Diapositiva 1

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INFORMATION AND DISCLOSURE ISSUES IN THE
ASSET-BASED SECURITIES MARKETS
José Antonio Trujillo InterMoney Titulización
SGFT, SA
WPFS WORKSHOP ON SECURITIZATION Madrid, 27 and 28
May 2010
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OVERVIEW

1. The importance of information
2. Information and ABS market collapse
3. What information do ABS markets require
4. The ECB triple-A rating requirement for ABS
5. The Spanish ABS information framework
6. Securitisation versus covered bonds
7. The future of securitisation

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1. The importance of information

• Asset information management demands enhancement
  across the banking industry
• Dynamic data on debtors and guaranties is not
  always updated
• Information may be disperse in non-related
  data-bases
• Data may not be readily and easily exportable
• Data responsibilities are disperse not well
  defined, and rank low in the management scale
• Problems to generate information and make it
  easily available to third parties (supervisors,
  rating agencies, markets), is an indication poor
  risk control
• If loan information had been better across the
  banking system, alarms would have turned on at an
  earlier stage of the bubble
• Enhancing information standards at originator
  level for internal control and external
  supervision is a much more important objective
  than disclosure for ABS markets

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2. Information and ABS market collapse

• ABS opacity may have contributed to the collapse
  of markets but it was not its main cause.
• The nature of ABS makes it difficult for them not
  to be relatively illiquid, which has resulted in
  unbearable levels of market risk for most
  investors.
• Their apparent liquidity before the crisis was a
  mirage, produced by a market in continuous
  expansion, fed by SIVs, Conduits, and other low
  capitalised term-transformation vehicles.
• Too high expectations have been placed on
  information enhancement as a means of restoring
  ABS markets.
• Investors in (triple-A) ABS are concerned mainly
  with market risk not with credit risk.

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3. What information do ABS markets require (1/2)

• Two different issues
• Enhancing the quality of information
• A balance between disclosure and efficiency
• The ECB proposal
• A complete data template, to homogenise content
  and terminology across EU jurisdictions.
• Required disclosure (for ABS ECB discount) at
  loan by loan level during the life of the ABS to
  all investors. How to implement this disclosure
  remains open.
• Is it a good proposal to restore ABS markets?
• The template is a very positive initiative
• Broad loan-level disclosure of granular
  portfolios is irrelevant for credit risk analysis
• A unified portal open to all investor to access
  loan-level data is costly and unnecessary
• As a requirement for ECB discount, it is
  irrelevant to asses credit risk (ABS are required
  to exhibit 2 triple-A ratings) and penalises
  relatively securitisation versus covered bonds,
  which is not neutral across jurisdictions

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3. What information do ABS markets require (2/2)

• Same benefits could be attained simply by
• Requiring better information at the originators
  and cash-flow servicers levels, which is the
  objective of the template,
• Standardising and enhancing reporting obligations
  with some level of aggregation, and
• Facilitating access to information on a
  decentralised basis.
• Market risk
• Some investors demand loan-level data for
  cash-flow analysis.
• The necessities of investors for this matter, at
  least for the European market environment, have
  been overstated.
• It is possible to give sufficient information
  without descending to loan-level data. The
  information provided by cash-flow servicers on
  alternative prepayment scenarios may be a
  reasonable second best.
• Leave the issuers to decide if they open their
  ABS portfolios for all investors at loan-level
  data.

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4. The ECB triple-A rating requirement for ABS

• The triple-A requirement (2 agencies) doesnt
  have a solid justification and damages the ABS
  market
• The introduction of rating requirements in
  Regulation, in particular in what refers to
  triple-A levels, has corrupted the ultimate sense
  and purpose of credit rating.
• Triple-A is a thin and blurred line, understood
  but by a few, that in the financial world
  separates heaven from hell. Such a line should
  not be used as an instrument for regulatory
  discrimination
• Data shows that the refinement of CRA analysis in
  the upper part of the rating scale is no more
  than an illusion and the product of models that
  produce thin results out of gross hypothesis
• The financial system is wasting resources dancing
  around a notion of total absence of credit risk
  which neither logic nor reality sustains.
• Triple-A requirements benefit some, because
  resources are distributed in their favour, but
  damages all by introducing instability in the
  system

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Standard Poors RatingsDirect on the Global
Credit Portal May 17, 2010
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(No Transcript)
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ABS SP Default Probabilities SP Default Probabilities SP Default Probabilities SP Default Probabilities SP Default Probabilities SP Default Probabilities SP Default Probabilities SP Default Probabilities
Term AAA AA A BBB BB B CCC CC
1 0,000 0,001 0,006 0,062 0,493 1,246 12,595 100,000
2 0,003 0,019 0,041 0,266 1,939 4,086 21,179 100,000
3 0,008 0,042 0,088 0,488 3,259 6,987 27,086 100,000
4 0,021 0,083 0,155 0,822 4,490 10,013 32,503 100,000
5 0,043 0,144 0,269 1,255 5,704 13,073 37,767 100,000
6 0,073 0,218 0,405 1,699 6,942 15,963 40,832 100,000
7 0,116 0,315 0,576 2,203 8,296 18,599 43,803 100,000
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ABS Moody's Loss Default Table Moody's Loss Default Table Moody's Loss Default Table Moody's Loss Default Table Moody's Loss Default Table Moody's Loss Default Table Moody's Loss Default Table Moody's Loss Default Table
Term\Rating Aaa Aa2 A2 Baa2 Ba2 B2 Caa2 Ca
1 0,0000 0,0007 0,0060 0,0935 0,8580 3,9380 14,3000 55,0000
2 0,0001 0,0044 0,0385 0,2585 1,9085 6,4185 17,8750 55,0000
3 0,0004 0,0143 0,1221 0,4565 2,8490 8,5525 21,4500 55,0000
4 0,0010 0,0259 0,1898 0,6600 3,7400 9,9715 24,1340 55,0000
5 0,0016 0,0374 0,2569 0,8690 4,6255 11,3905 26,8125 55,0000
6 0,0022 0,0490 0,3207 1,0835 5,3735 12,4575 28,6000 55,0000
7 0,0029 0,0611 0,3905 1,3255 5,8850 13,2055 30,3875 55,0000
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5. The Spanish ABS information framework (1/2)

• The ABS market started in Spain in 1993 and it is
  regulated by law
• Each ABS has to be structured by means of a SPV
  (Fondo de Titulización (FT)) and approved for
  registry by the CNMV
• FTs are represented and administrated by
  management companies (Sociedades Gestoras de
  Fondos de Titulización (SGFT)).
• There are 7 active SGFTs, with control of all the
  ABS transactions issued under Spanish legislation
  since the origin of the market in 1993.
• SGFT functions
• Loan-level monthly control of loan servicer data
  (typically on monthly basis)
• Portfolio and bond information to supervisors and
  market on regular basis
• Track performance of SPV contracts and rating
  compromises. Watch for any breach of contract,
  act accordingly to demand responsibilities if any
  and take the necessary steps to substitute
  counterparties if required.
• Responsibility to liquidate the FT in favour of
  investors.
• Spanish ABS require rating and external audit of
  the portfolio

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5. The Spanish ABS information framework (2/2)

• The ABS information framework is well established
  In Spain and applies to all underlying portfolios
  without distinction of asset type.
• However, as of today, loan-level information
  doesnt satisfy the standards of the ECB
  template, in particular in what refers to
  debtors data.
• The Spanish ABS market, by means of the role
  played by SGFTs, is well positioned relatively to
  other EU markets to accomplish with the ECB
  information requirements.
• The SGFT have in their data systems all the
  information on a loan by loan basis of all the
  Spanish ABS now in the market.
• The Spanish SGFT in conjunction with the official
  market AIAF, where all ABS are listed, are
  proposing the ECB to create a unified web portal
  for Spanish ABS, to give investors access to
  whatever bond and loan information is required.

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6. Securitisation versus covered bonds (1/2)

• Transferring credit risk by means of
  securitisation and consequently reducing capital
  consumption has become more difficult.
• Derecognising securitised assets has been
  increasingly difficult even before the crisis, at
  least in what refers to Spanish banks due to the
  supervisory practices of the Bank of Spain.
• Expected new regulation to align issuers and
  investors and disincentive originate-to-distribute
  strategies, by requiring some form of tranche
  retention by originators, will also amount to a
  reduction in risk transfer, and consequently make
  securitisation less attractive for issuers.
• Rating agencies have modified their criteria
  giving more importance to counterparty risk and
  commingling risk. This increases the cost of
  securitisation, in particular to those issuers
  which do not have maximum short-term rating level.

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6. Securitisation versus covered bonds (2/2)

• The SEC amendment to Rule 17 g-5 complicates ABS
  rating processes and increases its costs.
• Requirements of information for accounting and
  supervisory purposes have increased dramatically
  for ABS as compared to CB.
• Investors penalise the complexity of pass-through
  structures, typical of securitisation, in
  relation to the simplicity of CB.
• SIVs had close to 60 of the outstanding volume
  of European ABS. It is very unlikely that these
  vehicles or other similar alternative play the
  same role in the future to sustain the ABS
  market.
• The lack of homogeneity of ABS, even within the
  same class of collateral, reduces the possibility
  of liquidity.
• The ECB discount facility penalises
  securitisation given both the double triple-A
  requirement, the higher haircut compared to the
  rest of discountable bonds and the opacity of the
  ABS valuation criteria.

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7. The Future of Securitisation

• If securitisation has been reduced to a funding
  tool and no longer can be used to optimise
  capital, why not use covered bonds instead?
• The benefit of matching cash flows within the
  originating bank can not be the only
  justification for securitisation.
• The concept of secured loan, which is the covered
  bond concept, can be easily expanded to all types
  of assets.
• Bank funding should concentrate in high rated
  bonds, with simple financial characteristics
  that is, adequately secured bullet bonds. Issued
  in ample and potentially liquid markets, where
  investors are concerned by and properly informed
  about the cover pools, but do not require
  loan-level information to evaluate market risks.
• Risk transfer and capital optimisation, could be
  left to illiquid markets, where specialised
  investors will demand high information quality.
• This could be the future of securitisation
  transfer of risk by means of illiquid
  transactions where funding is not the issue, and
  a tool for (non-banking) future flows
  transactions.

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José Antonio Trujillo Chairman and CEO
jtrujillo_at_imtitulizacion.com Carmen Barrenechea
General Manager cbarrenechea_at_imtitulizacion.co
m Manuel González Escudero General Manager
mgonzalez_at_imtitulizacion.com Borja Sáez -
Director bsaez_at_imtitulizacion.com Mónica
Hengstenberg - Director monicah_at_imtitulizacion.co
m
www.imtitulizacion.com
www.imcedulas.com
Plaza Pablo Ruíz Picasso 1, Torre Picasso, planta
23, 28020 MADRID Tel. [phone] Fax 34 91
597 21 75