Develop the skillset essential to successful securitisation swaps management Securitisation Swaps is a complete practitioner’s guide to this unique and complex class of derivatives. This detailed examination follows the entire life cycle of securitisation swaps to give quants, structurers, traders, originators, issuers and lawyers a common reference for understanding their shared objective. Broad in scope to provide a common-ground perspective — yet detailed enough to promote full understanding — the discussion takes a distinctly cross-disciplinary approach that encompasses the multi-faceted knowledge base required to successfully execute these complex trades. Despite the fact that the size of the market is trillions of dollars in notional principal, securitisation swaps have thus far been neglected in both academic and practitioner literature. The numerous stakeholders that work together on these complex deals will all greatly benefit from a thorough understanding of their underlying risks and gain deep insight into the perspectives of each stakeholder. This invaluable guide provides multi-disciplinary insight that allows practitioners to: Manage securitisation swaps more effectively, from pre-trade structuring and modelling to post-trade risk management and accounting Understand the elements of securitisation and covered bonds, and how swaps mitigate risk in these types of transactions Explore how securitisation swaps differ from other derivatives and delve into their three specific risk factors — swap prepayment risk, swap extension risk and downgrade risk Learn practical methods and strategies of risk management, accounting, pricing and transaction execution When securitisation trades go wrong, they become front-page news — but when each participant understands accurate modelling, risk mitigation, optimal structuring, costs, pricing, commercial backgrounds and other integral practices, they are able to work together to achieve a shared objective. Securitisation Swaps provides the essential knowledge that streamlines and safeguards these important trades.

Table of Contents:
About the Author xiii Foreword xv Acknowledgements xix Chapter 1 Introduction 1 Chapter 2 Overview of Structured Funding 5 Funding 5 Funding Instruments 7 Securitisation 8 The Securitisation Process 8 Structured Funding Participants 9 Asset and Cash Flow Transformation 16 Summary of Securitisation 18 Master Trusts 18 Securitisation and the GFC 21 Covered Bonds 22 Documentary Framework 24 Offer Document 24 Subscription Agreement 25 Sale Agreement 25 Trust Documentation 25 Servicing Agreement 27 Swaps 27 Ancillary Service Provider Documentation 28 Structured Funding Markets 31 Risks 32 Credit Risk 32 Market Risk 32 Liquidity Risk 33 Prepayment Risk 33 Extension Risk 34 Downgrade Risk 34 Operational Risk 35 Legal Risk 35 Chapter 3 Asset-Backed Debt Structures 37 Loan Pool Dynamics 37 Derivation of Eq. (3.1) 38 Pool Amortisation 42 Securitisation Structures 42 Standalone Structures with Pass-Through Tranches 42 Standalone Structures with Bullet Tranches 47 Standalone Structures with Controlled Amortisation Tranches 48 Tranche Conservation Laws 49 Master Trust RMBS Structures 50 Credit Card ABS Structures 55 Covered Bond Structures 57 Hard Bullets 57 Extendible Maturity Structures 58 Comparison of Structures 59 Chapter 4 Swaps in Structured Funding 61 An Overview of Vanilla Swaps 61 Interest Rate Swaps 61 Cross-Currency Swaps 64 Vanilla Swap Pricing 66 Asset Swaps 68 Liability Swaps 70 Standby Swaps 72 Swap Priority and Flip Clauses 74 Chapter 5 Swap Prepayment Risk 79 What is Swap Prepayment Risk? 79 The Expected Swap Schedule 80 Balance Guarantee Swaps 83 Re-Hedging 84 What Factors Drive Prepayment Rates? 90 Monte Carlo Modelling of Swap Prepayment Risk 91 Working with a Mixed Measure 92 Modelling Prepayment 93 Modelling the Market Risk Factors 96 Simulation Methodology 97 Greeks, Hedging and VaR 103 Computing Greeks 103 Hedging 104 Value-at-Risk 106 XVA 108 Computing XVA for Swaps with Prepayment Risk 108 Intermediated Asset Swaps 109 Mitigation Strategies 110 Risk Transfer 110 Controlled Amortisation Structures 111 Reducing Prepayment Volatility via Diversification 112 Due Diligence and Surveillance 114 Duty of Continuous Disclosure 115 Step-Ups 116 System Issues and Whole-of-Life Deal Management 116 Trade Capture 116 Trade Maintenance 117 Risk Systems 118 Chapter 6 Swap Extension Risk 119 What is Swap Extension Risk? 119 Examples of Extension Risk 121 Dependence on the Capital Structure: Standalone SPVs 126 Extension Risk in UK RMBS Master Trusts 127 Covered Bond Extension Risk 127 A Simple Pricing Framework for 1-Factor Stochastic FX 128 Full Pricing Framework in a Multi-Factor Setting 132 Mitigation Strategies 133 Pre-Trade Structuring versus Real-Time Hedging 133 Pre-Trade Structuring 135 Real-Time Hedging 138 Stress Testing 139 Chapter 7 Downgrade Risk 141 Rating Agency Criteria 142 Criteria Specifics 144 Examples 146 Legal Aspects 149 Updates of Counterparty Criteria 151 Trade Capture and System Challenges 153 The Competitive Landscape for Third-Party Swap Providers 155 Basel III and the Liquidity Coverage Ratio 157 Liquidity Transfer Pricing 159 Constructing the LTP Curve 161 Updating the LTP Curve 162 Contingent Funding Valuation Adjustment 162 What Is CFVA? 162 Costs and Probabilities 163 The CFVA Calculation 165 Revaluation and Hedging 170 Risk Limits 171 Tenor 172 Currency 172 Purpose 172 Mitigation Strategies 172 Choice of Rating Agencies 173 Contractual Protections 174 Optimum Implementation of Counterparty Criteria 174 Risk Transfer 176 Collateralisation from Day One 176 Replacement Risk 177 Replacement of the Swap Provider 178 Third-Party Guarantors 178 Restructuring 179 Mitigants 179 Chapter 8 Deal Management 181 Pricing 181 The Total Swap Cost 181 Pricing Transparency 183 Execution Charges 184 Deal Checklist for Swap Providers 185 Closing the Deal 186 The Pricing Call 186 Executing the Documents 187 Covered Bond Coupon Rounding 187 Market Risk Management 188 Measurement 189 Monitoring 189 Governance and Risk Limits 189 Inform and Act 190 Future Regulation 193 Accounting 194 Fair Value 194 Revenue Reserves 196 Fair Value Hierarchy of Valuation Inputs 197 Glossary 199 References 201 Index 203