australian bond markets

7/29/2019 Australian Bond markets

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SUBMITTED BY-GROUP 4

RMBS Market in Australia


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ROLL NO NAME WORK ALLOTTED

91930

VN RaghuveerAnubhav GoelManik Kalra

1. Collecting datafrom ASX

2. Creating Interestrate lattice

3. Pricing of

Australian Bonds47 Sandeep Gudena 1. Structure of

securitization marketin Australia

23 Tanmay Gupta RMBS Markets in

Australia2

56Neha AgarwalUtkarsh Tathagath

1. Pricing of RMBS2. Credit

enhancement

60 Gaurav Bansal Interest ratederivatives

WORK DISTRIBUTION


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PRICING OF AUSTRALIAN BONDS

Spot Rate & Forward rate

(As on 15th August 2013)

Period Year Spot forward

0 0 2.350%

1 0.5 0.0235 2.570%

2 1 0.0246 2.670%

3 1.5 0.0253 2.810%

4 2 0.0260 2.850%

5 2.5 0.0265 2.950%

6 3 0.0270 3.395%

7 3.5 0.0280 3.771%

8 4 0.0292 3.733%

9 4.5 0.0301

INTEREST RATE LATTICE (CALLIBRATION

METHOD)

0.10504

0.06646 0.06879

0.10005 0.04352 0.045050.06226 0.04291 0.02850 0.01932

0.03924 0.02670 0.01840 0.01867 0.01265

0.02350 0.01683 0.01145 0.00789 0.01222 0.00829

0.02350 0.02570 0.02670 0.02810 0.02850 0.02950

T= 0 1 2 3 4 5


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bond

code

price using

calibration

previous

coupon

next

coupon

coupon

rate

accrued

interest

dirty

price

currentmarket

price

estimated

volatility

GSBK14 102.1819388 15-Jun-13 15-Dec-13 6.25% 2.118056 104.3 104.3 14.64%

GSBS14 101.0399841 21-Apr-13 21-Oct-13 4.50% 2.9 103.9 103.94 5.79%

GSBS15 104.631041 21-Apr-13 21-Oct-13 4.75% 1.530556 106.2 106.162 30.74%

GSBG15 104.0821671 15-Jun-13 15-Dec-13 6.25% 2.118056 106.2 106.2 4.23%

GSBK16 103.5681698 15-Jun-13 15-Dec-13 4.75% 1.609722 105.2 106.332 0.01%

CMP as on 15th August 2013


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INTRODUCTION TO

SECURTIZATION MARKET

Australia has well-established and increasinglysophisticated securitization market

It is one of the oldest securitization markets in

the world introduced at around mid 1980s One of the most active markets outside US

Specialist commercial vehicles by stategovernments were the first organizations to

exploit this technique Revenue at around $ 10 billion USD (in 2012)

Involves around 1600 businesses (in 2012)


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CHARACTERISTICS

Types of Securities

Residential Mortgage Backed Securities (RMBS)

Asset Backed Securities (ABS)

Commercial Mortgage Backed Securities (CMBS)Benefits for lending institutions include:

Greater diversity of funding sources at lower cost

Improved balance sheet and capital management Increased fee income and reduced reliance on

(declining) interest rate margins


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RMBS

The term residential mortgage-backedsecurities denotes debt securities, which aresecured, in respect of principal and interest on a

pool of residential mortgages.

A public trustee company specially establishedsolely for this purpose, which is known as aspecial purpose vehicle (SPV), issues theRMBSs.

The issue of debt securities by trustee companiesis unique to the Australian RMBS programs.


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Key Players

Originator

Trustee

Servicer

RatingAgencies

InvestorsSuperFunds

InsuranceCompanies

High NetWealth

Investors

CommonwealthGovernment


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RMBS Market in Australia

Banks are the main providers of housing loan finance to individuals in

the Australian market, accounting for about 91% of the housing loanmarket

The low LTV ratios of underlying mortgage loans of RMBS

transactions, with the average LTV ratio for these loans at about 60%

The uniformity and high standards of the underwriting policies andprocedures of bank and nonbank lenders for residential mortgages,

primarily due to Australia's prudent regulatory framework, consumer

credit legislation

The rarity of severe downturns in nominal property prices across the

country Strong population demographics, such as net immigration, natural

population growth, an increasing number of households, and a

shortfall in new home supply, which support the underlying demand

for new and existing residential properties.


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Growth of RMBS Issuance The increase in RMBS Issuance was driven by:

Strong growth in housing finance in Australia.

Increased competition in the mortgage market,with a growing share of lending done by

mortgage originators, who rely exclusively on

securitisation for funding.

Increased securitisation of residential mortgages

by traditional mortgage lenders like banks,

credit unions and building societies

These factors saw the share of housing loans fundedthrough securitisation increase from less than 10 per

cent in the late 1990s to a peak of 27 per cent in mid

2007.

However, around the middle of 2007, there was a

global reappraisal of the risks associated with

investing in structured credit products as credit

problems in the US subprime housing market becameevident.

Despite the continued strong performance of

Australian RMBS due to the quality of the underlying

assets, and the absence of issues of transparency and

complexity, investor appetite declined markedly.


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Pricing of RMBS

Australian RMBS provide investors a diverse investment in a

stable environment

If we consider relative valuation, RMBS is basically in

competition with senior unsecured debt and covered bonds

Product Spread

(bps)

Benchmark Comment

Covered Bond 60-65 3M BBSW Multiple price points,AAA Rated, Liquid

Senior Unsecured 85-90 3M BBSW Multiple price points,AA- Rated, Liquid

RMBS 140 1M BBSW Usually 2.5-3yr,AAA Rated,Secondary marketusually morebrokered in nature

Source: National Australia Bank (As at 18 September 2012)


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Types of RMBS

Within RMBS, we have prime and non-conforming RMBS1. Prime mortgage loans are those made by mainstream mortgage lenders

(banks and other deposit-taking institutions and mortgage originators).

2. Non-conforming mortgage loans are those made to borrowers who do

not meet the normal

eligibility requirements of themainstream lenders.

The pricing of RMBS depends on

whether it is a prime or non-

confirming asset and its rating


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Credit Enhancement

Used to raise the credit rating of some or all of the

securities above that of the underlying loans.

Three Commonly Used Methods:-

1. Splitting the RMBS into senior and subordinated

tranches2. Lenders mortgage insurance

3. Monoline insure or credit wraps


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Performance of RMBS in Australia

Delinquency RateAustralian RMBS continue to

perform well, with very low

arrears and loss levels relative

to outstanding loan balances.

Foreclosure FrequencyThe default rate in Australia

has remained low in the past

compared to global rates

even during stressed periods


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OTC Derivatives MarketAustralia

ForwardContract

SingleCurrencyInterest Rate

Equity

Cross CurrencySwap

Commodities

Types ofInstruments

Three Measuresof Market Size &

Risk

NotionalAmount

Outstanding

Gross MarketValue

Gross creditexposures and

liabilities

Collectively, Foreign

exchange and interest rate

derivatives account for90% of the global and

Australian notional

principal and gross market

values outstanding


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Notional Principal amount1.7% of global stock - US$11 trillion

Aggregate Gross Market Value1% of global gross market value -

US$300 billion Gross Credit Exposures and Liabilities as a share of Gross Market

Valuetwice global average


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Single Currency interest rate Swap Majority of amount outstanding is comprised of fixed-to-floating

interest rate swaps

Dealers index most Australian dollar-denominated single-currency

interest rate derivatives to the bank bill swap rate (BBSW)

The bid ask spreads are tight between 1 to 2 bps on average for the

most actively traded single-currency interest rate products


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Cross-currency interest rate Swap Around 70 per cent of aggregate outstanding in cross-currency interest rate

derivatives involve the Australian-US dollar cross

The interest payments of Australian dollars are linked to BBSW and

interest payments in US dollars linked to US dollar LIBOR rate

Globally , Australian dollar is the fifth most frequently used currency in

cross currency swaps, and is involved in around 15 per cent of

transactions

The bid-ask spread is around

2 to 4 bps


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Notional Principal Amount - $ 1 million each Total Notional Principal Amount = $2 million

What if interest rates rise?Positive Market Value for A, lets say = $20,000

Negative Market Value for B = -$20,000 Contracts gross market value = $40,000

Let a pre-existing derivative contract for each bank be as follows:

Bank A = -$6,000 & Bank B = +$6,000

Netting the exposures for each bank: Bank A has net position of +$20,000 - $6,000

= $14,000 i.e. Net Claim

Bank B has net position of -$20,000 + $6,000

= -$14,000 i.e. Net Obligation

Gross Credit exposures and liabilities = $28,000

australian bond markets

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