South Africa's new securitization law should debut sometime this week, bypassing the usual banter and delay other countries have encountered in undertaking this feat. Sources attribute the swift success of these guidelines to their likeness to current securitization laws, as they were crafted in the image of the Australian and U.K. decrees.

But the package offers much more than expediency, say market participants, who attribute the quick acceptance to a solid set of preliminary amendments that needed very little changes. In fact, market participants say the 14 different institutions invited to comment made only slight suggestions relating to the clarity of certain clauses. The guidelines were put out for commentary in May.

Based on the limited negative feedback, the regulatory committee - which consists of the South African Reserve Bank, banking sector representatives and the Bond Exchange for South Africa opted against submitting the amended law for a second round of commentary.

"It was mentioned that they have taken into consideration all industry comments, [but] if for some reason there isn't addressing of those suggestions it may put a damper on securitizations," said Eugene van der Berg of the structured and corporate finance team at Decillion Ltd. "As it is now each securitization must be taken to the reserve bank for review and that proves to be time consuming."

The current draft concentrates on mobilizing increase use of securitization; leveling of the securitization playing field; allowing banks a greater degree of participation by clearly defining its roles; introducing and expanding credit enhancement and the use of liquidity facilities; aligning the recently proposed Bank of International Settlements new draft capital accord and present securitization developments; and refining existing commercial paper regulations so that it may issue and list ABS pursuant to the new law.

What might be a problem...

The regulatory committee is aiming for development of South African securitizations for an international theatre, said van der Berg. "Through and through, most people feel very positive about the changes but there are certain points that must be addressed," he said.

For starters, van der Berg points to paragraph No. 11 of the proposed draft, referring to the conditions relating to the securitization of revolving assets. In it, the regulatory committee states prescribed conditions for which originating or remote originating banks or institutions within a banking group with respect to a securitization that includes the ongoing transfer of revolving assets.

These entities must both, "apply a credit conversion factor of 10% and the risk weighting attributable to the revolving assets concerned to the notional amount of the revolving assets transferred to the special purpose institution; and the Registrar may approve, subject to conditions that he/she may provide at his/her sole discretion, to the notional amount of the revolving assets transferred to the special purpose institutions."

According to participating commentators, based on research conducted by the BIS and a comparison with international regulation for revolving assets, the conversion factor of 10% should be significantly increased. "The conditions need to be broadened," says van der Berg in his response to the paragraph. "This by implication does not mean that the conditions should discourage the use and application of securitization on revolving assets."

As part of his comment, van der Berg emphasizes that revolving assets, after residential mortgages, are a substantial securitizable asset category and covers a broad range of different asset sub-types. These assets have two distinct periods attached to them: the revolving period and the scheduled amortization period. They are also vulnerable to the effect a credit event may have on the ability of an SPI to fulfill its obligations to investors. "Revolving assets further constitute substantial contribution for the use and development of conduits and multiseller conduits, which adds additional risk components to a securitization transaction," he adds.

As a suggestion, van der Berg along with other South African market participants, highlight terms set by both U.K. and Australian securitiztion laws where regulations define a more flexible framework. This includes risk aspects identified by BIS. The commentary encourages that the regulation expand on conditions that cater for continued transfer of assets, scheduled amortization, revolving period, early amortization, the impact on liquidity of the SPI and how it could effect liquidity facilities as well as credit enhancement facilities.

In paragraph three the committee investigates conditions relating to the limiting of association with assets and it states: "The SPI shall have no right of recourse against an institution acting in primary role or any of its associated companies and when such an institution is a bank any other institution within the banking group of which such a bank is a member in respect of losses incurred in connection with any of the assets after the transfer thereof in terms of the securitization scheme."

Here, van der Berg argues that the purpose of credit enhancement is to crystallize the risk of potential recourse coupled with the regulatory framework in which recourse can result from breaches in warranties. According to his commentary, the possibility exists that originators could abuse securitization for the covering up of other business risk. This in the end might impede the development of securitization.

What works best

While the commentary extends itself to several other aspects regarding the language of the terms set, van der Berg is confident that the absence of a second round means the committee has reviewed and accepted the terms. He emphasizes that in their initiatory efforts the committee managed to put together a sensible set of laws.

Of those, what is most commended by market participants is what van der Berg coins as a first for securitization laws. He refers to the risk-weighting scheme prescribed by the BIS that would be set to go into effect in 2005. In it, triple-A to double-A rated securitizations would require risk weighting to 20%, single-A-plus to single-A-minus rated deals would garner risk weighting to 50%, triple-B-plus to triple-B-minus would require 100% risk weighting and double-B-plus to double-B-minus would require 150%. Deals rated single-B-plus or below would be treated as a first-loss facility.

"Our reserve bank has gone one step ahead and immediately implemented the scheme for banks participating in the market," said van der Berg. "No other country has adopted these regulatory development - the committee gets a 10 out of 10 for that." The scheme simultaneously allows for greater bank participation beyond the usual five big participating South African banks and in doing so promotes the development of a secondary market.

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