Traditional Securitization Research Articles

The (Il)legitimacy of Cybersecurity. An Application of Just Securitization Theory to Cybersecurity based on the Principle of Subsidiarity

This contribution applies Floyd’s just securitization theory (JST) to cybersecurity and develops an own version of JST focused on subsidiarity from the critical discussion of this application. Floyd’s JST pursues a subsidiary approach. It emphasizes that securitization is only legitimate if it has “a reasonable chance of success” to avert threats to the satisfaction of “basic human needs”. From this perspective, cyber-securitization would be only legitimate if it protects critical infrastructure, which is a too narrow scope. Whilst Floyd’s JST focuses exclusively on permissibility and needs instead of rights, I argue that there are cases in which states’ compliance with Human Rights requires the guarantee of cybersecurity, most importantly regarding the human right to privacy. Furthermore, my version of JST strengthens the principle of subsidiarity, in the sense that stakeholders directly affected by a threat should participate in securitization. In order to strengthen a kind of subsidiarity focused on the private sector, I argue for the legitimacy of private active self-defence in cyberspace and emphasize the importance of a ‘whole-of-society approach’ involving digital literacy and ‘everyday security practices’. In contrast to that, I argue that far-reaching securitization on the nation-state level can be connected to hyper-securitization. I argue that the securitization of the digital public sphere following unclear notions such as ‘digital sovereignty’ creates a ‘cybersecurity dilemma’ and a ‘societal security dilemma’. Furthermore, I argue that this kind of counterproductive hyper-securitization involves an ‘invisible handshake’ between Big Tech and governments that should be counteracted by structural desecuritization focused on subsidiarity.

Agnosticism in Pan-Asian Structured Finance

Fixed income investors doing Asian cross-border deals have become increasingly agnostic in the types of transactions they are now engaging in, departing from the “safe” high-quality credit portfolios that underlie traditional securitizations and venturing into nontraditional asset classes and structures such as equity hybrids, mezzanine debt, single-asset or single-issuer deals, real estate, and distressed debt. These trends are driven by the chase for higher yields. Increasingly, a double-digit internal rate of return is becoming the predominant determinant for whether or not to do a deal. In Asia, however, foreign exchange controls and currency mismatching remain the biggest challenges to realizing such high levels of return. Cross-border movements of capital and currency conversions are often strictly regulated by central banks. Even where and to the extent permitted, the risk of local currency depreciation requires cross-currency and other types of market hedging, the cost of which may well render the proposed deal unfeasible. <b>TOPICS:</b>Fixed income and structured finance, international investing, real estate, risk management, interest-rate and currency swaps

Securitization and financial solvency: empirical evidence from Portugal

ABSTRACTThis paper analyses the effect of securitization issues on the solvency of Portuguese financial institutions. For this purpose, we use an unbalanced panel model estimated using GMM methods and find that securitization has a slightly positive impact on the soundness of the issuing entity. We study 35 financial entities and 60 traditional securitizations issued by 9 originators between 2001 and 2013. The analysis reveals that the financial entities’ soundness improved slightly, showing that securitization enhanced the quality of the originators’ portfolios and increased the regulatory capital requirements. We also found that efficiency and profitability improve the risk-adjusted ROAA and that efficiency increases regulatory capital requirements. The robustness analysis confirms the positive effect of securitization on solvency, where both credit quality and liquidity are shown to be significant variables.

The solvency of financial institutions in Spain: lessons from securitization

On analysing a sample of Spanish banks, we find that securitization has a slightly negative impact on the soundness of the issuing entity. An unbalanced dynamic panel model was estimated using the forward orthogonal deviations GMM method and used to analyse 537 traditional securitizations issued by 61 banks between 1998 and 2012. The analysis revealed that the entities’ soundness became weaker immediately prior to the crisis, but this effect became insignificant after 2007. Securitization has facilitated a process of regulatory capital arbitrage leading to lower capital requirements while, at the same time, giving rise to a slight worsening of the quality of the originators’ portfolios. It was found that profitability, liquidity and inflation positively affect solvency, while changes in short-term interest rates affect it negatively.

Swaps Regulation: Commodity Pools, Clearing, and Margin

This panel was held on Monday, January 28, 2013, at the ASF 2013 conference. Panelists discussed the developing impact of swap regulation on securitization and what it means for the ability to use swaps in securitization as new regulations take effect. The Dodd–Frank Act added a definition of the term “commodity pool,” and the Commodity Exchange Act revised the definition of the term “commodity pool operator.” As a result, many securitizations that held swaps, often solely to hedge interest rate or currency mismatches between their assets and their liabilities, were at risk of being considered commodity pools. By the time the panel took place, however, the Commodities Futures Trading Commission had granted two significant pieces of interpretive guidance and no-action relief that together excluded most traditional securitizations (e.g., credit card or auto loan securitizations), most asset-backed commercial paper programs, many CLOs and CDOs (collateralized loan obligations and collateralized debt obligations), and most covered bond transactions from the definition of a commodity pool. The panel focused on the relief that was granted and the issues that remained to be resolved. The panel also discussed the aspects of entering a swap that would be different for a securitization now than it would have been a year ago. The most significant changes have not yet become effective. Those include clearing and margin requirements and, eventually, a requirement to transact on a designated contract market or swap execution facility if the swap has been “made available to trade” on such a facility. One of the cornerstones of Dodd–Frank’s swap regulations is the requirement that swaps be cleared through a central counterparty. Whether a swap will need to be cleared depends on the identities of the counterparties, the nature of the swap, and whether a derivatives clearing organization is willing to clear it. Even if a swap is not required to be cleared, it may still be subject to margin requirements and margin calls. <b>TOPICS:</b>Interest-rate and currency swaps, credit default swaps

The Volcker Rule and Conflict-of-Interest Rulemaking: Will Traditional Securitization Survive?

While many reforms in Dodd–Frank are aimed at the securitization market, the proposed rules to implement Sections 619 and 621 may fundamentally limit traditional securitization practices that are vital to the consumer economy. Section 619 and the related proposed rule, otherwise known as the Volcker Rule, are intended to prohibit banks from engaging in proprietary trading and sponsoring, owning, or having certain relationships with hedge funds and private equity funds. Many securitizations are brought within the scope of the rule because they rely on the same exemptions from the Investment Company Act, namely Section 3(c)(1) or 3(c)(7), as do traditional hedge funds and private equity funds. However, there is ample evidence that the Volcker Rule is intended to address concerns that have nothing to do with the securitization markets, including the securitization exemption language in Dodd–Frank that explicitly states, “[n]othing in [the Volcker Rule] shall be construed to limit or restrict the ability of a banking entity … to sell or securitize loans.” For this reason, industry participants believe that Congress intended the Volcker Rule to fully exempt securitizations from its prohibitions. If a broad exclusion is not granted, other provisions of the rule must be modified to accommodate securitization, such as the “Super 23A” provisions that prohibit banking entities from engaging in certain “covered transactions” with securitization entities that are often integral to the securitization process. Section 621 and the related proposed rule, otherwise known as the conflict-of-interest rule, prohibit certain persons who create and distribute an asset-backed security (ABS) from engaging in transactions within one year after the date of the first sale of the ABS that would result in certain material conflicts of interest. The purpose of this prohibition is to eliminate incentives for market participants to intentionally design ABS to fail or default. Although the proposed rule does provide exceptions to the prohibition for risk-mitigating hedging activities, liquidity commitments, and bona fide market making, it is critical that the U.S. Securities and Exchange Commission (SEC) clarify which activities, including those inherent to the securitization process, would or would not be prohibited by the rule. Additionally, it remains to be seen the extent to which meaningful disclosure may be used as a tool to manage conflicts of interest that would otherwise be prohibited under the proposed rule. By revising the proposed Volcker Rule and conflict-of-interest rule to preserve traditional securitization activities, these rules can effectively achieve their intended goals without impeding the recovery of the securitization market. <b>TOPICS:</b>Technical analysis, legal and regulatory issues for structured finance

Financial Intermediation Theory and Implications for the Sources of Value in Structured Finance Markets

Structured finance instruments represent a form of securitization technology which can be defined by the characteristics of pooling of financial assets, delinking of the credit risk of the asset pool from the credit risk of the originating intermediary, and issuance of tranched liabilities backed by the asset pool. Tranching effectively accomplishes a slicing of the loss distribution of the underlying asset pool. This paper reviews the finance literature relating to security design and securitization, in order to identify the economic forces underlying the creation of SF instruments. A question addressed is under what circumstances one would expect to observe pooling alone (as with traditional securitization) versus pooling and tranching combined (as with structured finance). It is argued that asymmetric information problems between an originator and investors can lead to pooling of assets and tranching of associated liabilities, as opposed to pooling alone. The more acute the problem of adverse selection, the more likely is value to be created through issuance of tranched assetbacked securities. Structured finance instruments also help to complete incomplete financial markets, and they may also appear in response to market segmentation.

Competing Land Uses: The Territorial Dimension of Civil–Military Relations in Israel

‘Security comes before everything else’ has been a slogan which has accompanied the State of Israel throughout its history. Security considerations are the number one national priority in Israel and their influence is felt in almost every walk of life. Research projects have analyzed the problematic military–civilian relationship in a number of areas, but have not dealt with the way in which this national priority has influenced the formation of the human and civilian geographical landscapes. This paper examines the way in which regional and local planning have been influenced by the security discourse and the role of security considerations in the decision-making process concerning land use, zoning and physical planning. The problem is even more acute in Israel than other countries because of the small territorial size of the country, the rapidly growing population and the resultant competition for scarce land resources. There is virtually no region inside Israel where competition between military and civilian land uses and priorities does not take place. Military and civilian land uses are intertwined with each other, creating a complex mosaic which often causes conflicts and tensions. The debate concerning military–civil relations has become increasingly multi-disciplinary in recent years. Political scientists, sociologists, economists and anthropologists have become involved in an everwidening, and increasingly critical, debate over the role of the military authorities and defence establishments in western democracies in general and in Israel in particular. Noticeable for its absence, however, has been a discussion of the geographical and territorial dimensions of the civil– military interface. This is all the more surprising given the fact that the defence and military establishment is one of the major consumers of land, with army camps, training grounds, weapons stores and personnel accommodation requiring relatively large tracts of land. Land zoning for

Securitizing Transportation and Other Operating Assets

This article discusses “operating asset securitizations,” i.e., securitizations of discrete, tangible physical assets such as railcars, shipping containers, rental cars, and aircraft. The originators of these transactions are companies that regularly engage in the leasing of these assets to end users. A distinguishing feature of these securitizations is that the economically useful lives of the assets, and therefore the maturities of the asset-backed securities, will extend beyond the expiration dates of the leases associated with those assets. Such transactions are therefore more dependent than traditional securitizations on the servicer9s ability to deploy, maintain, and re-deploy the assets over time. The author discusses some of the unique legal aspects of these transactions and how such transactions are structured to achieve bankruptcy-remote objectives notwithstanding the increased reliance on the servicer and the fact that the assets are not themselves self-liquidating.