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
