Secured Funding Trade
The investment strategy capitalises on the opportunities arising from markets' and banking regulators' pressure to strenghten the European financial system which force European banks to look for additional and alternative source of term (unsecured to secured) funding solutions and from their need to monetise the large ABS portfolios they are holding.
SFTs collateralised by ABS offer a unique investment opportunity at attractive spread levels within the bank investment universe. An SFT is a "loan" to a bank secured by collateral with the following features :
- Two levels of recourse
- Dynamic over-collateralisation thanks to initial haircut and on-going margin calls
- Taking the form of a term repurchase agreement or Securities Lending or other financial instrument
When used as collateral, ABS portfolios which require specific expertise and infrastructure, offer attractive spread pick up.
Early entrants into this asset class may obtain better terms through :
- First choice of collateral selection
- Spread premium
Recent consultation paper issued by the FSA emphases the need for any given investor to be able to entirely monitor those transactions therefore the need of an asset manager to support the analytics.
