Moody's Investors Service updated its approach for analyzing set-off risk in U.K. securitization and covered bond transactions.

"Moody's has re-assessed the risk that obligors will set off deposits  held with an insolvent originator against payments that they owe under securitized receivables," said Edward Manchester, a Moody's senior vice president and author of the report.

The rating agency said that, while it is legally possible for obligors to set off their deposits against securitized receivables, an issuer's exposure to set-off is substantially reduced where obligors are entitled to compensation under the Financial Services Compensation Scheme (FSCS).

Moody's also said that the risk primarily affects U.K. RMBS, ABS and the structured features of U.K. covered bonds.

In the affected transactions other than the credit card master trust deals, the revised methodology will not have any rating impact. This is because set-off risk is already either modeled or covered by credit enhancement (without regard to the FSCS).

For credit card master trust transactions, credit enhancement is not specifically sized for set-off and Moody's is assessing the possible rating impact of the revised methodology.

"The impact for each credit card transaction will depend on various factors including the rating of the originator, available data on obligor deposits, the seller share and the degree of correlation between the credit quality of the originator and the receivables," Manchester said.


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