Contents

Risk Management

Euro secondary slides

Activity and pricing levels are sliding across the European securitisation secondary market.

Prime autos and RMBS finally succumbed to broader market downward pressure and edged wider on very light volumes yesterday. 2.0 CMBS is still offering some resistance, but elsewhere tone remains weak and liquidity is thin across the board.

Street buyers are occasionally being seen in select names in a variety of ABS/MBS paper. However, any such trading is not of sufficient size to hold levels up and the overall decline in prices is continuing with Portuguese bonds leading the way. Meanwhile, CLOs had another unclear day yesterday with no colour released on the four BWICs due.

There are three BWICs on the European schedule for today so far. First up, at 13:30 London time, is a single €15m line of MONAS 2006-I A2, which hasn't covered with a price on PriceABS in the past three months.

At 14:30 there is nine line 23.6m mixed bag comprising: CFHL 2014-1 B, DILSK 1 A, DRVUK 3 A, FRIAR 3 A, GFUND 2016-1X A1B, GRF 2013-1 B, HELIC 2002-1 B, PRADO 1 A and SUNRI 2015-3 A1. Two of the bonds have covered with a price on PriceABS in the past three months, last doing so on 27 January as follows: DILSK 1 A at 100.16 and SUNRI 2015-3 A1 at 100.376.

At 15:00 there is a UK non-conforming auction, which now involves four line items after GHM 2007-1 BB traded ahead. They are: £4m GHM 2007-1 BA, €2.5m PARGN 11X BB, €2.5m PARGN 14X BB and €3.917m PARGN 13X C1B. Only one of the bonds has covered with a price on PriceABS in the past three months - PARGN 11X BB at 87.5 on 4 December.

Secondary markets

Euro secondary lacklustre

Friday saw another lacklustre session in the European securitisation secondary market.

Macro market weakness once again kept investors stuck on the sidelines. Consequently, flows were light and spreads were broadly range-bound.

Prime assets were once again the positive area with two-way flows albeit at low volumes focused at the front end of the curve. Meanwhile, non-eligible peripheral bonds remain the laggards with tone increasingly weak.

There are currently two BWICs on the European schedule for today. At 14:30 London time there is a three line 18m original face euro and sterling CMBS list comprising: DECO 2014-BONX F, ECLIP 2006-1 A and TMAN 7 C. None of the bonds has covered on PriceABS in the past three months.

At 15:00, there is a 57.5m eight line mixed RMBS auction consisting of: ALBA 2006-2 E, AYTH M5 C, LGATE 2007-1 CB, LGATE 2008-W1X D, LMS 3 C, MPS 4X B1A, TDAC 7 B and UROPA 2008-1 C. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro secondary sidelined

The European securitisation secondary market remains quiet as participants continue sit out wider market volatility.

"It's understandably very quiet as everyone watches what's going on in banks and financials, which is brutal to say the least," says one trader. "The majority of investors we speak to are planning on staying on the sidelines - everyone is in risk-off mode."

However, the trader says: "There are some pockets of activity around very select names in prime resi and autos, and even some SMEs. In those sectors we are still seeing some reasonably sensible two-ways on the screens."

There are currently two BWICs on the European schedule for today. Both involve CLOs.

At 13:00 London time there is a two line auction consisting of €8m JUBIL VI-X B and €5m MERCT III-X A3. Only the latter has covered on PriceABS in the past three months - at 97.31 on 16 December.

At 15:00 is a four line €16.5m list comprising: HARBM 10X B1, HARVT II-X D1, OCI 2007-1X D and WIMIL 2007-1X D. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

US CLOs challenged

Internal and external factors are making things difficult in the US CLO secondary market.

"There's not a whole lot happening - it's a very challenging market at the moment," says one trader. "Secondary isn't helped by primary being hung as well - it's too difficult to get a deal away with secondary spreads 100+ wider than new issue, the arb doesn't work so even if you're talking about a clean deal it falls on deaf ears. However, we are beginning to see some movement especially in junior tranches where primary talk was 335-350, but has edged out to 375-400."

However, there appears to be little sign of anything moving in secondary. "The bids that are being shown by the secondary desks are very wide and we're seeing bid-asks in some cases out to 150bp, which isn't conducive to getting things done," the trader says.

While lack of new issuance and broader market volatility are the main hurdles to secondary CLO activity, there are sector specific issues too, the trader notes. "There's a fair amount of research from respected teams being circulated at the moment suggesting that potential defaults in CLOs will impact on OC tests, which will cut off some junior tranches and increase downgrade risk. So, that's why those tranches are being especially hammered and why we're seeing paper trading wider than the rating might indicate."

Today is relatively quiet in terms of BWICs, but sellers are still consistently coming to market despite current levels. "Some accounts are having to sell because they bought paper on leverage and we hear that applies from triple-As all the way down to equity," says the trader.

There are currently three BWICs on today's US CLO calendar, primarily made up of 1.0 bonds. The largest is a four line $55.61m current face triple-A auction due at 14:00 New York time.

The list comprises: ARES 2007-12A A, DUANE 2007-4A A1R, FOURC 2006-2A A and SHACK 2014-5A A. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary struggles

The European securitisation secondary market continues to struggle amid wider market volatility, but there are still some exceptions.

"Yesterday was once again quite weak overall," says one trader. "There was hope of some improvement thanks to better things in broader credit, but it will take more than that for us to recover more fully."

However, the trader adds: "We continue to see pockets of activity with prime assets still being the main focus. Most notably, yesterday saw good demand in UK prime, which was a reflection of primary activity."

Peripherals too saw some action yesterday, though it was not all positive, the trader reports. "Many eligible bonds continue to do well and we saw some strength in Spanish names in particular, but Portuguese RMBS was weaker again because of continuing political difficulties. At the same time, non-eligible peripherals widened across the board."

The remainder of the market is similarly struggling. "Away from prime and some peripherals it's still very difficult. In UK non-conforming and buy-to-let for example pretty much all bonds are down," the trader says. "Equally, in CLOs there's still not a lot to see, most of the activity is bilateral and there remains a lack of direction and transparency, so overall tone remains quite weak."

There are currently three short BWICs on the European schedule for today. First up and most eye-catching is a €1.005bn block of CLSME 2015-1 A at 10:30 London time. The Italian SME CLO has not covered on PriceABS before.

Also at 10:30 there is a three line mix, comprising: €12.13m BUMF 6 A2, £10.291m NDPFT 2014-1 A and £7.656m PMF 2014-1 A. Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: BUMF 6 A2 at 95.79 on 7 December and PMF 2014-1 A at H98 on 6 January.

At 14:30 there is a single €10m line of CRNCL 2014-4X C. The CLO tranche has not covered on PriceABS in the past three months.

Secondary markets

Euro ABS/MBS switchback

Yesterday was a better day in the European ABS/MBS secondary market, but today looks set to see a switch back to recent patterns.

"There was a slight rebound in broader markets yesterday, which enticed people back into the market," says one trader. "Notably, we saw some selling of senior assets and they all went through in line with expectations."

However, the trader continues: "It's a bad day in broader markets again today, so it looks like it'll be very quiet in our space. We'll likely see a return to recent trends where the vanilla space remains well supported but anything high beta is very difficult to move."

There are currently no BWICs on the European ABS/MBS schedule for today.

Secondary markets

Euro CLOs unsettled

Wider market volatility is continuing to unsettle the European CLO secondary market.

Thanks to the short-lived improvement in the macro picture yesterday, secondary trading picked up a little, mainly in seniors, but only relative to the extremely light flows of late. The majority of CLO investors remained sidelined and the single line item in for the bid, CRNCL 2014-4X C, traded but with no colour released.

The increased wider market volatility being seen today is likely to thin liquidity further, which combined with pricing opacity and no action in primary will keep CLO secondary unsettled and market tone weak. Nevertheless, there are a few BWICs due today, albeit possibly generated by false optimism yesterday.

After some confusion earlier this morning the European CLO calendar currently has a total of four lists on it for today. A pair of almost exclusively triple-B lists were due to trade at 11:00 London time and a pair of equity auctions are due at 15:00.

The chunkiest of the two equity lists comprises: €10m BABSE 2015-1A SUB, €12m CADOG 6X M1 and €23.625m HSAME 2007-IA F. The other equity BWIC amounts to €5m across four line items - ARBR 2014-1X SUB, BABSE 2014-1X SUB, BABSE 2015-1X SUB and OHECP 2015-3X SUB. None of the equity pieces has covered on PriceABS in the past three months.

In addition, there is a single €12m line of Trups CDO DEKAE 3X A1 due at 14:00. The bond has not covered on PriceABS in the past three months.

Structured Finance

SCI Start the Week - 8 February

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

Pipeline
Pipeline additions were heavily skewed to ABS last week. A total of 11 ABS deals were added, while there was also a single ILS, an RMBS, a CMBS and a CLO.

The ABS were: US$1bn BMW Vehicle Lease Trust 2016-1; US$850m CNH Equipment Trust 2016-A; US$141m EDvestinU Private Education Loan Issue No.1; US$649m Enterprise Fleet Financing Series 2016-1; US$198.8m First Investors Auto Owner Trust 2016-1; US$980m Ford Credit Floorplan Master Owner Trust A Series 2016-1; US$454m GreatAmerica Leasing Receivables Funding Series 2016-1; US$282m PFS Premium Finance; CNY2.71bn Rongteng 2016-1 Retail Auto Mortgage Loan Securitization; US$1.06bn Santander Drive Auto Receivables Trust 2016-1; and Turbo Finance 6.

Espada Re 2016-1 was the ILS, while Darrowby No.4 was the RMBS and US$955m MSBAM 2016-C28 was the CMBS. The CLO was US$300m Mill Creek CLO II.

Pricings
The majority of the week's prints were also from the ABS sector. As well as nine ABS there was one RMBS and three CMBS.

The ABS were: CNY1.31bn Autopia China 2016-1 Retail Auto Mortgage Loan Securitization Trust; US$140.4m CLI Funding VI Series 2016-1; €888m Driver Espana Three; US$350m Exeter Automobile Receivables Trust 2016-1; US$217.5m HERO Funding Trust 2016-1; US$439m Hertz Vehicle Financing II Series 2016-1; US$561m Hertz Vehicle Financing II Series 2016-2; US$1bn Nissan Auto Receivables 2016-A Owner Trust; and US$414m OneMain Financial Issuance Trust 2016-1.

US$225m Station Place Securitization Trust 2016-1 was the RMBS. The CMBS were US$991m CGCMT 2016-GC36, US$585m JPMCC 2016-ATRM and US$887m WFCM 2016-C32.

Markets
"The [US] ABS market remains bifurcated with strong demand for top tier, plain vanilla versus continued softness in off-the-run names/sectors," note JPMorgan analysts. They add: "Broad macro and financial technical dynamics also continue to be the primary driver of ABS spread performance." Triple-A credit card and private student loan ABS floating rate indicative spreads are Libor plus 45bp and plus 130bp, respectively.

Secondary activity was elevated for the European CMBS market last week, as both CMBS 1.0 and 2.0 names circulated on bid-lists. Bank of America Merrill Lynch analysts note that Italian names were particularly well bid. They say: "Broadly speaking, discount margins on pre-crisis European CMBS transactions are now around 140bp for original triple-A rated notes (up from 135bp last week), 200bp for original double-A rated notes (from 190bp last week), 250bp for original single-A tranches (from 240bp last week) and 290bp for original triple-B tranches (from 275bp last week)."

Editor's picks
Dispute resolution framework inked: Fannie Mae and Freddie Mac have implemented a new independent dispute resolution (IDR) process for handling alleged loan-level breaches of selling representations or warranties that are unresolved after completing the GSE appeals process. The aim is to provide lenders with a simpler and more certain representations and warranties framework for originations...
CMBS 2.0 delinquencies spike: January saw the largest one-month rise in US CMBS 2.0 loan delinquencies ever, but the corresponding servicer commentary appears to be relatively benign, according to Morgan Stanley CMBS strategists. Among the new delinquencies, they highlight a 2014-vintage loan requesting a modification and a number of new watchlisted loans that could potentially become credit concerns...
US CLOs down but not out: Despite the current downward trend in prices, there are signs that the US CLO secondary market is attempting to pick itself up. "It's not a pleasant picture for sellers right now," says one trader. "There were a couple of lists from people that had to sell [on Wednesday] and they found some really weak bids..."

Deal news
• Jefferies Funding is in the market with an RMBS backed by a one-year revolving warehouse facility guaranteed by Jefferies Group. The US$225m Station Place Securitization Trust 2016-1 transaction is structured with two legs of back-to-back repurchase agreements.
• Creval Group has agreed to sell a €314m securitisation of secured and unsecured NPLs to Credito Dondiario. The sale of the Cerere portfolio is the first significant shifting of NPLs off Creval's books as part of its medium-term NPL management plan.
• From the start of this month, Barclays is linking the interest rates it charges UK credit card customers to the Bank of England's base rate. The current low interest rate environment means such a move will support excess spread levels in the Gracechurch credit card ABS trust and reduce potential asset-liability interest rate mismatches between the receivables and note liabilities.

Regulatory update
• A decree formalising the Italian treasury's €200bn NPL plan (SCI 28 January) is expected shortly. Moody's suggests in its latest Credit Outlook publication that the proposed state guarantee will improve the rating and liquidity of the senior tranches, facilitating both the placement of the senior tranches with investors and the deconsolidation of bad loans from the books of Italian banks.
• Recent changes by Brazil's securities market regulator Comissao de Valores Mobiliarios to ABS performance reporting standards still lack a number of important features, Fitch warns. The breakdown of payment data could result in users continuing to underestimating delinquencies and losses.
• A recent US District Court for the Eastern District of Pennsylvania decision has highlighted once again the regulatory risks that the 'true lender' doctrine can create for internet-based lenders that partner with banks to establish exemptions from state consumer protection laws (SCI passim).
• Fannie Mae and Freddie Mac have implemented a new independent dispute resolution (IDR) process for handling alleged loan-level breaches of selling representations or warranties that are unresolved after completing the GSE appeals process. The aim is to provide lenders with a simpler and more certain representations and warranties framework for originations.
• Morgan Stanley has agreed to pay the FDIC nearly US$63m regarding claims over the sale of RMBS to three banks that later failed. The settlement, which resolves lawsuits brought forward by the regulator as receiver for the banks, will be distributed among their respective receiverships.
• A new Catalonian law on housing emergencies could deter potential purchases of Spanish mortgage NPLs, suggests Moody's. As a result, the adverse effects of Catalonian law 24/2015 may see fewer NPLs included within RMBS pools.

Deals added to the SCI New Issuance database last week:
Babson CLO 2016-I; CarMax Auto Owner Trust 2016-1; CFCRE 2016-C3; COMM 2016-CR²8; CSAIL 2016-C5; FREMF 2016-K504; FREMF 2016-K52; FREMF 2016-KBAM; FREMF 2016-KF13; FRESB 2016-SB11; Galileo Re series 2016-1; Hertz Vehicle Financing II series 2016-1; Hertz Vehicle Financing II series 2016-2; Home Partners of America 2016-1 Trust; Hyundai Auto Lease Securitization Trust 2016-A; Navient Private Education Loan Trust 2016-A; Storm 2016-I; Vitality Re VII series 2016; Voya CLO 2016-1

Deals added to the SCI CMBS Loan Events database last week:
CGCMT 2004-C2; CGCMT 2014-GC23; COMM 2013-LC13; COMM 2014-CR15; COMM 2014-UBS3; COMM 2014-UBS4; COMM 2014-UBS5; CWCI 2007-C3; DECO 7-E2; DECO 8-C2; ECLIP 2006-1; EMC VI; EURO 28; GSMS 2011-GC5; JPMBB 2014-C21; JPMBB 2014-C24; JPMCC 2010-C1; JPMCC 2012-C8; JPMCC 2014-C20; MLCFC 2006-1; TITN 2006-1 & TITN 2006-2; WFCM 2015-NXS2; WFRBS 2012-C9

CMBS

Gateway mod to realise a loss?

The US$94.2m Gateway Salt Lake loan - securitised in JPMCC 2010-C1 - has been assumed at US$78.5m and modified, following its acquisition by an investor group that reportedly includes Vestar and Oaktree (see SCI's CMBS loan events database). Morgan Stanley CMBS strategists expect the move to result in significant interest shortfalls and a loss to the trust of roughly US$15.7m.

The loan assumption comprised US$75m for the collateral purchase and US$3.5m to fund capital expense reserves. The maturity was extended from 1 April 2017 to 1 February 2021 and the interest rate was cut from 6.572% to zero in the first year, stepping up to 1% in the fifth year.

There had been speculation that the loan would be split into an A-note and B-note, but the Morgan Stanley strategists believe the modification will instead result in a US$15.7m write-off.

Gateway Salt Lake is the largest loan in JPMCC 2010-C1, accounting for 30.5% of the collateral. Based on their interpretation of the modification template, the strategists estimate that the resulting loss will fully write down the US$11.6m NR class of bonds and 65% of the US$6.3m H class. There may also be interest shortfalls of US$6.2m per annum, due to the write-off and interest rate deduction, which will impact bonds across the capital structure.

JPMCC 2010-C1 was the first CMBS 2.0 to be downgraded, with Moody's citing declining performance at Gateway Salt Lake as a primary driver of the rating action (SCI 9 December 2014). Due to significant operating losses, HFF was hired to market the property and sent offering memorandums to 1,450 potential investors on 24 April 2015, with confidentially agreements executed with 90 of them.

The sponsor obtained six all-cash offers to purchase the property, ranging from a low of US$15m to a high of US$76.73m, according to the strategists. The offers increased to US$70.5m-US$78.5m when the noteholder offered to provide purchase price financing and the receipt of current loan reserves.

CS

RMBS

Potential PMI boost for RMBS

The recovery of the private mortgage insurance (PMI) industry suggests that there is value to be found in legacy non-agency RMBS. Even insurers in run-off are making payments and bond values are expected to improve significantly for legacy deals backed by loans with PMI underwritten by still-active insurers.

The financial crisis devastated the PMI industry, with 2010 marking a trough in new insurance written (NIW). However, NIW has rebounded over the last few years, growing from US$70bn in 2010 to US$176bn in 2014 and US$168bn in the first nine months of 2015.

Rising NIW resulted in a decline in insurers' legacy non-agency portfolio as a percentage of outstanding mortgage insurance portfolios. Moreover, many insurance claims have already been dealt with and deals have continued to receive claim payments.

Most securitised non-agency loans with PMI were bought by the issuer for rating arbitrage. In the early 2000s, 40% or more of the collateral pools for subprime and alt-A deals had PMI. Deutsche Bank figures show that 14.6% of outstanding first-lien non-agency loans still have PMI.

Deutsche Bank RMBS analysts believe that even for some companies that are in run-off, investors should expect to see subsequent loss recoveries from loans with PMI. Triad Guaranty Insurance Corporation, an insurer which ceased to issue new commitments in 2008 and has operated in run-off since then, is one example.

Prior to June 2009, all valid Triad claims were settled in cash payments, but since then they have been settled by a combination of 60% cash and 40% through a deferred payment obligation (DPO). The DPO is an interest-bearing subordinated obligation. As of June 2011, the recorded DPO plus interest amounted to US$517.2m.

MGIC is also expected to continue to honour valid claims, considering its growing NIW, while PMI Group - despite being engaged in a run-off of its existing in-force book - also still pays claims. RMIC has also been paying partial claims, despite being placed under regulatory supervision.

"The private mortgage insurance industry has been recovering from the worst crisis since the Great Depression and paying partial mortgage claims, despite fighting an uphill battle for survival during the Great Recession. With the rise in NIW and a broad-based housing market recovery, we expect a meaningful reduction in loss severities a few months after losses are initially reported. This could result in a significant improvement in bond values, given that bond prices are very sensitive to changes in severity," say the analysts.

JL

Structured Finance

Customer services boosted

Assenagon has bolstered its customer services capability by appointing Ilona Wachter as md for institutional customers, based in the firm's Frankfurt office. She has over 25 years of experience in asset management and corporate finance.

Wachter was previously head of business development at Spängler IQAM Invest, focusing on institutional customers. Before that, she held management positions at Muzinich & Co, BNP Paribas Investment Partners and Quoniam Asset Management.

Structured Finance

Allianz buys CMBS investor

Allianz Global Investors is set to purchase Rogge Global Partners (RGP) from rival insurer Old Mutual for an undisclosed fee. The purchase will see Allianz boost its fixed income expertise and inherit RGP's various funds, including its investment strategies in CMBS.

Allianz says that RGP's team will become part of its global investment platform. This will add to the purchaser's growth, which has seen its fixed income AUM move up from €109bn to €167bn in the last four years. RGP's AUM stands at €34bn.

The transaction is expected to close by the end of 2Q16.

Structured Finance

'London whale' fine levied

The UK Financial Conduct Authority has fined Achilles Macris £792,900 for failing to be open and cooperative with the regulator. He was head of JPMorgan's international chief investment office (CIO) in London, responsible for a number of portfolios - including the synthetic credit portfolio - at the time of the 'London whale' trades (SCI passim).

Macris was the main contact with FCA predecessor the Financial Services Authority and, as an approved person, he was required to deal with the authority in an open and cooperative way. However, between 28 March 2012 and 29 April 2012, Macris did not inform it about concerns with the synthetic credit portfolio and consequently he failed to meet the standards expected of an approved person.

The synthetic credit portfolio began to suffer significant losses from the beginning of 2012. On 23 March 2012, the front office was instructed that no further trades should be executed on the portfolio until discussions had taken place.

Macris subsequently asked that daily risk reports for the synthetic credit portfolio be produced and in the following days took other measures, such as requesting assistance from outside CIO and arranging daily progress meetings with CIO risk and the front office. Despite these measures, the synthetic credit portfolio continued to suffer losses.

On 28 March 2012, Macris attended a supervision meeting with the authority, at which CIO International and the synthetic credit portfolio were discussed. The authority was updated on both positive and negative developments relating to the synthetic credit portfolio, including that it had made a loss of US$200m and that it had experienced rebalancing problems, but was told that it was now balanced and did not require additional trading. Macris is alleged to have not provided the authority with information about the full extent of the difficulties that the synthetic credit portfolio was then facing or take steps to ensure that the authority understood there were causes for concern with the portfolio.

On 10 April 2012, he took part in a telephone call with the authority that was set up to try to correct any inaccurate impression that may have been given by the publication of articles about the 'London whale'. By the time of the call, Macris was aware that the position of the synthetic credit portfolio had worsened and its losses had increased.

The call provided him with a further opportunity to provide information about concerns with the portfolio and the heightened response being adopted to address them, but he did not do so. Instead, Macris allowed an inaccurate impression to be given that there had been no material changes since the supervision meeting and that there were not wider causes for concern with the synthetic credit portfolio.

The FCA says that a high-level indication that there were causes for concern during the meeting, the call or at any time before the 29 April 2012 would have provided it with the opportunity to follow up with questions about the nature of the concerns and form its own assessment of the position.

Although settlement in this case was reached during Stage 2, which would usually lead to a 20% discount, in exceptional cases the authority may accept that there has been a substantial change in the nature or seriousness of the action being taken and that an agreement would have been possible at an earlier stage if the action had commenced on a different footing. The authority and Macris therefore agreed that an additional 10% discount is appropriate. Were it not for the total discount of 30%, the financial penalty would have been £1.13m.

Structured Finance

SF legal duo brought in

Kaye Scholer has beefed up its finance department by bringing in structured finance experts Howard Goldwasser and Skanthan Vivekanada. Both arrive as partners from K&L Gates, with the former based in New York and the latter in Los Angeles. The pair will provide their CLO 2.0 expertise to Kaye Scholer's current CLO team. 

Goldwasser's recent experience includes trade receivables financings and highly structured, asset-based finance transactions. He has represented many leading investment banks, commercial banks, non-bank lenders, hedge funds and investment managers.

Vivekananda advises investment funds and other financial institutions in connection with a wide variety of OTC derivatives and bespoke structured products. He focuses his practice on transactional structuring, as well as purely regulatory issues.

Structured Finance

DBRS chairman named

Stephen Joynt has been appointed executive chairman of DBRS Group. Already a member of the board, he brings a wealth of experience in the global credit rating industry, having served as the president and ceo and board member of Fitch for ten years. During that time, he led the agency through growth initiatives and acquisitions, expanding its market presence and global reach.

Richard Venn, who previously served as chairman, will remain a member of the board of DBRS Group.

CDO

Patriarch resigns as Zohar manager

Patriarch Partners is stepping down as collateral manager of Zohar CDO 2003-1, Zohar II 2005-1 and Zohar III. The firm says it will work with a new collateral manager - whose appointment has yet to be announced - to ensure a smooth transition.

Lynn Tilton, ceo of Patriarch Partners, comments: "The constant litigation between Patriarch and MBIA that began in 2009 and continues today has created an unproductive and untenable relationship between parties who by definition should be aligned. Since 2011, I have publicly represented to the controlling classes and the noteholders that my sole interest in serving as collateral manager was to serve the best interest of the funds, and that Patriarch was willing to transfer their collateral management roles if such would be in the best interest of the funds. The battles have led me to make the decision that I could no longer leave this choice open, but instead my firm and I must step down, so we can focus fully on driving the value of the portfolio companies."

Concurrent with the resignation, Patriarch Partners XV - the largest creditor of Zohar CDO 2003-1 - will withdraw its opposition to the motion to dismiss the involuntary Chapter 11 cases that it filed for Zohar I (SCI 23 November 2015). The firm says that Patriarch XV filed the involuntary petitions in order to "protect itself and Zohar I after years of fruitless restructuring negotiations with MBIA and with the good faith hope that a consensual plan of restructure could be accomplished".

It adds that despite these efforts, it has become clear that the parties will be unable to reach a consensual resolution in these matters. Consequently, in order to avoid any further negative impact on the underlying portfolio companies, Patriarch has chosen to step down as collateral manager of the Zohar funds and focus its full attention on the operating companies in its portfolio.

CLOs

Originator fund eyes broader investment

Blackstone/GSO Loan Financing - which currently invests predominantly in CLO income notes - is seeking shareholder approval to permit investment in all debt tranches of CLOs and loan warehouses, as well as in exposure to risk retention entities. The amendments to the investment policy will enable the company to invest in Blackstone/GSO US Corporate Funding (US MOA), a newly-formed entity.

It is expected that an entity in the Blackstone Group will have a controlling financial interest in US MOA for the purposes of US GAAP and, as such, its purchase of CLO securities will enable GSO/Blackstone Debt Funds Management (DFM) or Blackstone/GSO Debt Funds Management Europe (DFME) to comply with their US risk retention obligations in connection with CLOs that they sponsor. US MOA may also seek debt financing in connection with these investments.

The addition of a US risk retention entity to the underlying structure is designed to provide the company with the ability to invest - through Blackstone/GSO Corporate Funding - in US or European loans and finance those loans via risk retention-compliant CLOs in the US or Europe, whichever offers more efficient cost of capital. In order to mirror the domicile of loans permitted within CLOs, the amended investment policy will allow for a portion of the loans to be domiciled outside of the US or Europe, albeit loans domiciled in the US or Europe would form a substantial majority of the loans in which the risk retention entities invest.

Blackstone/GSO Loan Financing may also consider raising additional funding through the issue of new shares to take advantage of the continued attractive investment and funding environment. It is anticipated that any such share issuance would be through a 12-month placing programme. Accordingly, the company is seeking shareholder authority to dis-apply pre-emption rights for, and approval of the issue of, up to 500 million shares (which may be denominated in either US dollars or euros).

It is possible that an entity in the Blackstone Group may subscribe for shares under the placing programme, subject to an overall limit of 15%. Blackstone Treasury Asia currently owns €50m shares, representing approximately 15.09% of issued share capital.

Blackstone/GSO Loan Financing launched on 18 July 2014 (SCI 14 July 2014) with total initial net assets of €260.5m. As at 31 December 2015, its net assets were valued at €326m. The company has generated total net asset value returns since launch of 5.03% (on an annualised basis, as at 31 December 2015) and 8.11% in 2015.

CMBS

CMBS originations business closed

Redwood Trust is repositioning its commercial mortgage business to focus solely on investing activities and will discontinue commercial loan originations for CMBS distribution. However, the company will continue to opportunistically invest in mezzanine and subordinate CMBS tranches that meet its risk/return profile.

"We have concluded that the challenging market conditions our CMBS conduit has faced over the past few quarters are worsening and are not likely to improve for the foreseeable future," comments Marty Hughes, ceo of Redwood. "The escalation in the risks to both source and distribute loans through CMBS, as well as the diminished economic opportunity for this activity no longer make our commercial conduit activities an accretive use of capital."

The company's commercial loan origination activities resulted in a pre-tax loss of approximately US$3m in 2015, based on preliminary full-year 2015 results, including operating expenses of approximately US$8m. After discontinuing these activities, it expects to eliminate this earnings drag and free up approximately US$100m of capital for future investments.

Since initiating its commercial loan business in 2010, Redwood has focused on both investing in commercial mezzanine loans and originating commercial senior loans for sale into CMBS transactions. During that time, the company originated more than US$2.5bn of commercial loans, generated more than US$50m of revenues from the sale of loans into CMBS transactions and created a portfolio of commercial mezzanine loans that totalled approximately US$300m at 31 December 2015. This portfolio generated approximately US$30m of net interest income during the full-year 2015, based on preliminary financial results.

The move will result in a workforce reduction that will impact 25 employees primarily engaged in commercial loan origination activities, representing approximately 15% of the company's fixed compensation expense at 31 December 2015. However, it plans to retain a team of commercial professionals to support its portfolio of commercial mezzanine loans, as well as focus on additional commercial portfolio investments.

Redwood last month announced plans to restructure its residential loan operations by discontinuing the acquisition and aggregation of conforming loans for resale to Fannie Mae and Freddie Mac, and instead focus on direct conforming-related investments in mortgage servicing rights and risk-sharing transactions. The company is set to reduce its headcount by 25% in this segment too, affecting employees primarily engaged in and supporting its residential mortgage loan business.

Insurance-linked securities

Insurance solutions to target SMEs

Newly formed managing general underwriter Ventus Risk Management and XL Catlin have formed a partnership to bring unique property insurance solutions to the catastrophe exposed SME market, using key distribution partners. The platform will be supported by collateralised catastrophe reinsurance funds and traditional reinsurance.

Ventus ceo George Reeth comments: "We are initially targeting select classes of coastal commercial property risks, leveraging our proprietary industry-leading catastrophe risk analytics with the combined strength of XL Catlin's access to capital markets reinsurance capacity and strong balance sheet."

In addition to Reeth (who is a co-founder and former president of Validus Re), Ventus is led by Stuart Mercer (a co-founder and former cro of Validus Re and ceo of AlphaCat Managers) as president and Richard Goldfarb (the former cfo and chief actuary of CapSpecialty) as chief underwriting officer and chief actuary.

Risk Management

NMS unveils risk management group

NMS Capital Group has launched a new global risk management services group that will be headed by newly promoted ceo Marion Madden and president John Gill. Headquartered in London, NMS Global Risk Solutions will advise clients in a number of services, which cover securitisation and institutional insurance.

The services include designing global commercial insurance strategies to drive organisational cost savings, providing clients with cost coverage controls, and risk transfer and claims handling. The firm will also design and structure specialty credit enhancement structures.

Madden, already a partner at NMS Global, will be primarily responsible for business development at the firm, as well as the design and placement of insurance and reinsurance strategies for European, Middle East and Asian clients. Her previous experience includes senior roles at American Express and RSA.

Gill is tasked with business development and coordination of structured insurance, reinsurance and credit enhancement solutions for US-based clients. Gill has held a variety of roles in his career, including regional vp with both Transamerica and MetLife Insurance companies.

RMBS

Latest toxic MBS case settled

Morgan Stanley has agreed to pay out on another settlement involving failed MBS assets that it sold in the lead-up to the financial crisis. According to New York Attorney General Eric Schneiderman, the bank will pay a total of US$3.2bn, US$550m of which will go to helping New York State residents repair mortgage issues.

The lawsuit, headed by Schneiderman, accused Morgan Stanley of making multiple representations to RMBS investors about the quality of the mortgage loans it securitised and sold to investors, as well as supposedly screening out questionable loans in its process. The bank was accused of misrepresenting these products by securitising and selling them with underlying mortgage loans that it knew had material defects.

Morgan Stanley acknowledged that it increased the acceptable risk levels for loans in its securitised pools, which led to the bank purchasing various loans with LTV ratios over 100%. A 31 May 2006 email also reveals that the head of Morgan Stanley's team tasked with undertaking due diligence on the value of properties underlying the mortgage loans asked a colleague to "not mention the 'slightly higher risk tolerance' in these communications". The email went on to say the bank's team was running 'under the radar' and was therefore avoiding documenting shortfalls within the loans.

Another email on 21 November 2006 shows a member of Morgan Stanley's diligence team forwarding a list of questionable loans, and seeking review and approval to purchase them. It said: "I assume you will want to do your 'magic' on this one?" In another similar instance from July 2006, the head of the bank's valuation due diligence cleared dozens of risky loans for purchase after less than one minute of review per loan file.

The bank has also acknowledged that it securitised loans that failed to meet underwriting guidelines, as well as ignoring credit and compliance team recommendations to not purchase many of the loans. However, the bank increased its 'acceptable risk' threshold, which allowed its finance team to categorise the loans within this definition.

The resolution - US$400m of which is labelled as consumer relief - will include loan reductions to help residents avoid foreclosure and funds to spur the construction of more affordable housing. The settlement was finalised via the RMBS Working Group, which has recently undertaken comprehensive investigation of a number of banks' pre-crisis practices in the sector (SCI passim).

RMBS

Servicing penalties imposed

The OCC has terminated mortgage servicing-related consent orders against US Bank and Santander, and assessed civil money penalties against the banks for previous violations of the orders. The consent orders were terminated after the OCC determined that the institutions now comply with the orders.

The OCC - and the former Office of Thrift Supervision in the case of Santander - originally issued orders against the banks in April 2011 and amended them in February 2013 and June 2015. The termination of the orders ends business restrictions affecting US Bank and Santander that the OCC mandated in June 2015.

The OCC found that the banks failed to correct deficiencies identified in the 2011 consent orders in a timely fashion. As a result, the OCC determined that US Bank violated the 2011 consent order from 1 October 2014 through 30 August 2015 and that Santander violated the 2011 consent order from 1 October 2014 through 31 December 2015.

The OCC assessed a US$10m civil money penalty against US Bank and a US$3.4m civil money penalty against Santander. The banks will pay the assessed penalties to the US Treasury.

RMBS

Broker-dealer adds RMBS trader

First Empire Securities has hired RMBS trader Richard Liao. He was most recently an agency RMBS trader at Société Générale. Liao has also previously worked at RBC Capital Markets and BNP Paribas.

RMBS

HSBC settles over mortgage practices

The US Justice Department, the Department of Housing and Urban Development and the CFPB, along with 49 state attorneys general and the District of Columbia's attorney general, have reached a US$470m agreement with HSBC to address mortgage origination, servicing and foreclosure abuses. The settlement reflects a continuation of enforcement actions to hold financial institutions accountable for abusive mortgage practices, with negotiations beginning after the announcement of the US$25bn National Mortgage Settlement from February 2012 (SCI passim).

Under the agreement, HSBC has agreed to be bound to mortgage servicing standards and be subject to independent monitoring of its compliance with the agreement. The standards provide for oversight of foreclosure processing, new requirements to undertake pre-filing reviews of certain documents filed in bankruptcy court and ensure that foreclosure is a last resort by requiring the bank to evaluate other loss-mitigation options first. In addition, the standards restrict HSBC from foreclosing while a homeowner is being considered for a loan modification.

The bank will pay US$40.5m to the settling federal parties and US$59.3m to an escrow fund administered by the states to make payments to borrowers who lost their homes to foreclosure between 2008 and 2012, as well as US$200,000 to reimburse the state attorneys general for investigation costs. Additionally, by July 2016, HSBC will complete US$370m in creditable consumer relief by reducing the principal on mortgages for borrowers that are at risk of default, reducing mortgage interest rates and forgiving forbearance. The bank will not be permitted to claim credit for every dollar spent on the required consumer relief.

Compliance with the agreement will be overseen by an independent monitor, Joseph Smith, who is also the monitor for the NMS and SunTrust settlement. The parties may seek penalties for non-compliance.

The agreement resolves potential violations of civil law based on HSBC's deficient mortgage loan origination and servicing activities. But it does not prevent state and federal authorities from pursuing criminal enforcement actions related to the bank's conduct, or from punishing wrongful securitisation conduct that is the focus of the RMBS Working Group. Nor does it prevent any action by individual borrowers who wish to bring their own lawsuits.

The US Fed also announced a US$131m penalty - the maximum amount allowed under law - against HSBC for deficiencies in residential mortgage loan servicing and foreclosure processing. The penalty may be satisfied by providing borrower assistance or remediation in conjunction with the DOJ settlement, or by providing funding for non-profit housing counselling organisations. If HSBC does not satisfy the full penalty amount within two years, the remaining amount must be paid to the US Treasury Department.

The Fed issued an enforcement action in April 2011 requiring HSBC to correct its servicing and foreclosure-related deficiencies (SCI 14 April 2011). That action was among 14 corrective actions issued against Fed-supervised mortgage servicers for unsafe and unsound practices in residential mortgage loan servicing and foreclosure processing.

ABS

Mobile phone ABS comparability assessed

The credit performance of US mobile phone financing depends on many of the same factors as other types of consumer lending and therefore ABS tied to the debt would carry similar risks as other ABS, says Moody's. However, there are also some unique risks and strengths to consider.

Use of financing is growing rapidly as carriers change their business models. The receivables created by this shift in strategy are already being used as collateral for borrowing facilities.

As with other ABS, the credit quality of mobile phone securitisations would hinge on the creditworthiness of borrowers, deal structures and the strength of the economy. With that in mind, the rating agency notes that borrowers' performance is yet to be tested in a stressful economic environment.

Most carriers have extensive historical data on the credit performance of customers under service contracts, but how that translates to a loan's performance remains to be seen. Such ABS already exist in Japan, where Moody's has rated more than 60 securitisations of consumer loans used for purchasing mobile phones since 2007.

Those Japanese deals have performed within Moody's initial expectations, although differences in the underlying contracts and consumer behaviour limit comparability, the rating agency says. Factors differentiating the US mobile phone market from other domestic ABS sectors would flow from the constant pace of technological innovation and questions about how carriers would manage possible incentive misalignments.

ABS

Commingling concerns addressed

S&P has decided that no action will be taken as a result of its failure to correctly apply its criteria for unrated servicers when rating three auto ABS. Porsche Financial Auto Securitization Trust 2014-1, Porsche Innovative Lease Owner Trust 2014-1 and Porsche Innovative Lease Owner Trust 2015-1 are all serviced by Porsche Financial Services (PFS).

The fact that the documentation for the transactions allows PFS to commingle funds for up to 30 days, should certain conditions be met, is not consistent with the rating which was provided. However, PFS has entered into an agreement confirming that it will not commingle funds for more than two business days at any time the rated notes are outstanding, which S&P believes satisfactorily addresses the commingling risk and is consistent with the given ratings.

Structured Finance

CAF 2015-1 workout progressing

The first loan default in the US$251.6m Colony American Finance 2015-1 multi-borrower single-family rental (SFR) securitisation is expected to have little impact on the transaction's performance, as the US$1.1m loan accounts for just 0.4% of the collateral pool. The loan transferred to the special servicer - Midland Loan Services - in November 2015, a month after the transaction closed.

Of the special servicer's loss mitigation options, Moody's suggests the option that would be most beneficial to the trust would be the sale of the note to the income note holder Colony American Finance at par. If exercised, this option will result in no losses to the trust. Colony might have an incentive to exercise the repurchase option because it would allow it to control the workout process rather than Midland, allowing it to maximise recoveries at its own pace.

Other options include foreclosures on the properties, a foreclosure on the pledge of the property owner's equity and subsequent property sales, and a third-party note sale to an investor. Due to the damage to properties and low current valuations, each of these options is likely to result in distressed recoveries for the transaction.

Even though the impact of the loan default on the trust will be minimal, Moody's notes that the manner in which the special servicer works out the loan will provide an educational test case for the broader SFR sector because this is the first time in an SFR transaction that a commercial mortgage special servicer will handle a defaulted loan backed by small residential properties. Midland has taken several steps towards resolving the Colony loan default, including contacting the borrower regarding the status of the loan, inspecting the properties to determine the severity of the property damage and current property condition, obtaining updated BPO values on the properties and estimating the value of the loan under various loss mitigation options.

The defaulted loan is one of 69 backing the transaction. Prior to the transaction's closing, the loan's net cashflow debt service coverage ratio had already deteriorated from 1.2x at origination to 0.59x, triggering a DSCR cash trap event.

Moody's says it underwrote the loan's net cashflow DSCR as one of the weakest in the pool, resulting from its below-average gross margin, high repairs and maintenance, and high capital expenditures based upon the age of the properties. Continued impaired cashflow after the transaction's closing was the result of damage to the properties underlying the loan.

The borrower did attempt to rehabilitate the homes, but had underestimated the amount of required funds and so did not fully execute property repairs. Occupancy on the properties remained low as a result, further compounding the loan's cashflow problems. As of 31 December 2015, vacancy on the underlying properties was approximately 32%.

Because the borrower paid for repairs using rental income, the borrower did not have any funds to pay debt service on its loan, resulting in two defaults. The first default was failure to deposit rents into the rent deposit account and the subsequent failure to cure within the 60-day grace period. The second was failure to make the November 2015 debt service payment. The combination of these two defaults necessitated the transfer to special servicing to work out the loan.

Structured Finance

Credit hedge fund exposures gauged

The latest US Office of Financial Research market monitor report highlights the substantial investor redemptions experienced by certain credit funds at the end of last year (SCI 23 December 2015). In the report, the bureau examines hedge fund exposures to credit markets and their use of leverage, based on non-public Form PF data.

The analysis shows that, unsurprisingly, a number of hedge funds have material net long positions in credit markets and that several of them are much larger and more highly leveraged than the funds that recently had redemptions. The OFR limited its focus to the largest 1,600 hedge funds managed by advisors required to file Form PFs quarterly. As of 3Q15, these funds had a total long exposure of US$777bn, comprising US$309bn of bonds, US$134bn of loans and US$334bn of credit derivatives.

These positions were largely offset by short exposures totalling US$506bn, comprising US$46bn of bonds, US$2.5bn of loans and US$458bn of credit derivatives. The net exposure totalled US$271bn, which is relatively small compared to the overall US corporate bond market (US$8.2trn) and the total gross assets of these hedge funds (US$5trn).

However, several hedge funds had material net long positions. To better analyse this group, the OFR segmented the Form PF hedge fund data into funds with net long exposures that accounted for 50% or more of a fund's net assets, excluding any with net assets of less than US$500m.

This filter resulted in slightly more than 100 funds that manage approximately US$180bn in total net assets and US$435bn in total gross assets. These funds had a net long exposure to corporate bonds and loans of US$188bn and a net short exposure to credit derivatives of US$17bn.

Overall, these funds appear to have relatively low leverage. The median leverage ratio of 1.3x for the sample was below the overall median ratio of 1.9x for the broader universe of hedge funds. However, the ninety-fifth percentile leverage ratio for the sample was almost 5x and the five most leveraged funds in the sample had a simple average leverage ratio of 10.4.5.

CLOs

CLO asset slip to affect OC cushions

So far this year over 1.4% of the assets held within US CLOs have been placed on creditwatch with negative implications or had ratings lowered, says S&P. Another 0.9% have had ratings raised or been placed on creditwatch with positive implications.

The net result was a slight deterioration in the overall credit quality of US CLO assets, which S&P notes may lead to a decline in OC cushions. Murray Energy, Paragon Offshore and Sheridan Holding Co I and II - all associated with the energy sector and also held by several US CLOs - each saw their ratings lowered to a non-performing level this year (SCI 26 January).

There are 267 US CLO 2.0 deals with an average of 0.9% exposure to one or more of the issuers that have had their ratings recently lowered to non-performing. One deal has over 3% exposure.

CMBS

CMBS tweak raises thickness fears

MSBAM 2016-C28 contains a series of non-investment grade exchangeable classes, which is a nuance not seen before in a CMBS 2.0 transaction. Fitch believes the feature raises the question of sufficient tranche thickness and maintains that insufficient thickness - particularly below 1% - creates accelerated downgrade risk and a higher rate of loss given default.

Fitch has assigned a provisional rating of double-B minus to the transaction's class E notes. The tranche has credit support of 6.375% and thickness of 3% and is exchangeable into a class E2 at unchanged credit support and a class E1 at 7.875% credit support. Each exchangeable class is structured with tranche thickness of 1.5%. The classes have expected ratings of double-B minus and double-B respectively.

Class F has an expected rating of single-B minus at 5.375% credit support with a tranche thickness of 1%. This class is exchangeable into class F2 at unchanged credit support and class F1 at 5.875% credit support.

Each exchangeable class falls well below 1% of the pool in tranche thickness and Fitch says it will not rate these classes.

CMBS

Hancock exposure gauged

About US$114m in US CMBS securities across 16 loans could be affected by Hancock Fabric's second bankruptcy filing in nine years, according to Morningstar Credit Ratings. However, the agency expects the impact to be limited to a few small-balance loans with low current debt service coverage ratios and projected occupancy below 80%, should the retailer reject its leases.

Among the 14 loans with Hancock Fabrics as a tenant, Morningstar considers the US$5.5m South Park Shopping Center (securitised in GCCFC 2007-G11), US$4.6m Greenville Square Shopping Center (MLCFC 2007-5), US$2m Willow Lake Shops (WFCM 2015-C29) and US$1.1m South Loop II Shopping Center (WFRBS 2014-C20) loans to be the highest default risks. The agency suggests that these loans have the greatest risk of turning delinquent because the retailer occupies a large portion of the space or the current DSCR is already dangerously low.

The largest loan with exposure to Hancock Fabrics is the US$23.93m Regency Park Shopping Center (WBCMT 2006-C27), which is REO. The largest CMBS 2.0 loan with exposure is US$10.37m Greene Crossing Shopping Center (WFRBS 2014-LC14).

As part of its 2 February Chapter 11 bankruptcy filing, Hancock hired a company to liquidate some of its stores, stating that it is seeking to close 70 stores immediately and that it could sell all or part of the company. It operates more than 250 stores in 37 states.

The company previously filed for Chapter 11 bankruptcy in 2007 and emerged a year later.

CMBS

CMBS pay-offs jump

The percentage of US CMBS loans paying off on their balloon date rebounded sharply last month. The January reading is 67.2%, more than 15 points above the December number and close to the 12-month moving average of 67.9%, according to Trepp.

By loan count as opposed to balance, 64.5% of loans paid off in January. On this basis, the pay-off rate was below December's level of 66.2%. The 12-month rolling average by loan count now stands at 68.4%.

CMBS

Euro defaults remain stable

The 12-month rolling loan maturity default rate for the European CMBS in S&P's rated universe remained stable at 10%, at end-January. Overall, the senior loan delinquency rate increased slightly to 47.8% from 47.7% month-over-month.

The delinquency rate for continental European senior loans decreased slightly to 59.8% from 60.2%. The rate for UK loans increased to 22% from 20%.

Insurance-linked securities

MultiCat Mexico triggered

S&P says that its single-D rating on the MultiCat Mexico series 2012-I class C notes is unaffected following a triggering event. The agency received an event report for Hurricane Patricia from the calculation agent AIR Worldwide Corp, which confirms that a triggering event has occurred in relation to the catastrophe bond, resulting in a principal reduction of US$50m for the series 2012-I class C notes. S&P has determined that no rating actions are currently warranted, as these developments were not viewed as material to the ratings.

Risk Management

MiFID 2 deadline extended

The European Commission has announced a one-year extension for firms to comply with its MiFID 2 standards as it seeks more time to set up the complex technical infrastructure entailed within the package. The new deadline is now 3 January 2018.

Following talks with ESMA, the Commission accepted that many financial firms would struggle to reach the 2017 deadline. ESMA is tasked with collecting data from about 300 trading venues on about 15 million financial instruments. "Given the complexity of the technical challenges highlighted by ESMA, it makes sense to extend the deadline for MiFID 2," says Jonathan Hill, commissioner for financial services, financial stability and CMU. "We will therefore give people another year to prepare properly and make the necessary changes to their systems."

Meanwhile, Hill says that the Commission is pressing ahead with the level 2 legislation to implement MiFID 2 and expects to announce the measure shortly. The proposed deadline changes are not expected to impact the timeline for adopting level 2 implementing measures under both MiFID 2 and MiFIR.

A period of 30 months between the adoption and the entry of application of MiFID 2 had already been foreseen to take account of the 'very high level of complexity' of the package, the Commission adds.  

Risk Management

Common CCP approach agreed

The European Commission and the US CFTC have reached an agreement on a common approach regarding requirements for central counterparties (CCPs). The move means that European CCPs will be able to do business in the US more easily and that US CCPs can continue to provide services to EU companies.

But Julian Hammar, of counsel at Morrison & Foerster, notes that the agreement does not appear to include full mutual recognition by the CFTC of the EU regulatory scheme. "Under this agreement, the EU authorities will recognise US CCPs that comply with CFTC requirements, subject to three conditions specified in the agreement, but not vice versa. The CFTC will make a determination of substituted compliance with a 'majority' of EU requirements and streamline the registration process to take that into account. But an EU CCP will not be able to rely on EU requirements that have not been the subject of a substituted compliance determination," he observes.

He continues: "The CFTC will continue to impose its view in the minority of areas where it has not made a substituted compliance determination. It will be worth watching what those minority areas are."

Under the agreement, the European Commission intends to adopt an equivalence decision with respect to CFTC requirements for US CCPs, which will allow ESMA to recognise US CCPs as soon as is practicable. US CCPs may then continue to provide services in the EU while complying with CFTC requirements.

For its part, the CFTC will propose a determination of comparability with respect to EU requirements, which will permit EU CCPs to provide services to US clearing members and clients while complying with certain corresponding EU requirements. The CFTC also proposes to streamline the registration process for EU CCPs wishing to register with it.

Both the CFTC and EU requirements are based on international principles, which accounts for the high degree of similarity between the two regimes. The two authorities say they will work to ensure that changes are implemented in a coordinated manner and to monitor the impacts resulting from the sequencing of the changes and assess whether any further actions must be taken to ensure financial stability or prevent regulatory arbitrage.

The proposed EU determination of equivalence is based on the condition that CFTC-registered US CCPs confirm that their internal rules and procedures ensure: for clearing members' proprietary positions in exchange-traded derivatives, the collection of initial margins that are sufficient to take into account a two-day liquidation period; that initial margin models include measures to mitigate the risk of pro-cyclicality; and the maintenance of 'cover 2' default resources. The European Commission will also shortly propose the adoption of an equivalence decision under EMIR to determine that US trading venues are equivalent to regulated markets in the EU, providing a level playing field between EU and US trading venues for the purposes of the MIFID I framework.

The CFTC's determination of comparability concludes that a majority of EU requirements are comparable to CFTC requirements. This determination will provide a basis for both EU CCPs already registered with the CFTC as derivatives clearing organisations and those seeking registration to meet certain CFTC requirements by complying with the corresponding requirements as set forth in EMIR.

The European Commission recognises that EU market participants may wish to use CFTC-registered US CCPs to satisfy their upcoming central clearing obligations under EMIR. The first phase of EU clearing obligations for certain interest rate derivative contracts does not take legal effect until 21 June 2016. Market participants may choose to continue to clear these contracts in non-recognised CFTC-registered US CCPs up until that date.

US SEC requirements for clearing agencies is a separate and distinct regime from the CFTC's. The European Commission says it continues to be in constructive and progressive discussions with SEC staff regarding the SEC's requirements, in the context of the European Commission's analysis of equivalence.

James Schwartz, of counsel at Morrison & Foerster, notes that some hurdles remain - such as the vote of member states in the European Securities Committee. However, he indicates that the understanding between the US and EU authorities is further proof that the authorities favour the cleared swaps market over the uncleared market.

"The CFTC has made no substituted compliance determinations over uncleared swaps since minor ones at the end of 2013. Consequently, liquidity has increasingly become fractured into US and non-US pools. Thanks to the US-EU agreement announced [yesterday], the market for cleared swaps will hopefully escape a similar fracture," Schwartz concludes.

Risk Management

Cross-border swap rules approved

The US SEC has voted to adopt rules requiring non-US companies that use personnel in the US to arrange, negotiate or execute security-based swap transactions to include such transactions in determining whether those companies should register as security-based swap dealers. These rules aim to ensure that both US and foreign dealers are subject to Title VII of Dodd-Frank.

"These final rules are integral to the SEC's regulation of the security-based swap market, marking a key milestone in the completion of our regime for overseeing dealers," says SEC chair Mary Jo White. "The rules should improve transparency and enhance stability and oversight in the security-based swap market, while reducing potential competitive disparities, lessening the likelihood of market fragmentation and mitigating the risk that may flow into US financial markets."

The rules are effective 60 days after publication in the Federal Register. Compliance is required from 12 months following publication or from the SBS Entity Counting Date, whichever is later.

RMBS

Florida servicer payments 'credit positive'

The payments made on delinquent loans by servicers in Florida are credit positive for the RMBS backed by the assets, Moody's reports in its latest Servicer Dashboard publication. The agency suggests that the practice may protect servicer rights to restart the foreclosure process on properties underlying long-delinquent loans and consequently gain recoveries on them.

Some servicers have been crediting payments on delinquent loans in an effort to position foreclosures to comply with Florida's statute of limitations. This practice may protect their right to restart foreclosures on loans delinquent for over five years that the Florida courts previously dismissed and keeps foreclosures moving.

The courts are divided on various issues related to applying the statute of limitations and the Florida Supreme Court is currently reviewing a case that servicers hope will clarify many of these issues. "Even if the court rules unfavourably for lenders and servicers, the impact on private-label RMBS would be limited because it wouldn't affect more than 3% of Florida loans," says Moody's analyst Frank Wissman.

Meanwhile, the latest dashboard shows that collections metrics continued to improve slightly or remained flat in 3Q15. Though Ocwen's performance improved, the company remained the worst performer in the prime and alt-A categories. Wells was the best performer in subprime and Citi the best in alt-A.

Cure and cash-flowing metrics were also slightly better or flat for all product types during the quarter, with the exception of Citi in alt-A. Ocwen's level of modifications increased and the servicer continues to have the highest level of loss-mitigation activity among peers across all products.

Additionally, modification re-default rates improved slightly or were flat, with Ocwen's re-default performance worse for all product types due to the servicer's high re-modification count. Finally, foreclosure timelines were flat for all product types.

RMBS

Fourth set of FNMA NPLs sold

Fannie Mae has revealed the winning bidders from its fourth NPL sale, which included 6,500 loans totalling US$1.32bn. The winners were Canyon Partners for the first pool, Pretium Mortgage Credit Partnerns I Loan Acquisition for the second pool and Goldman Sachs for both the third and fourth pools.

The GSE began marketing the loans last month (SCI 14 January). The weighted average sale price of the combined pools was in the mid-70s as a percentage of unpaid principal balance.

The transactions are expected to close on 28 March. Separately, bids are due on Fannie's second community impact pool on 18 February.

RMBS

German loan terms decreasing

Average German residential mortgage loan terms are falling as the amortisation portion of instalments increase in response to low interest rates, Fitch reports. An analysis of 310,800 loans in Fitch-rated covered bond and structured finance deals shows that average terms for new originations fell to 19 years in 2015 from just over 25 years in 2010.

Average interest rates dropped to around 2% in 2015 from 4% in 2010 on loose ECB monetary policy and high competition between lenders. However, the instalments remained constant at 7%-8%, with repayment rates increasing in inverse proportion to the decline in interest rates.

Not all lenders have adopted this approach, however. For example, Postbank mortgage covered bond data shows that average instalments dropped by 1.7 percentage points to around 5% between 2010 and 2015. This contributed to longer contractual mortgage terms, at just over 35 years for loans originated last year. But the lender has partly compensated for this by lengthening the term to the interest reset date to, on average, 15 years, compared with 10 years in 2010.

Postbank generally offers loans with optional prepayment rights and/or options to change the repayment rate. If borrowers take these up, the expected term of a mortgage can be significantly shorter than the contractual term. For example, an annual prepayment rate of 2% of the original balance would reduce a loan's contractual term from 35 years to 20.

Fitch-rated German RMBS are currently experiencing very low and stable three-month plus arrears, reflecting the country's economic growth and low unemployment. The agency forecasts three-month plus arrears to stand at 0.5% in 2016, due in part to lenders not relaxing credit standards nor reducing instalments to sell mortgage loans to consumers that could otherwise not afford them.

RMBS

Loan loss model changes mooted

Fitch has proposed changes to its US RMBS loan loss model criteria and is seeking market feedback. The model's core methodology would be unchanged and no rating implications are expected for outstanding bonds issued since 2009.

The key proposed changes include: a revision to the distressed sale adjustment to reflect new GSE historical data; a cure-rate adjustment for borrowers that default but have enough equity to resolve the default without a loss; a simplification of the liquidation timeline projections and stresses; modest changes to originator quality adjustments; and a reduction in the geographic concentration penalty.

The changes are expected to result in a lower default assumption for borrowers with strong equity positions due to a cure-rate adjustment. The most meaningful negative implication of the changes is expected to be higher loss severities for prime conforming balance loans, due to an increase in the distressed sale adjustment.

Fitch is accepting comments until 8 March.

RMBS

Countrywide verified petition filed

Bank of New York Mellon, as trustee for all 530 RMBS involved in the Countrywide settlement, last week filed a verified petition for judicial instruction regarding the proper distribution of the allocable shares within deal capital structures. As a result, it now appears that the final payment of the US$8.5bn may be delayed once again.

Morgan Stanley RMBS strategists suggest that the chief reason for the petition is the timing and manner of write-ups with respect to payment distribution, especially within overcollateralisation structures. "The strict interpretation of distributing the payment in its entirety before writing up the requisite tranches could lead some OC trusts to achieve their OC targets, thus requiring the trustee to 'leak' settlement payments to subordinate bondholders," they explain.

These contractual issues are subject to competing interpretations, the resolution of which could determine the allocation of the US$8.5bn settlement amount. As such, Bank of New York Mellon is seeking judicial instructions.

The petition states that the forthcoming proceeding "presents an opportunity for certificateholders to be heard", which could delay payment even further. "The indirect impact could be felt throughout the broader risk asset space. The US$8.5bn of distributions would need to be re-invested somewhere, and the longer it takes for investors to get their hands on that money, the longer it takes for that demand to materialise," the Morgan Stanley strategists observe.