Contents

CMBS

US CMBS going strong

It has been a busy last few days in US CMBS. While the secondary market has been quiet, primary issuance has been very healthy and there is more on the way.

Freddie Mac and Fannie Mae each priced deals (US$1.3bn FREMF 2012-K710 and US$718m FNA 2012-M8) that were typically well received. The A1 tranche on the Freddie deal priced at swaps plus 33bp, reports one trader.

"In the conduit world Morgan Stanley and Bank of America priced MSBAM 2012-C5, which again priced pretty well. A1s were 37bp over swaps, with A2s, A3s and A4s 76bp, 120bp and 135bp over, respectively. To put that in perspective, the previous deal priced at swaps plus 160bp," he says.

The trader continues: "The previous deal was UBS-Barclays 2012-C2. With both of these deals a really interesting feature has been a new class in there that is exchangeable into the regular classes. Basically they took the junior triple-A, double-A and single-A classes and combined them into a single thick tranche."

In the MSBAM deal this tranche had a thickness of about 17%. In the UBS deal the class EC was 15.75% thick. "That has been a really interesting development," the trader adds.

The other deal to price was JPMCC 2012-HSBC, where the collateral is the loan on HSBC's New York headquarters. The trader says the triple-A there priced at swaps plus 135bp, double-A at 195bp, single-A was 225bp and the triple-B minus at 335bp.

There are also two more deals in the market now expected to price soon. WFRBS 2012-C8 is a US$1bn-plus transaction backed by 80 loans on 122 properties and GSMS 2012-SHOP is a US$625m deal backed by The Grand Canal Shoppes and The Shoppes at the Palazzo in Las Vegas.

The secondary market has been quieter, which is a trend the trader expects to continue. He says: "Spreads in the secondary market have been holding in, even when equity widened. I think people are coming to the realisation that basically rates are going to stay low and there are not too many places you can get yield, so as that sinks in we should see more stabilisation."

JL

RMBS

Restive market seeks 'game changer'

It has been a quiet spell for the European RMBS market. Demand seems to be outstripping supply, but a recent transaction - Dutch Mortgage Portfolio Loans X - has caught the eye and change could be on the horizon.

"The lack of issuance is really starting to show," says one trader. "The short end is extremely well bid and trading very well, so we find it very hard to obtain paper right now. We put bids on BWICs and we bid dealers, but there is still a lot of supply constraint. It is much less so on the longer end, though."

Spread movement has been minimal. The trader says his firm bid for positions in DMPL X twice last week - once at the start of the week and once at the end - and saw it cheapen by about 5bp over. The paper was purchased from two different parties, however, so the trader is unsure whether that is a genuine cheapening or just the difference between two dealers' prices.

"DMPL X is actually a really interesting deal. Once the price talk came out on the latest transaction, we saw a lot of secondary offers in the market. We were involved in that activity; when the guidance was tightened, we lowered the amount we committed to and bought some in secondary instead. It worked well because then you at least get certainty of allocation and you do get a better price," the trader notes.

He continues: "It is really unusual to see so many offers in secondary like that. It does not seem to have affected primary pricing though, because they were still able to tighten pricing on the A1 tranche. But, again, for all the very good execution at the short end, they had to price at guidance for the long end."

Furthermore, the trader notes that Achmea Hypotheekbank, the originator on the deal, ended up buying half of the tranches itself. "It is hard to say how successful the transaction would have been otherwise," he comments.

Finally, the one thing that the trader believes could provide a big boost to the market and reinvigorate issuance is the inclusion of RMBS under the Basel 3 liquidity coverage ratio (LCR). He concludes: "The inclusion of selected ABS, such as prime RMBS, in the LCR eligibility would change things drastically. That could be a real game changer."

JL

Structured Finance

SCI Start the Week - 16 July

A look at the major activity in structured finance over the past seven days

Pipeline
It was a busy week for the pipeline. There were four CMBS, one RMBS, one CLO, one ILS and four ABS deals.

The CMBS transactions were US$1.2bn FREMF 2012-K710, US$300m JMPCC Mortgage Sec Trust 2012-HSBC Commercial Mortgage Pass-Thru Certificates, C$240m IMSCI Commercial Mortgage Pass-Through Certificates Series 2012-2 and US$1bn MSBAM 2012-C5 CMBS.

The RMBS and CLO were Lanark series 2012-2 and US$300m JFIN CLO 2012, respectively. The ILS was Vita Capital V series 2012-1.

The ABS deals were £454m Bealine, an airport slots deal, and three student loan ABS deals: US$526m Educational Funding of the South Series 2012-1, US$531m Iowa Student Loan Liquidity Corp series 2012-1 and US$463m North Texas Higher Education Authority Inc series 2012-1.

Pricings
There was also a fair share of pricings, with two CLOs and seven ABS. The CLOs were US$514m Gramercy Park CLO and €839.2m SME Grecale.

The ABS prints were C$514.7m CIT Canada Equipment Receivables ULC Series 2012-1 (equipment ABS), US$1.45bn Hyundai Auto Receivables Trust 2012-B (auto prime), US$300m Sierra Timeshare 2012-2 Receivables Funding (timeshare), US$1.215bn SLM Student Loan Trust 2012-5 (student loans), US$416m World Financial Network Credit 2012-B (credit cards), US$266.67m World Financial Network Credit 2012-C (credit cards) and US$713m World Omni Auto Receivables Trust 2012-A (auto prime).

Markets
Activity has picked up in the US CLO market, with increased secondary trading and the New York Fed announcing three rounds of Maiden Lane III sales for later in the month (SCI 13 July). "Secondary spreads tightened this week across the capital structure. Legacy triple-A spreads tightened in by 5bp while double-A, single-A and triple-B spreads tightened by 25bp," note securitised products analysts at Bank of America Merrill Lynch.

There was also increased activity in US CMBS as the market continued to pick up after the previous holiday week. Citi securitised products analysts note that weekly secondary activity "approached near-average levels". Legacy spreads have continued tightening, but there has been widening amongst new issuance, with long senior bonds trading at their widest point this year.

Demand is strong in US RMBS, say Barclays ABS analysts. In the agency space they note that "dollar prices hit new highs this week as most coupons outperformed duration hedges" and that collateral shortage technicals drove FN 3.5 and 4.5 rolls sharply higher. The non-agency market also remained strong, with prices rising higher despite broader concerns.

Demand is also good in European RMBS where it is outstripping supply, as SCI reported on 11 July. Spread movement has been limited as a lack of issuance is starting to take its toll. "The short end is extremely well bid and trading very well, so we find it very hard to obtain paper right now. We put bids on BWICs and we bid dealers, but there is still a lot of supply constraint. It is much less so on the longer end, though," reports one trader.

JPMorgan ABS analysts note that it was a quiet week in primary European ABS, with no new deals placed with investors. A scarcity of paper saw secondary tightening in vanilla asset classes.

Deal news
• GRAND CMBS bonds reacted positively in the secondary market to the proposed restructuring terms (SCI 10 July), with class A spreads moving from the low- to mid-90s to above 97 and junior tranches rallying by more than 20 points. If accepted, the refinancing is expected to lead to a 're-rating' of the transaction, with further significant price appreciation possible.
• The New York Fed has announced a succession of asset sales from Maiden Lane III, with bids due at three points this month. In each case Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Pierce Fenner & Smith, Morgan Stanley and RBS have been invited to bid for the collateral.
• A portfolio of 33,000 apartments being sold by BayernLB subsidiary GBW is expected to generate significant bidding interest, reflecting sustained demand for German multifamily housing (MFH) portfolios, Fitch notes. The agency says this supports its view that the diversified and durable income generated by well-managed MFH is a major strength for the three large German MFH CMBS.
• European DataWarehouse (ED) has successfully completed a private placement with 15 key investors, consisting largely of global banks and institutions. The placement was coordinated by Perella Weinberg Partners.
• Moody's has placed 78 tranches from 15 European CLOs, currently rated Aa1 and below, on review for upgrade and upgraded two further tranches. The actions reflect a correction to the rating model the agency used for these transactions, as well as the generally stable performance of the affected tranches since the last rating action in 2011.

Regulatory update
• SIFMA public policy and advocacy evp Kenneth Bentsen has testified before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit to discuss the Qualified Mortgage (QM) proposed rulemaking and its impact on the cost and availability of mortgage credit.
• OTC derivative market reforms are raising particularly challenging questions for sovereign institutions, according to a new BNY Mellon report. The report explores inherent inconsistencies in the application of key OTC reform provisions and the potential impact on sovereign institutions - a base of increasingly influential global investors that use capital markets and OTC derivatives for implementing their investment strategies and hedging exposure.
• SIFMA public policy and advocacy evp Kenneth Bentsen yesterday (Tuesday) testified before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises regarding the impact of the Dodd-Frank Act. Specifically, he focused on the implementation of the Volcker Rule, credit risk retention, Title VII and Section 165(e) single counterparty credit limits.
• The US SEC has approved rules and interpretations that further define the terms 'swap' and 'security-based swap', as well as whether a particular instrument is a 'swap' regulated by the CFTC or a 'security-based swap' regulated by the SEC. The action also addresses 'mixed swaps' - which are regulated by both agencies - and 'security-based swap agreements', which are regulated by the CFTC but over which the SEC has antifraud and other authority.
• The Basel Committee and IOSCO have published a consultative paper on margin requirements for non-centrally cleared derivatives. The report lays out a set of high-level principles on margining practices and treatment of collateral.
• The ECB has released a timeframe for the implementation of loan-level data reporting for ABS. Provision of loan-by-loan information for RMBS will be mandatory as of 1 December 2012, with SME ABS and CMBS reporting to be implemented by 1 January 2013 and consumer finance, leasing and auto loan ABS reporting by 1 January 2014.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-5; BACM 2006-2; BACM 2007-3; CD 2006-CD2; CSFB 2004-C3; CSMC 07-C5 & 08-C1; DECO 2006-C3; DECO 2007-E5 & WINDM IX; DECO 8-C2; EMC 6; EPICP DRUM; EURO 24; FHSL 2006-1; GECMC 07-C1, BACM 07-1 & JPMCC 07-LDPX; GRAND 1; GRF 2006-1; GSMS 2006-GG8; ING (UK) Listed Real Estate Issuer; JPMCC 2007-LD11; LBUBS 2006-C3; LBUBS 2007-C7; MSC 2006-T23; MSC 2007-IQ15; OPERA UNI; PROMI 2; REC 6; TITN 2007-CT1; WBCMT 2004-C10; WINDM VII; WINDM XI; and WINDM XIV.

Top stories to come in SCI:
Brevan Howard Credit Catalysts profile
REO-to-rent securitisation potential
ILS market update
Structured credit recruitment trends

RMBS

BoE scheme 'RMBS negative'

The Bank of England has launched its funding for lending scheme (FLS), intended to improve lending to the real economy. While this should be beneficial for SME and mortgage lending, it is likely to have a significant negative impact on the UK RMBS primary issuance market, according to Barclays Capital securitised products analysts.

The scheme aims to boost the incentive for banks and building societies to lend to UK households and non-financial companies by reducing funding costs so that loans can become cheaper and more easily available. Those banks which most increase lending will be able to borrow more in the scheme, at a lower cost than those that do not lend as much.

Last month the BoE extended its ECTR facility (SCI 15 June), providing banks with funding for the shorter end of the curve. The new FLS facility now provides assistance for longer term funding, which the analysts say will reduce the need for other forms of funding, such as RMBS.

"We still expect to see limited volumes over the next few years while this scheme is in effect, from large issuers that would like to keep the RMBS avenue open (we expect smaller-size deals to be placed far less frequently than seen currently) and also from mid-sized firms (eg, building societies) that may find the scheme restrictive due to the increase in net lending requirement," the analysts note.

Prepayments for UK RMBS transactions are expected to increase as borrowers will be encouraged to remortgage more frequently. "This could lead to a reversion to the pre-crisis environment when borrower rate-hopping at the end of the teaser period was the norm," add the analysts.

Certain details are still to be confirmed and there should be greater clarity come the end of the week. Although HSBC has announced it will not be involved, most lenders are expected to take part in the scheme.

JL

RMBS

Ambac RMBS play touted

The recent decision by the Wisconsin Commissioner of Insurance to pay Ambac non-agency RMBS policyholders 25% of accrued and future claims in cash (SCI 12 June) should provide a significant payment - believed to be about US$800m in total - to many bondholders. These bonds could represent one way of capitalising on a housing market recovery.

Ambac-wrapped non-agency RMBS are currently trading in low single-digits, according to Barclays Capital ABS analysts. Incorporating recoveries from the expected cash payments, these yields jump to between 4% and 6%. If surplus notes are ultimately paid to RMBS bondholders and can be sold at 50% of face in the secondary market, yields could increase to 12%-16%, the Barcap analysts suggest.

However, the bonds are subject to valuation and timing risks on the surplus notes. If, for example, the issuance of surplus notes is delayed for two years and can be sold for only 25% of face, yields fall to 8%-11%.

"Despite the risks regarding implementation of the 25% cash/75% surplus note distribution, on balance we believe that Ambac-wrapped non-agencies are reasonably attractive at current prices," the analysts note. "To the extent that investors have a view on a housing market recovery or what losses will be on Ambac's policies, these bonds could be an appealing way to capitalise on a recovery."

Although claim payments made by Ambac in the future will benefit Ambac-wrapped bonds, a few non-agency deals have provisions in their PSAs that prioritise reimbursement payments to Ambac for previously paid claims before principal payments are made to other unwrapped bonds in the structure. The analysts point out that in these cases future claim payments by Ambac court hurt valuations on other bonds in the deal. Certain unwrapped super-senior bonds in these structures could lose 2-4 points in yield terms, while senior mezzanine bonds may lose 3-8 points.

CS

CDS

German CDS alliance announced

OTC derivatives analytics firm Pricing Partners and derivatives consultancy MathFinance are partnering to provide clients in Germany with a tailored service combining derivatives pricing software and software integration as well as training and quantitative consulting services.

MathFinance will become a local distributor for Pricing Partners in Germany and will provide services around Pricing Partners' solutions, including onsite training, support and system integration.

CDS

Electronic trading platform enhanced

Traccr has added instant messaging to its online negotiations and trading platform for structured products, enhancing communication between participants. The portal is mainly used for CLNs and CDS.

"Our goal is to streamline the trade execution process by enhancing bilateral communication from inception of a request-for-quote by either a dealer or investor client to matching trade specifications during execution and subsequently providing a complete audit trail post-execution to allow for improved compliance oversight," comments Farooq Jaffrey, Traccr ceo.

CLOs

CLO specialist joins law firm

Perry Sayles has joined McDermott Will & Emery in New York. He becomes financial institutions partner.

Sayles has broad experience of derivatives, securitisation and structured products transactions as well as traditional corporate finance, project finance and acquisition finance. He specialises in CLOs and CDOs.

CLOs

Alternative credit group joins

THL Credit Advisors has completed the acquisition of McDonnell Investment Management's alternative credit strategies group. The team of James Fellows, Brian Good, Robert Hickey and Michael Herzig will now join THL's capital markets investment business and lead its credit senior loan strategies group.

Fellows joins as a co-head, md and senior portfolio manager. He has more than 24 years of investment industry experience, mainly in leveraged finance. Prior to serving as co-head of alternative credit strategies at McDonnell he was at Columbia Management and Van Kampen Investments.

Good is also co-head, md and senior portfolio manager in the group. He was alternative credit strategies co-head at McDonnell alongside Fellows and also had prior stints at Columbia Management and Van Kampen Investments.

Hickey joins as md. He was a senior credit analyst and portfolio manager at McDonnell. Before that he was vp at Invesco Funds and a director at Van Kampen.

Herzig is md and head of business development for the group. He was head of product strategy for the alternative credit strategies group at McDonnell and has previously served as co-head of Deutsche Bank's CDO business in the Americas. He also spent almost a decade at Merrill Lynch, where he marketed structured credit and interest rate derivative products to US investors.

CMBS

Trepp adds ETF to CMBS offering

Trepp has partnered with BlackRock's iShares exchange-traded funds (ETFs) business. It will now integrate the iShares Barclays CMBS Bond Fund into its CMBS analytics product offering.

The iShares fund is the first ETF to provide exposure to investment grade CMBS (SCI 17 February). Trepp has leveraged its CMBS data to provide clients with a detailed overview of the iShares Barclays CMBS Bond Fund's holdings and collateral performance via a dedicated screen and enabled clients to use its portfolio analytics capabilities for both surveillance and scenario analysis.

Insurance-linked securities

Manager beefs up ILS underwriting, modelling

Twelve Capital has enhanced its ILS underwriting and modelling capabilities with two hires. John Butler joins from Hannover Re as partner while Roman Muraviev becomes an associate.

Butler is currently senior underwriter in Hannover's international treaty group, responsible for managing and underwriting European and Asia-Pacific property catastrophe and terrorism portfolios. His primary responsibilities for Twelve Capital will be to source and execute private ILS transactions.

Muraviev will focus on quantitative analysis, modelling and research. He has a background in research and teaching, including applied research at the RiskLab of the Federal Institute of Technology in Zurich in the field of risk and portfolio management for finance and insurance.

ABS

Tobacco tranches on rating watch

Fitch has updated its US tobacco settlement ABS criteria and placed 150 of the 230 tobacco tranches it rates onto rating watch negative. The agency expects to resolve these watches within a month, with most downgrades expected to be one or two notches.

The new criteria updates Fitch's base case assumption for the annual change in the master settlement agreement (MSA) payment to 0%, have previously been assumed as a 1% increase. The assumption change is largely down to the declining annual tobacco shipment rate.

ABS

Credit card settlement could hurt ABS

Credit card ABS could be negatively affected by a recent agreement between credit card companies and merchants which accept card payments, according to Fitch. The agreement saw card companies agree to pay US$6.05bn to merchants and cut the fees merchants pay on credit card transactions for eight months.

The agreement also allows merchants to introduce surcharges for paying by credit card. Fitch believes the likely increased costs for consumers could negatively affect credit card ABS pools in the future.

More expensive transactions are expected to reduce the volume of credit card purchases and could see a rebalancing of pool composition as high-quality cardholders, who regularly pay their balances in full, would have less incentive to charge purchases. Further, Fitch would expect up to a 5% reduction in portfolio yield as a result of the interchange reduction, although this could be offset by an increase in interest income paid by revolving cardholders.

Structured Finance

Spanish tranches on watch

Fitch has placed 212 tranches related to Spanish structured finance transactions on rating watch negative. A further 48 tranches previously on RWN have been maintained. The agency downgraded several tranches only last month (SCI 11 June).

The rating actions are due to transactions' exposure to Banco Santander, Banco Bilbao Vizcaya, Instituto de Credito Oficial, Confederacion Espanola de Cajas de Ahorros, Banco Espanol de Credito, Santander Consumer Finance, CaixaBank, Kutxabank, Unicaja Banco and Banco de Sabadell. The agency says the remedial actions expected following the downgrades of these entities have not been fully implemented by the transaction parties.

Fitch says it has been informed that the respective SPV management companies and transaction parties are making progress in the implementation of remedial actions. However, these are not yet finalised, which is why the ratings have been placed or maintained on RWN.

Structured Finance

APAC upgrades outnumber downgrades

Fitch reports that APAC structured finance upgrades outnumbered downgrades in 2Q12 for the first time in two years. There were 24 upgrades, four downgrades and 267 affirmations during the quarter.

The upgrades were predominantly driven by stronger-than-expected asset performance and increased available credit enhancement in Australia and India. The limited downgrades in the quarter were mostly to distressed tranches of Japanese CMBS that defaulted following realised losses on property workout activity.

Fitch notes that Indian ABS with international ratings were affirmed with a stable outlook, despite the negative outlook for the sovereign rating and that of financial institutions in the country. The agency believes there are enough alternative counterparties operating in India to ensure that its counterparty criteria will continue to be met.

The upgraded tranches were five Australian non-conforming RMBS and three auto loan ABS, 14 Indian auto loan ABS and two Indian equipment lease ABS. In all cases, the underlying loans have performed stronger than Fitch's initial expectations and available credit enhancement has increased.

One New Zealand non-conforming RMBS tranche was downgraded to single-C from triple-C.

The affirmation of 267 SF tranches across the APAC region and all asset classes during the quarter reflects the continued stable performance of assets in the region, Fitch notes. Its outlook on most ratings remains stable.

In total, 16 international ratings of Indian ABS tranches, 37 national ratings of Indian tranches, 179 Australian and New Zealand tranches, 27 Japanese tranches, four Korean tranches, one Singaporean tranche and three Thai tranches were affirmed during the quarter.

Structured Finance

Credit opportunity fund minted

RLJ Credit Opportunity Fund has received a license from the US Small Business Administration to operate as a Small Business Investment Company. The launch of the new fund is a continuation of The RLJ Companies' strategy to become a preeminent business in financial asset management.

Deutsche Bank, SunTrust, Wells Fargo and Northern Trust have invested in the fund, which is designed to provide access to financing for minority and small businesses across the country. It will be led by Trevoir Gregg, managing partner, and launches with approximately US$70m of committed capital, with the goal of raising a total of US$225m in capital to deploy.

The fund will make senior and subordinated debt investments in lower middle market companies and will provide flexible capital solutions to facilitate buyouts, recapitalisations, refinancings and growth financings.

Structured Finance

Further ML3 auctions announced

The New York Fed has announced a succession of asset sales from Maiden Lane III, with bids due at three points this month.

First, there are nine tranches being auctioned where bids are due by 19 July. These are: two tranches of Adirondack 2005-1, worth just over US$689m; two tranches of Adirondack 2005-2, worth just over US$949m; two tranches of Laguna ABS CDO, worth almost US$680m; two tranches of Sierra Madre Funding, worth over US$893m; and one tranche of Toro ABS CDO I, worth just under US$700m.

There are also 11 tranches being offered where bids are due by 24 July. These are: three tranches of Broderick CDO 1 (worth approximately US$725m); two tranches of G Street Finance (US869m); one tranche of Hout Bay 2006-1 (US$634m); one tranche of Margate Funding I (US$475m); three tranches of Mercury CDO 2004-1 (US$213m); and one tranche of Mercury CDO II (US$621m).

A further 14 tranches are being offered for auction with bids due by 31 July. These are: two tranches of Belle Haven ABS CDO (US$444m); one tranche of Bernoulli High Grade CDO I (US$856m); Cascade Funding CDO I (US$107m); three tranches of Orient Point CDO (US$1.23bn); two tranches of Reservoir Funding (US$169m); one tranche of Summer Street 2005-HG1 (US$541m); one tranche of Summit RMBS CDO I (US$114m); one tranche of Verde CDO (US$507m); and two tranches of Witherspoon CDO Funding (US$484m).

In each case Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Pierce Fenner & Smith, Morgan Stanley and RBS have been invited to bid for the collateral.

CDO

Trups CDO criteria updated

Fitch has published an updated rating criteria report for Trups CDOs, under which it will differentiate its cure rate assumptions among current deferring bank issuers based on their bank score history following a deferral. Bank scores are assigned via the agency's proprietary bank score model and are a key factor in its Trups CDO rating methodology.

In addition to its base assumptions, Fitch will apply a sensitivity scenario to most of the Trups CDO transactions unless the most senior class in a transaction is rated triple-C or below and the transaction has not improved since the last rating review. The sensitivity scenario will look at the impact of the likely early prepayment of issuers affected by the Collins Amendment and implication of a potential underperformance by larger exposures.

The results of this analysis will guide the agency's assignment of outlooks, while the base assumptions will form a basis for ratings. Any transaction for which the outcome of the sensitivity analysis may be given some weight in assigning the ratings will be disclosed in the rating action commentary.

The impact of these criteria revisions will vary for each deal, but in general is expected not to exceed a rating category.

CDO

Agency takes action on 20 CDOs

Fitch has taken various rating actions on 20 CDOs, affirming 108 classes of notes and downgrading seven, including five downgrades to single-D. The downgrades were: two classes of Acacia CDO 8 from single-C to single-D, one class of Commodore CDO II from double-C to single-C, one class of Crystal River CDO 2005-1 from single-C to single-D, one class of Orion 2006-1 from single-C to single-D, one class of RFC CFO II from double-C to single-C and one class of South Coast Funding I from single-C to single-D.

CDS

Regulatory compliance options expanded

OpenLink Financial plans to expand its suite of Dodd-Frank regulatory compliance solutions with ICE Trade Vault swap data repository (SDR) reporting capabilities. The solution will provide clients with a cost-effective way to ensure compliance with CFTC SDR reporting requirements.

ICE Trade Vault is currently the only CFTC-approved SDR for the commodity and energy, interest rate swaps, CDS and FX asset classes (SCI 29 June).

CDS

Sovereign CDS activity reviewed

CMA has released its global sovereign debt credit risk report for 2Q12, in which it names the top-ten most and least risky sovereigns, as well as the best and worst performers.

The quarter proved to be rocky for many sovereigns, as the European debt crisis spread to Spain and Italy. However, Greece re-entered the rankings after being removed last quarter, as CDS on the sovereign's new debt began trading again a few weeks after its default - albeit liquidity is very thin. Meanwhile, Portuguese CDS ended the quarter at 805bp - 331bp tighter than 1Q12.

Although there was no change to the top-four least risky sovereigns, average percentage spreads widened by 45%. The UK remains fairly stable, moving up one place in the rankings, ahead of hosting the Olympics and potentially boosting GDP.

CDS

OTC reform impacting sovereigns

OTC derivative market reforms are raising particularly challenging questions for sovereign institutions, according to a new BNY Mellon report. The report explores inherent inconsistencies in the application of key OTC reform provisions and the potential impact on sovereign institutions - a base of increasingly influential global investors that use capital markets and OTC derivatives for implementing their investment strategies and hedging exposure.

The evolving and inconsistent regulatory framework raises important issues for sovereigns regarding their obligations and the potential cost of compliance, BNY Mellon notes. "Sovereigns are generally regarded as low risk counterparties and, as such, have not generally been required to provide collateral," observes Jai Arya, head of the firm's sovereign institutions group. "With global regulatory reforms, however, precisely what is in and out of scope with respect to sovereigns remains murky. The classification of sovereigns and subsequent variation in Basel 3 capital adequacy rules must be addressed to avoid market distortions and regulatory arbitrage. In addition, the cost of compliance to the new rules could potentially hit sovereigns - and those servicing sovereign counterparties - very hard."

The report notes that the continuing debate over 'extraterritoriality' adds further complexity. European sovereigns have generally expressed concern over the potential impact on counterparty selection as a result of the proposed Dodd-Frank Act's extraterritorial scope, for example. The de facto exclusion of US financial institutions as potential counterparties could have a very negative impact on derivatives pricing, liquidity and risk management.

"We expect that a common approach will be reached between the major strands of regulatory reform to avoid market distortions and regulatory arbitrage, but inconsistency and conflict between national and supranational rules persists," says Nadine Chakar, head of Derivatives360, BNY Mellon. "Until a consistent framework of exemptions from both capital adequacy and clearing requirements across jurisdictions may be agreed, sovereigns may find that their OTC derivatives activities become subject to mandatory clearing."

CMBS

CMBS leverage set to rise

Leverage on US CMBS conduit loans to be securitised in the third quarter will likely be higher than it was in the second quarter, leading to more credit enhancement being necessary to achieve similar ratings, Moody's notes. Specifically, based on the transactions in its deal pipeline, the agency's LTV ratio is positioned to increase to 102.1% during the quarter from 97.8% in the previous quarter.

Moody's credit enhancement level for Baa3 rated tranches appear to be approximately 7.3% in the third quarter, up from 5.8% when the CMBS market resumed after the credit crisis. "The relatively favourable position of the credit cycle mitigates some of the risk from the increasing leverage in conduit loans," says Tad Philipp, Moody's director of commercial real estate research. "The current position bares similarities in several of its metrics to the market conditions that prevailed in the early 1990s, which was 5-7 years past the prior peak and saw loan origination vintages that were high performing."

Moody's notes that its LTV ratio is much higher than the LTV ratio used in underwriting the loans. In fact the agency expects the gap between them to widen to 37.7% in the third quarter. The gap reflects the fact that underwriting valuations use increasingly low capitalisation rates as US 10-year treasury rates remain low, while the Moody's valuations use capitalisation rates that are stabilised, to capture the risk that interest rates may be much higher when a loan must be refinanced.

CMBS

Fannie continues strong multifamily issuance

Fannie Mae issued US$6.7bn of multifamily MBS in 2Q12 backed by new multifamily loans, slightly less than the first quarter total of US$7.1bn (SCI 20 April). It also resecuritised US$1.2bn of DUS MBS through its Fannie Mae Guaranteed Multifamily Structures (Fannie Mae GeMS) programme.

"Increasing property values, solid operating incomes and a low interest rate environment are all creating tailwinds. Issuance and resecuritisation volumes remain elevated as the rental housing market continues its expansion and credit remains strong. Secondary market activity is also robust - there were seven Multifamily REMICS issued in the first half of the year," says Kimberly Johnson, Fannie Mae multifamily capital markets vp.

The company's DUS MBS securities provide market participants with highly predictable cash flows and call protection in defined maturities of five, seven and ten years. Fannie Mae's GeMS programme consists of structured multifamily securities created from collateral specifically selected by Fannie Mae Capital Markets. Features of Fannie Mae GeMS have included block size transactions, collateral diversity and pricing close to par through Fannie Mae's multifamily REMICs (ACES) and multifamily Mega securities.

CMBS

US CRE prices back up

US CRE prices were up by 1.4% in May, according to the Moody's/RCA Commercial Property Price Indices. They had been down 0.6% the month before.

The increase for core commercial properties was 1.2%, with apartment prices rising 1.9% during the month. The central business district (CBD) office sector saw the largest gains, with prices rising 8.1%.

"Acquisition demand for CBD office remains strong among institutional investors, particularly in gateway cities, while opportunistic investors who bought during the trough have been selling to realise gains," says Tad Philipp, Moody's director of CRE research.

A large discrepancy has opened up between major markets and non-major markets, however. The suburban office sector saw the largest decline in May, falling 1.8% and continuing a slide which has seen prices down 5.5% for the quarter.

The only other sector to post a decline in May was the retail sector, which was down 0.9%.

RMBS

HARP accounts for more refis

The share of HARP refis as a percentage of total refinancings reached an all-time high of 20% in May. The average from January to April had been 16% and for the whole of 2011 had been 13%, note RMBS analysts at Bank of America Merrill Lynch.

Within HARP refis, the share of loans with an LTV of 105%-125% increased to a high of 28% in May from 24% in April, although the share of loans with an LTV greater than 125% fell to 4% from 8%. Loans with an LTV of 80%-105% continued to account for the majority of HARP refis, with their share declining only slightly to 68% in May from 69% in April.

The HARP share of total refinances was highest in Nevada, Arizona, Florida and Michigan. Loans with an LTV greater than 105% accounted for 59% of total HARP modifications in Nevada. The analysts note that spreads on HARP cohorts were almost unchanged in June while aggregate speeds picked up, suggesting the share of HARP refis may have fallen back again last month.

RMBS

Rating action taken on Alt-A RMBS

Moody's has downgraded the ratings of 95 tranches, upgraded one tranche and confirmed another 36 tranches from 20 RMBS transactions, backed by Alt-A loans, issued by Credit Suisse from 2001 to 2004. The actions affect US$1.2bn of securities.

The actions are a result of the recent performance of Alt-A pools originated before 2005 and reflect Moody's updated loss expectations on these pools. The upgrade is because of a build up of credit enhancement, with the downgrades due to deteriorating performance or structural features resulting in higher expected losses.

RMBS

Eminent domain legality questioned

Mortgage Resolution Partners' (MRP) proposal to use eminent domain to acquire mortgage loans, currently being considered by San Bernardino County and which would be expected to negatively affect private label RMBS (SCI passim), would be unconstitutional, says SIFMA. The association has released a legal memo drafted by O'Melveny & Myers which says the proposal would not survive a legal challenge.

"As currently conceived, the MRP proposal suffers from multiple apparent legal and procedural defects, including defects arising under the US constitution and the California constitution and under the laws of California and San Bernardino County governing the exercise of eminent domain authority," says Walter Dellinger of O'Melveny & Myers.

The law firm assets the proposal: is subject to challenge as an impermissible taking of private property under the US and California constitutions; could be challenged as a violation of the contracts clause of the US constitution; may impermissibly burden interstate commerce in violation of the US constitution's commerce clause; appears to contravene the San Bernardino County Charter; and would expose the joint powers authority and taxpayers to "potentially enormous liability" to existing noteholders if courts recognise the correct market value of performing loans.

RMBS

LTVs secondary for Japan RMBS delinquencies

The occurrence of mortgage delinquencies in Japan during the global financial crisis was more closely correlated with employment status than with high LTV ratios, says Moody's. Japanese lending criteria places more emphasis on occupation and income than on LTV ratios.

Self-employed borrowers or those employed at small enterprises were more affected by the crisis than those at large companies, the agency says. Income sustainability - a key consideration in Japanese mortgages - is determined by the financial strength or credit quality of an applicant's employer. Large companies are seen to offer greater stability for their employees.

Since the crisis, the delinquency rates for RMBS pools for regional Japanese banks with a low percentage of self-employed workers have remained stable, while those for pools with a high percentage of self-employed workers have risen, despite having lower LTV ratios.

RMBS

MERS, AG settlement reached

MERSCORP has reached a settlement with Delaware Attorney General Joseph Biden. MERSCORP has agreed not to file as plaintiff any mortgage foreclosure actions in the state and agreed to quality control and transparency requirements.

Under the settlement, MERSCORP will more closely monitor the integrity of its signing officer process to avoid a repeat robo-signing and will conduct semi-annual audits, which will be provided to Delaware's Department of Justice consumer protection unit. It will also maintain a freely-accessible database to make it easier for homeowners to find out who owns their mortgage and must now record assignments of mortgage with the county recorder of deeds before a foreclosure can proceed.

"MERS' inaccurate and unreliable records raised serious questions about who owns what in America. The steps MERS will now take will help answer those questions," says Biden. MERSCORP is still facing lawsuits from the New York and Massachusetts AGs (SCI 2 December 2011, 6 February 2012).

RMBS

Call for QM safeharbour

SIFMA public policy and advocacy evp Kenneth Bentsen has testified before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit to discuss the Qualified Mortgage (QM) proposed rulemaking and its impact on the cost and availability of mortgage credit.

"A broad QM definition with clear parameters and a safe harbour for compliance is vital to ensuring the continued availability of affordable mortgage credit," Bentsen said. "Lending outside of the confines of the QM definition will be limited, performed at far greater cost to the consumer and is more likely to be provided by less regulated, less well-capitalised and possibly less reliable entities."

In his testimony, Bentsen noted that the vast majority of future mortgage lending is likely to fall within the guidelines established by the QM definition, to facilitate compliance with the ability-to-repay provisions of Title XIV of Dodd-Frank. Due to liability, supervisory, reputational and other concerns, SIFMA does not expect significant origination of non-QM loans.

The association is concerned that the QM regulations may be constructed in a narrow manner, with parameters that will not allow for the certainty of compliance at the time of loan origination. SIFMA's members believe that such an outcome would restrict the availability of credit, through increased cost and restrictive underwriting, and would be detrimental to consumers.

Bentsen pointed out that the ability-to-repay provisions were not intended to outline the parameters of mortgage lending for the most creditworthy borrowers; that is the purpose of a provision of the risk retention statute, which exempts qualified residential mortgages (QRMs) from those requirements. Further, he stressed that due to the risk of liability inherent in non-QM lending, the parameters of the definition must provide clear, bright lines at the time of origination and a safe harbour for compliance. Lenders and investors should know at the time of origination whether the loan meets the QM standards.