May 30, 2012 / 2:07 PM / 5 years ago

TEXT-Fitch updates structured finance counterparty criteria

Link to Fitch Ratings' Report: Counterparty Criteria for Structured Finance
TransactionsMay 30 - Fitch Ratings has published updated criteria for the analysis of
counterparty risk in structured finance transactions. The criteria update
follows the expiry of a consultation period following the publication of an
exposure draft report on 12 March 2012 and the subsequent review of feedback
In addition to the updated criteria reports, Fitch has published a feedback
analysis report which provides a summary of the feedback received and specifies
the criteria updates that have been implemented. These include:	
-- Extended rating eligibility thresholds	
The updated criteria include extended rating eligibility thresholds as per the
exposure draft proposal. The criteria maintain the previous benchmark, that
direct support and derivative counterparties (without collateral), are expected
to have a minimum Long-Term IDR of 'A' and a minimum Short-Term IDR of 'F1' to
support 'AAAsf' rated notes, but expand minimum rating eligibility thresholds
for SF rating categories below 'AAAsf'.	
-- Changes to collateral posting calculations	
The updated criteria incorporate the exposure draft proposals with respect to
collateral posting calculations, including the new approach for determining
volatility cushions (VCs) resulting in updated VCs for cross-currency swaps. In
addition, Fitch has incorporated a number of additional minor refinements as
detailed in the feedback analysis report.	
-- Extension collateral types examined	
Fitch remains of the opinion that the extension of collateral types could be
beneficial. This would be subject to appropriate eligibility criteria and
advance rates being determined, as well as sufficient supporting data and other
mitigants, being in place. However, the exposure draft proposal to expand
collateral types has not been incorporated into the criteria update. Based upon
mixed feedback received, Fitch considers that this proposal needs further
development before it could be adopted into criteria, for example whether
sufficient data can be gathered to support robust haircuts that can adequately
mitigate liquidity risk.	
Fitch does not expect the criteria updates to have any direct rating impact upon
structured finance note ratings. However, the amendments may have indirect
impacts in the following scenarios.	
In transactions that experience a counterparty downgrade below a previous
criteria threshold and subsequently fail to implement remedial actions that
would maintain the current note ratings, the highest achievable rating may be
different under the updated criteria. In determining the maximum note rating
that can be supported by the counterparty arrangements, Fitch will consider both
the current level of counterparty ratings as well as the minimum counterparty
rating level that is expected to be maintained throughout the life of the
transaction. The consequences under the transaction documentation of any failure
to implement documented remedial actions is a matter of contract for transaction
parties to address. However, where transaction counterparties display an
unwillingness to maintain minimum counterparty ratings (for example, by seeking
to restructure to a lower eligibility standard at a lower rating level rather
than honour currently documented remedial provisions), then note ratings may be
capped at the ratings of the relevant counterparties.	
Conversely, where previously documented triggers are set higher than Fitch's
criteria, and the documented triggers are breached, as long as a counterparty's
arrangements continue to be consistent with Fitch's criteria, the agency would
not expect to downgrade the note ratings of a transaction exclusively due to the
breach of any triggers specified in transaction documentation which no longer
reflect Fitch's current criteria. Nevertheless, the consequences under the
transaction documentation of such a breach would be a matter for transaction
parties to address as a matter of contract. Fitch would expect to be notified of
any action taken by the transaction parties in response to such a breach and
what future actions might be expected to be taken in response to breaches of the
new criteria thresholds.	
Where transaction parties choose to amend existing documentation to incorporate
aspects of the updated criteria (e.g. updated collateral posting calculations),
Fitch will not take rating actions on the affected notes for this reason as long
as the transaction remains consistent with criteria. Fitch expects to be
notified of any such amendments however, in light of this statement, Fitch will
not expect to provide transaction-specific rating confirmations with respect to
proposed changes.	
Fitch will publish an update to the Covered Bond Counterparty Criteria in early
Additional information is available at	
Applicable Criteria and Related Research:	
Feedback Analysis: Counterparty Criteria for Structured Finance Transactions	
Counterparty Criteria for Structured Finance Transactions: Derivative Addendum	
Fitch Structured Finance Counterparty Criteria: Advance Rates for Government
Bonds and Currency Risk	
Covered Bond Counterparty Criteria

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