ABCPs in the simple world of short-term investments

Updated: Apr 13, 2019

The Money Market Fund Regulation allows for securitisations and asset-backed commercial paper (ABCP) in the investment portfolio.

 

There are conditions to be met. But meet those and you are good.

 

One of the conditions which is common to both is the tenor of the investment. Interestingly, in securitisations and ABCPs can have a tenor beyond 397 days (up to 2 years) if there is an interest reset no later than 397 days apart.

 

There is one interesting difference between the conditions for securitization and ABCPs. An ABCP must have support of a credit institution (banks) in respect of credit risk, liquidity risk and various costs.

 

This is quite opposite to the risk-transference rules applicable under the Basel regime: if a bank wants to achieve a reduction in risk weighted assets through securitization (and ABCP is a specific form of securitization), it must not extend any kind of support to the investor.

 

This excludes money market funds from participation in risk transference by banks through ABCPs; but not through securitisations.

 

The ABCP tenor is expected to be less than 270 days; usually no lesser than 90 days. A securitization may have a legal or residual maturity of up to 2 years (with a reset no later than 397 days): but the condition of support from a bank, does not apply to securitisations.

 

Securitisations must comply with the STS regulation. But investing in a securitization which is not STS-compliant seems to merely reduce the amount that can be invested: it is not excluded from investing.

 

Will this lead to banks structuring risk transference as a securitization of shorter tenor than an ABCP? 


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