Consultations The RBA's Response to the Consultation on its Proposed RMBS Cash Flow Waterfall Reporting Template

On 19 April 2013, the Reserve Bank published for consultation a draft cash flow waterfall template for repo-eligible RMBS (for details see Media Release 2013-08). The consultation period closed on 15 May 2013. During the consultation period, the Bank received four submissions which focussed mainly on compliance costs, external auditor validation, confidentiality and liability issues.

This document sets out the Reserve Bank's response to the submissions received during the consultation period. Section 1 deals with the reporting format of the cash flow waterfall. Section 2 covers the requirement for external audit of the reported waterfall. Section 3 addresses issues raised in relation to commercially sensitive information and liability. Section 4 summarises the Bank's response to issues relating to compliance costs and exemptions from reporting. Section 5 responds to a question about the applicability of the waterfall requirements to master trust structures. Section 6 responds to a number of technical issues raised during the consultation period and provides clarification on several issues.

1. Reporting format of the cash flow waterfall

Some submissions questioned the need for the requirement that the cash flow waterfall be reported as a program written in Visual Basic for Applications. They proposed that the Reserve Bank should instead allow waterfalls to be reported in multiple formats, including as cell-based formulas in a Microsoft Excel workbook.

The Bank believes that it is important for RMBS issuers (or the relevant ‘information provider’ as defined in Media Release 2013-08 and the documents referred to therein) to report waterfall models in a consistent format that is relatively easy to understand and use, and that is widely available to most potential users. At this time, reporting in Visual Basic for Applications (VBA) best meets these requirements. Accordingly, the Reserve Bank is retaining the requirement that the cash flow waterfall is reported as a program written in VBA. The Bank recognizes that the securitisation industry may over time develop an alternative standard programming language for RMBS waterfalls. If such an industry standard was to become established, the Bank would consider changing the programming language from VBA to that standard after consulting with the industry.

2. The external audit requirement

A number of submissions noted that the external audit requirement for the waterfall program could be very costly, and that it would be difficult to design an audit framework that would validate waterfall templates consistently with the RBA's requirements. The requirement was also inconsistent with the three other templates for repo-eligible RMBS.

The Reserve Bank has decided to remove the requirement that the reported waterfalls are validated by an external auditor when they are initially reported and when any subsequent changes are made. However, the Bank will validate the reported waterfall, for example by comparing the reported waterfall program outputs with the actual past distributions by the RMBS trust. This change brings the waterfall template into line with the other templates, which do not require an external audit, reduces compliance costs significantly, and more closely aligns the Bank's reporting requirements to those in other jurisdictions.

3. Commercial sensitivity and liability

Some submissions sought clarification on whether commercially sensitive information on trust expenses and privately placed junior notes would be required to be made publicly available. Clarification was also sought on the appropriate use of liability disclaimers for unintentional model or data errors.

a) Commercially sensitive information

The RMBS trust fees and expenses that rank senior to the RMBS's most senior notes should be aggregated into a single item. The waterfall program should treat all of the senior fees as a single item. This applies to both the waterfall template reported to the Reserve Bank and to the template reported publicly. Other expenses that rank equally or are junior to the senior notes should be aggregated in separate single items.

Information providers should redact the following commercially sensitive information from the publicly reported waterfall template:

  • For non-marketed RMBS (RMBS that are self-securitised or that are issued entirely through private placement) the senior fees should be redacted from the publicly reported template, and should be reported as 0 (zero). This redaction should be made clear in the publicly reported template so that users can clearly understand that they will have to input their own estimate of the senior fees when using the reported waterfall model.
  • Information providers should redact from the publicly reported template the margins and the RMBS historical interest income distributions on privately placed notes that are junior to the most junior publicly placed note. For self-securitisations, information providers should redact from the publicly reported template the note margins and the RMBS historical interest income distributions on all notes. The redacted margins should be reported as 0 (zero) and the redacted income distributions should be reported as ‘NR’. This redaction should be made clear in the publicly reported template so that users can clearly understand that they have to input their own estimates of the issuance margins when using the reported waterfall model.

All information, including the information that is redacted in the publicly reported template, should be reported to the Reserve Bank of Australia.

b) Liability

Despite the best endeavours of information providers to provide accurate information, it is possible that the reported waterfall models may contain some minor errors that are not made with the intention of misleading investors. Reflecting this, information providers may include appropriate disclaimers regarding model and data accuracy and requirements on users to acknowledge any terms and conditions attached to use of the model. The disclaimers, where used, should not be couched in a way that limits substantially the value of the information being provided and should not reduce, or purport to reduce, the representations and warranties that investors are entitled to rely on under the relevant transaction documents or the ability of investors to rely (to the extent contemplated in the transaction documents) on the same or similar information delivered under the relevant transaction documents.

4. Compliance costs, grandfathering and exemptions from reporting

Several submissions raised the concern that RMBS issuers, particularly smaller issuers, do not have the expertise to produce the required VBA waterfall models. In contrast, one submission provided a fully functioning waterfall program meeting the essential points of the Reserve Bank's reporting requirements, and indicated that creating the submitted waterfall model was relatively straightforward.

The waterfall template requirements will impose a cost on RMBS issuers. On the other hand, there are benefits to investors of having a standardised reporting format for this information. In the interests of balancing these factors, the Reserve Bank will exempt from the waterfall reporting requirements those RMBS transactions which have less than $100 million of AAA-rated notes outstanding as at the 31st of December 2014. The waterfall reporting will be required for all RMBS issued after 31 December 2014, with the exception of self-securitised RMBS issued by authorised deposit-taking institutions (ADIs) that are subject to APRA's Minimum Liquid Holdings framework and where the aggregate AAA tranche size is less than $100 million. These exemptions recognise that some small ADIs with self-securitised RMBS and some legacy RMBS may find the cost of compliance high. Should the Reserve Bank purchase such RMBS under reverse repo, the margin ratio used to derive the purchase price will be higher than that which would have applied should a waterfall template have been submitted.

5. Master trust structures

No adjustment has been made to the waterfall template to accommodate master trust securitisations as these structures do not exist in the Australian market.

6. Other changes and clarifications

A number of submissions suggested technical changes to the cash flow waterfall template. These suggestions and internal work at the Bank have led to the following changes to the requirements:

  • For notes issued in a currency other than the Australian dollar, information providers should provide in the waterfall template the interest rate and exchange rates paid on the Australian dollar legs of the cross-currency swaps used to hedge the foreign currency cash flows. For notes with fixed coupons that are hedged with a fixed-for-floating interest rate swap, information providers should provide in the waterfall template the interest rate paid on the floating rate leg of the interest rate swap.
  • All endogenously determined conditions – conditions that depend on the collateral pool status, time, or other observable variables – that can change the distribution priority of payments in the waterfall or lead to a wind-up of the deal should be included in the waterfall program. The program should return output variables indicating whether these trigger conditions have been satisfied as at the reporting date. These variables should be Boolean (that is, the variable takes true or false values only). For trigger conditions that also depend on some form of trust manager discretion, such as some pro-rata payment triggers or clean-up calls, the waterfall program should include a Boolean input variable that indicates to the program whether the RMBS trust has implemented the relevant discretionary decision.
  • Arrays should be indexed from 0 (zero) and the program code should include the ‘Option Base 0’ statement.
  • The waterfall program should include a Boolean output ‘missed payment’ variable indicating if a required income or principal payment has not been met.
  • The waterfall program will potentially have to accept a large number of input variables. In order to handle this uniformly and to address the limit on the number of named parameters that can be passed to a VBA function, all inputs should be passed to the waterfall function as a reference to the range of worksheet cells (a continuous sequence of cells in a single row) that contain the inputs for a single reporting date.

In addition, please note:

  • The waterfall template allows for the inclusion of a small number of auxiliary functions that automate repeated program code.
  • All distribution priorities of payments that can foreseeably be triggered should be included in the waterfall program. Different waterfall programs should not be reported for different distribution priorities. For example, in deals with sequential and pro-rata principal distribution priorities, both distribution priorities should be modelled in the waterfall program; the two distribution priorities must not be reported in separate models.
  • Fixed inputs – inputs that do not change over the life of the RMBS, such as note margins, should be passed to the program as inputs in every period.

Domestic Markets Department
Reserve Bank of Australia
18 July 2013


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