APRA APS 120 Securitisation: capital treatment and operational rules

Prudential Standard APS 120 Securitisation is the APRA standard that sets how an authorised deposit-taking institution (ADI) treats securitisation for regulatory capital and operational purposes. In short: APS 120 lets an originating ADI move a pool of assets (such as residential mortgages) into a special purpose vehicle (SPV), and it determines whether the ADI may stop holding capital against that pool. It distinguishes between "funding-only" securitisations and securitisations for "regulatory capital relief", and it sets the operational requirements each must meet.

The version in force commenced on 1 January 2024 (Banking (prudential standard) determination No. 6 of 2023), supported by guidance in APG 120. If you are searching for "aps 120 securitisation", the practical questions are usually: does my structure qualify for capital relief, what risk must I transfer, and what operational rules apply. This explainer answers those in order.

What APS 120 is and who it applies to

APS 120 applies to ADIs regulated by APRA — banks, building societies and credit unions — and to authorised NOHCs to the extent the standard provides. It applies principally to an ADI acting as an *originating ADI*, the institution whose assets back the securitisation, but also to ADIs in other roles, such as managing a securitisation, providing facilities (liquidity, derivatives or credit enhancement) to an SPV, or holding securitisation exposures as an investor.

The standard's key requirements are that an ADI must:

• have a risk management framework covering its involvement in a securitisation;
• ensure clear and prominent disclosure of the nature and limitations of its obligations arising from that involvement;
• not provide implicit support to a securitisation; and
• calculate regulatory capital for credit risk against its securitisation exposures.

APS 120 is a prudential standard made under section 11AF of the Banking Act 1959. For the legislative basis, see the Banking Act 1959 on the Federal Register of Legislation. Securitisation also sits within the wider financial services regulatory perimeter.

Funding-only versus capital relief securitisations

The first decision under APS 120 is which of two treatments applies.

Funding-only securitisation. Here the ADI uses the structure to raise funding but does not seek to reduce its capital requirement on the underlying credit risk. An originating ADI may treat a securitisation as funding-only if it meets the operational requirements in Attachment B, and it continues to hold capital against the underlying exposures.

Regulatory capital relief securitisation. Here the ADI seeks to exclude the pool from its capital calculation. Subject to meeting the operational requirements in Attachment A, an originating ADI of a traditional securitisation may exclude the underlying exposures from its regulatory capital calculation for credit risk. It must still hold capital for any facilities or exposures to the SPV that it holds and that relate to the pool.

Significant credit risk transfer

Significant credit risk transfer is the gateway to capital relief. The principle is straightforward: an ADI cannot reduce its capital for risk it still effectively bears.

Attachment A puts numbers on this. Broadly, an originating ADI must sell the non-senior securities issued in the securitisation to third parties, and must not hold or fund the acquisition of more than 20% of the non-senior securities (or of any tranche of them), or hold, fund or provide other loss positions or credit enhancement beyond the standard's limits. Once sold, non-senior securities must not be repurchased except under a compliant clean-up call, and credit risk mitigation or other hedges cannot be treated as a sale of non-senior securities.

Operational requirements

APS 120 sets operational requirements that an ADI must satisfy for its chosen treatment to hold. The recurring themes are independence, transparency and no implicit support:

• Clean transfer. An originating ADI must not maintain effective or indirect control over exposures transferred to an SPV. The securities issued must not be obligations of the ADI, and investors may only have a claim on the pool and the SPV's facilities.
• No implicit support. Implicit support is support "in excess of its explicit contractual obligations". An ADI must not provide it, or knowingly create or encourage a perception that it will.
• Fixed undertakings. Any undertakings an ADI gives must be expressed clearly in the legal documentation and be fixed as to time and amount.
• No improving the pool. An originating ADI must not alter the underlying exposures to improve the pool's credit quality, or increase a retained first-loss position or credit enhancement after the deal is set up (except in a self-securitisation).
• Disclosure. The nature and limitations of the ADI's obligations must be clearly and prominently disclosed.

Boards and risk functions should treat APS 120 compliance as an ongoing obligation, not a point-in-time sign-off at issuance.

Capital treatment of retained exposures

Even in a capital-relief deal, an ADI rarely walks away entirely. It commonly retains senior notes, provides a liquidity facility, or holds a derivative with the SPV. APS 120 requires the ADI to hold capital against the securitisation exposures it retains or provides, calculated under the methods set out in the standard.

The capital outcome therefore depends on the *net* position: relief on the transferred risk, less capital held on retained exposures. Modelling the retained-exposure capital before issuance is essential to knowing whether a capital-relief structure is worthwhile.

(Confirm the specific risk-weight and exposure calculations against the current APS 120 text.)

Self-securitisation

APS 120 defines a self-securitisation as "a securitisation which is solely for the purpose of using the securities created as collateral in order to obtain funding via a repurchase agreement with the Reserve Bank of Australia". Several of the standard's restrictions (for example on repurchasing securities or exposures) are relaxed for self-securitisations because of the RBA repurchase arrangement. A self-securitisation is a funding tool and is not a route to capital relief, since the ADI does not transfer the credit risk.

Implementation steps and common pitfalls

A workable compliance approach:

1. Decide the treatment early. Choose funding-only or capital relief at structuring, and document how the relevant attachment is met.
2. Test risk transfer. For capital relief, evidence that non-senior securities have been sold to third parties within the 20% limits.
3. Model retained capital. Quantify capital on retained notes, facilities and derivatives to confirm the net benefit.
4. Lock down documentation. Ensure a clean legal transfer, fixed undertakings and clear disclosure.
5. Monitor for implicit support. Build controls so the ADI never supports an SPV beyond contract.

Common pitfalls include assuming a sale automatically gives relief (it does not unless Attachment A is met), underestimating capital on retained exposures, providing informal support that taints the structure, and treating compliance as a one-off rather than continuing. Where any calculation or threshold is uncertain, check the current standard with APRA before relying on it.