When securities are purchased by the Reserve Bank under repurchase agreement (repo), the market value of those securities is adjusted by a margin ratio in order to obtain the purchase price. This is consistent with the arrangements set out in the SIFMA/ICMA Agreement contained within the RITS Regulations by which all eligible counterparties are bound when dealing with the Reserve Bank. For more information about the Reserve Bank's criteria for eligible securities, see Eligible Securities.
The Reserve Bank has discretion to vary its margin ratios at any time. In particular, the Reserve Bank may increase the margin ratios for securities that it considers to have features that generate uncertainty regarding the application of the Reserve Bank's eligibility criteria or the valuation and margining of the securities.
1. Margin ratios where the counterparty is unrelated to the securities
Margin ratios are applied to the market value of securities purchased by the Reserve Bank under repo in the following manner:
purchase price = market value / margin ratio
margin ratio = (1 + margin / 100)
The ‘margin’ represents the additional collateral that is provided under the repo as a percentage of the purchase price applied by the Reserve Bank. For example, if a margin of 10 per cent was to be applied to a security with a market value of $100, then the purchase price for the security would be $90.91.
Where securities do not have a market value, the Reserve Bank determines the fair value of the securities and uses this as a substitute for the market value. In circumstances where the Reserve Bank needs to make such an assessment, the margin ratio applied to the securities may also be increased.
The margins applied to securities eligible for purchase by the Reserve Bank under repo depend on the type of security, its maturity and/or its credit rating. The table below outlines the margins currently applied to eligible securities by the Reserve Bank, where the counterparty selling the securities is considered by the Reserve Bank to not be materially related to the credit quality of the securities.
|Minimum Credit Rating(a)||Margins by residual maturity
|0–1 years||1–5 years||5–10 years||>10 years|
|Australian Government Securities||n/a||1||2||2||2|
|Securities Issued by Supranationals and Foreign Governments(b)||AAA||2||3||4||4|
|Securities with an Australian Government Guarantee||n/a||2||3||4||4|
|Securities with a Foreign Sovereign Government Guarantee(b)||AAA||2||3||4||4|
|public credit rating||20||n/a||n/a||n/a|
|- Standard||A−1 or AAA||10||10||10||10|
|- Other(e)||A−1 or AAA||15–20||15–20||15–20||15–20|
|Other Securities||A−1 or AAA||6||7||8||10|
(a) Standard & Poor's credit rating, or equivalent from Moody's or Fitch.
(b) The minimum credit rating requirement is waived for securities issued and/or guaranteed by the New Zealand government.
(c) For securities issued with only a short-term credit rating, the lesser of the margin applicable to the issuer's long-term unsecured credit rating, or 20 per cent, will apply.
(d) The Reserve Bank considers ‘standard’ asset-backed securities to be those where at least 90 per cent of the value of the collateral pool held by the issuing trust comprises domestic, full-doc, insurable residential mortgages. Additional margin ratio adjustments apply for related parties.
(e) Actual margin is available on request.
2. Margin ratios for asset-backed securities where: the counterparty is related to the securities; market prices are unavailable; or the securities are subject to reporting exemptions
Asset-backed securities include asset-backed commercial paper (ABCP), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and securities backed by auto loans/leases and/or credit card receivables.
For asset-backed securities where the counterparty to the repo is ‘related’ to the securities proposed as collateral, the Reserve Bank may: restrict the counterparty from selling that security to the Reserve Bank; or make adjustments to the margin ratio through the application of an ‘additional discount’. When determining whether a party is related to the securities, the Reserve Bank takes into account the information provided in the trust documents, the application for eligible security status, and any regular reporting to the Reserve Bank (see Section 2 of Eligible Securities for more information about reporting requirements).
The Reserve Bank may also apply an additional discount if no market price is available for the security, or when certain optional exemptions from ongoing reporting requirements have been exercised.
Where an additional discount is applicable, this is applied in addition to the margin for asset-backed securities outlined in Section 1 above. Note that the additional discount is defined differently from the margin; while the margin is defined as a percentage of the security's purchase price, the additional discount is defined as a percentage of the security's market value. The additional discount is defined in this way so that it is independent of the margin. Where an additional discount is applied, the margin ratio can be expressed in terms of both the margin and the additional discount:
Margin Ratio = 1 / [1 / (1 + Margin / 100) − Additional Discount / 100]
Continuing the example from Section 1 above (where a margin of 10 per cent was applied to a security with a market value of $100, resulting in a purchase price for the security of $90.91), if an additional discount of 3 percentage points was then applied, the purchase price would be reduced from $90.91 to $87.91.
The types of additional discounts that apply are outlined in the following table, with further details provided in the remainder of this section.
|Threshold for counterparty to present securities for repo issued by the issuing trust||Additional discount to the market value of the security
|Counterparty relationship to the issuing trust:|
Can only be presented under the standing facilities if the counterparty has been granted a specific related-party exemption.
Cannot be presented at open market operations.
4 if the counterparty is not a collection account provider.
If the counterparty is a collection account provider, see ‘collection account provider’ below.
Only RMBS can be presented.
Other asset-backed securities cannot be presented.
|At least 4 (calculated by estimating the collection account balance as a percentage of the collateral pool in a high prepayment scenario).|
Can only be presented if:
|Can be presented if a threshold rate mechanism or its equivalent is in place.||1|
|Can be presented if the commitment is less than 3 per cent of the collateral pool.||0|
|Can be presented if the commitment is between 3 and 10 per cent of the collateral pool.||Commitment as a proportion of the collateral pool minus 3.|
|Cannot be presented if the commitment is greater than 10 per cent of the collateral pool.|
|Cannot be presented.|
|No Market Price available||3|
|Securities subject to reporting exemption:|
2.1 Sponsor, originator and/or servicer
For repos contracted under the Reserve Bank's open market operations, the Reserve Bank is not willing to purchase asset-backed securities from a counterparty that is related to the issuing trust in their capacity as a sponsor, originator and/or servicer.
For repos contracted under its standing facilities, the Reserve Bank may relax its restriction on purchasing asset-backed securities from a sponsor, originator and/or servicer where the ADI has applied for, and been granted, a specific related-party exemption in respect of those securities. These related-party exemptions provide the arrangements for internal securitisations (also known as self-securitisations) to be used in the Reserve Bank's standing facilities. Such exemptions will generally be granted only to the most senior notes in the asset-backed security transaction in terms of the allocation of losses across the notes in the transaction, and which satisfy all of the Reserve Bank's requirements for eligible securities. The Reserve Bank's preference is to only grant these exemptions in respect of eligible securities where at least 90 per cent of the collateral pool held by the issuing trust (by value) is comprised of fully documented, domestic, insurable residential mortgages. The Reserve Bank will consider related-party exemptions for other types of asset-backed securities on a case-by-case basis.
Where the Reserve Bank decides to not grant a specific related-party exemption to a particular counterparty, the Reserve Bank can still assess whether the security satisfies the criteria for eligible securities (see Eligible Securities). If the Reserve Bank determines that the security satisfies the criteria for eligible securities, it will then appear on the Current List of Eligible Securities. However, the counterparty related to the securities would be unable to present them for repo with the Reserve Bank.
Where the Reserve Bank agrees to grant an exemption to a sponsor, originator and/or servicer for the use of a related-party security in its standing facilities, and the trust documents make clear (or the related party can otherwise attest) that funds received into collection accounts (or their equivalent) are not invested with the related party or in instruments issued by the related party, an additional discount of 4 percentage points will apply when the Reserve Bank prices the security for use by the related party. Where this condition is not met, an additional discount, outlined in Section 2.2 below, is applied.
2.2 Collection account provider
For RMBS securities, a counterparty that provides a collection account is permitted to sell the security to the Reserve Bank (provided they satisfy other relevant eligibility criteria). In this case, the additional discount is the larger of: 4 percentage points; or a conservative estimate of the peak collection account balance (as a per cent of the collateral pool) between reporting dates to the Reserve Bank. This estimate is calculated by adding a high-prepayment scenario to the collection account balance (as a per cent of the collateral pool) most recently reported to the Reserve Bank. The high-prepayment scenario may be varied based on issuer-specific data, but would be at least double the market average monthly prepayment rate. The high-prepayment scenario is designed to take into account potential variation in prepayment rates in the calculation of the additional discount.
For CMBS and other asset-backed securities, the provider of a collection account will typically not be permitted to sell that security to the Reserve Bank.
2.3 Interest rate swap provider
For a counterparty that provides an Australian dollar denominated interest rate (fixed-for-floating or floating-for-fixed) swap, an additional discount of 3 percentage points is applicable where:
- the notional swap principal is less than 25 per cent of the value of the collateral pool held by the issuing trust;
- the value of any assets with interest rates fixed for greater than 5 years does not exceed 1 per cent of the value of the collateral pool held by the trust; and
- the maturity of any fixed-rate debt issued by the trust does not exceed 5 years.
Where any of these conditions are not met, an interest rate swap provider will not be permitted to sell the security to the Reserve Bank.
2.4 Basis swap provider
For a counterparty that is a basis swap provider, an additional discount of 1 percentage points is applicable where a threshold rate mechanism (or something deemed equivalent by the Reserve Bank) is in place. Where this condition is not met, a counterparty that is a basis swap provider will not be permitted to sell the security to the Reserve Bank.
2.5 Liquidity facility, liquidity reserve account and/or redraw facility provider
For a counterparty that provides a liquidity facility, liquidity reserve account and/or redraw facility, if the commitment exceeds 10 per cent of the collateral pool held by the trust, the provider will not be permitted to sell the security to the Reserve Bank. Where the commitment is less than 3 per cent, no adjustment will be made to the margin ratio. However, where the commitment is greater than 3 per cent and less than 10 per cent, an additional discount equal to the commitment (as a per cent of the collateral pool) less 3 percentage points will apply. Where a counterparty provides more than one facility for a security, the commitments under the facilities are aggregated.
When calculating the additional discount for a liquidity reserve account provider, the commitment is defined as the size of the liquidity reserve account.
2.6 Cross-currency swap, redemption facility and/or guaranteed investment contract (GIC) provider
A provider of a cross-currency swap, redemption facility and/or a GIC provider is not permitted to sell the security to the Reserve Bank.
2.7 No available market price
For asset-backed securities where there is no available market price, an additional discount of 3 percentage points may be applicable at the Reserve Bank's discretion.
2.8 Asset-backed securities with certain exemptions from reporting requirements
Certain reporting exemptions are available to self-securitised RMBS where the ADI is subject to APRA's minimum liquidity holdings (MLH) framework and the aggregate size of the AAA-rated AUD-denominated tranches in the transaction is less than $100 million.
The reporting exemptions are also available to legacy asset-backed securities transactions, where at 30 June 2015 and subsequently, the aggregate amount of outstanding AAA-rated AUD-denominated tranches in the transaction was less than $100 million.
The exemptions cover the reporting of loan-level data (for RMBS and CMBS), some pool-level data (for other asset-backed securities) and a cash flow waterfall model.
Where the exemption has been utilised, the security attracts an additional discount of 10 percentage points if loan-level data (or the relevant pool-level nodes for other asset-backed securities) are not reported, and/or an additional discount of 5 percentage points where a valid cash flow waterfall is not provided with each submission. Where a deal qualifies for a reporting exemption, yet the relevant data are reported on a voluntary basis, these additional discounts do not apply.
For a summary of structural features typically found in Australian RMBS, see Arsov I, I S Kim and K Stacey (2015), ‘Structural Features of Australian Residential Mortgage-backed Securities’, RBA Bulletin, June, pp 43–58.