Securitisation Swaps

CHAPTER 1Introduction

There are literally trillions of dollars of face value of swaps embedded in securitisation and covered bond structures globally. These embedded swaps – which we shall call securitisation swaps – have several highly distinctive features that make them quite different from other derivatives. Despite these differences and the sheer size of the market, securitisation swaps have long been neglected in both the practitioner and academic literature.

Amongst the participants of structured funding markets the emphasis is (rightly) on the funding task for originators and the relative value proposition for investors. Much attention and discussion are lavished on the size of the coupon on residential mortgage‐backed securities (RMBS), asset‐backed securities (ABS) and covered bonds and whether it is tighter or wider than recent comparable issuance. Yet for originators the key metric is not the coupon but rather the landed cost of funds, that is the cost of funding once all expenses, including swap fees, are included.¹ This is almost never publicly disclosed – but that certainly does not diminish its central importance. In this vein, securitisation swaps deserve more prominence as they are, in many cases, a material proportion of the overall funding cost.

In addition to impacting the landed cost of funds, securitisation swaps incorporate new risks and complexity into structured funding transactions. For instance, a credit rating downgrade of the swap provider can, in ...