Principia Partners, a leading solution provider for the management and administration of structured finance investments, today announced the latest release of its Structured Finance Platform (Principia SFP), providing industry standard tools to help EU banks comply with the breadth of investor due diligence requirements specified under Article 122a of the EU Capital Requirements Directive.
The latest functionality enables ABS, MBS and structured credit investors to comprehensively satisfy the operational credit analysis requirements of the EU wide regulation, and avoid additional capital charges associated with a failure to comply.
The platform provides the due diligence, deal and portfolio risk exposure analysis, stress testing and operational tools needed to efficiently implement Article 122a guidelines, as described by the EBA (European Banking Authority) and EU prudential supervisors. Credit institutions benefit from a single software backbone to analyze and record the risk characteristics of securitizations and their underlying exposures, apply assumptions to forecast cashflows and perform stress tests as well as deliver deal, portfolio and collateral reports across any specified set of risk exposures. In addition, operational workflow, audit and risk sensitivity controls can be applied easily across deals, business units or parent operations to establish formal guidelines and maintain compliance with an organization's operating and disclosure requirements.
Principia SFP allows investors to analyze any given deal in the context of the entire portfolio, alongside hedging and funding, and evaluate deals in relation to investment guidelines and industry benchmarks. To understand the risk characteristics of any transaction, investors can automate the integration of all relevant issuance, performance and cashflow data for existing or hypothetical deals into a single portfolio and risk management view. Issuer information such as tranche seniority, servicer history, ratings and credit enhancements can be efficiently and consistently mapped using new market standard issuance fields. Investors can also specify issuance data fields for any given originator, for example to monitor if and how a 5% net economic interest has been retained by the seller.
Asset specific risk characteristics and underlying exposure types can be stress tested to anticipate risks across one deal, many deals or the credit investment business. This enables the ongoing assessment and audit of a deal's structural risk characteristics, and the performance of underlying exposures (such as delinquency rates, foreclosure rates, credit score distribution or other stratifications of credit worthiness across asset, industry, geography etc). Key performance indicators can be integrated from multiple external sources (such as Intex and Lewtan), alongside internal credit analysis and pool statistics. This enables comprehensive in-house evaluation of the waterfall structure, ongoing collateral performance, concentrations and any transaction triggers. The platform's compliance engine can automate risk monitoring and establish limits, triggers and operational controls to maintain compliance with internal and external investment guidelines.
Article 122a specifies that EU credit institutions investing in securitized assets must demonstrate that before investing, and on an ongoing basis, they have a comprehensive understanding of their securitization positions. Formal policies and procedures must be in place to diligently analyze, manage and record the risk profile, performance and structural features of any individual transaction and across portfolios. In addition it is stated that credit institutions must not rely on third party due diligence and that 'the process should remain within the full responsibility and control of the institution'. The penalty for any judged infringement is a proportionate additional capital risk weighting of up to 1250% for each position.
"Investors interested in structured finance want to truly understand the positions they are entering and Article 122a will be key to ensuring that credit institutions do so in a sustainable way," said Douglas Long, EVP Business Strategy, Principia. "By developing an out-of-the- box solution to perform their own due diligence, Principia's software provides banks of all sizes with the control and analytical rigor to address the current requirements of Article 122a, as well as a robust framework to maintain compliance as amendments are introduced in 2012."