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A. Asset risk

C 52/2017 STA يسري تنفيذه من تاريخ 1/12/2022

1.Nature of Assets
 

In simple, transparent and comparable securitisations, the assets underlying the securitisation should be credit claims or receivables that are homogeneous. In assessing homogeneity, consideration should be given to asset type, jurisdiction, legal system and currency.

As more exotic asset classes require more complex and deeper analysis, credit claims or receivables should have contractually identified periodic payment streams relating to rental,3 principal, interest, or principal and interest payments. Any referenced interest payments or discount rates should be based on commonly encountered market interest rates, but should not reference complex or complicated formulas or exotic derivatives as specified below.

Homogeneity

For capital purposes, the homogeneity of assets in the pool should be assessed taking into account the following principles:

  • The nature of assets should be such that investors would not need to analyse and assess materially different legal and/or credit risk factors and risk profiles when carrying out risk analysis and due diligence checks.
  • Homogeneity should be assessed on the basis of common risk drivers, including similar risk factors and risk profiles.
  • Credit claims or receivables included in the securitisation should have standard obligations, in terms of rights to payments and/or income from assets and that result in a periodic and well-defined stream of payments to investors. Credit card facilities should be deemed to result in a periodic and well-defined stream of payments to investors for the purposes of this criterion.
  • Repayment of noteholders should mainly rely on the principal and interest proceeds from the securitized assets. Partial reliance on refinancing or re-sale of the asset securing the exposure may occur provided that re-financing is sufficiently distributed within the pool and the residual values on which the transaction relies are sufficiently low and that the reliance on refinancing is thus not substantial.

Commonly encountered market interest rates

The term “commonly encountered market interest rates” should be understood to encompass rates reflective of a lender’s cost of funds, to the extent that sufficient data are provided to investors to allow them to assess their relation to other market rates. Examples of these would include:

  • Interbank rates and rates set by monetary policy authorities, such as LIBOR, EURIBOR, EIBOR and the Fed funds rate; and
  • Sectoral rates reflective of a lender’s cost of funds, such as internal interest rates that directly reflect the market costs of a bank’s funding or that of a subset of institutions.

Exotic derivatives

Determination of whether particular derivatives are “exotic” is inevitably somewhat subjective, but banks should apply a reasonable and conservative process to identifying exotic instruments. The Global Association of Risk Professionals (GARP) defines an exotic instrument as a financial asset or instrument with features making it more complex than simpler, plain vanilla, products. Interest rate caps and/or floors would not automatically be considered exotic derivatives.

2.Asset performance history
 

In order to provide investors with sufficient information on an asset class to conduct appropriate due diligence and access to a sufficiently rich data set to enable a more accurate calculation of expected loss in different stress scenarios, verifiable loss performance data, such as delinquency and default data, should be available for credit claims and receivables with substantially similar risk characteristics to those being securitized, for a time period long enough to permit meaningful evaluation by investors. Sources of and access to data, and the basis for claiming similarity to credit claims or receivables being securitized, should be clearly disclosed to all market participants.

In addition to the history of the asset class within a jurisdiction, investors should consider whether the originator, sponsor, servicer and other parties with fiduciary responsibilities to the securitisation have an established performance history for substantially similar credit claims or receivables to those being securitized and for an appropriately long period.

The originator or sponsor of the securitisation, as well as the original lender, who underwrites the assets, must have sufficient experience in originating exposures similar to those securitized.

When determining whether the performance history of the originator and the original lender for substantially similar claims or receivables to those being securitized has been established for an “appropriately long period of time,” investors should consider a performance history no shorter than a period of seven years for non-retail exposures. For retail exposures, the minimum performance history is five years.

3.Payment status
 

Non-performing credit claims and receivables are likely to require more complex and heightened analysis. In order to ensure that only performing credit claims and receivables are assigned to a securitisation, credit claims or receivables being transferred to the securitisation may not, at the time of inclusion in the pool, include obligations that are in default or delinquent or obligations for which the transferor (e.g. the originator or sponsor) or parties to the securitisation (e.g. the servicer or a party with a fiduciary responsibility) are aware of evidence indicating a material increase in expected losses or of enforcement actions.

To prevent credit claims or receivables arising from credit-impaired borrowers from being transferred to the securitisation, the originator or sponsor should verify that the credit claims or receivables meet the following conditions:

  1. a.The obligor has not been the subject of an insolvency or debt restructuring process due to financial difficulties within three years prior to the date of origination;4
  2. b.The obligor is not recorded on a public credit registry of persons with an adverse credit history;
  3. c.The obligor does not have a credit assessment by an ECAI or a credit score indicating a significant risk of default; and
  4. d.The credit claim or receivable is not subject to a dispute between the obligor and the original lender.

The assessment of these conditions should be carried out by the originator or sponsor no earlier than 45 days prior to the closing date. Additionally, at the time of this assessment, there should be to the best knowledge of the originator or sponsor no evidence indicating likely deterioration in the performance status of the credit claim or receivable.

Additionally, at the time of their inclusion in the pool, at least one payment should have been made on the underlying exposures, except in the case of revolving asset trust structures such as those for credit card receivables, trade receivables, and other exposures payable in a single instalment at maturity.

4.Consistency of underwriting
 

Investor analysis generally is simpler and more straightforward where the securitisation is of credit claims or receivables that satisfy robust origination standards. To ensure that the quality of the securitized credit claims and receivables is not affected by changes in underwriting standards, the originator should demonstrate to investors that any credit claims or receivables being transferred to the securitisation have been originated in the ordinary course of the originator’s business, without material deterioration in underwriting standards. Where underwriting standards change, the originator should disclose the timing and purpose of such changes. Underwriting standards should not be less stringent than those applied to credit claims and receivables retained on the balance sheet.

In all circumstances, all credit claims or receivables must be originated in accordance with sound and prudent underwriting criteria based on an assessment that the obligor has the “ability and volition to make timely payments” on its obligations, or in the case of granular pools of obligors, originated in the ordinary course of the originator’s business with expected cash flows modelled to meet stated obligations of the securitisation under prudently stressed loan loss scenarios.

The originator or sponsor of the securitisation is expected, where underlying credit claims or receivables have been acquired from third parties, to review the underwriting standards of these third parties (i.e. to check their existence and assess their quality) and to ascertain that they have assessed the “ability and volition to make timely payments on obligations” for the obligors.

5.Asset selection and transfer
 

The performance of the securitisation should not rely upon the ongoing selection of assets through active management on a discretionary basis of the securitisation’s underlying portfolio. Credit claims or receivables transferred to a securitisation should satisfy clearly defined eligibility criteria (such as criteria related to size of the obligation, age of the borrower, loan-to-value ratios, debt-to-income ratios, or debt service coverage ratios). Credit claims or receivables transferred to a securitisation after the closing date may not be actively selected, actively managed or otherwise cherry-picked on a discretionary basis. Investors should be able to assess the credit risk of the asset pool prior to their investment decisions. Provided they are not actively selected or otherwise cherry-picked on a discretionary basis, the addition of credit claims or receivables during the revolving periods or their substitution or repurchasing due to the breach of representations and warranties do not represent active portfolio management.

In order to meet the principle of true sale, the securitisation should effect true sale such that the underlying credit claims or receivables:

  1. a.are enforceable against the obligor and their enforceability is included in the representations and warranties of the securitisation;
  2. b.Are beyond the reach of the seller, its creditors or liquidators and are not subject to material re-characterization or claw-back risks;
  3. c.are not effected through credit default swaps, derivatives or guarantees, but by a transfer5 of the credit claims or the receivables to the securitisation; and
  4. d.demonstrate effective recourse to the ultimate obligation for the underlying credit claims or receivables and are not a securitisation of other securitisations.

An independent third-party legal opinion must support the claim that the true sale and the transfer of assets under the applicable laws comply with points (a) through (d) above.

In applicable jurisdictions, securitisations employing transfers of credit claims or receivables by other means should demonstrate the existence of material obstacles preventing true sale at issuance (such as the immediate realization of transfer tax or the requirement to notify all obligors of the transfer) and should clearly demonstrate the method of recourse to ultimate obligors.6 In such jurisdictions, any conditions where the transfer of the credit claims or receivable is delayed or contingent upon specific events and any factors affecting timely perfection of claims by the securitisation should be clearly disclosed.

The originator should provide representations and warranties that the credit claims or receivables being transferred to the securitisation are not subject to any condition or encumbrance that can be foreseen to adversely affect enforceability in respect of collections due.

6.Initial and ongoing data
 

To assist investors in conducting appropriate due diligence prior to investing in a new offering, sufficient loan-level data in accordance with applicable laws or, in the case of granular pools, summary stratification data on the relevant risk characteristics of the underlying pool should be available to potential investors before pricing of a securitisation.

To assist investors in conducting appropriate and ongoing monitoring of performance and so that investors wishing to purchase a securitisation in the secondary market have sufficient information to conduct appropriate due diligence, timely loan-level data in accordance with applicable laws or granular pool stratification data on the risk characteristics of the underlying pool and standardized investor reports should be readily available to current and potential investors at least quarterly throughout the life of the securitisation. Cut-off dates for the loan-level or granular pool stratification data should be aligned with those used for investor reporting.

To provide a level of assurance that the reporting of the underlying credit claims or receivables is accurate and that the underlying credit claims or receivables meet the eligibility requirements, the initial portfolio should be reviewed7 for conformity with the eligibility requirements by an appropriate legally accountable and independent third party, such as an independent accounting practice or the calculation agent or management company for the securitisation. The review should confirm that the credit claims or receivables transferred to the securitisation meet the portfolio eligibility requirements. The review could, for example, be undertaken on a representative sample of the initial portfolio, with the application of a minimum confidence level. The verification report need not be provided but its results, including any material exceptions, should be disclosed in the initial offering documentation.


3 Payments on operating and financing leases are typically considered to be rental payments rather than payments of principal and interest.

4 This condition would not apply to borrowers that previously had credit incidents but were subsequently removed from credit registries as a result of the borrower cleaning their records. This is the case in jurisdictions in which borrowers have the “right to be forgotten.”

5 The requirement should not affect jurisdictions whose legal frameworks provide for a true sale with the same effects as described above, but by means other than a transfer of the credit claims or receivables.

6 E.g., equitable assignment, perfected contingent transfer.

7 The review should confirm that the credit claims or receivables transferred to the securitisation meet the portfolio eligibility requirements. The review could, for example, be undertaken on a representative sample of the initial portfolio, with the application of a minimum confidence level. The verification report need not be provided but its results, including any material exceptions, should be disclosed in the initial offering documentation