Retention of Risk by Securitisers in Australian Securitisations

1. Retention of Risk by Securitisers in Australian Securitisations ASF Evening Series February 2010 Chris Dalton

2. Panel • Alex Breier – Portfolio Manager, AMP Capital Investor • Kevin Lee – Division Director, Macquarie Bank • Mary Ploughman – Director, Resimac

3. IOSCO Recommendation 1 “Consider requiring originators and/or sponsors to retain a long term economic exposure to the securitisation in order to appropriately align interests in the securitisation value chain.”

4. EU Retention Options

5. US Retention Proposals • June Obama Administration Proposed Securitization Reform Legislation (“Administration Draft”) • July House of Reps draft Financial Stability Improvement Act (“House Draft”) • November Senate draft Financial Regulatory Reform (“Dodd Draft”)

6. Administration Draft • a securitiser retain “at least 5%” of the credit risk of any securitized exposure • prohibit hedging or transferring the retained risk • regulators to specify how retention should be satisfied • securitiser is an issuer or underwriter of ABS (as defined under SEC’s Regulation AB)

7. House Draft • Similar to the Administration draft proposals • Retention of an economic interest of at least 5% • Applies to any transfer of a loan by a creditor in the secondary market whether or not in connection with a securitisation

8. Dodd Draft • require a securitizer to retain an economic interest in a material portion of the credit risk of securitized assets • minimum level of retention is not less than 10% • prohibition on hedging or transferring retained risk • Securitiser is an issuer of ABS (as defined under the Securities Exchange Act 1934)

9. ASF Retention of Risk Principles

10. New 2010 ASF Best Practices

11. ASF Retention Proposal • Recognition and quantification of economic exposure • Disclosure of quantum of risk retained by the securitiser • Calibration to asset class risk • Non complying transactions permitted under “if not, why not disclosure provisions” • Recognition of equivalency of Australian framework by other jurisdictions

12. 1. Securitiser’s retained exposure • Compliance with ASF Standards • Value of up Securitiser’s up front investment • value of part commissions paid to brokers • payment of LMI premiums • value of subordinated reserves funded by the securitiser • Cost of derivative contract to match cash flows • NPV of Securitiser’s future income • loan and special servicing fees • value of any deferred income • expected value of RIU (not monetarised)

13. 2. Quantify and Disclosure • Quantify based on industry guidelines • Disclosed and expressed as a percent of notes sold to investors • Evaluation of adequacy by investors

14. 3. Calibration to Asset Class Risk • Originator history • for similar receivables previously originated by the securitiser, 1.5 times historical losses* • Asset class history • where originator history is not available, 2.0 times historical losses* * As measured on a rolling three year basis

15. 4. Non Complying Transaction • The ASF proposed framework would permit transactions that do not meet the ASF standards and retention of risk minimums where this was clearly disclosed and explained to institutional investors.

16. 5. Mutual recognition • ASF’s proposal is predicated on the expectation that international regulators will recognise the equivalency of the Australian regulatory framework in satisfying the IOSCO recommendation 1.

17. Panel Discussion and Questions