PrefBlog

The Bank of Canada is attempting to re-start a market in Canadian ABCP … or, at least, that is my interpretation of the call for comments released today.

The Bank of Canada is seeking comments from direct participants in the Large Value Transfer System (LVTS) and other interested parties on the proposed eligibility criteria for accepting asset-backed commercial paper (ABCP) as collateral for the Bank of Canada’s Standing Liquidity Facility (SLF). Written comments are requested by 14 March 2008. The final terms and conditions for accepting ABCP as collateral for the SLF will be announced by 31 March 2008. Recognizing that the market for ABCP in Canada is still evolving, the Bank of Canada intends to review these criteria in a year’s time and announce the results of that review by 30 June 2009.

The proposed eligibility criteria require the sponsor to be “a deposit-taking institution that is federally or provincially regulated and that has a minimum stand-alone credit rating equivalent to at least A.” – which is to say, a bank or credit union. They may have good reasons for this requirement, but it’s not disclosed.

Other eligibility criteria are:

• The liquidity agreement(s) include an obligation to provide funding except in the event of insolvency of the conduit or near-default status of the underlying assets.
• The program must not contain any actual or potential exposure to securitized assets, with the exception of National Housing Act mortgage-backed securities.
• The program has received the highest possible short-term credit rating from at least two rating agencies.

Of perhaps even greater interest are the transparency requirements:

• The Bank must receive a single, concise document that is provided by and validated by the sponsor, and that includes all relevant investment information.
• This document must be easily accessible to all investors.
• The sponsor must agree to provide timely disclosure to all investors of any significant change to the information contained in this document.
• At a minimum, relevant investment information would include:
  • The identity of the sponsor, the financial services agent, and liquidity providers
  • The range of assets that may be held by the program, including maximum or minimum proportion, if applicable, and when/how asset composition could change
  • Characteristics of the asset pools, including at a minimum: composition, foreign currency exposures, performance measures, credit enhancements, and hedging methods. Other information such as average remaining term, current payment speeds, and geographic locations should be disclosed if relevant to the investor.
  • Where the investor could obtain updates of relevant investment information
  • The nature of the liquidity facilities, including the amount of support from each liquidity provider
  • The nature and amount of program-wide credit enhancements
  • The flow of funds, including payment allocations, rights, and distribution priorities

I maintain rather enormous doubts as to the number of investors who will actually make use of the transparency information, but at least the few who are sufficiently interested will have the ability to look.

From a practical perspective, how is the word “concise”, as in “The Bank must receive a single, concise document”  defined?

And as a last quote, here’s one in the eye for the conspiracy theorists:

The Bank will also consult other available documents, including credit-rating reports, to assess whether an ABCP program meets its criteria.

Golly, credit rating reports? From Credit Rating Agencies? Don’t they get paid by – gasp! – the issuers?

The bank is to be applauded for taking this action – securitization markets are a Good Thing. However, I remain concerned about the appropriate level of capital that the liquidity-guaranteeing bank must put up in respect of their guarantee … I suspect that the current credit conversion factor is simply too low. Additionally, it seems to me that the sponsoring bank (Bank!) should be putting up capital to reflect the reputational risk that it runs if there are actual credit problems in the vehicle.

These are not directly BoC concerns, however – determination of this matter belongs to OSFI and other BIS members.

This entry was posted on Wednesday, March 5th, 2008 at 7:00 pm and is filed under Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.