Principia, the leading software provider for the management, risk oversight and operational control of structured finance investments, today announced system enhancements aimed at addressing the US Market Risk Final Rule's securitization investment guidelines.
The ruling, which came into force on January 1, 2013, implements due diligence requirements for US banks that must now demonstrate adequate independent credit analysis, risk management and timely reporting when investing in structured finance assets.
Version 6.8 of Principia's Structured Finance Platform delivers enhanced cashflow forecasting analytics and asset interfacing capabilities to fully integrate and utilize market pricing, collateral performance and cashflow models from the leading data providers in the ABS industry. This operational flexibility to consolidate the universe of data into a single coherent portfolio, risk and operations platform is fundamental to satisfying the requirements of the Market Risk Rule, which states:
"A bank must demonstrate its comprehensive understanding of a securitization position by (i) conducting an analysis of the risk characteristics of the position prior to acquiring the position, and (ii) documenting such analysis within three business days after acquiring the position...the bank must evaluate, review and update as appropriate the analysis described above for each securitization position on an on-going basis."
In December 2013, the American Securitization Forum released an implementation guide for its members, following consultation with the market about how to best address the operational requirements of the due diligence standards.
Tom Deutsch, Executive Director of the ASF said, "Securitization investors need the operational capabilities to access and make use of all the relevant data that will allow them to understand, manage and report on the key structural features and collateral performance of transactions. The Dodd-Frank Act has forced the U.S bank regulators to a system where credit ratings cannot be used as a benchmark for credit worthiness for ABS and MBS."
Principia's latest software developments address the end-to-end needs of institutions investing in structured finance securities. The system delivers a complete infrastructure for the lifecycle analysis and operational management of these assets, alongside their associated hedges and liabilities. This single platform approach allows for the consistent and efficient presentation, analysis and workflow control of ABS, MBS and structured credit investments.
Investors can fully consolidate and consistently assess structural and collateral performance information, integrating market standard data and cashflow models from multiple internal or external sources. Users can stress test deal performance and forecast the impact of changing delinquency and prepayment levels across a portfolio.
"This is the culmination of work to deliver a complete, out-of-the-box solution for credit investment portfolio management. US banks can quickly tick the boxes outlined in the ASF guidelines for implementation," said Douglas Long, EVP Product Strategy, Principia. "The solution can increase efficiencies by eliminating risky and time consuming manual inputs and cumbersome spreadsheet integration, bringing together all the necessary information and tools to effectively run the structured finance business."
The ruling, proposed and implemented by the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) is one step towards aligning US capital requirements with those of the EU, as well as being integral to removing references to credit ratings in the assessment of risk capital. Failure to perform the appropriate level of due diligence and disclosure will carry capital penalties as banks are forced to hold more cash for investments they cannot effectively assess.