Contents

CDS

CDS index rolls provide opportunities

The roll to CDX IG27 may be uneventful in terms of names changes, but Morgan Stanley analysts believe that it does offer investors a good opportunity to move existing longs from cash into synthetic credit, given a sharp compression in the cash-CDS basis. Meanwhile, speculation on the demise of the European single name CDS market were premature, argues Markit, considering the healthy liquidity going into the iTraxx roll.

There are only two name changes from IG26 to IG27, with the removals and additions trading at around the same average spread. The Morgan Stanley analysts note that the fair value of the roll is around 9.2bp, but expect the actual roll to trade tighter considering outstanding index-arb positions in IG26 and a better quality portfolio in IG27.

The cash-CDS basis is close to two-year tights, driven by strong demand for credit and yield. The analysts believe the basis is too tight and cash investors are not being sufficiently compensated for the weaker liquidity of bonds at current valuations.

They say: "Overall, the CDX indices look cheap to us on a relative basis, and we think the new index will offer an attractive opportunity to move existing longs from cash to synthetic credit. We like positioning for a more negative basis in portfolio form by selling the IBOXIG TRS (duration hedged) contract to December and going long risk in CDX IG."

The analysts also recommend owning hedges in the options market instead of index. Implied volatility remains "extremely cheap" as the current bout of weakness should continue. There are also catalysts for credit volatility to remain bid through the end of the year, including upcoming central bank meetings and uncertainty about the US election.

In Europe, the Markit iTraxx crossover index was able to entirely fill its constituent from the list of the 1000 most liquid CDS contracts in the six months leading up to September's roll. Historically, thin liquidity in high yield single name contracts has forced crossover rolls to be filled by a supplementary list of alternate high yield contracts based on recently issued debt.

The ample liquidity ensured that only one of the index's changes was due to insufficient trading volumes. That constituent was Elis Group. The other deletions were Melia and British Airways, which became ineligible due to having less than €100m debt outstanding.

JL

CLOs

Reported CLO WAS levels diverging

Deal-reported weighted average spread (WAS) of collateral in European CLOs has been rising, while for US CLOs it has been falling. This has pushed WAS test cushions close to breaching for US CLOs and is expected to impact equity cash distributions.

Unlike computed WAS, reported WAS typically includes the Libor-floor benefit. While the reported WAS in US CLOs has been declining due to a higher Libor, the computed WAS has actually been stable.

Trustee reports give monthly update on WAS, but he Libor rate for the calculation of the Libor-floor benefit in reported WAS is generally updated only quarterly, usually when the coupons of the debt tranches get reset. Most 2.0 CLOs - in both the US and Europe - pay in the January-April-July-October cycle, so these are typically the months for which Libor levels are captured.

The deal-reported WAS is the value used to the minimum WAS test in CLOs, so higher Libor rates push down the reported WAS and thin the WAS test cushion. Morgan Stanley analysts note that, currently, 31.7% of US CLO 2.0 deals are within 15bp of their WAS threshold, with more deals likely to breach the WAS test after the next Libor level reset.

A lower Libor-floor benefit is expected to eat into the cash distributions to CLO equity tranches. A Morgan Stanley analysis shows each 10bp increase in Libor roughly reducing the annual cash distributions to CLO equity investors in a US$500m CLO by 0.9 percentage points. "Therefore, we expect the recent increase in Libor to decrease cash payments to CLO equity tranches by about 1 percentage point (annualised) in the next payment cycle," they add.

However, while the Libor-floor benefit has been declining in the US due to a rising Libor, in Europe the Euribor rate has been decreasing, "therefore increasing the in-the-moneyness of Euribor floors in the deals". This has been a key part of why reported WAS in European CLO portfolios has been increasing all year.

There has also been an increase in the computed WAS for European CLOs - and in WAC - but the analysts believe this may reverse. There has been a wave of European loan repricings due to strong technicals, which could translate into lower coupon spread for European loans and therefore decreasing European CLO WAC and computed WAS.

JL

CLOs

High CLO supply

US CLO supply last week was the highest for the year as four new issues and two refis priced for a total of US$3.61bn. The rolling four-week average of new issuance has been trending higher all year and has reached US$2.3bn.

Year-to-date supply is US$58.9bn on 136 CLOs. According to JPMorgan figures, this includes 16 US refis at US$5.46bn. The fact that refis accounted for 37% (US$1.3bn) of last week's issuance therefore takes on added significance as activity remains elevated across leveraged finance and CLO markets.

"So far in September, refinancing activity has accounted for the highest percent of total monthly new issue volume in the loan market and second highest in the CLO market. All of the US$3.83bn in leveraged loan issuance in September has been either refinancing or repricing," note JPMorgan analysts.

They add: "US CLO refis have accounted for 24% of the US$5.6bn of new issue volume in September, which after August 2016, is the highest since May 2015 when 37% of volume was refinancing related. We continue to expect refinancing volume to remain elevated through the end of the year."

JL

Structured Finance

Virtus expands European arm

Virtus Partners has made three senior hires as it expands its European activities. Dean Fletcher is hired as chief strategy officer, Dermot Caden as head of European Regulated Fund Administration and Jennifer Nolan as senior director of its Dublin arm.

Nolan has over 15 years' industry experience, having previously worked at BNY Mellon Corporate Trust for nine years. She has also worked at HSBC, Barclays Capital, Citibank and UBS in CLOs as well as funds, trade support and settlements.

Fletcher was also most recently at BNY Mellon where he was head of its EMEA Corporate Trust. Caden has over 15 years' experience in alternative asset management, funds and broader financial services.

Structured Finance

DBRS strengthens non-bank focus

DBRS intends to expand coverage of both corporate and structured finance ratings tied to the non-bank financial institution (NBFI) sector. The NBFI and structured finance analytical teams will be more closely aligned to provide investors, issuers and all interested parties with a better understanding of these institutions and their operations.

"We see structured finance transactions from non-bank financial institutions as one of the biggest growth areas in the global structured finance market in the near future," says Claire Mezzanotte, group md, global structured finance. "The added resources DBRS has dedicated to this area will further enhance what we've done so far in the space."

Structured Finance

Bank shuffles SF pros

Credit Suisse has made a series of changes to its asset finance team, with a number of structured finance pros changing roles. Among the changes, Jay Kim has been promoted to global head of structured products.

Kim's promotion follows the appointment of Brian Chan, former co-head of credit and securitised products, to the firm's board with the new role of head of global markets. Taking Kim's old position is Michael Dryden, who has been promoted to global head of asset finance, where he will oversee ABS, RMBS and CMBS.

Also in a new role is Matt Gahr. He takes Dryden's old role as head of special solutions. He is a director based in London.

CMBS

Dock Street brought in for CRE CDO

Dock Street Capital Management has been named as replacement collateral administrator to JPMorgan-CIBC 2006-RR1. Under the terms of the appointment, Dock Street will now assume all responsibilities, duties and obligations of the collateral manager under the applicable terms of the collateral administration agreement.

Moody's says there will be no rating impact, in part due to Dock Street's experience and capacity to perform the duties of collateral administrator. Dock Street acts as collateral manager or administrator on several other Moody's rated CDOs and CRE CDOs.

Insurance-linked securities

ILS firm hires industry vet

Markus Schmutz has joined Rewire Securities. He will work at the investment bank to boost its analytical, advisory and structuring expertise.

Most recently he was ceo at Swiss Re Capital Markets and Swiss Re Risk Solutions Corporation as well as md, head of ILS structuring at Swiss Re Capital Markets, New York. He has extensive experience managing teams involved in the origination and execution of ILS transactions.

Stefano Sola, co-founder and ceo of Rewire, says: "We are extremely pleased to have someone of Markus's caliber join Rewire. Markus will be instrumental in further developing Rewire's underwriting analytics and related ILS products with a key focus on further integrating Rewireconnect, our insurance risk transfer technology platform. Markus's appointment is a key addition to the team and as an accomplished leader in the ILS space will further strengthen our organisation."

ABS

Bumper week for ABS issuance

Last week brought the highest number and dollar total of new ABS for any week for the past three years. It also brought the 2016 year-to-date total ahead of 2015 supply over the same period.

JPMorgan puts the total at 21 ABS for US$12.8bn. The average over the past three years has been six transactions and less than US$4bn per week.

2016 supply so far is now US$143.2bn, compared to US$142.7bn over the same period last year. September volume is now US$17bn with two weeks left, compared to US$9.4bn over the entirety of September 2015.

JPMorgan analysts expect full-year issuance to exceed last year's US$178bn. With issuers potentially motivated to complete funding before a possible December rate hike by the Fed as well as risk retention implementation, they believe "there is a decent chance" of total volume approaching US$195bn.

ABS

Many Navient rating actions taken

Moody's has upgraded 15 classes of notes and downgraded 14 classes in securitisations sponsored or administered by Navient. It has also confirmed the ratings of 14 classes of notes. All the ABS - totalling US$7.7bn over 31 securitisations - are backed by FFELP student loans.

The downgrades are the result of Moody's analysis that indicates that the tranches will not pay off by their final maturity dates under some or all of 28 cash flow scenarios, as outlined in Moody's methodology published last month. Expected losses are higher than the benchmark levels set for their current ratings.

The downgrades of some lowest payment priority class A notes result in these notes being rated lower than the subordinated class B notes in the affected securitisations. Although transaction structures stipulate that class B interest is diverted to pay class A principal upon default on the class A notes, Moody's analysis indicates that the cash flow available to make payments on the class B notes will be sufficient to make all required payments to class B noteholders by the class B final maturity dates, which occur much later than the final maturity dates of the downgraded class A notes.

The upgrades and confirmations are primarily the result of Moody's analysis that indicates that these tranches are either likely to successfully pay off by their maturity dates, or that the expected loss for each such tranche is lower than or consistent with the expected loss benchmark levels.

The affected deals are: Navient Student Loan Trust 2014-1; Navient Student Loan Trust 2014-2; Navient Student Loan Trust 2014-3; Navient Student Loan Trust 2014-4; Navient Student Loan Trust 2014-5; Navient Student Loan Trust 2014-6; Navient Student Loan Trust 2014-7; Navient Student Loan Trust 2014-8; Navient Student Loan Trust 2015-1;
Navient Student Loan Trust 2015-2; Navient Student Loan Trust 2015-3; Navient Student Loan Trust 2016-1; SLC Student Loan Trust 2009-1; SLC Student Loan Trust 2009-3; SLM Student Loan Trust 2009-2; SLM Student Loan Trust 2009-3; SLM Student Loan Trust 2010-2; SLM Student Loan Trust 2011-1; SLM Student Loan Trust 2011-2; SLM Student Loan Trust 2011-3; SLM Student Loan Trust 2012-1; SLM Student Loan Trust 2012-2; SLM Student Loan Trust 2012-4; SLM Student Loan Trust 2012-7; SLM Student Loan Trust 2012-8; SLM Student Loan Trust 2013-2; SLM Student Loan Trust 2013-3; SLM Student Loan Trust 2013-4; SLM Student Loan Trust 2013-6; SLM Student Loan Trust 2014-1; and SLM Student Loan Trust 2014-2.

ABS

Delinquencies down for Italian SME ABS

Total delinquencies of Italian SME ABS have decreased from April 2016 to July 2016, from 6.2% to 5.1%, Moody's says. However, the 60-90 day delinquency rate has increased slightly over the same period, from 0.3% to 0.6%.

The rating agency notes that constant prepayment rates increased from 4.5% to 6.1% between April 2016 and July 2016. As of July 2016, Moody's 28 rated Italian SME ABS deals and lease market transactions have an outstanding pool balance of €17.2bn, representing a year-over-year decrease of 10.4%.

Moody's believes that the Italian ABS SME sector is stable due to a number of credit protections that mitigate the increased counterparties and assess credit risk.

ABS

Autos see credit deterioration

US auto loan and lease credit performance is likely to continue to deteriorate in 2H16 and into 2017, according to Fitch. The rating agency says that year-over-year credit performance deteriorated for auto lenders in 1H16, despite improved loss rates in 1H16 relative to 2H16, which the agency attributes to seasonality.

Despite this credit deterioration, Fitch adds that its rated auto lenders' ABS credit performance remains strong relative to historic norms - the average net loss rate increased 8bp to 0.73% in 2Q16 from 0.65% in 2Q15. Average 30-plus day delinquencies actually decreased slightly to 3.16% from 3.25% during the same period and losses among the largest auto lenders remained low, but continue to normalise due to an increase in loss frequency and severity.

The average net charge-off rate on the managed portfolios for lenders increased to 0.53% from 0.43% year-over-year.

ABS

Biggest PACE deal issued

Renovate America is in the market with its eighth securitisation of PACE bonds. Dubbed HERO Funding 2016-3, the US$320.3m deal is the largest such green bond deal completed to date by any issuer.

Both Kroll Bond Rating Agency and DBRS have assigned ratings of double-A to the class A1 and A2 notes. Moody's has also assigned its highest Green Bond Assessment of GB1.

The portfolio comprises 12,394 PACE assessments levied on residential properties in 34 Californian counties as part of Renovate America's HERO programme. The initial assessments have an average balance of approximately US$21,310, a weighted average annual interest rate of 7.93% and original terms of 14.56 years.

CLOs

CLO market 'focus on technicals'

The US CLO market is focussed on technicals, with fundamentals and credit concerns taking a back seat, according to Wells Fargo analysts. They add that the outlook for continued or increasing overseas investment in CLOs remains a primary concern.

While many industry participants at this week's ABS East conference are bullish on Q4 spread tightening, the Wells Fargo analysts comment that it is difficult to be bullish on both issuance and spreads as the CLO market tends to fill demand with supply, which limits spread tightening. As a result they see less upside in spreads, given the bullish outlook in issuance, the number of managers looking to issue before year-end and the possibility of larger deal sizes and more upsized CLOs in Q4.

Additionally Wells Fargo says that a commonly voiced concern is that the current rally feels "fragile", added to by the potentially increased volatility in Q4. They add that the technical-driven rally is susceptible to central bank policy changes, political risks and commodity price movements.

Furthermore, tightening in triple-A spreads may be seen due to increased demand for CLOs from certain managers, although a lack of loan supply could be a supply constraint on CLO issuance going forward, Wells Fargo suggests. The analysts also believe that credit risk could come from a broad credit cycle downturn with defaults rising in many sectors, as opposed to any specific sector.

CMBS

CMBS 'unaffected' by floods

Recent floods in Louisiana could stress the state's cash balance but CMBS deals there are unlikely to be affected in the near term - despite elevated risk (SCI 8 September) - according to Fitch. The agency comments that despite damage totalling US$8.7bn throughout the state, properties linked to CMBS rated by Fitch are largely unscathed.

The rating agency states that throughout the Federal Emergency Management Agency (FEMA)-defined emergency zone, it rates CMBS deals with 103 loans totalling US$1.2bn in the region, with the average loan in the zone being US$11m. The largest loan of US$126m is for a Lafayette mall, which is reported to be undamaged.

Fitch adds that the floods may create an added challenge for the state to close its deficit for year ending 30 June 2016. The impact on commercial real estate could also rise if tenants do not return.

CMBS

Bankruptcy poses CMBS concerns

Morningstar Credit Ratings finds elevated risk in 17 commercial mortgages with exposure to Golfsmith International Holdings, amounting to an allocated property balance of US$365.5bn. Golfsmith filed for bankruptcy on 14 September, resulting in the closure of 20 stores - two of which are properties backing loans in CMBS, totalling US$42.6m in allocated property balance.

Golfsmith is also the anchor tenant at many of the 17 properties backing the CMBS loans, occupying 20% of gross leasable area at six of these. As such, a closure would drop occupancy below 80% at eight properties, including one where closure has already been announced.

Adding to the risk, about half of the loans with exposure to Golfsmith with combined maturity of US$173.3m mature before year-end 2018. As such, an anchor's bankruptcy or closure could signify problems to lenders and intensity refinance risk, although there are relatively few loans with exposure to the retailer and none of the loans have property balances exceeding US$58m.

The two stores set to close are at properties backing the US$23m Charles River Center loan in GSMS 2010-C1 and the US$19.6m Voice Road Plaza loan in LBUBS 2004-C2. Golfsmith's departure is likely to have a smaller effect on the Charles River Center loan as it accounts for only 7.7% of gross leasable area with debt service coverage ratio of 1.75x as of June 2016. While the Voice Road Plaza loan has reported healthy cash flows for the past several years, it is the largest in LBUBS 2004-C2 accounting for 44.5% of the deal and it will see occupancy fall below a healthy level when Golfsmith leaves its space.

While these two CMBS loans are the only ones identified in the first round of store closures, Morningstar comments that it expects Golfsmith to close further stores. Morningstar identifies several other risky loans where Golfsmith's departure would impact cash flows and the chance of the loan defaulting.

Morningstar highlights a US$23.4m loan backing Lutherville Station Shopping Centre, comprising 4% of JPMCC2006-CB17 as higher risk. It suggests that losing Golfsmith at the shopping centre would compound the loss potential for this loan.

Furthermore, there is occupancy risk on the US$16.6m Lenox Plaza Shopping Center loan, accounting for 0.9% of JPMCC2007-CB19. While the property is 100% occupied, Golfsmith makes up 37.5% of the gross leasable area and has a lease expiring June 2017, one month after the loan's maturity date. Another major tenant's lease, for Party City, expires in March.

Finally, Morningstar thinks that the US$39.3m Fountain Square loan is at heightened risk. It accounts for 3.8% of BSCMS 2006-PW14 and is set to mature 1 October 2016. Should Golfsmith depart, it may be harder for the loan to find takeout financing as the tenant occupies 14.8% of the GLA at the Brookfield, Wisconsin retail property.

CMBS

Fresh Sears closures announced

Seritage Growth Properties, the Sears REIT spin-off, has exercised its right to terminate the leases at 17 unprofitable stores, with all 17 understood to be Kmart stores. The JPMCC 2015-SGP CMBS, which is secured in part by the borrower's interests in 235 wholly-owned properties, is affected.

Seritage's business plan is to recapture, redevelop and re-lease space at each property to improve revenues and diversify the tenant base, reports Kroll Bond Rating Agency. The latest closures are in line with that strategy.

Sears will continue to pay Seritage the contractual rent until the spaces are vacated, which is expected to occur next January. To terminate the leases, Sears must also pay Seritage a termination fee equivalent to one year of base rent plus certain additional charges.

CMBS

Macy's impact considered

While Macy's is yet to release a list of which stores will be closing (SCI 18 August), closures are expected to begin in early 2017. Fitch reports that there are 86 properties backing 104 loans across 79 CMBS where Macy's is a top-five tenant.

Most of these properties are located in regional malls, with a smaller number of retail centres or mixed-use properties. The rating agency notes that the potential closure of stores will have a direct impact to the respective loans regardless of whether the store itself is collateral for the loan; declining rental income, reduced foot traffic, and/or potential co-tenancy lease clauses will all impact the overall property.

The Macy's located at the Hudson Valley Mall (CFCRE 2011-C1) has already been vacated. There are 23 Macy's leases scheduled to expire over the next three years, with 18 in Fitch-rated 2.0 transactions and five in 1.0 deals.

CMBS

Commercial mortgage defaults down

US commercial mortgage annual loan defaults have continued to decline from their 2010 peak, with Kroll Bond Rating Agency noting defaults declined 26% in 1H16, falling to 199. Over the same period last year, the number was 268.

Kroll's study includes 92,415 commercial real estate loans primarily originated for securitisation between 1995 and June 2015. Of these, through June 2016, 14,459 loans defaulted for a cumulative default rate by loan count of 15.6%.

Despite this, losses performed conversely with over a 50% increase from 1H15 to 1H16, and as of June 2016 the cumulative loss rate was 4% with an average loss severity of 49.7%. Furthermore, the time to resolve a loan has trended higher since 2010, averaging 36.1 months in 1H16 compared to 21.5 months in the same period last year.

Kroll says future resolutions may be entering a period of change as CRE prices have reached or exceeded peak levels in many markets. Additionally, CMBS mortgage originations may be further impacted by impending risk retention rules.

Added to this, the report finds 36.5% of maturing loans in 2017 are brick-and-mortar retail so the overall refinance rate may be negatively impacted due to structural shifts in the sector. This could contribute to increased loss severities for defaulted retail loans.

CMBS

CMBS loan collateral value drops

The value of the collateral behind the US$57.5m PNC Corporate Plaza loan has reduced sharply, notes Trepp. The servicer had previously been posting the securitisation value of US$78.4m, but last month that was reduced to US$37.5m.

The property is a 29-storey office building in Louisville, Kentucky, built in 1972 and renovated in 2003. It is collateralised in WBCMT 2007-C30.

PNC Bank is due to vacate the space prior to its lease expiration next February. It is the property's largest tenant, with 27% of the space. The loan matures in March 2017.

Marketplace Lending

Rated UK MPL ABS prepped

Zopa is in the market with its inaugural rated consumer loan securitisation, which is the first rated securitisation of UK marketplace consumer loans. The £138m deal, dubbed Marketplace Originated Consumer Assets 2016-1, is backed by unsecured consumer loans originated via Zopa's marketplace lending platform.

Moody's has assigned provisional ratings of Aa3 to the £114m class A notes, A2 to the £7.5m class Bs, Baa2 to the £7.5m class Cs and Ba3 to the £9m class Ds. The £12m class Z notes are unrated.

The portfolio is made up of 27,137 contracts with a weighted average seasoning of 10 months and maximum loan term of five years. Most borrowers are employed full-time (89.9%) with an average outstanding loan balance of £5,500, with loans mainly being used for auto purchases (36.2%), debt consolidation (34%) and home improvements (22.3%).

Moody's determines expected defaults to be 7% and expected recoveries to be 5%. Its estimated portfolio expected defaults of 7% are higher than EMEA consumer loan average due to the limited performance history of marketplace lending, benchmark transactions, economic uncertainty in the UK and a "rather new originator" with a new business concept compared to classical loan origination.

NPLs

'Increased scrutiny' for Italian banks

The asset quality of Italian banks will come under increased scrutiny if the ECB's guidance on non-performing loans (NPLs) is implemented, according to Fitch. The rating agency suggests that should the guidance go through, Italian banks will "rise up the agendas" of regulators, governments and Eurozone authorities.

Such scrutiny will result because the new guidance will impose "realistic" and "ambitious" targets on banks with high levels of NPLs, as existing approaches have not been effective to date, Fitch suggests. The government has recently given strong support to a scheme to use securitisation to get assets of banks' balance sheets (SCI passim).

The agency believes several government-led initiatives to speed up recovery of NPLs should result in a gradual reduction. However, it adds that it is unlikely to improve the asset quality significantly in the short term and the effectiveness of such initiatives is also untested and the size of the problem is large.

The restructuring plan for Banca Monte dei Paschi di Siene could be used as a model for other banks if successful, according to Fitch, although the bank could fail if it does not work and an alternative solution is not found. As of the end of June 2016, the sector's "unlikely to pay" exposures reached €340bn, equivalent to around 20% of Italy's GDP. Net of reserves this halves to around 10% of GDP.

Risk Management

ICE meets EMIR standards

The Bank of England has authorised ICE Clear Europe as a CCP in accordance with EMIR. It says that ICE has demonstrated that the clearinghouse's governance, operations, risk management, treasury and banking infrastructure are EMIR compliant.

"ICE Clear Europe is delighted that our clearing operations have been authorised by the Bank of England in line with the requirements of EMIR and we will continue to work closely with our clearing members and their customers as the European clearing mandates come into force over the coming months," says Paul Swann, president and md, ICE Clear Europe.

Risk Management

Threshold extension requested

Timothy Massad, CFTC chairman, has recommended a one-year extension to the swap dealer de minimis threshold to December 2018. Currently the swap deal de minimis threshold comes into effect in January 2017, whereby the threshold will drop from US$8bn to US$3bn. Massad says that the extension will give the CFTC more time to consider this "critical decision".

The de minimis threshold was established by the CFTC and SEC jointly in 2012 when there was limited data on the market. While Massad notes that there is much better data available on the market today, he says it still has several limitations such as inability to identify market participants, duplicate records and unreliable data on non-financial commodity swaps.

Additionally, Massad says that based on current data, moving the threshold from US$8bn to US$3bn today would result in more companies registering as swaps dealers, but the notional amount of interest rate swaps and CDS that would be covered would increase by only 1%. As a result of these findings, he suggests the best course of action is to pause.

A major reason for an extension is also to consider setting a rule on capital requirements for swap dealers, which Massad says should be finalised before turning to the threshold. He adds that the threshold also pertains to commodity swaps, where data is lacking, so more time is needed to consider the impact of the threshold on this area.

Risk Management

ESMA seeks derivatives comments

ESMA has published a discussion paper regarding the trading obligation under MiFIR. The trading obligation will move OTC trading in liquid derivatives onto organised venues.

MiFIR outlines the process for determining which derivatives should be traded on-venue. The current consultation is seeking stakeholders' feedback on the options put forward by ESMA on how to calibrate the trading obligation.

The consultation is open for comments until 21 November. ESMA will use the feedback received to continue working on implementing MiFIR's trading obligation and, if deemed appropriate, draft technical standards specifying which derivatives should be subject to the trading obligation.

Risk Management

FpML recommendations published

ISDA has published recommendations for an updated version for Financial products Markup Language (FpML). The latest version - FpML 5.9 - focuses on regulatory reporting in response to several regulatory developments in the US and Europe.

These developments include the SEC's security based swaps reporting requirements and clarification on the reporting obligations from the EU's revised MiFID II/MIFIR. It also includes amendments made to the reporting treatment of derivatives made by the CFTC.

Further recommendations include improvements and updates to coding schemes and how they can be applied to increase data quality. Other changes include a new interest rate addition, foreign exchange and securities (repo) products within pre-trade process functionality as well as including equity volatility swaps.

Work is set to begin on FpML 5.10 at the start of October, looking at reporting, clearing and electronic execution.

RMBS

Mexican RMBS ratings amended

Moody's has changed the ratings on several Mexican RMBS transactions to reflect a correction to its cash flow modelling.

The upgrades consist of certificates from METROCB 06U, from Caa3 to Caa2. This primarily results from a correction to the cash flow waterfall model used to rate this transaction. This led to an increase in the available excess spread to make payments of interest and principal.

Conversely, the agency has downgraded certificates from the three Proyectos Adamantine deals, also due to the corrections in the cash flow models. MXMACCB 05U is downgraded from Ba3 to B3 , MXMACCB 05-2U is downgraded from Caa2 to Caa3 and MXMACCB 06U is downgraded from Caa3 to Ca.

In the original model used for the Proyectos Adamantine deals, the interest payments on the partial credit guarantee draws were not included in the cash flow waterfall model but this has now been corrected.

RMBS

Record involvement for new CIRTs

Fannie Mae has completed two more credit insurance risk transfer (CIRT) transactions, worth US$14.4bn. The company has now transferred a portion of the credit risk on US$759bn in single-family mortgages, with its latest deals attracting a record number of reinsurers.

CIRT 2016-7 and CIRT 2016-8 shift a portion of the credit risk on pools of single-family loans to insurers and reinsurers. The covered loan pools consist of 30-year fixed rate loans with LTVs between 60% and 80%.

The new deals attracted 12 reinsurers, which is a new record for the CIRT programme. This included three new participants.

Fannie Mae retains the risk for the first 50bp of loss on a US$10.4bn pool of loans for CIRT 2016-7. With CIRT 2016-8, Fannie Mae retains risk for the first 50bp on a US$4bn pool.

RMBS

Settlement talks watched closely

Final settlements reached by European banks with the US Department of Justice (DoJ) for the issuance and underwriting of RMBS are likely to be far lower than the DoJ's US$14bn opening position in relation to Deutsche Bank (SCI 16 September), says Fitch. Deutsche Bank has already made the point that US peer banks settled for far lower sums than the mooted US$14bn.

Deutsche Bank is the first of the European banks for which any number has been made public. Barclays, Credit Suisse, HSBC, RBS and UBS are also among the banks waiting to reach settlements with the DoJ.

Unlike other European banks, RBS still has lawsuits pending relating to the FHFA, which could result in a large settlement. US bank settlements with the DoJ have ranged from US$5bn for Morgan Stanley to US$16.6bn for Bank of America (SCI passim).

"We believe that the US$14bn figure for Deutsche Bank is only a starting point in the negotiations. Therefore, we expect the final outcome to be a substantially lower number, much more in line with provisions the bank has already set aside. There are no rating implications at this stage, but if the size of the final settlement turns out to be materially more than the provisions made, this could result in negative rating action," says Fitch.

RMBS

South African RMBS 'robust'

South African RMBS will remain robust despite subdued growth expected for the country's economy, according to Moody's. The rating agency adds that the credit risk of borrowers in the collateral pools is minimal relative to borrowers in the wider population.

Greg Davies, avp at Moody's, states: "While consumer indebtedness is high, RMBS borrowers have lower debt levels compared to their income. Their stronger credit profiles will insulate them from rate hikes. Borrowers backing the mortgage bonds have stronger credit quality, so new arrears will nonetheless be very moderate. For those that do encounter difficulties, the low savings rate would be a notable pressure point."

The firm adds that it finds a lack of correlation between interest rate movements and mortgage arrears, which is significant given the high number of South African mortgages with a floating interest rate. Instead the firm finds that the resilient performance is due to the low amount of the loans relative to the value of the properties acting as collateral, with average South African LTVs approximately 60%.

Moody's suggests that this lower leverage reduces probability of default and maximises recovery amounts for banks in the event of foreclosure. The agency concludes that RMBS pools also benefit from tighter borrower selection criteria, with mortgage arrears of 90-plus days increasing to only 3.66% in January 2016 from 3.49% in October 2015, according to the firm's latest figures.

RMBS

GS meeting settlement requirements

Goldman Sachs is meeting its consumer relief requirements as part of its US$5bn RMBS settlement, says the settlement's monitor. A report from monitor Eric Green shows that Goldman Sachs passed its first round of compliance testing for the consumer relief portion of its settlement, which was reached earlier this year (SCI 12 April).

In addition to a US$2.385bn civil monetary penalty to the federal government, Goldman Sachs is also required to make US$875m in cash payments to resolve claims by other federal entities and state claims.

That US$875m included US$575m to settle claims by the NCUA, US$37.5m to settle claims by the Federal Home Loan Bank of Des Moines as successor to the Federal Home Loan Bank of Seattle, US$37.5m to settle claims by the Federal Home Loan Bank of Chicago, US$190m to settle claims by the state of New York, US$25m to settle claims by the state of Illinois and US$10m to settle claims by the state of California. Goldman Sachs is also required to provide US$1.8bn in consumer relief in the form of loan modifications.

RMBS

Australian mortgage arrears rise

Mortgage arrears in Australia have risen 4bp to 1.14% in 2Q16, which comes as a surprise to the market, notes Fitch. Its latest Dinkum RMBS Index - which tracks Australian mortgage loans underlying RMBS - report highlights that the rise is unusual given the strong economic environment, low-interest rates and low-but-positive real wage growth.

It adds that the country has now seen a 6bp year-over-year rise in arrears, mainly in the 90-plus days bucket, following the migration of 30-60 days arrears into 1Q16 longer-dated arrears. While Q1 arrears tend to correct in Q2, recent figures indicate households with financial problems in 1Q16 had them in 2Q16.

The rating agency suggests that the causes for this could be persistent underemployment, a weakening national mining sector which is now affecting Queensland, Western Australia and Northern Territory - states where it expects to see increases in 90-plus days arrears. Additionally, while unemployment figures have seen declines in 2016, numbers of underemployed workers has risen.

The report states that monetary policy has not benefitted mortgage performance in 2Q16 and 30-60 days arrears did not benefit from lower mortgage rates, although the August 2016 rate-cut may improve 2H16 arrears. It concludes that tighter lending standards might have lowered households' borrowing capacity but that the standards increase the mortgage market's stability should the economy slow.

RMBS

RFC on RMBS methodology

DRBS has issued a request for comment on the proposed UK addendum to its European RMBS methodology, which is considered to be a material change. Comments are published on the rating agency's website and should be received on or before 19 October 2016.

The UK addendum introduces a new proprietary default model to forecast expected defaults and losses on European RMBS portfolios. The model combines a loan scoring approach and dynamic delinquency migration matrices to calculate loan-level defaults and losses and also uses a home price model to generate market value declines.

It outlines country specific aspects of the methodology to estimate defaults and losses for UK mortgages. It will be applied to the methodology for rating European RMBS and other deals linked to UK residential mortgage assets.

The UK addendum also outlines analysis methods of UK residential mortgages which includes underlying property values for both defaults and losses. It details the firm's UK mortgage scoring model, constructed using logistic regression with various parameters and variables to assess the relative credit risk of UK RMBS.