-day commitments, which are then rolled over continuously, the source said.

Similar to other issues, the forum argues that classifying all 364-or-less facilities as "credit exposure structures" is, again, too general.

"The basic point that we're making was that there are lots of different types of liquidity facilities in use," Miller said. "There are some distinct features and terms and conditions [in different facilities], and proposing a uniform capital treatment across the board really wouldn't be appropriate without looking at some of the differences that exist."

According to a source familiar with both sides of the 364-day issue, the regulators are looking to charge capital because certain ABCP issuers are basically guarantying their paper under the guise of liquidity facilities.

However, in the commentary, the ESF breaks down a number of examples of facilities that the forum believes should continue to be exempt from the 20% conversion factor. Namely, facilities which are designed just to add liquidity to performing assets during periods of temporary illiquidity should be exempt.

"Our point was to distinguish these types of facilities, or at least some of them from the view that would apply to risk weighting which would suggest that what this is, effectively, is more of a credit exposure," Miller said.

Interestingly, the source familiar with the issue said that ABCP profit margins are relatively thin. The commitments are usually provided by the bank sponsoring the ABCP conduit. If the regulators were to charge 20%, it would cut the profit margins drastically.

"It's either going to cut their profits, or they'll have to change the way they do business," the source said

Specific Issues

In addition to a greater number of "buckets" for determining risk weighting, the ESF argues that rated asset-backeds should enjoy the same capital treatment as equivalently rated assets that are unsecuritized, such as corporates.

Further, while the forum endorses the proposal for use of external ratings, the ESF feels there should be a simultaneous development of the internal ratings based as an alternative.

Under the proposed guidelines, particularly with the FFIEC, the use of the internal ratings approach would be limited to certain aspects of asset-backed commercial paper credit enhancement programs, Miller said.

"We think that the use of internal models, whether that's an internal ratings approach or an internal modeling approach, ought to enjoy broader support and be capable of being utilized more broadly," he explained.

The ESF also raises issue with the committee's increased risk weighting associated with "revolving facilities where uncontrolled early amoritisation or master structures may pose special problems'".

The forum argues that such a formulation could cause unnecessary uncertainty associated with that area of the market.

"The risk weightings should be more closely aligned with actual credit default experience," Miller said.

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