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The UK referendum has caused uncertainty in the financial services industry, but what does it mean for alternative capital providers? And could it create some business opportunities?

Alternative capital providers are unregulated, or at least non-bank, financial institutions. Alternative finance embraces lenders from the smallest participants in peer-to-peer platforms to multibillion dollar global alternative lending

Investors in crowded sectors may look on the opportunities created by the supply chain as medieval adventurers once looked on the fabled kingdom of Prester John.  Huge volumes of illiquid credit are created in sale transactions every day as goods and services are sold.  This credit locks up working capital for sellers and limits their appetite to supply their customers.  The effective yield on this form of financing is tied up in price negotiations.

This market is already supplied with credit by third parties through trade receivables securitisation, factoring and other variations on the theme of using trade debts as collateral on a recourse or non-recourse basis.  In some cases this financing (for the right, usually larger corporate borrowers in the right sectors and locations) can be extremely cost effective.  There are also many ways of transferring credit risk on sale transactions which may be paid for by the buyer or the seller.  But a high proportion of trade transactions are not financed or protected in this way and the availability of credit in many sectors can be volatile or non-existent and pricing is inefficient. This all adds up to create opportunities for new capital.

If this is the opportunity, what are the challenges?
Continue Reading Unlocking the Supply Chain: challenges to widening the investor base for supply chain finance and some solutions

It’s been a busy Christmas and New Year’s season for US regulators. After three years of work, the Federal Reserve Board announced in mid-December that five federal agencies have issued final rules to implement section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Volcker Rule”), which is intended to limit proprietary trading by banks. But their job was hardly done.

US regulators came back to work after the holiday to find that portions of the final version of the Volcker Rule have been challenged in a lawsuit over claims that requiring small banks to divest their holdings in certain collateralized debt obligations known as trust-preferred securities or TruPs C.D.O.s will cause 275 small banks about $600 million in losses and impact their ability to lend to consumers and businesses.

The American Bankers Association, an industry lobby that represents several community banks, objects to the portion of the rule that will force banks to sell TruPs C.D.O.s, and has filed a complaint before the U.S. Court of Appeals for the District of Columbia Circuit seeking a court order blocking the rule from taking effect before the end of the year (source: New York Times). The group claims that the regulators did not properly analyze the economic cost of this portion of the rule on small community banks and the impact on their capital levels.

Then, on 14 January 2014, the regulators released a final interim rule to permit banks to retain interests in TruPs C.D.O.s under the following conditions:Continue Reading New Year, New Troubles for US regulators: Volcker Rule challenged before federal courts

On 4 September 2013, the European Commission published a draft regulation on the regulation of European money market funds.  Money market funds are important investors in certain types of securitisation, particularly asset backed commercial paper, and the draft Regulation includes some detailed provisions dealing with this relationship.  This is explained in the recitals: “Due the fact that during the crisis certain securitisations were particularly unstable, it is necessary to impose maturity limits and quality criteria on the underlying assets”.  The limitations imposed are such that the only types of securitisation which are eligible are those with underlying assets consisting of short term corporate debts, such as trade receivables.  Assets linked to the acquisition or financing of services or goods by consumers (such as personal loans, auto loans,  credit card debts and residential mortgages) are expressly excluded.  The draft regulation also requires that the underlying corporate debts be “of high credit quality and liquid”.
Continue Reading Regulation of Money Market Funds and Securitisation

As part of the Dodd-Frank financial reforms, the U.S. Commodity Futures Trading Commission (“CFTC”) increased its oversight of “swaps”.  One change stemming from Dodd-Frank is that a “swap”, as defined in the Commodity Exchange Act and CFTC regulations, is now a “commodity interest”.  The CFTC regulates collective investment vehicles that invest in commodity interests, which it calls “commodity pools”.  This can include SPVs which are not incorporated in the U.S..

The CFTC regulates the person with managerial or operational control over the commodity pool which is referred to as the commodity pool operator (“CPO”).  Determining precisely which person should serve as the CPO in any given structure requires an analysis beyond the scope of this blog post but where there is a commodity pool, there must be a CPO.  CPOs can be subject to onerous regulatory requirements.  Determining whether or not an entity is a commodity pool and then whether its operator needs to register as a CPO requires some careful analysis and, to make the issue more interesting, the rules have undergone significant changes recently.
Continue Reading CFTC Rules – When is a European SPV a commodity pool?

The Basel Committee on Banking Supervision announced yesterday that it had finalised the rules for the Liquidity Coverage Ratio or LCR i.e. the main mechanic for regulating liquidity in the Basel III package of reforms.

The LCR requires that a bank hold a sufficient stock of “High Quality Liquid Assets” to meet its net cash outflows in a hypothetical stress scenario. The rules set out the parameters for the stress scenario, the calculation of the net cash outflow and the type of assets which can constitute High Quality Liquid Assets.

Lobbying has achieved a notable success as certain “residential mortgage-backed securities rated AA or higher” can now be included in a bank’s stock of high quality liquid assets (subject to a 25% haircut, which is lower than the haircut applied to some corporate debt securities and to the limitation that this component can form no more than 15% of the buffer as a whole).
Continue Reading RMBS can form part of the Basel III liquidity buffer. Some good news for the structured finance industry.

A new consultation paper  published earlier this week by the Basel Committee on Banking Supervision will inevitably cause uncertainty and is likely to affect investment decisions long before the new rules take effect.

The paper sets out the Committee’s proposal to revise the treatment of securitisation exposures and is largely inspired by the belief that highly-rated securitisations currently attract too little regulatory capital and low-rated senior securitisations are subject to regulatory capital charges which are too high. The proposals are relatively high level. The Committee has invited the submission of comments by 15 March  2013. Responses to the public consultation, together with the results of a quantitative impact study, will be considered as the Committee moves forward to suggest detailed amendments to the securitisation framework.
Continue Reading Basel Committee proposes changes to the Basel II securitisation framework – what does this mean for new issuance?

European Central Bank and Bank of England liquidity schemes require that loan-level data be disclosed on a regular basis (no less than quarterly) with respect to asset-backed securities which are to be used as collateral.  On 27 November the ECB announced that it would postpone the introduction of mandatory loan-level data reporting requirements to 3 January 2013 for RMBS, 3 January 2013 for ABS backed by SME loans and 1 March 2013 for CMBS.  Both the Bank of England and the ECB provide templates for disclosure of loan-level data on their websites.

The ECB describes the rationale for its loan-level data initiative as being to help “both investors and third-party assessment providers with their due diligence” and states that “Ultimately, more transparency will help to restore confidence in the securitisation market”.  It is clear that the intention is to set a standard not just for the central bank liquidity scheme but also for the ABS market in general.
Continue Reading Loan-level data – implications