Contents

CLOs

C tranches cause CLO market stir

SCI's PriceABS data shows a mix of US CLO names out for the bid yesterday. Offered tranches were biased towards 2006- and 2012-vintage paper, with talk largely concentrated in the 80s and 90s.

Many of the bonds circulating in Monday's session were C tranches or lower. ALM 2012-5A C and ALM 2012-6A C were talked at 100.13 and 100.25, respectively, while NAVIG 2006-1A C was talked at 97.38 and around 98.

DRSLF 2011-22A C made its first appearance in the PriceABS archive with talk at 100.25, while FRASR 2011-6A C - which was last covered on 14 June 2012 at 91 handle - was talked at 100.06. The INGIM 2005-1A C tranche, which was covered two months ago at 96.26, was talked at 96 and at 96.13.

A more recently issued ING tranche - INGIM 2012-1A C - was also out for the bid. Like a number of other C tranches, it was talked at 100.25. LCM 6A C was talked in the low-90s and at 92.5, while NWSTR 2005-A1 C was talked in the mid-90s, having traded in June when talk was in the higher 90s.

Moving down the capital structure there was also HLA 2012-1X D, which was talked in the mid-90s. Previous price talk on that tranche comes from last November, when it was talked in the high-80s, at 88 and at 91.75.

A couple of sub tranches - BLUEM 2012-2X SUB and CIFC 2012-3X SUB - each debuting in PriceABS were also available. The BLUEM tranche was talked in the low/mid-80s, while the CIFC tranche was talked in the high-80s.

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CMBS

CMBS volume recovers as spreads widen

At US$605m, US CMBS bid-list supply was relatively heavy yesterday, as the sector recovered from a mid-week dip. Spreads have continued to widen, however, as evidenced by SCI's PriceABS data.

The bulk of the day's supply was concentrated in 2004- to 2007-vintage paper, although paper from 1998 and from post-crisis issuances was also circulating. In addition, PriceABS shows a pair of Freddie Mac K-series notes out for the bid.

BACM 2006-4 A4 was one of many tranches to attract a successful cover during the session. It was talked at 110 and covered at 115, having previously been covered at 73 in May. The same tranche was also covered in August last year at 83.

Indeed, 2006-vintage A4 bonds proved popular yesterday, with another - GCCFC 2006-GG7 A4 - also covered at 130. This tranche was last covered in April at 71 and was again covered in August of last year, when it was covered at the start of the month at 105 and later at 88.

In addition, 2007-vintage AJs attracted attention yesterday. The JPMCC 2007-CB20 AJ bond was talked at 100 area, at 415 and in the mid/high-400s and was covered at 459. WBCMT 2007-C30 AJ was talked in the mid-90s, high-500s and at 575 and was covered at 599.

E, F, G and H tranches were also out for the bid. LBFRC 2006-LLFA E was talked in the high-90s and at around 98, with a cover at 97.75, while names such as GSMS 2005-GG4 F, MLMT 2006-C1 G and CSFB 2005-C5 H were also circulating.

The 1998-issued GSMS 1998-C1 H was another H tranche doing the rounds and was talked in the low-60s and mid-60s. One of the most recently issued tranches to be covered in the session, meanwhile, was WFRBS 2013-C14 A5 - which was talked at 110 and covered at 105.

Finally, FHMS K029 A2 was talked at plus 56 and at 60 with a cover at 62, while FHMS K030 A2 was talked at plus 57 and at 60 with at cover at 59.5. That latter tranche was covered earlier this month at 66, while the former had not appeared in the PriceABS archive before.

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RMBS

Liquidations lead to subprime surge

Subprime paper stole the show as US RMBS non-agency BWIC supply approached US$1bn yesterday. The glut of subprime names was driven by two CDO liquidations.

SCI's PriceABS data shows one such subprime tranche to trade during the session was CWL 2005-1 MV5. The tranche was talked in the low-80s and covered at high-70. It was covered last month in the high-70s.

Several other Countrywide tranches were also out. Among others, CWL 2005-1 MV3 was covered at mid-90, CWL 2005-2 M1 was covered at very high-90 and CWL 2005-BC1 M6 was covered at low-80.

EMLT 2005-1 M3 was another subprime tranche out for the bid yesterday. It was talked in the high-70s and covered at mid-70. The tranche was recorded as a DNT on 12 July, when talk was in the mid-70s, marking a dramatic change from a year before as the tranche was covered in the mid-40s on 11 July 2012.

There were also several SAIL tranches out for the bid, such as SAIL 2005-2 M1, SAIL 2005-3 A4, SAIL 2005-3 M2 and SAIL 2005-6 M4. SAIL 2005-4 M3 was talked in the low/mid-80s and covered at low-80.

Fixed-rate line items were more varied. There were some larger senior Alt-A tranches as well as some smaller re-REMICs and mezzanine bonds.

In the Alt-A fixed space, RALI 2004-QS16 1A2 made its first appearance in the PriceABS archive and was covered at mid-90. SASC 2004-4XS 1M1 was also circulating and talked in the mid/high-70s, although it did not trade.

The Alt-A hybrid MHL 2005-4 A1 tranche was traded during the session, having been talked in the mid/high-80s the day before. The first recorded cover for the tranche comes from May last year, when it was covered in the low-70s.

The option ARM SAMI 2006-AR5 1A1 tranche also appeared in PriceABS for the first time. It was talked in the low-70s.

JL

ABS

Commodity trade finance deal debuts

BNP Paribas has completed what it describes as a first-of-its-kind commodity trade finance securitisation. Dubbed Lighthouse Trade Finance Issuer I, the US$131.6m transaction is designed to increase liquidity in the commodity transportation market and provide investors with access to a new asset class.

The transaction's capital structure comprises a US$100m senior A loan (that priced at 85bp over Libor), US$20m class B notes (300bp over Libor) and US$5m subordinated notes. There is also vertical retention of an economic interest of 5% through the issuance of US$6.6m sponsor notes. Fitch rated the senior loan triple-A.

Representing the inaugural issuance from the Lighthouse Trade Finance Master platform, the deal is backed by short-term loan advances granted to corporates for the financing of physical commodities trade flows - such as the shipment of oil and metal-based products - mostly by vessels or pipelines. The financing covers the funding gap between the payments to the suppliers and the receipt of the final buyers' payments.

The loans are to commodity trading companies that act as intermediaries between a supplier and a buyer (off-taker), financing specific pre-sold trades on energy and metal commodities. Loans may be supported by a letter of credit (L/C) from the off-taker's bank (L/C provider). They share many similarities with trade receivables, but also have differences as they are interest-bearing instruments.

The maturity of the loans is generally short, between two and six weeks, with the initial portfolio having a weighted average maturity of about 15 days. Although the maximum tenor can be as long as 90 days, the short-term nature of the assets means that portfolio characteristics may change significantly - within the limits in the transaction documents.

The transaction has a two-year revolving period, which can be extended upon originator, senior A loan provider and noteholder approval. The revolving portfolio will be replenished weekly.

Fitch says that borrower defaults are rare as the loans are repaid by the proceeds from the sale of the commodity to the final buyer or the payment made by the L/C provider upon delivery. The agency expects recoveries on any defaulted loans to be high as the originator has security over the commodity and/or the sales proceeds.

In light of the general good quality of the individual assets, Fitch views concentration risk as the largest single risk to the transaction. The pool could have as few as 15 borrowers supported by as few as 12 off-takers or L/C providers. In addition, the borrowers are active in the same industry and are likely to be influenced by similar risk drivers.

The deal has a dual-SPV structure comprising acquirer and issuer vehicles. The purpose of the acquirer is to purchase eligible loans that satisfy acquirer eligibility criteria from the originator at closing and on subsequent purchase dates. The acquirer funds its purchase price of the loan portfolio by proceeds received from: an issuer loan extended by the issuer; and a variable-funding note from the originator.

The acquirer SPV is set up to allow the purchase of assets from other entities with BNP Paribas group. The new assets to be acquired will be ring-fenced from the inaugural transaction.

BNP Paribas (Suisse) plays a number of significant roles in the transaction. For example, the quality of the loan receivables depends on its operational competence in originating and servicing the trade finance loans. While various mechanisms are designed to reduce the dependence on the firm, a multi-notch downgrade of its parent (BNP Paribas) may result in the senior A loan being downgraded, Fitch concludes.

CS

RMBS

Sales put GSEs on course

Since announcing that the GSEs would reduce their less liquid holdings by 5% this year, at least six large non-agency BWICs have been brought to market (SCI passim). This has put them on course to achieve their reduction targets, although they may have begun with the better-performing tranches.

The lists have totalled US$6.1bn so far, with Fannie Mae accounting for the majority of that. Bank of America Merrill Lynch strategists estimate Freddie Mac has sold US$1.4bn, or 1.9% of its legacy non-agency portfolio as it was at end-2012. Fannie, conversely, is believed to have sold nearly US$4.7bn, or 14.7% of its end-2012 portfolio.

By selling in advance of the taper talk the GSEs were able to get ahead of some of the market sell-off that followed. The BAML analysts believe this avoided market value losses of about US$70m on the sales.

The BWICs have been skewed towards older-vintage tranches backed by Alt-A collateral. Around 92% of the tranches on the bid-lists were securitised in 2005 or earlier, despite such tranches only accounting for 22% of their estimated holdings. Likewise, while Alt-A tranches account for 31% of their holdings, they have accounted for 63% of the offered BWIC tranches.

"To date, none of the CUSIPs on the BWICs have included tranches that are part of the FHFA's lawsuits," note the analysts. "It is uncertain whether their BWIC strategy was to first sell better performing, earlier vintage tranches or if they are holding back CUSIPs that are tied to the pending litigation."

If the latter is the case, it may limit the amount and type of securities they may try to sell in the near term. Another US$60bn of outstanding par remains tied up in the courts as the FHFA has so far only settled with three banks (SCI 21 August).

The GSEs are thought to hold around US$91bn of par outstanding non-agency securities. They must also reduce their overall portfolios by 15% this year and Fannie is understood to have completed half of that reduction over the last four months, while Freddie has also completed around 40% of its required portfolio reduction, largely through CMBS security sales.

"While many large legacy portfolios have already been distributed into the market, the GSEs still have sizeable non-agency holdings and we expect they will continue to divest their holdings as part of their requirement to reduce their investment portfolio. However, it is important to note they are not forced sellers as they are on their way to meet their overall portfolio reduction targets," say the analysts.

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Structured Finance

Credit vet named fixed income chief

Juan Landazabal has joined Deutsche Asset & Wealth Management as global head of fixed income trading, based in London. He joins from Fidelity Investments, where he was also head of fixed income trading.

Landazabal worked his way up at Fidelity from a senior credit trading position, where he focused on investment grade bonds and CDS, with additional responsibilities in high yield and ABS. He managed an ABS CDO portfolio and a CDS portfolio at Caja Madrid and has also worked in the Latin American debt capital markets group at Santander Investment.

Structured Finance

Credit manager adds four

CVC Credit Partners has strengthened its teams in Europe and the US with four new hires. Ran Landmann, Mitchell Glynn and Lucie Bonnieux join in London, while Caroline Benton is based in New York.

Landmann, who was previously at Owl Creek Europe Management, the New York-based hedge fund covering distressed credit in Europe, joins as md. Before that he was part of Sandell Asset Management's European team in its credit opportunities group.

Glynn joins as an investment executive. He was previously at Neuberger Berman as an associate research credit analyst and was at LightPoint Capital Management before that.

Bonnieux joins as an analyst from Société Générale, where she worked in the leveraged finance team in London and Madrid. Before that she was at BNP Paribas, based in Paris and Sydney.

Lastly, Benton joins as md. She previously spent 15 years at Goldman Sachs in proprietary investing and risk management functions in the special assets, global bank loan distressed investing and special situations investing groups within the fixed income division.

Structured Finance

Structured credit pro brought in

GoldenTree Asset Management has appointed Brian Marshall as business development md. He is based in New York and reports to head of business development Thomas Humphrey.

Marshall was previously structured credit products md at Barclays Capital, where he focused on credit and mortgage products including CLOs, leveraged loans, credit correlation, esoteric ABS and RMBS CDOs. Before joining the bank he was head of structured credit sales in North America for Lehman Brothers.

Structured Finance

Bank builds up UK SF team

RBS has made three new appointments to its corporate and institutional banking division's financial institutions structured finance business. They join a team focused on originating and executing structured credit facilities to finance companies, debt purchasers and specialist lenders in the UK.

Nick Parkhouse will lead the team. He joined RBS two years ago from Commonwealth Bank of Australia, before which he worked at Barclays Capital.

Veronika Lovett becomes director while Michael Murray will serve as associate director. Lovett has experience across structured finance while Murray previously worked in the securitisation team at Westpac.

CDS

Consultancy adds derivatives vet

Kevin McPartland has joined Greenwich Associates as principal to lead a new market structure and technology advisory service. The new initiative will help clients to navigate market changes driven by regulatory and economic changes.

McPartland joins from BlackRock and has previously worked at TABB Group, JPMorgan, UBS and Deutsche Bank. He specialises in fixed income and OTC derivatives.

CMBS

Asset manager boosts CRE capacity

Insight Investment has agreed an advisory relationship with DTZ Investment Management and appointed DTZ chairman Robert Peto to its commercial real estate investment committee. It has also hired Duncan Westbrook as a CRE analyst, who will join next month from Cushman and Wakefield, where he was part of the capital markets team for EMEA.

Under the terms of the agreement with DTZ, the company will assist Insight in the due diligence process and provide data and property market research views. This will enable the fund manager to access a broader spectrum of loans as it looks to target the space vacated by the banking sector.

Risk Management

Futures groups unite, form new board

The Futures Industry Association, FIA Europe and FIA Asia are set to form FIA Global. The new organisational structure will enable the associations to take a global position on cross-border issues and increase coordination and information flow among regions.

FIA Global has named an initial board of directors of 14 members, with derivatives and OTC clearing representation prevalent. FIA president and ceo Walt Lukken will serve as FIA Global's ceo.

RMBS

Motion to dismiss denied

A California Superior Court judge has denied S&P's motion to dismiss a lawsuit filed by California Attorney General Kamala Harris against the rating agency in February (SCI 6 February). The California case is notable for its asserted violations of unfair competition laws and the California False Claims Act, which allows the state to seek triple damages but has not previously been used with respect to financial analysts, according to SFIG.

In the complaint, the State of California alleges that S&P's rating of MBS led to almost US$600m in losses to California pension fund investors in 2008. S&P sought dismissal of the lawsuit on several grounds under the False Claims Act, including that the statute of limitation to file a claim under the Act had lapsed.

To successfully make that argument, the agency had to show that California reasonably should have known of the alleged wrongdoing before 15 June 2008. The California Superior Court judge ruled that S&P did not meet its burden of proof that the statute of limitations had run.

The next pre-trial conference on the case is scheduled for 6 September.

RMBS

Bank breached RMBS guidelines

JPMorgan has been told to pay Leonard Blavatnik US$42.5m plus interest in a breach of contract lawsuit centred on RMBS investments. The decision was made by a New York state court after Blavatnik sued the bank for investing twice as much of his money in RMBS as his investment guidelines allowed.

The RMBS cap was set at 20% but reached as much as 60% of the fund's portfolio. A Lowenstein Sandler client memo notes that although the court generally found in favour of Blavatnik, it did find in favour of JPMorgan with respect to an associated negligence claim against the bank.

ABS

Auto ABS losses on the rise

US auto ABS prime and subprime losses rose last month after reaching lows in the spring, according to Fitch. Despite the uptick in losses, asset performance has remained strong, as have used vehicle values.

In the prime sector 60-plus day delinquencies rose 10% to 0.33% in July month-over-month. That said, delinquencies remain 13% lower than in the same month last year.

Prime annualised net losses rose from 0.21% in June to 0.31%. Loss rates do still remain historically low and prime cumulative net losses were at a record low in July at 0.27%, which is 25% lower year-over-year.

Subprime 60-plus day delinquencies rose almost 8% to 3.13%, which is around the same level as July 2012. Annualised net losses increased 17% month-over-month to 4.45%, which is a 6% improvement year-over-year.

Auto ABS losses are likely to increase in the coming months "as the seasonally weak fall progresses". Dealers will begin discounting existing 2013 models to make way for new 2014 ones, which typically impacts loss severity and drives loss rates higher.

ABS

Indices point to positive card performance

US credit card ABS collateral performance is expected to stay positive and ratings should remain stable, says Fitch. Credit card ABS collateral continues to outperform as Fitch's preliminary prime chargeoff index is likely to hit a seven-year low.

The preliminary prime chargeoff index is expected to decrease for the fourth consecutive month, driven by the continuing record decline of Fitch's prime 60-plus day delinquency index. Late payments are expected to drop for the fifth consecutive month.

After a decline of over 100bp in monthly payment rate (MPR) last month, Fitch's prime MPR index is projected to exceed its all-time high, which it reached in the May 2013 reporting period. The prime gross yield index is expected to experience a slight increase.

Structured Finance

Ratings reviewed on bank linkage

Moody's has placed on review the ratings of a number of securities directly exposed to the credit quality of certain US banks, on which the agency took rating actions on 22 August. The action affects 20 tranches in 12 structured finance deals and 32 tranches in 18 structured credit deals.

The move is driven by the linkage between the ratings of the securities and those of the banks, each of which acts as either the guarantor of the securities or the issuer of collateral securities in the transaction. Because of the linkage, each rating is essentially a pass-through of the bank's rating, Moody's explains.

The agency notes that the affected transactions are subject to a high level of macroeconomic uncertainty, which could negatively impact their ratings.

Structured Finance

'Passporting' framework recommended

SFIG has submitted a comment letter to the EBA regarding its consultation paper on revised proposed EU securitisation regulations. To mitigate the costly and potentially preclusive impact of differing regulatory approaches on cross-border securitisation transactions, the association recommends that the EBA adopt a framework for 'passporting' that would permit non-EU sponsors to comply with a non-EU jurisdiction's risk retention requirements.

The EU risk retention framework places the burden of ensuring compliance on certain regulated investors in securitisation transactions. In contrast, the proposed US framework would place requirements on securitisers for meeting risk retention requirements.

Further, the comment letter requests the EBA to clarify that the proposed risk retention requirements may be satisfied by a single entity on a consolidated group basis and that non-EU entities may also satisfy the risk retention requirements on a consolidated basis. Clarification is also sought so that in transactions with multiple sponsors, a single sponsor may satisfy the entire risk retention requirement if certain conditions are met or the sponsors may appropriately apportion the risk retention requirements as agreed between themselves.

In addition, the EBA is requested to ensure that the disclosure-related requirements of the risk retention provisions do not conflict with any obligations binding on sponsors or originators relating to confidentiality and privacy, and that loan-level data not be required in the context of certain publicly-issued and privately-placed securitisations. Finally, SFIG is seeking changes that would permit all types of EU regulated entities and firms that are in compliance with any applicable regulations of their respective jurisdictions to be eligible to serve as sponsors.

CDS

Credit futures calculator launched

Quantifi has launched an industry price-spread calculator for credit index futures listed on ICE Futures US. The tool aims to allow market participants to better monitor and manage credit risk exposures.

The calculator is designed to convert futures prices into the equivalent forward spreads for any given date. Key features of the tool include: easy accessibility via the ICE website; implied underlying spread corresponding to futures price quotes for settlement dates; implied corresponding futures price for a given spread; and calculations for 'when issued' credit index futures based on forward starting indices.

CMBS

Varied recovery for global CMBS

A new S&P report highlights that as economic growth varies by region, so does the recovery of the CMBS market. Year-to-date through June the US and European CMBS markets were already ahead of 2012 CMBS issuance levels, while other regions - including Japan, Canada, Australia and Singapore - have seen limited to no issuance.

In the first-half of 2013, US deals accounted for 90% of total global CMBS issuance. This level compares to 2006, a significant issuance year that S&P considers to be a comparable period of time for issuance among all regions. The US accounted for approximately 72% of global CMBS issuance in 2006, while Europe and Japan picked up another 24%.

Property prices remain soft - and well below peak levels - in Europe and Japan. Capital values in major European commercial real estate markets declined sharply in 2007/2008, followed by a rebound, though mostly in the primary markets. In Japan property prices are recovering but are still about 22% lower than peak levels.

In the US property prices have recovered more quickly, with current pricing close to or exceeding trough levels, depending on property type and market. In Canada, Australia and Singapore, property fundamentals have generally been stable to strong.

The recovery in property prices has benefited US CMBS issuance and, in turn, the success in refinancing loan maturities. Low interest rates and the dominance of seasoned 2003-vintage maturities contributed to a strong fixed-rate pay-off rate of 88% in the first half of 2013. However, the largest concentration (78%) of outstanding maturities occurs in 2015 through 2017, when interest rates might not be as favourable.

In Europe, 2013 and 2014 are the largest maturity years due to shorter-term loans. Of Europe's scheduled maturities in the first half of 2013, 39% were fully repaid.

Japan also has relatively short note terms and most of Japan's CMBS maturities occurred in 2009-2011. From 3Q08 through the end of 2012, Japan's maturity pay-off rate was 39%.

In Canada, more than 80% of CMBS outstanding will come due by 2016. In Australia, 80% matures in 2015, and 73% comes due in Singapore in 2014.

CMBS

Multifamily, hotels lead CMBS NOI growth

Net operating income (NOI) has improved nearly 3% year-over-year for Fitch-rated US CMBS. This has been driven by stability in the multifamily sector and a continuing recovery for hotels.

Servicer-reported NOI improved by 2.7% year-over-year in 2012, compared with just 0.8% in 2011 and a 0.9% decline in 2010. Multifamily NOI growth in 2012 was broadly positive, with states such as Illinois and Colorado recording year-over-year NOI gains of more than 10%.

The agency warns that some regional hotel weakness may continue. Overall hotel NOI growth was 8.2% year-over-year; but while it was up 30% in Hawaii, it fell 7% in Washington, DC.

CMBS

LBUBS 07-C2 hit by further losses

LBUBS 2007-C2 has been hit by a further US$568,000 of losses - despite no new property sales - which pushed interest shortfalls up to the class AM notes. This comes after a barrage of liquidations drove losses up to the AJ tranche last month (SCI 18 July).

Barclays Capital CMBS analysts note that the losses are due to 'additional expenses' charged this month on almost all of the loans that were liquidated in July. As the servicer did not release any explanatory note, it is unclear what these expenses are related to, but they are believed to represent additional fees or charges paid as a part of the liquidation process.

Together, these charges totalled US$2.37m, which the servicer reimbursed from general trust cashflows. Of this, US$564,000 came from scheduled principal payments and an additional US$4,000 came from unscheduled curtailments.

Because all principal cashflows were diverted to the servicer, no principal payments were made to the front cashflow bonds. To prevent the deal from being under-collateralised, a corresponding US$568,000 loss was applied to the lowest AJ tranche.

The remaining US$1.8m was reimbursed from interest proceeds. ASERs, modification shortfalls and servicing fees on the remaining two delinquent loans in the pool accounted for another US$25,000, resulting in the deal taking interest shortfalls of US$1.83m.

The Barcap analysts expect these additional expenses to be a one-off event. "As a result, interest shortfalls on the AM should be reimbursed next month. However, the US$1.8m diverted from interest cashflows to pay back the servicer should constitute a permanent interest shortfall on the lowermost tranche, the AJ."

CMBS

More REO assets to be auctioned

There will be US$322m of distressed US CMBS loans out for bid through Auction.com in the last weeks of August through September, including the office property at 401 E. Ocean Boulevard, which backs a US$22m loan in LBUBS 2007-C1. The loan has been in REO since November and a December appraisal pegged the value of the property at US$17m.

Barclays CMBS analysts note that the US$20.4m Courthouse Marketplace Retail Center in WBCMT 2007-C31 is also due to be liquidated in auctions next month. The anchored retail property moved into REO in April of last year and is appraised at US$15m as of May 2013.

Risk Management

Macro impact of OTC reform assessed

The Macroeconomic Assessment Group on Derivatives (MAGD) has published a report on the macroeconomic effects of OTC derivatives regulatory reform. The report finds that the net benefits of stricter OTC derivatives regulation outweigh the costs.

MAGD's report focuses on the effects of mandatory central clearing of standardised OTC derivatives, margin requirements for non-centrally cleared OTC derivatives and bank capital requirements for derivatives-related exposures. It found economic benefits worth 0.16% of GDP per year from avoiding financial crises and economic costs of 0.04% of GDP per year from institutions passing on the expense of holding more capital and collateral to the broader economy, resulting in net benefits of 0.12% of GDP per year.

Risk Management

IGA up-take signals regulatory cooperation

GreySpark Partners has released a report exploring the emerging global regulatory landscape that is designed to provide an international perspective on what are often seen only as regional mandates. A key finding is that despite differences in regulations between territories, the up-take of intergovernmental agreements (IGAs) highlights the desire for cooperation among some jurisdictions.

The report focuses on nine territories, chosen owing to the influence of their regulations on global capital markets: Australia, Brazil, Canada, the EU, Hong Kong, India, Japan, Singapore and the US. Regulatory changes in these jurisdictions continue to create uncertainty, mismatched objectives and extensive opportunities to misinterpret requirements for market participants, GreySpark observes.

One of the report's findings suggests it is increasingly apparent that regulatory avoidance can only take place beyond the jurisdiction of the US, the EU and the G20 in areas where there is a lack of legal and regulatory maturity. But FATCA is likely to generate the strongest degree of international cooperation, as IGAs are signed by jurisdictions seeking reciprocal information from the US.

Further, the challenge of integrating many complex legal and regulatory infrastructures is great and costly. Substituted compliance - whereby local regulations are substituted with similar, foreign regulations, due to their relative comparability to the CFTC's rules on cross-border swap trading - exists in a variety of forms across several jurisdictions, though there is little evidence of directly comparable regulations between many territories.

GreySpark's findings also show that while cooperation can exist, regulatory interoperability across jurisdictions while pursuing a variety of regulatory agendas is a myth. "Without a single, truly global regulatory body with the authority to sanction deviants, there is no likelihood of seamless information exchange or the need for overseas counterparties to conform to absolutely standardised compliance requirements," the firm notes.

Finally, exemptions to regulations are shown to offer compliance relief to entities and transactions under certain conditions. For example, in both the EU and the US, regulators appear to agree on the exemption of legitimate hedgers and certain end-users from bilateral clearing mandates. However, they differ in the detail.

Under the Dodd-Frank Act, exemptions are in place for non-financial entities that use derivatives to hedge commercial risk while, end-users are only exempt under EMIR if their positions are legitimate hedges and fall below a certain threshold. The extent of exemptions across the regulations explored is not far-reaching enough to have a powerful market impact, according to GreySpark.

RMBS

Portuguese RMBS picture improves

The rate of deterioration in Portuguese RMBS collateral eased in 2Q13, according to S&P's latest index report. Total delinquencies decreased slightly quarter-on-quarter for the first time in two years.

The pace of delinquencies has been softened by low interest rates and increased forbearance measures. However, continuing struggles for the broader economy will continue to constrain performance.

The real estate market is expected to remain weak this year, with further house price declines likely in the short term. With a high unemployment rate and other factors pressurising the housing market it remains to be seen whether the collateral performance improvement seen in the last quarter can continue.

RMBS

Slower RMBS liquidation rates observed

Morningstar projects that it will take 41 months to clear RMBS distressed inventory in the US, given current market dynamics. This is up by one month from the agency's estimate in 1Q13 and up by three months from its estimate one year ago.

Overall distressed inventory has decreased by 21% from a year ago, while the number of liquidations declined by 37%. The number of distressed properties was approximately 949,000 units at end-May, down by 6.5% from three months prior.

Morningstar's principal observations of RMBS distressed inventory are: a surprising decline in short sales; an increasing number of loan modifications; much slower liquidation rates; and more months of inventory. Declines in the number of properties entering the distressed inventory and the continued liquidation of distressed inventory are factors contributing to the steady decline in distressed inventory, the agency reports.

Approximately 43% of the national distressed inventory is stalled in the foreclosure status. Because judicial foreclosure processes typically take longer than non-judicial foreclosure processes, the top six states for distressed inventory - New Jersey, Florida, New York, Illinois, Maine and Connecticut - are unsurprisingly judicial states.

Based on Morningstar's conversations with local realtors from previously hard-hit regions, the agency says that certain markets - such as Phoenix - have experienced bidding wars. Institutional cash buyers have driven demand and made a notable impact on distressed inventory, as well as property prices in hot markets, such as Phoenix, Atlanta and Las Vegas.

Short sales as a percentage of total distressed sales increased from 44% to 47% since June 2012 to end-May. Rising home prices could make lenders less willing to approve short sales and leave underwater homeowners to seek other options.

Meanwhile, close to US$99bn of the distressed inventory had been modified as of May, compared to US$94bn in February. The increase in loan modification activities may ultimately reduce the foreclosure starts, the foreclosure-to-REO roll rate and non-REO third-party sales, Morningstar observes.

REO sales also continue to decline. The increase in loan modification activities and the decrease in both REO and non-REO sales have contributed to the decline in overall liquidation speed.

Morningstar's estimate for the months to clear the distressed inventory is 59 in judicial states and 29 in non-judicial states - a decline from its previous quarter's forecast of 64 months in judicial states and 27 months in non-judicial states. Regional variation for distressed inventory across the top 20 MSAs remains dramatic.

The average months to clear the distressed inventory for the top 20 MSAs as of May is 54 months, ranging from 17 months in Phoenix to 235 months in New York. This represents seven months of inventory increase from three months ago.

Excluding the New York MSA - which is a judicial foreclosure state and has an unusually low percentage of distressed sales - the average months to clear inventory is 45 months, compared to 38 months estimated three months ago. On average, the percentage of short sales in the top 20 MSAs has decreased slightly from 57% to 56% over the past three months.

RMBS

QRM revision anticipated

The federal agencies responsible for jointly promulgating the risk retention rule under the Dodd-Frank Act are expected to propose a revised rule on 28 August. In particular, the requirements for qualified residential mortgage (QRM) status are likely to be loosened, to mirror the CFPB's definition of qualified mortgage (QM) under its ability-to-repay rule (SCI 11 January).

Meanwhile, the SFIG has submitted a letter to the CFPB regarding certain aspects of the ability-to-repay (ATR) rule and the QM standard. The letter cites four areas of the ATR rule as being of primary concern to the association's members: the effect of the "higher-priced covered transaction" threshold on the availability of jumbo prime loans; the practical effect of the 43% debt-to-income (DTI) requirement on consumer access to jumbo prime loans; the interaction between Appendix Q and the risks to the creditor associated with the rebuttable presumption; and subjective considerations in the verification of self-employment income.

SFIG believes that these issues directly affect consumer access to credit and could have significant negative economic consequences for both primary and secondary mortgage market participants. The association's residential mortgage committee is scheduling a series of roundtable discussions relating to matters affecting the mortgage finance industry, including the ATR rule.

RMBS

Improvement seen in Mexican RMBS

Mexico's RMBS market has slowly caught up with the broader economy in the country, which began to recover in 2010. However, S&P notes that the progress in RMBS could be threatened by that wider recovery now slowing down.

Delinquencies were generally stable for the first half of the year and upgrades outpaced downgrades for the first time since S&P began rating Mexican RMBS. Performance has stabilised and credit enhancement has improved, so even fewer downgrades are expected over the next 12 months.

New issuance is down 25% so far in 2013 from this time last year, with large issuers Infonavit and Fovissste both slowing their securitisation pace. More positively however, BBVA Bancomer was the first private originator to return to market since 2009, which could pave the way for others to follow suit.