Securitisation Swaps
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Securitisation Swaps : A Practitioner's Handbook

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Description

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.
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Product details

  • Hardback | 232 pages
  • 156 x 235 x 19mm | 482g
  • New York, United States
  • English
  • 1. Auflage
  • 1119532272
  • 9781119532279
  • 508,275

Flap copy

Securitisation Swaps provides the information needed to acquire a clear understanding of the structuring, pricing and risk management of securitisation swaps. This handbook is designed for all parties dealing with the complexity of structured funding, whether directly or as a service-provider.

The authors demystify the complex, multiple moving parts that comprise a securitisation swap and reveal how rigorous modelling and a wide variety of risk-mitigating structures can help manage these complex risks. The book highlights securitisation swaps in structured funding transactions where the underlying debt is residential mortgages in predominantly floating rate markets, auto loans and credit card receivables. This invaluable guide provides essential knowledge that can also be applied to other underlying asset classes.

Both sophisticated professionals and those with little or no securitisation knowledge will find Securitisation Swaps to be a must-have handbook for developing a deep understanding of this unique and complex class of derivatives.
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Back cover copy

Praise for

Securitisation Swaps

"A timely and succinctly written handbook catering to all structured finance practitioners in any capacity. The authors are ambitious in their coverage of all stages in the lifecycle of securitisation swaps and their management. I highly commend this guide which helps to dispel the complexity underlying these instruments, providing practical guidance and strategies that practitioners can utilise every day." --Jamie Ng, Global Head of Finance, Funds and Restructuring, Ashurst

"Securitisation swaps are a critical, yet neglected area of finance markets. Mark, Vlad and Andrew have made a clear, much needed addition to the literature, from an introduction to the basics, through to a detailed discussion of all the key risks and how a transaction is put together from start to finish." --Rohan Douglas, CEO, Quantifi, London

"Mark, Vlad and Andrew have done an outstanding job in the quality and breadth of content and its sheer accessibility." --Chauncy Stark, Former General Manager, FX and Cross Asset Trading, National Australia Bank

An Essential Guide to Understanding the Complexities of Securitisation Swaps

Written by noted experts on the topic, Securitisation Swaps offers an authoritative yet practical guide to understanding and managing the life cycle of securitisation swaps. The handbook examines every step of the cycle from pre-trade structuring and modeling to transaction management through post-trade risk management and accounting.

Securitisation Swaps explains how securitisation swaps are priced, what risks they carry and how the price and risk vary across the myriad structuring options. The handbook provides an introduction to the key elements of securitisation and covered bonds and explores how derivatives fit in this space. In general terms, the authors reveal the risk that derivatives mitigate in these transactions.

Since securitisation swaps incorporate new risks and complexity into structured funding transactions, the book details how securitisation derivatives are different from other derivatives. It explores in depth the three specific risk factors which set them apart: prepayment risk, extension risk and downgrade risk.

The handbook offers all the stakeholders working on a deal (quants, structurers, traders, originators, lawyers and risk professionals) a detailed explanation of the deal lifecycle and contains practical suggestions on risk management, accounting, pricing and transaction execution specifics.
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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
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About Mark Aarons

MARK AARONS is Head of Investment Risk at a leading Australian funds manager and an Adjunct Associate Professor in the Centre for Quantitative Finance and Investment Strategies at Monash University. Previously he was Head of FICC Structuring at the National Australia Bank, where he built a leading securitisation swap business in both Australia and the UK.

VLAD ENDER is a director at Kauri Solutions, a financial markets consulting practice. Prior to founding Kauri Solutions, he spent eight years at National Australia Bank's London office. He also served as an Executive Director in the FICC Structuring team.

ANDREW WILKINSON is a senior legal counsel in Australia who specialises in bespoke derivatives and securitisation. Previously, Andrew spent a decade in London working through the financial crisis and beyond for leading law firms Linklaters LLP and Weil, Gotshal & Manges.
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