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Response to SubmissionsEnhancements to the Basel II Framework in Australia23 May 2011

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Australian Prudential Regulation Authority

Australian Prudential Regulation Authority 2

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In December 2009, APRA released a discussion paper on proposed changes to its prudential standards relating to the capital adequacy of authorised deposit-taking institutions (ADIs). These changes were in response to a series of enhancements to the Basel II Framework announced by the Basel Committee on Banking Supervision (BCBS) in July 2009 (‘the Basel II enhancements’). APRA also proposed other amendments to the prudential standards to clarify some existing provisions.

Consultation on the Basel II enhancements continued throughout 2010. In May 2010, APRA released proposed changes to the reporting framework and, in October 2010, issued for consultation additional amendments to the Basel II enhancements package announced by the BCBS in June 2010. Consultation has covered the areas of capital adequacy, market risk, securitisation and prudential disclosures.

APRA received 11 submissions on the proposals. The submissions broadly supported the BCBS’s approach and APRA’s proposed implementation of the enhancements, but raised several issues for APRA to consider and sought clarification in a number of areas. This paper outlines the main issues raised and APRA’s response. In most cases APRA has provided clarification on the issues raised.

The final prudential standards, prudential practice guides (PPGs) and reporting forms released with this discussion paper will come into effect on 1 January 2012.

Preamble


Contents

Glossary 5

Chapter1 – Introduction 7

Submissions received 8

Implementation 8

Chapter 2 – Enhancements to the Basel II Framework 9

Valuation practices and APS 111 9

Revisions to the Basel II market risk framework and APS 116 11

Treatment for certain securitisations and APS 120 13

Disclosure requirements and APS 330 16

Chapter 3 – Additional APRA proposals 18

Modifications to APS 116 18

Modifications to APS 120 18

Consequential amendment to APS 310 from changes to APS 330 21

Appendix A – Substantive changes to APS 111 22

Appendix B – Substantive changes to APS 116 and APG 116 23

Appendix C – Substantive changes to APS 120 and APG 120 26

Appendix D – Substantive changes to APS 310 29

Appendix E – Substantive changes to APS 330 30


Glossary

ABCP Asset-backed commercial paper

ADI Authorised deposit-taking institution

AMA Advanced Measurement Approach

APRA Australian Prudential Regulation Authority

APG 116 Prudential Practice Guide APG 116 Market Risk

APG 120 Prudential Practice Guide APG 120 Securitisation

APS 111 Prudential Standard APS 111 Capital Adequacy: Measurement of Capital

APS 112 Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk

APS 116 Prudential Standard APS 116 Capital Adequacy: Market Risk

APS 120 Prudential Standard APS 120 Securitisation

APS 310 Prudential Standard APS 310 Audit and Related Matters

APS 330Prudential Standard APS 330 Capital Adequacy: Public Disclosure of Prudential Information

ARF 110.0.1 Reporting Form ARF 110.0.1 Capital Adequacy (Level 1)

ARF 110.0.2 Reporting Form ARF 110.0.2 Capital Adequacy (Level 2)

ARF 116.0 Reporting Form ARF 116.0 Market Risk

ARF 120.0 Reporting Form ARF 120.0 Standardised Approach – Securitisation

ARF 120.1A, 120.1B and 120.1C

Reporting Forms ARF 120.1A, ARF 120.1B and ARF 120.1C Internal Ratings-based (IRB) Approach – Securitisation

ARF 120.2 Reporting Form ARF 120.2 Securitisation – Supplementary Items

ARS 110.0 Reporting Standard ARS 110.0 Capital Adequacy

ARS 116.0 Reporting Standard ARS 116.0 Market Risk

ARS 120.0 Reporting Standard ARS 120.0 Standardised Approach – Securitisation

ARS 120.1 Reporting Standard ARS 120.1 Internal Ratings-based (IRB) Approach – Securitisation

ARS 120.2 Reporting Standard ARS 120.2 Securitisation – Supplementary Items

Basel II enhancementsSeries of enhancements to the Basel II framework announced by the Basel Committee on Banking Supervision in July 2009 and further adjustments announced in June 2010


BCBS Basel Committee on Banking Supervision

ECAI External credit assessment institution

IAA Internal Assessment Approach

IRB Internal Ratings-Based

IRC Incremental Risk Charge

P&L Profit and loss

PPG Prudential Practice Guide

QIS Quantitative Impact Study

RMBS Residential mortgage-backed security

SPV Special Purpose Vehicle

VaR Value-at-risk


In July 2009, the Basel Committee on Banking Supervision (BCBS) released a package of measures to enhance the Basel II Framework1, as part of a broader work program to strengthen regulatory capital, risk management and supervision requirements. The measures aim to ensure that the risks inherent in banks’ portfolios related to trading activities, securitisations and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements, risk management practices and accompanying disclosures to the public.

The key elements of the Basel II enhancements include amendments to the capital framework for market risk, requiring banks to calculate additional capital charges for market risk under stressed conditions. Other elements include amendments to Pillar 1 requirements to strengthen the risk capture of the Basel II framework, in particular by strengthening the minimum capital requirements for certain securitisations, as well as expanded disclosure requirements for securitisations and off-balance sheet exposures.

In June 2010, the BCBS announced additional amendments to the Basel II enhancements relating to the market risk framework. It also announced the delayed implementation of the Basel II enhancements to 1 January 2012.

APRA’s proposals to give effect to the Basel II enhancements were set out in consultation packages released in December 2009 (dealing with capital adequacy issues) and in May 2010 (dealing with reporting requirements). APRA also wrote to all authorised deposit-taking institutions (ADIs) in October 2010 about the additional amendments to the Basel II enhancements and the delayed timetable. The consultation packages included APRA’s proposals on other amendments to prudential standards on capital adequacy to clarify existing provisions and to support the implementation of the Basel II enhancements.

1 BCBS, ‘Enhancements to the Basel II framework’, July 2009 at www.bis.org/publ/bcbs157.htm

Chapter1 – Introduction

APRA’s consultations have related to the following prudential standards and associated reporting requirements:

Capital adequacy

• Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111);

• Reporting Standard ARS 110.0 Capital Adequacy (ARS 110.0);

• Reporting Forms ARF 110.0.1 Capital Adequacy (Level 1) (ARF 110.0.1) and ARF 110.0.2 Capital Adequacy (Level 2) (ARF 110.0.2);

Market risk

• Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116);

• Prudential Practice Guide APG 116 Market Risk (APG 116);

• Reporting Standard ARS 116.0 Market Risk (ARS 116.0);

• Reporting Form ARF 116.0 Market Risk (ARF 116.0);

Securitisation

• Prudential Standard APS 120 Securitisation (APS 120);

• Prudential Practice Guide APG 120 Securitisation (APG 120);

• Reporting Standard ARS 120.0 Standardised Approach – Securitisation (ARS 120.0), Reporting Standard ARS 120.1 Internal Ratings-based (IRB) Approach – Securitisation (ARS 120.1), and Reporting Standard ARS 120.2 Securitisation – Supplementary Items (ARS 120.2);

• Reporting Form ARF 120.0 Standardised Approach – Securitisation (ARF 120.0);

• Reporting Forms ARF 120.1A, ARF 120.1B and ARF 120.1C Internal Ratings-based (IRB) Approach – Securitisation (ARF 120.1A, ARF 120.1B, ARF 120.1C);

• Reporting Form ARF 120.2 Securitisation – Supplementary Items (ARF 120.2);

http://www.bis.org/publ/bcbs157.htm


Public disclosure of prudential information

• Prudential Standard APS 330 Capital Adequacy: Public Disclosure of Prudential Information (APS 330); and

Consequential Amendment

• Prudential Standard APS 310 Audit and Related Matters (APS 310).

Submissions receivedAPRA received 11 submissions on its December 2009 and May 2010 consultation packages. APRA did not receive any comments in response to its October 2010 letter on the additional amendments to the Basel II enhancements and its delayed implementation. APRA received only a few comments on its proposals on other amendments to prudential standards on capital adequacy.

This paper summarises the main issues raised in submissions and provides APRA’s response. In a number of areas, submissions requested further clarification or indicated that the proposed requirements would cause compliance difficulties.

In response, APRA has clarified its requirements and, where it has discretion under the Basel II Framework to do so, has modified its proposals on the basis of issues raised or suggestions made in submissions. The following chapters provide details of the issues raised and APRA’s response.

ImplementationAPRA is releasing, with this discussion paper, its final prudential standards and prudential practice guides (PPGs) that give effect to the Basel II enhancements. It is also releasing revised APRA reporting standards and reporting forms for both ADIs and consolidated banking groups under the Financial Sector (Collection of Data) Act 2001.

The prudential standards, as well as the reporting standards and reporting forms, will come into effect from 1 January 2012, in line with the internationally agreed timetable.


Valuation practices and APS 111Drawing on experience from the global financial crisis, the BCBS sought a far more rigorous approach by prudential regulators to the recognition of fair values for capital adequacy purposes. This included, in particular, the measurement of fair values associated with illiquid financial instruments. As a result, the BCBS has provided greater direction on criteria to be applied by prudential regulators for the recognition of fair value changes in measuring capital adequacy across both the banking and trading books.

In response, the December 2009 and May 2010 consultation packages proposed a number of changes to APS 111, and to ARF 110.0.1, ARF 110.0.2 and their associated instructions. The key changes include a restatement of the principles governing the measurement of fair values for capital and other prudential purposes in the trading and banking books, the key principles being that valuations must be prudent and reliable.

Burden of changes

Comments received

The Basel II enhancements apply a common set of requirements to the recognition, for capital adequacy purposes, of fair values for financial instruments held in both the banking and trading books. This approach has resulted in the extension of many of the criteria previously applied to the trading book under APS 116 to the recognition of fair values for financial instruments held in the banking book.

A small number of submissions asserted that the approach proposed in APS 111 places unnecessarily burdensome requirements on recognition of fair values in the banking book. In particular, the requirements proposed under paragraph 6 of Attachment E of APS 111 for daily marking-to-market of banking book positions and associated hedges were suggested to be unduly onerous. Submissions suggested that, given the longer investment horizons of most banking book positions, the marking-to-market of these positions should take place at intervals that align with an ADI’s own management reporting frameworks.

APRA’s response

The application of robust criteria for fair value measurement of financial instruments, against which prudential regulators can assess valuation practices, is a fundamental precept of the Basel II enhancements. The criteria apply to all financial instruments accounted for at fair value, whether held in the banking or trading book, and apply at all times, not only during times of stress.

APRA supports the BCBS’s emphasis on consistent and rigorous approaches to fair value measurement, and agrees that these approaches should be applied to all financial instruments accounted for at fair value, whether held in the banking or trading book of an ADI.

Transition period

Comments received

Some submissions remarked on the perceived rigidity of requirements in relation to the use of fair values for cap-ital adequacy purposes in APS 111 Attachment E, such as for assessing the illiquidity of an exposure. The submis-sions suggested that to ensure full compliance with the proposed fair value requirements, ADIs would need a longer transition period than was proposed in APS 111.

APRA’s response

The requirements for the use of fair values in APS 111, including Attachment E, apply to all financial instruments that are accounted for at fair value. However, the requirements do not mandate that an ADI must fair value financial instruments or otherwise revalue assets and liabilities.

As part of the Basel II enhancements, the BCBS proposed the immediate implementation of measures contained in the supplemental guidance attached to changes to the Basel II Framework. This guidance incorporated provisions relating to valuation practices, including the measurement of financial instruments at fair value.

Chapter 2 – Enhancements to the Basel II Framework


APRA supports the BCBS’s approach and sees no case to step away from the more rigorous approach to recognition of fair values contained in APS 111 and, in particular, Attachment E, nor does it consider it appropriate to delay the implementation of the revised APS 111 requirements beyond 1 January 2012. APRA recognises that, for some ADIs, the systems changes necessary to meet these requirements in full may not be complete by that date. In such cases, APRA may be willing to accept a brief delay in an ADI achieving full compliance. APRA’s position will be based on a case-by-case assessment of the particular circumstances of the ADI and the time in which it envisages achieving full compliance.

Alignment with Australian Accounting Standards

Comments received

Some submissions proposed the alignment of the APS 111 requirements for recognition of fair values for capital adequacy purposes with the provisions govern-ing recognition of fair values in Australian Accounting Standards. Submissions also sought clarification regard-ing whether the requirements in APS 111 apply to ADIs’ financial reporting.

APRA’s response

The APS 111 requirements relating to measurement of fair values are not intended to require ADIs to change the valuation procedures they use for financial reporting purposes. They are intended to apply only where an ADI accounts for financial instruments in the banking and trading books on a fair value basis.

Paragraph 15(a) of APS 111 provides that an ADI may measure its financial instruments at fair value for capital adequacy and other prudential purposes provided ‘the ADI complies with all relevant requirements of Australian accounting standards applicable to the use of fair values…’ Indeed, the BCBS noted in its revisions to the market risk framework2 that the requirements relating to fair values were intended to be more consistent with accounting guidance on recognition of fair values.

2 BCBS, ‘Revisions to the market risk framework’, July 2009, at www.bis.org/publ/bcbs158.htm

APRA understands that an ADI would, as a starting point, apply accounting principles and guidance in determining the recognition and measurement of financial instruments at fair value for prudential purposes. However, such guidance may not be sufficiently determinative for prudential purposes in all circumstances. APRA supports the BCBS approach that prudential regulators should retain the ability to require adjustments to current fair values beyond those required by financial reporting standards. In particular, where there is uncertainty around the current realisable value of financial instruments due to illiquidity, APRA’s view is that it is appropriate to specify more explicit requirements in relation to procedures used to determine measures of fair values for prudential purposes.

APRA is retaining the approach proposed in APS 111. The alignment of prudential and accounting requirements for fair value may be subject to further review as a result of changes to international accounting standards (and Australian Accounting Standards) currently under consultation.

Use of guidance

Comments received

Submissions suggested that APRA’s proposed require-ments were more formal than those proposed in the Basel II enhancements and that APRA should consider applying its requirements though a PPG rather than in prudential standards.



APRA’s response

The BCBS has referred to its fair value measures as ‘guidance’ but the language used is more prescriptive. For example, the BCBS states in its Pillar 2 supplementary guidance on valuation practices that banks are ‘expected to have adequate governance structures and control processes for fair valuing exposures for risk management and financial reporting purposes’ and ‘must have adequate capacity’ to establish and verify valuations for instruments and transactions in which it engages, including during periods of stress3. Such language is best reflected in APRA’s prudential framework by way of requirements in a prudential standard, rather than good practice outlined in a PPG, particularly given the significance that APRA attaches to providing more explicit requirements for the recognition of fair values for prudential purposes. APRA also notes that many of the fair value requirements contained in APS 111 have been brought across from the fair value requirements already contained in APS 116.

APRA does not intend to issue a PPG relating to its fair value requirements in APS 111 but will monitor the application of the requirements to assess whether such guidance would be helpful.

APRA expects ADIs to use a proportionate approach in applying the principles in APS 111 relating to the recognition of fair values for prudential purposes.

Wording of paragraphs 3(f) and 5(a) of Attachment E of APS 111

Comments received

A clarification was sought on whether paragraph 4(f) of Attachment E of APS 111 refers to accounting practice rather than relevant Australian Accounting Standards.

APRA’s response

Paragraphs 3(f) and 5(a) have been amended to include a footnote that refers to ‘accounting guidance’ as Australian Accounting Standards. However, where no relevant guidance is available in Australian Accounting Standards, accounting guidance should be taken to refer to generally used accounting treatment, unless APRA indicates otherwise.

3 BCBS, ‘Enhancements to the Basel II framework’, July 2009, page 21

Clarification of treatment of items when markets are inactive or thinly traded.

Comments received

Clarification was sought on the treatment of items where markets are inactive or thinly traded.

APRA’s response

In such circumstances, an ADI will need to satisfy itself as to whether an item is illiquid and whether a reliable fair value estimate can be obtained for that item. Where an ADI concludes that an item is illiquid or any fair value measure for the item is likely to be unreliable, the ADI should apply the provisions contained in APS 111 Attachment E.

Revisions to the Basel II market risk framework and APS 116The December 2009 and May 2010 consultation packages and APRA’s October 2010 letter proposed a number of changes to APS 116, and to ARF 116 and their associated instructions. The key changes primarily supplement the current Value-at-Risk (VaR)-based trading book framework with an incremental risk capital charge and a stressed VaR requirement. The changes also make the capital charge for securitised products in the trading book consistent with the treatment of securitised products in the banking book (with limited exception).

Stressed VaR

Comments received

Several submissions sought further guidance regarding the choice of an appropriate historical observation period for the calculation of stressed VaR by ADIs with internal model approval. Submissions also expressed a preference for the historical observation period to be consistent across ADIs. Clarification was also sought on the calculation frequency of stressed VaR.


APRA’s response

APRA has provided additional guidance in APG 116 regarding the choice of an appropriate historical observation period for the calculation of stressed VaR. APRA expects ADIs to regularly analyse the appropriateness of their choice of stressed VaR period and include this analysis in the scope of their regular model review. In addition, APRA expects ADIs to consider other triggers for a review of their choice of period, such as instances where non-stressed VaR exceeds stressed VaR or following significant changes in trading book exposure.

APRA does not intend to mandate an historical observation period for ADIs. APRA will allow some flexibility where an ADI can demonstrate that there is more than one choice of historical observation period that results in stressed VaR calculations not materially different from the most severe.

APRA confirms that the required frequency of the stressed VaR calculation is at least weekly. APG 116 has been clarified to provide that, where an ADI is required to calculate a daily average stressed VaR, it should use the most recently calculated stressed VaR calculation for trading days for which it has not calculated stressed VaR.

Securitisation in the trading book

Comments received

Some submissions raised concerns about the proposed requirement to undertake credit analysis of securitisation positions in the trading book, in order for those positions not to incur a higher capital charge. The submissions claimed that this treatment would be disproportionate, particularly for less complex securitisations and for positions held for a short time. Further, the submissions argued that holding-period requirements for trading book positions (described as ‘good practice’ in APG 116) sufficiently address this issue for securitisation positions held in the trading book. Some submissions also raised concerns that the due diligence requirements covered in APS 120 would be more appropriately placed in APS 116.

APRA’s response

After the lessons of the global financial crisis, APRA is unsympathetic to any argument that ADIs should be allowed to hold structured credit investments without a substantial credit risk analysis, but with a concessional capital treatment.

APRA notes that, particularly during times of financial market stress, securitisation exposures originally allocated to the trading book may be held by an ADI for periods exceeding the ADI’s trading book holding-period limits. Accordingly, APRA endorses the BCBS position that the due diligence requirements for securitisation positions are appropriate for trading book exposures, regardless of their intended holding period.

APRA agrees that the due diligence requirements for securitisation positions in the trading book should be addressed in APS 116 and has redrafted APS 116 Attachment B accordingly.

Reporting Form ARF 116

Comments received

Clarification was sought regarding:

• the calculation of specific risk for securitisations and resecuritisations; and

• whether the credit spread stress tests set out in sheet ARF_116_0_23 are indicative or final.

APRA’s response

APRA confirms that, where an ADI has approval to apply the comprehensive risk charge in respect of its correlation trading portfolio, it is required to include the comprehensive risk charge value in respect of those positions in sheet ARF_116_0_13. For all other securitisations and resecuritisation positions, the specific risk charge is to be calculated according to the standard method and the values entered into sheet ARF_116_0_1.


APRA sought industry feedback on ARF 116, including the credit spread stress tests set out in ARF_116_0_23. No submissions were received on the credit spread stress tests and these have been retained in the final ARF 116, released as part of this Basel II enhancements package.

Treatment for certain securitisations and APS 120The December 2009 and May 2010 consultation packages proposed a number of changes to APS 120, and to ARF 120.0, ARF 120.1 and ARF 120.2 and their associated instructions. The key changes introduce several improvements in the treatment of securitisations, including changes to risk-weights for resecuritisations, use of ratings subject to self-guarantee, operational requirements for credit analysis, and changes to credit conversion factors for eligible liquidity facilities.

Definition of ‘resecuritisation’

Comments received

Submissions raised a number of questions about the definition of resecuritisations, including:

• the size and materiality of securitisation exposures that would make the structure a resecuritisation;

• the circumstances in which a residential mortgage-backed security (RMBS) conduit structure would be considered a resecuritisation;

• whether a securitisation vehicle that included securitisation exposures on its authorised investment list would be considered a resecuritisation; and

• the potential for some warehouse arrangements to be considered resecuritisations.

APRA’s response

APRA has adopted the definition of resecuritisation in the Basel II enhancements. This definition specifically recognises that a resecuritisation includes a securitisation where the pool contains many individual mortgage loans and a single RMBS. The BCBS has also confirmed (for the purposes of its recent Quantitative Impact Study) that it considers the investment of surplus cash of a pool in a securitisation security is sufficient for claims on the pool to constitute a resecuritisation. However, ‘…in situations where the mandate does not explicitly exclude an investment in securitisation exposures but actually the asset manager never made such an investment, and therefore the securitised pool never contained securitisation exposures, the bank may treat its position as a securitisation exposure, and not re-securitisation exposure.’4

Accordingly, APRA has amended APG 120 to indicate that it is prepared to treat a structure as a securitisation where the structure is allowed to invest surplus cash in securitisation securities but has not done so and has no plans to do so in the future. After consideration of existing market structures, APRA considers that asset-backed commercial paper (ABCP) conduits will generally qualify as resecuritisations and has clarified this in APG 120.

Operational requirements for the use of external credit assessments (self-guarantees)

Comments received

Submissions sought clarification as to whether a facility (other than credit support) provided by an ADI, such as a cash flow timing mismatch liquidity facility or a derivative product such as a swap, which is required by the rating agency, would prevent the originating ADI from using the external rating.

4 BCBS, ‘Frequently asked questions on the comprehensive quantitative impact study’, 18 May 2010, page 57


APRA’s response

APRA’s view is that it is the responsibility of an ADI to understand the structure to which it is providing a facility and the rating process used to determine the external rating. If the rating is dependent on the unfunded support provided by the facility, the ADI is unable to use the rating.

Operational requirements for use of external credit assessments

Comments received

APRA is aware that, for certain structures, one external credit assessment institution (ECAI) has rated a number of tranches of notes (and/or other exposures) and another ECAI has rated fewer tranches (and has either not been asked to or has chosen not to rate the other tranches or exposures).

APRA’s response

This type of structure is against the intention of APS 120 that there be no selective use of ECAIs and that ECAIs are used by the ADI on a consistent basis. APRA has amended APG 120 to clarify that, in these situations, it would expect an ADI to presume that the exposures not rated by a second ECAI have effectively been assigned a rating of ‘unrated’ by that ECAI and assign capital to those exposures actually rated only by one ECAI as if they were unrated.

Self-assessment and due diligence requirements

Comments received

Some submissions expressed the view that the requirements to perform self-assessments and due diligence on all securitisation exposures, including those held in the trading book, and the penalties for not complying, are onerous. The penalty for failing to comply with the due diligence requirements is that the exposure is deducted from capital.

The extent of the due diligence required, including the amount of information accessed and frequency of review, was also queried. Clarification of the interaction of the requirements of APS 116 and APS 120 to securitisation exposures held in the trading book was also requested.

A suggestion was made to modify the due diligence requirements so that these are more in line with the specific wording of the Basel II enhancements.

APRA’s response

APRA does not accept arguments that proper risk controls, including due diligence, should not be required because they are demanding. The due diligence requirements are an essential component of the Basel II enhancements and are intentionally applied to both the trading book and the banking book. Many of the losses experienced internationally during the global financial crisis arose from trading losses on complex instruments for which the financial institution had not performed effective due diligence. APRA will not modify the range of exposures subject to the application of the due diligence requirements. However, APRA has amended the relevant paragraphs to bring them into line more closely with the language of the Basel II enhancements.

APS 120 requires ADIs to perform a self-assessment of its involvement in all aspects of securitisation. ADIs should regard these self-assessments as essential documents to be regularly updated. APRA does not consider it appropriate to issue detailed guidance on the due diligence process. It is the responsibility of ADIs to determine the due diligence needed, according to the details of their involvement in the securitisation scheme and the extent to which they also provide credit and other facilities. General guidance on APRA’s expectations of the due diligence process and the review of information gathered through that process is included in APG 120.

APRA has also clarified that ADIs are to apply the requirements of APS 116 to the capital calculation for securitisation exposures in the trading book while also applying the remaining provisions of APS 120 (including self-assessment) to those exposures.


Necessity of changes to APS 120

Comments received

Several submissions expressed the view that the proposed changes are excessive on the claim that Australia did not experience the problems with securitisations evident in overseas markets. Concerns were also raised that implementation of APS 120 could cause ADIs to become uncompetitive in the Australian securitisation market. Suggestions were made that APRA should provide more guidance on acceptable securitisation exposures (e.g. by maintaining a publicly accessible database of rulings) or return to the previous arrangement where APRA pre-approved securitisation schemes.

APRA’s response

APRA endorses the enhancements to the Basel II Framework designed to strengthen the capital treatment of securitisations. Notwithstanding the underlying quality of securitisations originated by ADIs in Australia, the Australian market was not immune from the global loss of confidence in structured credit instruments and the market is only now recovering.

APRA does not see merit in returning to the previous arrangement where it pre-approved securitisation schemes. The self-assessment of compliance with APS 120 is consistent with the approach adopted for all other ADI standards, except for capital issues.

APRA notes the industry’s desire for more prompt feedback on issues and concerns and has broadened the coverage of APG 120 to provide further guidance in several areas. APRA intends to review APG 120 periodically to ensure that it reflects APRA’s views on issues arising from new structures and developments in the securitisation industry. APRA will write to all ADIs from time to time to highlight areas of particular concern.

Reporting Form ARF 120.1B

Comments received

Submissions suggested improvements to ARF 120.1B as follows:

• that an additional field be included in Section A to distinguish eligible assets to meet the requirements of Attachment E and those that are not allowed to use the Internal Assessment Approach (IAA) but have written approval from APRA to apply paragraph 40 of APS 120 Attachment D as an eligible facility;

• adding the new provision for reporting cash collateral in ARF 120.0 Section C to ARF 120.1; and

• including a break-up by securitisation and re-securitisation exposure type in line with the new data proposed in the ARF 120.0.

APRA’s response

An additional field has been included in ARF 120.1B Section A to distinguish eligible assets to meet the requirements of Attachment E. A new section has been inserted in ARF 120.1B for reporting cash collateral.

APRA does not agree that ARF 120.1B should include the break-up by securitisation and re-securitisation exposure and no change has been made to this form.

Reporting Form ARF 120.2

Comments received

Submissions raised issues and sought clarifications on ARF 120.2 as follows:

• Section A includes a new requirement to disclose ‘Value of Assets in Pool’ but the instructions do not stipulate whether the ‘value’ is to represent historical cost or fair value;

• the proposed new reporting items 2.1 and 2.2 of Section B would require a substantial amount of work when the data would not be useful for risk assessment purposes;


• the categorisations in Section C should be made consistent with the new ‘basis swap’ and ‘other derivatives’ categories in Section D;

• a new category – ‘warehouse’ - should be added to tables 3.1 and 3.2;

• clarification was sought on the expression ‘ADI as Originator’ particularly to ensure that it does not mean ‘Originating ADI’;

• clarification was sought on the basis of reporting for the new ‘Value of Funding Received’ data in Section E and whether it should be reported on a gross or net funding basis (e.g. for funding net of subordinated notes held); and

• concern was raised that a large amount of work would be required for the requirements in Section D to provide net receipts and payments and revaluation on all derivatives. Concern was also raised regarding the appropriateness of including items 4.6 and 4.7 as income because the receipt and payments of some of the derivative products may include principal. Clarification was also sought on whether item 4.8 ‘Other Income’ includes income such as interest.

APRA’s response

The specific instruction for the ‘Value of Assets in Pool’ is consistent with the instruction for other items reported in Section A. ADIs are expected to report the whole of Section A based on the value used in their accounting records.

The proposed new reporting items 2.1 and 2.2 of Section B are intended to ensure that ADIs are in a position to undertake on-going due diligence on the pools. APRA agrees that the proposed data requirements in items 2.1 and 2.2 of Section B could be burdensome to compile and these have been removed from ARF 120.2.

APRA also agrees that the categorisations in Section C should be made consistent with the new ‘basis swap’ and ‘other derivatives’ categories in Section D and that a new category ‘warehouse funding’ should be added to table 3.1 and 3.2. It has amended ARF 120.2 accordingly.

APRA does not believe that further clarification of the expression ‘ADI as Originator’ is necessary as APS 120 does not distinguish ‘ADI as Originator’ and ‘the Originating ADI’. They are subject to identical requirements under APS 120.

APRA acknowledges the concerns that a large amount of work would be required for the requirements in Section D to provide net receipts and payments and revaluation on all derivatives. APRA’s view, however, is that these data items are necessary to monitor these derivative transactions. As such, APRA has retained these items in ARF 120.2. Finally, APRA’s view is that the instructions for ‘Value of Funding Received’ are sufficiently clear that it is to be reported as a gross figure and hence no changes have been made.

Disclosure requirements and APS 330The December 2009 consultation package proposed a number of changes to APS 330. The changes in APS 330 expand the disclosure requirements to include securitisation exposures within the trading book, which broadly aligns these disclosures with securitisation disclosures in the banking book.

Expansion of disclosure requirements

Comments received

Some submissions expressed concern that the expansion of disclosure requirements relating to securitisation exposures would be onerous and potentially increase the compliance burden on ADIs. Other submissions sought clarification of a number of items required in the expanded disclosure requirements. A concern was also raised that some of the disclosures required are not relevant to the structure of the Australian RMBS market and therefore are of little benefit to investors.


APRA’s response

APRA expects that the proposed prudential disclosures will assist market participants by allowing them to assess the strength of ADIs’ balance sheets in respect of their securitisation activities. Improved disclosure will also allow market participants to evaluate the ADIs’ internal risk management processes and systems for these activities. The prudential disclosures will only be relevant to those ADIs that are involved in the types of securitisation structures included in the proposed disclosure requirements. APRA expects that ADIs will need to make disclosures that reflect their real risk profile as markets evolve over time. APRA reiterates that ADIs will not be required to disclose elements of the proposals that are not relevant to their securitisation activities.


In its December 2009 discussion paper, APRA took the opportunity to review the prudential standards on capital adequacy to address issues that have arisen since the standards became effective, including industry requests for clarification. APRA also proposed some other supplementary changes to the prudential standards to support the Basel II enhancements and to improve cross-referencing.

Modifications to APS 116

Specification of market risk factors

Comments received

Some submissions sought clarification on the requirement for internal model users to capture non-linearities beyond those inherent in options and other relevant products as well as correlation risk and basis risk (e.g. between credit default swaps and bonds). In particular, the submissions sought clarification on whether all such non-linearities must be captured.

APRA’s response

APRA has clarified APS 116 to indicate that ADIs must justify to APRA’s satisfaction any non-linearities that are not captured in the VaR model.

Back-testing

Comments received

Several submissions raised concerns about the requirement for ADIs with internal model approval to conduct back-testing using actual profit and loss (P&L) results, suitably adjusted. In particular, concerns were raised about the requirement for ADIs to adjust the actual P&L results for this purpose by removing intra-day trading results.

Some submissions sought clarification on whether the plus factor applies to back-testing on a regional or global basis, and whether the plus factor is determined only on the basis of the number of actual back-testing exceptions.

APRA’s response

APRA will exercise its national discretion5 to require ADIs with internal model approval to conduct back-testing using both hypothetical and actual P&L results. However, actual P&L results will not need to be adjusted for intra-day trading. Rather, actual P&L is to be adjusted to remove fees and commissions, brokerage and additions to and releases from reserves that are not directly related to market risk (e.g. administration reserves).

APRA confirms that the plus factor is to be applied on a global basis (as opposed to a regional basis) and is to be determined based on hypothetical back-testing.

Modifications to APS 120

APRA’s ability to approve non-complying securitisations

Comments received

The application of proposed APS 120 paragraphs 7 and 8 was raised by several submissions. Some noted that foreign jurisdictions may permit the issuance of instruments such as covered bonds. Some submissions argued that APRA should have the flexibility to approve non-complying arrangements that may evolve in the future, citing experience with contingent liquidity securitisations.

APRA’s response

APRA has made some amendments to APS 120 in light of these comments. APS 120 paragraph 8 now requires an ADI to consult with APRA before entering into a fund-raising arrangement (other than a securitisation that complies with all the provisions of APS 120) or entering into a complying securitisation that the ADI wishes to treat as on-balance sheet. The prohibition on entering into fund-raising arrangements does not extend to the issuance of covered bonds by Level 2 entities regulated in other jurisdictions, where such arrangements are permitted by the host regulator.

5 As provided in ‘Revisions to the Basel II market risk framework’, July 2009, page 15

Chapter 3 – Additional APRA proposals


APRA notes that the Government is currently proposing to introduce legislation to allow Australian ADIs to issue covered bonds. If and when the legislation is implemented, APRA will further revise APS 120 to take this into account.

ADIs will be able to approach APRA for approval, in exceptional circumstances, to enter into funding activities where they cannot establish compliance with paragraph 8. ADIs may also approach APRA for approval, in exceptional circumstances, of existing securitisation exposures that do not comply with all the requirements of APS 120. APRA’s approval, if granted, will also include specification of the capital treatment of the transaction.

Implicit support and other penalties

Comments received

Some submissions indicated concern that APRA would be able to impose significant capital penalties if it identified that an ADI had provided implicit support to a securitisation, or would be able to impose a range of restrictions where it identified a risk with an ADI’s securitisation arrangements. The concern was that APRA’s imposition of capital penalties or restrictions would be disproportionate to the severity of the risks.

APRA’s response

APRA will only apply additional capital requirements where it has identified that an ADI has provided implicit support to a securitisation. The additional capital requirement will be commensurate with the level of implicit support. APRA will assess each situation on a case-by-case basis when determining its supervisory response.

The potential restriction on securitisation activities is a separate power that can operate independently of the finding of implicit support. It is intended to give APRA the ability to act directly and in a targeted manner where it has identified a particular prudential concern that cannot be readily addressed by holding additional capital.

Maximum capital amount

Comments received

Some submissions raised the concern that ADIs with contingent liquidity securitisations would no longer be able to use the maximum capital amount method to calculate the credit risk capital requirements and that ADIs would not be able to risk-weight the underlying pool of assets at less than 100 per cent if using the maximum capital amount method.

APRA’s response

APRA has clarified that ADIs with contingent liquidity securitisations can continue to use the maximum capital amount methodology to calculate the credit risk capital in APG 120 (this issue had been covered in a footnote in the December 2009 draft of APS 120).

It is not APRA’s intention to rule out a risk-weight of less than 100 per cent. Rather, in conducting its self-assessment, an ADI must consider the structure of the holding of the assets when determining the risk-weight of the underlying pool. If the sale of an asset to a securitisation structure means that the ADI can no longer meet all the requirements of Attachment C of Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112), the ADI cannot use the concessional risk-weights outlined in that Attachment. This judgement will require a consideration of the specific circumstances of each scheme. APRA is unable to provide a blanket confirmation that specific structures would qualify for a concessional risk-weight.

Cash collateral

Comments received

Some ADIs expressed the view that APS 120 was unclear about the appropriate capital treatment for cash collateral provided in respect of some securitisation structured arrangements (e.g. when lodged with a stand-by swap provider).


APRA’s response

APRA has clarified that cash collateral provided to a third party in respect of stand-by arrangements is not an over-lapping securitisation exposure but is an exposure to the third party.

Warehouse structures

Comments received

Some submissions raised concerns that APRA’s views on warehouses are not in accordance with industry practice. Industry practice is that the warehouse funder may require additional support to be provided by the originating ADI, such as additional subordination, prior to renewing the funding facility.

APRA’s response

APRA views warehouses as structures that are established to provide temporary funding for assets before they are sold into a term securitisation. A warehouse structure is required to meet all the requirements of APS 120, including the requirements for the originating ADI not to provide additional credit support.

Amendments made to APS 120 and APG 120 provide details of APRA’s interpretations on specific ADI queries.

Acquisition of securities by an originating ADI

Comments received

Submissions indicated some confusion about the intended operation of the limit of 20 per cent of outstandings that applies to the purchase and holding by an originating ADI of the securities issued by a special purpose vehicle (SPV). The submissions sought clarification of the requirements of APS 120 Attachment F in relation to both the initial purchase and on-going holding of securities issued by a securitisation vehicle.

APRA’s response

APS 120 Attachment F paragraph 8 has been amended to clarify that points (a) and (b) apply to the initial acquisition while points (c) and (d) apply to on-going holdings.

Significant credit risk transfer

Comments received

The assessment by ADIs of whether they have achieved significant credit risk transfer under paragraph 2 of Attachment B has varied. In seemingly similar structures, some ADIs have determined that significant credit risk transfer has occurred, while others have assessed that it has not occurred.

APRA’s response

APRA has deliberately not specified any quantitative thresholds and requires an ADI to use its judgement to determine whether significant risk transfer has occurred. APRA has expanded the guidance in APG 120 on significant credit risk transfer.

Representations and warranties

Comments received

Some submissions sought clarification regarding the operation of the requirements to provide compensation in respect of breaches of representations and warranties, particularly the provisions on the reassumption of credit risk.

APRA’s response

APRA expects an ADI to have full discretion as to how it should rectify a breach of a representation or warranty within the requirements of APS 120. APG 120 has been expanded to include APRA’s view on how the requirements of APS 120 could be applied in practice.


Rating mapping tables

Comments received

ECAIs have commenced issuing specific structured finance ratings that are not the same as the ratings recognised in the ratings tables in APG 120.

APRA’s response

APRA has updated the rating tables to allow explicitly for structured finance ratings and has moved the tables into APS 120.

Transition arrangements

Comments received

Submissions requested information about the proposed transition process and whether outstanding structures would be grandfathered.

APRA’s response

APRA has indicated that it does not favour grandfathering. As provided for in paragraph 8 of APS 120, where an ADI has entered into a structure prior to 1 January 2012 that does not comply with the revised requirements, it must apply to APRA for consideration of transition arrangements. If there are exceptional circumstances, APRA may approve the structure for transition purposes. In such cases, APRA may impose an appropriate capital adequacy treatment for the transaction in accordance with subparagraph 8(c) of APS 120.

Legal opinion on wind up

Other issues

An ADI is required to obtain advice from legal counsel that its exposures are put beyond the reach of the ADI and its creditors, including in winding up and receivership. The legal opinions APRA has seen often do not address the possible interim step of an appointment of a statutory manager.

APRA’s response

APRA has expanded the requirement to obtain a legal opinion that expressly covers the appointment of a statutory manager.

Consequential amendment to APS 310 from changes to APS 330The December 2009 consultation package proposed a number of changes to APS 330, giving rise to consequential amendments to APS 310. The key change in APS 310 was to address all required annual attestations, including an attestation requirement for prudential disclosures required under APS 330.

Necessity of consequential amendment to APS 310 from changes to APS 330

Comments received

Concern was raised over the consequential change made to APS 310 requiring both the CEO and Board to attest to the reliability of the APS 330 prudential disclosures. Specifically, it was argued that requiring the Board to sign off on prudential disclosures was a higher level of representation from the Board than is required for financial reporting. The suggestion was made that an Audit Committee or equivalent Board committee more familiar with the processes and controls around financial reporting should be allowed to make the attestation, instead of the full Board.

APRA’s response

APRA affirms the importance of having both the Board and CEO attest to the reliability of the APS 330 prudential disclosures. APRA does not agree with the view that the Board should not be required to attest to the reliability of the prudential disclosures, or that requiring Board attestation is a higher level of representation than is required for financial reporting. APRA emphasises the important role the Board plays in the prudential oversight of the ADI, including an understanding and oversight of the prudential disclosures as required under APS 330.


Appendix A – Substantive changes to APS 1116

Paragraph Description of change

15Broadened application from use of fair value option to application of fair values more generally in accordance with Basel II enhancements.

Clarification of what is captured by reference to financial instruments.

16 Broadened application to use of fair values more generally.

39(d) and (e), 44 (d) and (e)

Broadened application to use of fair values more generally in the trading and banking books. Clarify that this covers any use of fair values where valuation does not meet requirements for use of fair values set down in prudential standard. Reference to illiquid financial instruments transferred to Attachment E.

Deletion of former sub-paragraphs 39(e) and 44(e) with contents now covered by sub-paragraphs 39(d) and 44(d) respectively and by way of footnotes.

39(p) and 44(p) Clarify link to other Tier 1 deductions required in APS 120

52Inclusion of core principles governing the use of fair values across both banking and trading books in line with Basel II enhancements.

53Material previously included in this paragraph transferred to new Attachment E; inclusion of key elements for risk management systems covering use of fair values in accordance with Basel II enhancements.

55Clarify that options open to APRA include requiring adjustments to be made to fair values used by ADIs for capital adequacy and other prudential purposes.

Attachment E New

1-2Inclusion of key principles governing use of fair values for capital adequacy and other prudential purposes.

3Material previously in paragraph 53 of APS 111; former material from APS 116, Attachment A; and from the Basel II enhancements also included.

4-19Basel II enhancements and material from former Attachment A of APS 116.

Capture of references to illiquid instruments formerly covered in sub-paragraphs 39(d) and 44(d).

20 Provision transferred from previous paragraph 53(f) of APS 111

6 Unless otherwise stated, all paragraph references are to the revised standards and PPGs. The changes detailed in these appendices do not include typographical or other minor changes, updated paragraph numbering and revisions to update cross-references.


Appendix B – Substantive changes to APS 116 and APG 1167

7 See footnote 6


APS 116

6(h)Insert definition of ‘nth-to-default credit derivative’ in accordance with Basel II enhancements.

(Former) 25

Deleted. The transitional provisions related to ADIs with internal model approval for equity specific risk, where models did not adequately allow for ‘event risk’.

The provision allowed those ADIs to continue to calculate equity specific risk capital according to the previous Market Risk Standard (APS 113) until 1 January 2010 or such later date as may be approved in writing by APRA.

This transitional arrangement is to be extended until the effective date of the revised APS 116 of 1 January 2011. Hence a transitional provision is unnecessary.

Attachment A

(Former) 18-26Deleted. In accordance with Basel II enhancements, these provisions now apply to all positions, not just trading book positions (and thus are now captured in Attachment E to APS 111).

Attachment B

(Former) 10Deleted in accordance with Basel II enhancements, as specific risk provisions for securitisation exposures have been included.

11-14

Inserted in accordance with Basel II enhancements for the calculation of the specific risk charge for securitisation exposures.

Paragraph 11 amended to outline the due diligence requirements for securitisation and resecuritisations.

15-16Inserted in accordance with Basel II enhancements, allowing a different treatment for positions in the correlation trading portfolio. Note that, under paragraph 16, this concessionary treatment is to be at APRA’s discretion.

18 Transitional provision inserted for securitisation positions

19New provision inserted on the limitation of specific risk capital charge to maximum possible loss.

(Former) 36-40Modified in accordance with Basel II enhancements, removing the concessionary calculation of equity specific risk for liquid diversified portfolios.

Attachment C

2 Inserted in accordance with Basel II requirement to calculate a ‘stressed VaR’.

3The capital formula has been modified to reflect the introduction of a stressed VaR and (for correlation portfolios) the comprehensive method.



18-19Inserted in accordance with Basel II enhancements, which are now more prescriptive regarding the factors which must be included in a VaR model (capturing non-linearity and all pricing factors).

29Inserted in accordance with Basel II enhancements for the calculation of a VaR (scaling up to a 10-day holding period calculation).

31 In accordance with Basel II enhancements, data sets are to be updated more frequently.

34 Technical calculation details for the stressed VaR calculation.

43

In accordance with Basel II enhancements, the internal model method for interest rate specific risk (not currently used by Australian ADIs) cannot be used for either securitisation exposures or nth-to-default credit derivatives. For these exposures, the standardised method or (for the correlation portfolio) the more sophisticated ‘comprehensive method’ may be used.

44 Clarification of equity event risk.

(Former) 41 Removed in accordance with Basel II enhancements that clarify the calculation of incremental risk.

49-50

Modified in accordance with Basel II enhancements clarifying the calculation of incremental risk. Also included in paragraph 50 is the requirement to comply with paragraphs 51 to 76, in accordance with the Basel II ‘Guidelines for computing capital for incremental risk in the trading book’*.

51-76Inserted in accordance with the Basel II ‘Guidelines for computing capital for incremental risk in the trading book’**.

77-80

Inserted to allow the use of the more sophisticated ‘comprehensive’ approach for the correlation trading portfolio.

Paragraph 77 amended to clarify that exposures for which the ADI does not meet the due diligence requirements set out in paragraph 11 of Attachment B must be deducted in accordance with that paragraph and may not be included in the comprehensive risk approach.

82

Clarification of the requirement to use clean trading outcomes (i.e. actual trading outcomes adjusted to remove the impact of income arising from factors other than market movements alone, such as fees, spreads and intra-day trading result) when calculating back-testing results using actual profit and loss.

86

A redrafting to incorporate the obligation to add a plus factor of one to the multiplication factor following 10 or more back-testing exceptions within a year, which places the requirement on the ADI rather than on APRA. In practice, APRA will have some discretion in applying the standard, as appropriate.

* www.bis.org/publ/bcbs149.htm

** Ibid.




Attachment D

15-17Paragraphs 15-16 modified and paragraph 17 inserted in accordance with Basel II enhancements that have elaborated the capital treatment of nth-to-default credit derivatives.

APG 116

7-12Deleted. These provisions now apply to all positions, not just trading book positions (and thus are now captured in Attachment E to APS 111).

7-8Guidance on what will be considered by APRA in giving concessionary treatment for positions in the ‘correlation trading portfolio’.

30Clarifications added to ‘SVaR

-t’ (

or the ‘stressed VaR calculated t trading days earlier’)

and to the ‘plus factor’.

34The capital formula has been modified to reflect the introduction of a stressed VaR and (for correlation portfolios) the comprehensive method.

49-50 Deleted. No longer necessary due to the modification of APS 116.

45-49 Guidance on the calculation of a stressed VaR.

50 Additional paragraph inserted on reviewing the choice of historical observation period.

59 Modified, due to greater prescription within APS 116 regarding the calculation of the IRC.

64 Description of ‘event risk’, moved to APS 116.

Further guidance on the calculation of the IRC.


Appendix C – Substantive changes to APS 120 and APG 1208

8 See footnote 6


APS 120

8Proposal to require consultation with APRA prior to ADIs entering into funding facilities. Expanded to include provisions for APRA to determine appropriate capital treatment for non-complying structures.

9(b) Revised definition for ‘basis swap’ to clarify the nature of such a transaction.

9(r)Addition of a definition for ‘resecuritisation exposure’ as part of implementing the Basel II enhancements.

18 New provision concerning significant credit risk transfer.

21New provision to give APRA the discretion to impose an additional capital charge for the provision of implicit support. The calculation for the capital charge for a pool also clarified.

23Inclusion of a power giving APRA the ability to limit an ADI’s securitisation activities where APRA believes the risks are not adequately addressed by imposing additional capital charges.

(Former) 23Provisions on transitional arrangements removed – replaced with new provisions inserted into paragraph 8

Attachment B

12Basel II enhancement prohibiting the use of a credit rating for risk-weighting purposes by an ADI where the credit assessment is based on any unfunded support provided by that ADI.

13 Basel II enhancement regarding operational criteria for credit analysis.

17Basel II enhancement for potential overlap between exposures in the trading and banking books.

25New provision prohibiting the inclusion in capital adequacy calculations of positive mark-to-market values for basis swaps until irrevocably received.

26Clarification that the election to treat a pool as on-balance sheet is only available to complying structures and only for the purposes of calculating capital adequacy.

27 Clarification regarding the calculation of the maximum capital amount.

Attachment C

2 Insertion of a reference to resecuritisation.

Table 1 Basel II enhancement regarding higher risk-weights for resecuritisation exposures.


12Basel II enhancement to apply consistent credit conversion factor to all eligible liquidity facilities regardless of term.

15New provision inserted on treatment of a securitisation exposure which is not an eligible facility.



19-20 Insertion of ratings grades for Standard & Poor’s, Moody’s and Fitch.

Attachment D

4 Insertion of a reference to resecuritisation.



8 Modified to reflect application only to securitisation exposures.

9 Treatment of a senior resecuritisation exposure.

16-17 Insertion of ratings grades for Standard & Poor’s, Moody’s and Fitch.

40Basel II enhancement to apply consistent credit conversion factor to all eligible liquidity facilities regardless of term.

Attachment E

16 (c)Removal of the reference to eligible facilities to allow recognition of cash collateral arrangements provided in support of derivative transactions.

17Clarification of capital treatment for cash collateral provided by a standardised ADI to a securitisation in support for the provision of facilities.

APG 120

3 Clarification of treatment of sub-trusts within conduit structures.

6-15 Pillar 2 requirements from Basel II enhancements package.

17 Clarification inserted on self-assessment.

24 New paragraph on treatment of unrated securitisation exposures.

25-27 Guidance on achieving significant credit risk transfer.

28. New guidance on the cross-holding of securities.

29Examples of actions APRA can take under the new requirement in APS 120 paragraph 22.

34New guidance on when APRA assesses that an ADI has provided implicit support to a securitisation.

35New guidance on the operational requirements for the use of external credit assessments.

42New paragraph inserted to cover the situation where there is an appointment of an ADI statutory manager.

53-56New guidance inserted on breaches of any representation or warranty given by an ADI to an SPV.

57-59Clarification of application of APS 120 to ADIs selling exposures into warehouse SPVs, and examples of situations that constitute the provision of implicit support to warehouse SPVs.



60 New paragraph inserted on the treatment of resecuritisations.

61-63Examples of information on the underlying pool that ADIs with securitisation exposures must have to meet the new operational criteria in APS 120 Attachment B paragraph 13.

67 Additional guidance on first loss credit enhancements.

73 Additional guidance on APRA’s expectations of when ADIs can exercise call options.

74-75 New guidance on limits on purchases of securities.

79Additional guidance on informal arrangements with managers and administrators of securitisation vehicles.

89 Additional guidance on cash collateral provided to a back-up swap provider.

(Former) 70-77Guidance on transition provisions removed and references to the mapping of ratings grades for Standard and Poor’s, Moody’s, and Fitch moved to APS 120.


Appendix D – Substantive changes to APS 3109

9 See footnote 6


26 (e)Requirement for Board and CEO to attest to the reliability of Prudential Disclosures as previously provided for in former paragraph 32 of APS 330.


Appendix E – Substantive changes to APS 33010

10 See footnote 6


6 To strengthen the BCBS Guiding Principle arising from the Basel II enhancements.

18 Removal of ‘separately’ to clarify drafting.

23 (b) and (c) Amendment to require comparative disclosure from previous reporting period.

(Former) 25 Paragraph deleted as the requirement is no longer applicable.

29 To clarify the exiting provision.

(Former) 32 Removed and included in APS 310 paragraph 26 (e)

Attachment A

Table 3(b)and (c) Drafting amendments to clarify existing requirements.

Table 3 (d)Drafting amendments to clarify existing requirements and insertion of ‘standard method’ to reflect the fact that some ADIs apply and disclose both approaches.

Table 3 (e)Insertion of standardised approach to reflect the fact that some ADIs are reporting on both approaches.

Table 3(f) Drafting amendments to clarify existing requirements.

4 Drafting amendment.

Footnote 1 Addition of acronym.

Table 4(a) Deletion of ‘statistical methods’ as already captured in provision.

Table 4 (b) Drafting amendments to align Attachment A and Attachment B requirements.

Table 4 (f) Drafting amendments to align Attachment A and Attachment B requirements and replacement of ‘loans’ by ‘facilities’ to ensure consistent terminology.

Table 4(g) Replacement of ‘loans’ by ‘facilities’ to ensure consistent terminology.

Table 4(j) Insertion of disclosure to align Attachment A and Attachment B requirements.

Table 5(a)Drafting amendment to replace the term ‘agency’ with external credit assessment institutions (ECAI).

Table 6(d) Drafting amendment to align definition with Table 6(c).

Footnote 16 Deletion of sentence that is no longer applicable.

Footnote 19 Qualification inserted as part of the Basel II enhancements.

Footnote 20 Qualification inserted as part of the Basel II enhancements.

Table 9 Drafting edit resulting from changes flowing from Basel II enhancements to Pillar 3.

Table 9(a) Drafting amendments to include qualitative requirements flowing from Basel II enhancements.

Table 9(b) Basel II enhancement disclosures.



Table 9(c) Drafting amendments to include qualitative requirements flowing from Basel II enhancements.

Table 9(d) Minor edit to reflect Basel II enhancements.

Table 9(e)and (f) Basel II enhancement.

Table 9(g) Quantitative disclosures for banking book; drafting amendments to include quantitative requirements flowing from Basel II enhancements.

Table 9(h) Drafting amendments to include quantitative requirements flowing from Basel II enhancements.

Table 9(i), (j) and (k) Basel II enhancement disclosures.

Former 9(f) Deleted to reflect Basel II amendments.

Table 9(l)Drafting amendments to include quantitative requirements flowing from Basel II enhancements.

Table 9(m) Minor edit to incorporate Basel II enhancement.

Table 9(n) Basel II enhancement disclosures.

Former 9(i) and (j) Deleted to reflect Basel II amendments.

Table 9(o)Quantitative disclosures for trading book; drafting amendments to include quantitative requirements flowing from Basel II enhancements.

Table 9(p),(q),(r), (s),(t),(u),(v) and (w)

Basel II enhancement disclosures.

Table 10(b) Drafting amendments to clarify existing requirements.

Table 13(f)Drafting amendments to clarify existing requirements; deletion of requirements no longer applicable.

Attachment B

Table 16(b) Drafting amendments to align Attachment A and Attachment B requirements.

Table 16(c),(d)and (e) Drafting amendments to clarify existing requirements.

5Insertion of new securitisation disclosure requirement to support Basel II enhancements.

Table 18, 18(a) and(b)Insertion of new securitisation disclosure requirement to support Basel II enhancements.

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Email [email protected]

Website www.apra.gov.au

Mail GPO Box 9836 in all capital cities (except Hobart and Darwin) A

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