Contents

Structured Finance

SCI Start the Week - 15 August

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

Pipeline
The rate of additions to the pipeline has slowed down. Last week there were two new ABS, three RMBS and two CMBS added.

CNY3bn Fuyuan 2016-2 Retail Auto Mortgage Loan Securitization Trust and Honda Auto Receivables 2016-3 Owner Trust Notes were the ABS, while the RMBS were US$430m JPMMT 2016-2, US$505m Mill City Mortgage Loan Trust 2016-1 and US$237.21m Nationstar HECM Loan Trust 2016-3. The CMBS were US$500m Citigroup Commercial Mortgage Trust 2016-C2 and US$471.5m FORT CRE 2016-1.

Pricings
A few more prints were registered. In total there were six ABS, four RMBS and four CMBS.

The ABS were: CNY3bn Autopia China 2016-2 Retail Auto Mortgage Loan Securitization Trust; US$255.39m Avant Loans Funding Trust 2016-C; US$1,175bn Chase Issuance Trust 2016-A6; US$340.5m Engenium Capital Equipment Dollar Trust; US$1.09bn Hyundai Auto Lease Securitization Trust 2016-C; and €1.373bn ICCREA SME CART 2016.

US$371m Agate Bay Mortgage Trust 2016-3, £2.25bn Hawksmoor Mortgages 2016-1, A$700m Torrens Series 2016-1 Trust and €2.856bn UBI SPV 2016-1 were the RMBS. The CMBS were US$512.5m BBCMS 2016-ETC, US$181m CSMC 2016-BDWN, US$600m Hudson Yards 2016-10HY and US$719.8m MSCI 2016-UBS11.

Editor's picks
Investors rally to Ocwen: RMBS investors in deals serviced by Ocwen are holding meetings in the wake of the publication of an open letter from United Capital Markets ceo John Devaney to S&P. The letter and investors argue that Ocwen has outperformed its peers and that any transfer of servicing away from Ocwen would be seriously detrimental, strongly criticising Gibbs & Bruns for pursuing such an outcome...
Optimistic outlook: Many interesting topics were raised about the current state and potential future of marketplace lending at SCI's Marketplace Lending and Securitisation Seminar in New York in June. During a panel on investor perspectives, several matters that concern buyers of marketplace loans were discussed...
Money market tranches touted: The basis between money market ABS tranches (MMABS) and corporate CP appears to be widening ahead of the implementation of money market reforms in the US in October. Against this backdrop, Wells Fargo structured product strategists believe that MMABS offers good relative value for the credit risk taken...

Deal news
• Banca Popolare di Bari (BPB) has closed its much-anticipated NPL securitisation, becoming the first bank to make use of the Italian government's GACS guarantee scheme (SCI 30 March). The €150.54m Popolare Bari NPLs 2016 deal is backed by assets with a gross book value (GBV) of €471m and €8.8m of collections.
• National Bank of Greece (NBG) has completed the first Greek SME securitisation since 2007. The transaction, Sinepia, will enable the bank to raise up to €300m of medium-term financing.
• Fitch has affirmed all rated tranches of Canadian CMBS CMLS Issuer Corp series 2014-1, including the class G notes, which have been removed from rating watch negative. The rating action reflects the overall stable performance of the pool, in addition to the Clearwater Suites property becoming fully operational after the Fort McMurray, Alberta area was evacuated due to wildfires in May.
• A third collateral manager has been put forward to replace CWCapital Investments as manager of Gramercy Real Estate CDO 2007-1 (SCI passim). The holders of a majority of the CRE CDO's controlling class have nominated Cairn Capital Management North America as successor collateral manager on the deal.
• ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Grupo Isolux Corsan Finance. The move follows a restructuring agreement entered into by the firm that includes a suspension of payments proceeding relating to its €850m unsecured notes due 2021 and the bankruptcy of four of its Spanish subsidiaries.

Regulatory update
• The CFPB has amended its mortgage servicing rules to ensure mortgage servicers treat homeowners and struggling borrowers fairly. It is also issuing an interpretive rule under the Fair Debt Collection Practices Act relating to servicers' compliance with certain mortgage servicing provisions as amended by the final rule.
• Morgan Stanley has begun fulfilling its consumer relief obligations under the terms of its settlement with New York State (SCI 12 February). The settlement concerns failed RMBS sold in the lead-up to the financial crisis.

Structured Finance

Special situations partner poached

Doo-Soon Choi has joined Mayer Brown JSM as a Hong Kong-based partner in the banking & finance practice. He was previously a partner at Ashurst in Hong Kong.

Choi's experience includes multijurisdictional acquisition finance, distressed portfolio sales and strategic debt investments. He advises clients regarding multi-tiered, bilateral, club and syndicated financings, whether for new money deals or in special situations.

Structured Finance

Fixed income teams merged

BNP Paribas continues to revamp its investment banking operations by combining its primary and credit markets into a new business. This will encompass the bank's asset finance and securitisation businesses, headed globally by Matt Salvner.

Martin Egan and Benjamin Jacquard will stay in their positions as global head of primary markets and global head of credit respectively. Salvner reports jointly to both Egan and Jacquard.

Structured Finance

United Guaranty sale agreed

Arch Capital Group is set to acquire United Guaranty Corporation and United Guaranty Insurance from AIG for US$3.4bn. The sale will see the firms combine their businesses to create the largest private mortgage insurer in the world, based on insurance in-force.

Arch says that it expects to retain a significant presence in North Carolina, while maintaining its existing mortgage insurance operations based in California. It will also combine the companies' global operations in Europe, Hong Kong and Australia.

The sale will be funded through US$2.2bn in cash, US$250m in Arch Capital's perpetual preferred stock and US$975m in non-voting common-equivalent preferred stock from the sale of United Guaranty. AIG had originally intended to sell the company through an IPO.

The sale is expected to complete by 4Q16 or 1Q17. Credit Suisse is acting as sole financial advisor and Cahill Gordon & Reindel and Clyde & Co are acting as legal counsel to Arch.

Structured Finance

ABL team expands

MB Business Capital has opened a new office in Vancouver, Washington and appointed Kevin Schrader to its middle-market asset-based lending (ABL) team as svp. He will source ABL opportunities for MB Business Capital in the Washington, Oregon and Idaho markets.

Schrader brings nearly 25 years of banking experience to MB. Previously, he served as an md at GE Capital, where he originated asset-based and leveraged cashflow facilities. Prior to GE, he originated new business at LaSalle Business Credit/Bank of America Business Capital and also held positions at Wells Fargo Capital Finance, Diversified Business Credit and PriceWaterhouse.

Structured Finance

Private debt team bolstered

Muzinich & Co has expanded its UK private debt team with the hire of Grant Davidson as director, boosting the group's number in the UK to seven. Davidson joins from Investec, where he was senior origination director for growth and acquisition finance. In the role, he was responsible for sourcing and executing deals for UK mid-market businesses with EBITDAs of up to £15m.

Structured Finance

Aon appoints Asia director

Aon has appointed Les Collett as regional director for structured credit and political risk, based in Hong Kong. He was previously at Willis Towers Watson, where he was an executive director.

Collett will report to Miles Johnstone, who is head of structured credit and political risk for Asia. Collett has previously worked at Standard Bank, Calyon, HSH Nordbank, Bankgesellschaft Berlin and Sanwa Bank.

Structured Finance

Syndicated loan team expands

Muzinich has recruited an additional four names as it increases its European syndicated loans capabilities. The firm has hired portfolio managers Torben Ronberg, Stuart Fuller, Sam McGairl and Alex Woolrich, all of which have joined from Wells Fargo subsidiary, ECM Asset Management.

They will provide the firm with a mixture of experience that has included structured finance, derivatives, emerging markets and high yield loans. The news follows the announcement this week that Muzinich has also appointed Grant Davidson to its UK private debt team (SCI 17 August).

Structured Finance

AIMS supports Littlejohn

Goldman Sachs Alternative Investments & Manager Selection (AIMS) Group has made a minority investment in Littlejohn & Co. The investment was made through Goldman's AIMS Petershill programme, which is purchasing a passive, non-voting primary stake in Littlejohn representing less than 10%.

The investment follows a 17-year relationship between AIMS and Littlejohn, in which AIMS has been an investor in all of Littlejohn's committed capital private equity funds. None of the AIMS Petershill capital is being distributed and all proceeds from the investment will be retained by Littlejohn and used for the continued growth of its core private equity, special situations and performing credit strategies.

Barclays provided financial advice and Debevoise & Plimpton provided legal advice to Littlejohn in connection with the transaction.

CMBS

Executive director tapped

The CRE Finance Council has named Lisa Pendergast executive director. The association says this latest appointment is a significant step in the restructuring of its management team, following the hire of Michael Flood as deputy executive director (SCI 11 May).

Pendergast brings to CREFC 25 years of industry experience in structured finance markets. Most recently, she was md and head of CMBS strategy & risk in Jefferies' MBS/ABS/CMBS group. Previously, she was an md in the fixed-income strategies group at RBS.

Pendergast is a past president of CREFC, having served in 2010-2011. She is a current member of its board of governors, having served on the board for over nine years.

CREFC notes that some 35 senior-level professionals were seriously considered for the role.

CMBS

CMBS trader charged for loan fraud

The US SEC has charged former CMBS trader Tianyu Zhou with inaccurately marking certain loans held on his employer's books prior to securitisation. Zhou has agreed to settle the SEC's charges, while his former firm - Deutsche Bank - was not charged as it cooperated with the SEC's investigation.

The SEC says that Zhou - who worked at his firm from 2012 to 2015 - mismarked loans and provided inaccurate information to his employer's internal control function, preventing his employer's internal control function and other employees from learning the true value of these loans. Zhou falsely claimed that the largest loan in question featured a step-up coupon, when it did not.

The SEC also says that Zhou fabricated a loan document as supporting documentation that featured such a step-up coupon. In late 2015 he securitised the loan, leading to the discovery of the fabricated document. Without admitting or denying the findings in the SEC's order, Zhou has agreed to entry of a cease and desist order and to pay a penalty of US$50,000.

Risk Management

ICE acquisitions cleared

Following US Department of Justice clearance, Intercontinental Exchange is set to close its acquisition of S&P Global's Securities Evaluations (SPSE) and Credit Market Analysis (CMA) businesses (SCI 2 March). The transaction is expected to close in October, at which time SPSE and CMA will become part of ICE Data Services. ICE intends to offer its customers new data and valuation services as a result.

RMBS

Ex-Goldman trader barred

The US SEC has barred a former Goldman Sachs RMBS trader from the securities industry after he was found to have repeatedly misled customers and caused them to pay higher prices on bonds. The bank's former head trader, Edwin Chin, also had to pay US$400,000 to settle charges by the regulator.

According to an investigation, Chin reportedly generated extra revenue for Goldman by concealing the prices at which the bank had bought various RMBS. He then allegedly resold the bonds at higher prices to the buying customer, with Goldman keeping the difference. On other occasions, he also supposedly misled purchasers by suggesting he was actively negotiating a transaction between customers when he was merely selling RMBS out of Goldman's inventory.

The SEC says that Chin began undertaking these actions back in 2010 and continued until he left Goldman in 2012. He agreed to pay the settlement charges in a breakdown of US$200,000 in disgorgement, US$50,000 in prejudgment interest and a US$150,000 penalty.

RMBS

JPMorgan settlement approved

The US$4.5bn JPMorgan RMBS settlement was last week approved by the court, which overruled the final objector to the agreement. Proceeds could potentially be distributed within 12 months of the next remittance period.

The settlement pertains to 319 of the 330 RMBS trusts involved. The final objector, W&L Investments, had disagreed with the order in which the settlement proceeds would be distributed to certificateholders. However, the court found W&L's arguments to be without merit.

As part of the agreement, JPMorgan has agreed to implement several improvements to its subservicing protocol, including the requirement that loans serviced by JPMorgan are transferred to a qualified subservicer after they become 60 days delinquent. Limits on servicer advances, prohibitions on certain affiliated-party transactions and monitoring of subservicer performance will also be implemented.

In the case of the Countrywide settlement, the IRS took around six months after the court's acceptance of the settlement to indicate its approval. But Wells Fargo structured product analysts believe that the Countrywide case may have set a precedent for these types of pay-outs and, as such, the approval process for the JPMorgan settlement could potentially progress faster.

After the IRS approves the pay-out, JPMorgan will have a window (120 days in the case of Countrywide) to deposit the settlement amount with the eight trustees involved, which are then expected to distribute it on the next remit date.

RMBS

RMBS sales, trading teams bolstered

Hilltop Securities has made a string of changes to its RMBS trading and sales group in its New York, Chicago and Dallas offices. Chris Paternoster, Jeff Arnier, Brian Bowes and Carl Schref are all new additions to the RMBS sales and trading teams, while Joe Vendemia has been promoted to mortgage sales manager.

Paternoster will serve as md in the firm's RMBS trading team in New York, trading agency CMOs, prime jumbo and Alt-A non-agency products. He was most recently at Cantor Fitzgerald and has also worked at UBS and Paine Webber.

Arnier will serve as a trading assistant in the firm's Dallas headquarters. He was previously at Goldman Sachs, where he was an analyst in the residential mortgage analytics and CRE portfolio analytics groups.

Bowes becomes md in the firm's RMBS sales group in New York. He joins the firm from the structured products sales group at Stormharbour Securities. He has also traded non-agency RMBS at KGS-Alpha and headed the residential loan securitisation conduit at UBS.

Schref joins as md in the firm's RMBS sales group in Chicago. He was previously at Cantor Fitzgerald and has also worked at Lehman Brothers, UBS and Banc of America Securities.

Current md Vendemia's promotion means he will focus on broadening client coverage and directing recruitment to the sales group, while continuing to cover accounts. He has been at the firm since 2013 and has previously worked at Gleacher & Co, JPMorgan and UBS.

Structured Finance

Japanese ratings surge

S&P's rating of new Japanese securitisations rose by 34.2% year-on-year in 1H16 as negative interest rates spurred new RMBS issuance. The agency assigned ratings to roughly ¥1.33trn during the first half of the year, across 10 new transactions.

A 43.3% jump in issuance of RMBS - the largest asset class in Japan - helped push up the total issuance figure. S&P says more borrowers have opted for fixed rate housing loans after the Bank of Japan caused market rates to plunge with its negative rate policy. A breakdown of RMBS deals by originator shows that the Japan Housing Finance Agency remained the leading originator of RMBS in 1H16, with a roughly 95% share of the total rated issuance amount for that segment.

In terms of surveillance, the agency took rating actions on 70 tranches during the first half of 2016. Of these, 33 were upgrades, comprising 28 in relation to RMBS and five on synthetic CDOs. There were also four downgrades, relating to two RMBS, one ABS and one synthetic CDO.

Structured Finance

Euro defaults hit post-crisis low

Overall European structured finance credit quality increased in 2015, with the annual default rate falling to its lowest level since 2008, according to S&P's latest annual rating transitions study. Nevertheless, the number of rating downgrades exceeded the number of upgrades.

S&P had more than 4,800 ratings outstanding on European structured finance securities at the beginning of 2015. Of these securities, 0.7% defaulted during the year.

"The downgrade rate increased to 15.9% in 2015 from 13.7% in 2014, but this was still lower than in all but one of the previous seven years," notes S&P global fixed income research md Andrew South. "Meanwhile, the upgrade rate declined to 13.9% in 2015, from 14.2% in 2014, but remained well above the one-year average of 6.4%."

Combining upgrades and downgrades with their severity, the agency raised its ratings on European structured finance securities by an average of 0.07 notches on aggregate, compared with a 0.02-notch decline in average credit quality during 2014. This marks the first positive year-end reading since 2007.

"Looking at rating actions by asset type, the CMBS sector continued to exhibit the highest downgrade rate last year," adds South. "By contrast, the structured credit sector - including transactions, such as leveraged loan CLOs - showed strong credit performance, with a double-digit upgrade rate. This was mainly due to structural amortisation in more seasoned cash transactions."

Structured Finance

TFIF to tap 'favourable conditions'

TwentyFour Income Fund (TFIF) intends to raise additional equity capital through the issue of new ordinary shares of 1p each. The move is in response to continued investor demand and favourable prevailing market conditions.

TFIF invests in mezzanine ABS and the portfolio currently has a triple-B minus weighted average rating and a four-year weighted average life. The portfolio currently has a gross yield of 7.79%. In comparison, the triple-B component of the sterling corporate bond market currently yields 1.8% over gilts.

"Extraordinary intervention by central banks continues to drive markets and has materially changed the yield opportunity in many parts of the fixed income universe," comments Ben Hayward, portfolio manager at TwentyFour Asset Management. "Sterling assets have been the most recent beneficiary of these moves, following the Bank of England's implementation of further easing. This has led to a material change in value as gilts and corporate bond supply has been sucked out of the market through direct Bank of England purchases."

He continues: "This yield drain has reduced the risk-free rate and pushed credit spreads tighter, but not on an even basis across the board. Assets that have not experienced this yield squeeze will undoubtedly become more sought-after going forward. The ABS market is a large but specialist component of European fixed income and it is not as directly correlated as other parts of the market."

The new shares will be issued at a premium of 2% to the unaudited net asset value per share, as at 19 August 2016. The fund's existing placing programme will remain in place until its expiry on 27 January 2017.

Qualified investors are invited to apply for new shares by contacting Numis Securities. The issuance price will be finalised on 22 August and commitments should be received by 24 August. The results of the issuance will be announced on 25 August, with admission to the LSE due on 31 August.

TwentyFour reports that recent opportunities the fund has taken advantage of include the Hawksmoor Mortgages 2016-1 class E and Aurorus 2016 class F bonds (see SCI's new issuance database).

CDS

Puerto Rico CDS settled

The final price for Commonwealth of Puerto Rico CDS was determined to be 58.5. Six dealers submitted initial markets, physical settlement requests and limit orders to the auction to settle trades across the market referencing the entity (SCI 19 July).

CLOs

Taurus investment increased

Chenavari fund Toro recently disclosed that it has increased its investment in an originator - Guernsey LLP Taurus Corporate Financing - in relation to its originated transactions strategy, via two investments of €23m and €12m in loan warehouse transactions. Taurus will act as the originator for and hold risk-retention securities in Chenavari Investment Managers' latest CLO - the €350m Toro European CLO 2.

In return, Taurus will receive a 100% fee rebate of Chenavari's management fees (excluding performance or incentive payments) in proportion to the risk-retention securities it holds of the relevant class. This benefit enhances the returns available from originated transactions, consistent with Toro's investment strategy.

Separately, Taurus has entered into an asset-based lending arrangement with a major European bank secured by a portfolio of European corporate exposures.

CMBS

CMBS maturity pay-offs expected

A majority of US CMBS loans that mature during the refinancing wave are likely to pay off, according the Moody's. The agency notes that property prices are now higher and interest rates lower as opposed to when they were aggressively underwritten a decade ago.

"The financial metrics of more than two-thirds of maturing CMBS loans indicate a high probability of successful pay-offs," says Moody's director of CRE research, Tad Philipp. "Although loans originated before the financial crisis were aggressively underwritten, property prices have topped the pre-crisis peak and loan coupons are several percentage points lower, providing a further boost to their refinancing prospects."

Moody's adds that commercial property fundamentals today are generally stable or recovering, though earnings growth is likely to decelerate in several sectors as construction picks up. In the first quarter of this year, construction exceeded 5% of existing inventory in 22 metropolitan area/asset class pairs, which is nearly three times the number a year earlier.

CMBS

At-risk Macy's eyed

About US$3.64bn in loans securitised in CMBS issued since 2010 could be impaired by Macy's recently announced round of store closures, according to Morningstar Credit Ratings. The agency has identified 28 Macy's locations that reported below-average tenant sales and are the most at risk of closing.

The retailer said last week that it plans to shutter an additional 100 stores due to slowing traffic and muted sales. This comes just months after it closed 36 other locations (SCI 7 January).

Morningstar calculates that CMBS exposure to Macy's as a collateral tenant totals about US$7.13bn, with an additional US$21.36bn in loans exposed to the store as a shadow anchor. The agency notes that losing a Macy's may not immediately impact a loan, as cashflow could absorb the vacancy. However, if a mall is hit by two or more anchor closures, that could trigger a downward spiral.

For example, the Hudson Valley Mall lost two anchor tenants within a 12-month period - including Macy's in 1Q16 - and is now in foreclosure. Morningstar expects a US$32.4m loss on the US$49.2m Hudson Valley Mall loan.

Of the 28 Macy's that reported sales that were less than the company's 2014 national average, the asset of greatest concern is the Cottonwood Mall in Albuquerque, New Mexico, where Macy's has the weakest sales among stores reporting. The US$101.3m loan accounts for 8.6% of COMM 2014-CR17.

Morningstar says it is concerned that there is a competing Macy's about 13 miles from the property at the Coronado Center. Additionally, more than 30% of the tenants for the collateral space have less than 24 months left on their leases.

CMBS

Delinquencies inch up

US CMBS delinquencies increased by 2bp in July to 3.20% from 3.18% a month earlier, according to Fitch's latest index results for the sector. The portfolio run-off of US$7.6bn exceeded Fitch-rated new issuance volume of US$4.1bn from four transactions in June, causing a decrease in the overall index denominator.

In terms of loan count, 76 loans were resolved in July, slightly above the year-to-date average of 71. Additionally, 69 loans became newly delinquent, compared to the year-to-date average of 59.

In terms of volume, resolutions of US$524m in July were below the year-to-date monthly average of US$847m (excluding the Peter Cooper Village/Stuyvesant Town asset). New delinquencies of US$440m in July reached the lowest level in 2016, after averaging US$755m per month year-to-date.

The largest resolution last month was the US$31.6m Lakeside Market asset (securitised in MLCFC 2007-6), which was disposed of with no losses. The largest new delinquency was the US$27m Yankee Candle Company (MLCFC 2007-5), after the sole tenant renewed its lease at lower rents, thereby creating a projected shortfall for debt service.

Fitch reports that current and previous delinquency rates by property type are: 4.73% for retail (from 4.64% in June); 4.56% for office (from 4.59%); 4.30% for hotel (from 4.22%); 0.86% for multifamily (from 0.83%); 3.98% for industrial (from 4.13%); 4.03% for mixed use (from 3.94%); and 0.76% for other (from 0.79%).

Insurance-linked securities

ILS approach finalised

AM Best has finalised its methodology for rating insurance-linked securities and insurance-linked structures. The 'Best's insurance-linked securities& structures methodology' (BILSM) offers insight into information requirements, key rating considerations, risk modelling and surveillance activities that are generally applied by the agency to rate ILS transactions. Its idealised issue default matrix and idealised issuer default matrix are included within the BILSM.

AM Best notes that in some cases, ILS transactions are rated using structured finance technology by considering the credit profile or risk characteristics of the assets, liabilities, triggers or legal structure that affects the payment of interest and principal to investors. These transactions would be evaluated using the BILSM, along with a number of supplemental ILS transaction criteria.

In other cases, ILS transactions that have the 'look and feel' of an insurance company are rated based on a set of methods that may also include structured finance technology. While less emphasis may be placed on certain factors - such as financial flexibility and/or business profile - these types of transactions will be evaluated based on Best's credit rating methodology (BCRM) and its supplemental criteria procedures.

The considerations as to whether to apply the BILSM or the BCRM to an ILS transaction include: the existence of an SPV or a special purpose captive; the extent of legal recourse to the sponsor; the ability to reasonably predict the transaction's cashflows; the ability to reasonably predict the amount of economic capital needed to meet counterparty obligations; the de-linking of the transaction's cashflows from the sponsor; a well-defined waterfall for distributing cashflows; well-defined investment guidelines for any collateral held for the benefit of sponsors or investors; a stated transaction term; specified conditions under which the transaction can be terminated and obligations extinguished without triggering defaults; and limitations on the activities in which the managers of the transaction can engage.

NPLs

NPL RMBS approach finalised

Fitch has finalised its approach for rating RMBS backed by non-performing loans, which leverages its US RMBS seasoned and re-performing loan criteria with respect to loan file documentation, due diligence review scope and sample size, and representations and warranties. However, due to the idiosyncratic and adverse-selection risk, the agency applies a rating cap of single-A to NPL RMBS and expects a number of structural features - such as a sequential pay structure and application of available funds - to pay interest to the rated notes.

Fitch defines NPLs as loans that are 60 days or more delinquent (DQ) and considers a transaction as an NPL RMBS if more than 10% of the collateral comprises 60-plus days DQ at issuance. The agency assumes a 100% probability of default for NPL loans and loss severity is determined based on the loan's current property value, Fitch's model-projected sustainable market value decline, property liquidation assumptions and a distressed sale discount.

A key distinction between Fitch's NPL rating approach and that used for re-performing loans is its cashflow analysis. For NPLs, the agency applies a transition rate approach, where the transition rates from one DQ status to another are decreased for a period of time to delay liquidation timing for stress scenario analysis.

Risk Management

Variation margin protocol launched

ISDA has launched a new protocol to help market participants comply with variation margin requirements. The ISDA 2016 Variation Margin Protocol allows counterparties to quickly and efficiently put contractual documentation in place with multiple counterparties in order to implement the requirements or to make changes to existing collateral agreements to bring them into compliance.

ISDA notes that the new margin rules for non-cleared derivatives will represent a significant change for the market, requiring firms to make changes to potentially thousands of collateral agreements. The new protocol should expedite that process.

Financial firms with the largest derivatives portfolios are scheduled to exchange initial and variation margin on non-cleared derivatives trades from the start of next month. Initial margin requirements will be phased in for other entities over a four-year period, with all firms required to post variation margin from 1 March 2017.

ISDA's new protocol is open to both members and non-members and is open for adherence on ISDA's website, with an electronic version becoming available on ISDA Amend in October.

Risk Management

CCP papers published

The Committee on Payments and Market Infrastructures (CPMI), IOSCO and the Financial Stability Board (FSB) have issued reports advancing the regulatory agenda on CCPs. The CPMI and IOSCO reports are aimed at enhancing the resilience of CCPs, while the FSB paper covers CCP resolution planning.

"Although the risk of default cannot be entirely eliminated from the global financial system, we aim to limit potential systemic risks arising from any default by a central counterparty member as much as possible by applying a robust but balanced approach to reinforce financial buffers and risk control," says IOSCO board chair Ashley Alder.

The first CPMI and IOSCO report is on the monitoring of principles for financial market infrastructures (PFMI) and looks at the implementation of key standards for the industry. It also reviews measures in place at a set of derivatives CCPs and finds they have made important progress in implementing arrangements consistent with the standards, albeit with certain shortcomings, notably in the areas of recovery planning and credit and liquidity risk management.

There is also a consultative report on resilience and recovery of CCPs, providing further guidance on the PFMI and proposing more granular descriptions of how CCPs are expected to implement key parts of the PFMI to improve resilience and recovery planning. In particular, the report provides guidance on governance and disclosure relating to risk management, credit and liquidity stress testing, coverage of credit and liquidity resource requirements, margin, a CCP's contribution to its own financial resources to losses, and recovery planning.

The FSB's paper also looks at CCP resolution planning. It covers matters such as timing of entry into resolution, adequacy of financial resources, tools for returning to a matched book and allocating default and non-default losses, application of the 'no creditor worse off' safeguard and treatment of a CCP's equity in resolution, as well as cross-border cooperation and effectiveness of resolution actions. The discussion note also sets out related questions on which the FSB seeks comment, with responses due by 17 October.

Risk Management

Second UPI consultation underway

The Committee on Payments and Market Infrastructures (CPMI) and IOSCO have published for public comment a second consultative report on harmonisation of the unique product identifier (UPI). The harmonised global UPI is intended to uniquely identify OTC derivatives products which authorities require to be reported to trade repositories.

The UPI system will assign a code to each OTC derivative product, which maps to a set of data elements describing the product in a corresponding reference database. This reference database, which was previously known as a classification system, was the focus of the first consultative report issued late last year (SCI 18 December 2015).

The focus of the second consultative report is the format of the UPI code and the content and granularity of the UPI data elements. In drafting this second consultative report, the CPMI and IOSCO say they have considered the responses to the first consultative report.

The report has been drafted as part of a mandate from the FSB to develop global guidance on the harmonisation of data elements reported to trade repositories and important for the aggregation of data by authorities, including the unique transaction identifier (UTI) and UPI. The report seeks general and specific comments and suggestions by 30 September.

RMBS

Chinese RMBS approach published

Moody's has published its approach to rating Chinese RMBS using the MILAN framework. The agency will use the approach in conjunction with its existing methodologies to rate RMBS in China.

The calibration of MILAN for China was primarily driven by benchmarking the Chinese residential real estate market to other jurisdictions that also use MILAN. Moody's says it has used many parameters from the new securitisation market settings of MILAN for Chinese residential mortgage pools, with a few changes to reflect Chinese-specific elements.

Among the most important of these changes are the MILAN settings associated with house price stress rates, the wider range of property values in the property value adjustment, a MILAN default probability adjustment for upper tier cities and an additional debt-to-income (DTI) adjustment. The agency may also make an adjustment for mortgage cancellation risk because - as a matter of Chinese law - there is a risk that transferred mortgage loans will become unsecured, unless registration of the associated mortgage transfers is completed in a timely manner. Although the risk is low, it is reflected in the loss assumptions for high severity scenarios.