Winner: International Association of Credit Portfolio Managers (IACPM)

The IACPM is SCI’s pick for the Outstanding Contribution to SRT award this year, for being uniquely the voice of the SRT industry. Not only does the association espouse a collaborative and consensus-driven approach to advocacy, its initiatives also provide much-needed transparency into what remains an opaque market.

The IACPM was established in 2001 by 11 founding bank members to further the measurement and management of portfolio credit risk. But the genesis of the association began in the 1990s, at a time when a handful of banks in New York and London started pursuing a more sophisticated and dynamic approach to managing their credit portfolios.

“With the advent of securitisation, secondary loan markets and other tools that created more liquidity, credit became more sophisticated, but most banks were still managing their portfolios in the traditional way. In the 1990s, a few risk departments began analysing portfolio concentration and other metrics - as well as the inflow and outflow of credit - and we began to see the use of CDS to hedge certain names and single-name concentrations,” explains Som-lok Leung, executive director at the IACPM.

Leung himself was recruited in May 2005 from Moody’s KMV (now Moody’s Analytics), where he had served as a senior director for client solutions. Before that, he was director of risk and credit policy at Nomura, director of credit risk control at UBS and a consultant at Oliver Wyman.

For a while, the IACPM membership consisted only of banks. Then Swiss Re joined the association, along with some other (re)insurers and some ECAs. They were followed by investors - all of which are active in the SRT market – as well as MDBs and insurance brokers. Membership currently stands at 146 firms.

“These non-bank members had an interest in joining the IACPM because of their significant interactions with banks,” Leung observes.

The association is widely recognised for its biennial benchmark survey, ‘Principles & Practices in CPM’ (credit portfolio management), which polls members on methods of both onboarding risk at the front end, as well as mitigating and transferring it at the back end. Post-financial crisis, asset sales has most often been cited as the top tool for the back end, while funded and unfunded SRT have hovered around the top three and top six spots respectively.

Last year, for the first time, survey results pointed to credit insurance as the most important tool for the back-end risk mitigation efforts. However, Leung anticipates that SRT will be voted into the top spot next year.

“SRT is one portfolio management tool among many, but it is becoming increasingly more important. Given that IACPM is a relatively small association, we try to operate in a space that is not duplicative and where credit portfolio managers are uniquely impacted – SRT fills that role. Many of our members are embedded in the market,” he notes.

But he credits the IACPM with “really becoming effective” in the SRT space when the association started collecting transaction data. “We started collecting SRT data because there was no information available elsewhere for this private market. We felt that data would be useful to both regulators and to our members. Increased transparency is helpful for the whole market and being an association is advantageous in this sense because we represent neutral ground.”

Indeed, Leung believes that there is a direct link between the IACPM sharing an expanded set of its SRT data with the EBA and the EBA’s recommendation in 2019 to extend the STS framework to SRT transactions. “The EBA had concerns over the performance of the underlying asset pools in on-balance sheet securitisations; in particular, whether the assets would be cherry picked. But our data demonstrated that it’s the opposite case: SRT portfolios represent banks’ core books of business and it's in the interests of both issuers and investors that the pools perform as expected. As such, SRT deals are completely different to the arbitrage synthetics seen pre-financial crisis, because the interests of both issuers and investors are much better aligned,” he observes.

The IACPM’s collaborative relationship with the EBA has continued since, with the two organisations meeting on an annual basis. Additionally, the association regularly meets with the European Commission, the UK PRA and the US regulatory agencies.

Regarding the US SRT market, Leung says the sector is at present beset by “headwinds” – not least due to political issues around the Basel 3 Endgame and the presidential election in November. “Unfortunately, it is a difficult time in which to try to finalise a very technical piece of regulation,” he adds.

The IACPM operates an annual planning process, whereby the board sets its priorities based on member feedback. One recent outcome of such feedback was the introduction last year of regulator-investor roundtables, which were widely acclaimed by the SRT industry.

“We find that a lot can be achieved when there is better understanding and less of an adversarial attitude between the industry and global regulators. There is always some area of common ground to be found, as both sides want the financial industry to thrive. If a disaster like the GFC were to occur again, it would be no good for anyone,” Leung observes.

One theme that is high on the IACPM’s to-do list is the current regulatory treatment of unfunded SRT, which isn’t properly recognised in Europe and not recognised at all in the US. “To treat an insurer in the same way as a corporate doesn’t take into account the positive characteristics about insurance policies – such as the fact that the liabilities are senior in the waterfall – or the fact that insurers are regulated financial institutions, very diversified and highly rated. To me, it seems an overly conservative approach, especially when the broader utility of SRT is to help banks increase lending to the real economy,” argues Leung.

Tamar Joulia-Paris, senior advisor at the IACPM, agrees that effective and proportionate securitisation frameworks can scale up risk sharing between a growing variety of lenders, investors and insurers, and create sound economies for the future. “Risk sharing is a long-term journey. Securitisation, when undertaken properly, can facilitate economic and social development without creating financial instability, and attract more talent and financial resources to support the green and digital transition. Securitisation is also a global, cross-border product, so it’s important that there is harmony across the market and stakeholders’ incentives,” she notes.

With that in mind, the IACPM is currently engaged in a conversation with its members about terminology, with the aim of settling on an appropriate moniker for SRT. “Consistency of terminology would be helpful in terms of creating a uniform understanding and articulation of what the industry is trying to achieve with SRT. What is the purpose of SRT? At the end of the day, it’s all about risk transfer, but we also need a single definition for market harmony, and ‘Significant Risk Transfer’ is already defined in some existing regulations,” Joulia-Paris concludes.

For the full list of winners and honourable mentions in this year’s SCI Capital Relief Trades Awards, click here.