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
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