B. Asset Risk

C 52/2017 STA Effective from 1/12/2022

1.Nature of assets

Conduit level

The sponsor should make representations and warranties to investors that the criteria at the transaction level are met, and explain how this is the case on an overall basis. Only if specified should this be done for each transaction.

Provided that each individual underlying transaction is homogeneous in terms of asset type, a conduit may be used to finance transactions of different asset types.

Program-wide credit enhancement should not prevent a conduit from qualifying for STC, regardless of whether such enhancement technically creates a type of resecuritisation.

Transaction level

The assets underlying a transaction in a conduit should be credit claims or receivables that are homogeneous, in terms of asset type. (This does not automatically exclude securitisations of equipment leases and securitisations of auto loans and leases from the short-term STC framework.)

The assets underlying each individual transaction in a conduit should not be composed of “securitisation exposures” as defined in the Central Bank’s Standard on Required Capital for Securitisation Exposures. The transaction-level requirement is still met if the conduit does not purchase the underlying asset with a refundable purchase price discount but instead acquires a beneficial interest in the form of a note which itself might qualify as a securitisation exposure, as long as the securitisation exposure is not subject to any further tranching (i.e. has the same economic characteristic as the purchase of the underlying asset with a refundable purchase price discount).

Credit claims or receivables underlying a transaction in a conduit should have contractually identified periodic payment streams relating to rental,¹¹ principal, interest, or principal and interest payments. Credit claims or receivables generating a single payment stream would equally qualify as eligible. Any referenced interest payments or discount rates should be based on commonly encountered market interest rates, but should not reference complex or complicated formulae or exotic derivatives.

Homogeneity

For capital purposes, homogeneity should be assessed taking into account the following principles:

•The nature of assets should be such that there would be no 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 for the transaction.
•Homogeneity should be assessed based on common risk drivers, including similar risk factors and risk profiles.
•Credit claims or receivables included in the securitisation should have standards 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 the securitisation exposure 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 the sponsors 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 Federal 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

Conduit level

In order to provide investors with sufficient information on the performance history of the asset types backing the transactions, the sponsor should make available to investors sufficient loss performance data on claims and receivables with substantially similar risk characteristics, such as delinquency and default data on similar claims, and for a time period long enough to permit meaningful evaluation. The sponsor should disclose to investors the sources of such data and the basis for claiming similarity to credit claims or receivables financed by the conduit.

Such loss performance data may be provided on a stratified basis. Examples of such data might include:

•all materially relevant data on the conduit’s composition (outstanding balances, industry sector, obligor concentrations, maturities etc) and conduit’s overview; and
•all materially relevant data on the credit quality and performance of underlying transactions, allowing investors to identify collections, and, as applicable, debt restructuring, forgiveness, forbearance, payment holidays, repurchases, delinquencies and defaults.

Transaction level

In order to provide the sponsor with sufficient information on the performance history of each asset type backing the transactions and to conduct appropriate due diligence and to have 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 risk characteristics substantially similar to those being financed by the conduit, for a time period long enough to permit meaningful evaluation by the sponsor.

The sponsor of the securitisation, as well as the original lender that underwrites the assets, must have sufficient experience in the risk analysis/underwriting of exposures or transactions with underlying exposures similar to those securitized. The sponsor should have well documented procedures and policies regarding the underwriting of transactions and the ongoing monitoring of the performance of the securitized exposures. The sponsor should ensure that the seller(s) and all other parties involved in the origination of the receivables have experience in originating same or similar assets, and are supported by a management with industry experience. For the purpose of meeting the short-term STC capital criteria, investors must request confirmation from the sponsor that the performance history of the originator and the original lender for claims or receivables substantially similar to those being securitized has been established for an “appropriately long period of time.” This performance history must be no shorter than a period of five years for non-retail exposures. For retail exposures, the minimum performance history is three years.

3.Payment status

Conduit level

The sponsor should, to the best of its knowledge and based on representations from sellers, make representations and warranties to investors that the STC criteria at the transaction level are met with respect to each transaction.

Transaction level

The sponsor should obtain representations from sellers that the credit claims or receivables underlying each individual transaction are not, at the time of acquisition of the interests to be financed by the conduit, in default or delinquent or subject to 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 original seller or sponsor should verify that the credit claims or receivables meet the following conditions for each transaction:

•The obligor has not been the subject of an insolvency or debt restructuring process due to financial difficulties in the three years prior to the date of origination;¹²
•The obligor is not recorded on a public credit registry of persons with an adverse credit history;
•The obligor does not have a credit assessment by an external credit assessment institution or a credit score indicating a significant risk of default; and
•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 original seller or sponsor no earlier than 45 days prior to acquisition of the transaction by the conduit or, in the case of replenishing transactions, no earlier than 45 days prior to new exposures being added to the transaction. In addition, at the time of the assessment, there should be, to the best knowledge of the original seller or sponsor, no evidence indicating likely deterioration in the performance status of the credit claim or receivable.

Further, 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 replenishing 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

Conduit level

The sponsor should make representations and warranties to investors that:

1.It has taken steps to verify that, for the transactions in the conduit, any underlying credit claims and receivables have been subject to consistent underwriting standards, and explain how; and
2.When there are material changes to underwriting standards, it will receive from sellers disclosure about the timing and purpose of such changes.

The sponsor should also inform investors of the material selection criteria applied when selecting sellers (including where they are not financial institutions).

Transaction level

The sponsor should ensure that sellers (in their capacity as original lenders) in transactions with the conduit demonstrate to it that:

a.Any credit claims or receivables being transferred to or through a transaction held by the conduit have been originated in the ordinary course of the seller’s business subject to materially non-deteriorating underwriting standards. Those underwriting standards should also not be less stringent than those applied to credit claims and receivables retained on the balance sheet of the seller and not financed by the conduit; and
b.The obligors have been assessed as having the ability and volition to make timely payments on obligations.

The sponsor should also ensure that sellers disclose to it the timing and purpose of material changes to underwriting standards.

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.

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

If the sponsor of the securitisation did not originate the assets, the additional requirement will ensure that the seller has to check (a) the existence and quality of the underwriting standards; (b) that the borrowers to whom the acquired loans are extended have been screened by the lender; and (c) that their ability and their willingness to repay have been assessed by the original lender. This should not, however, be understood as an obligation for the seller to perform this assessment itself.

5.Asset selection and transfer

Conduit level

The sponsor should:

1.Provide representations and warranties to investors about the checks, in terms of their nature and frequency, it has conducted regarding enforceability of underlying assets; and
2.Disclose to investors the receipt of appropriate representations and warranties from sellers that the credit claims or receivables being transferred to the transactions in the conduit are not subject to any condition or encumbrance that can be foreseen to adversely affect enforceability in respect of collections due.

Transaction level

The sponsor should ensure that credit claims or receivables transferred to or through a transaction financed by the conduit:

a.Satisfy clearly defined eligibility criteria;
b.Are not actively selected after the closing date, actively managed or otherwise cherry-picked.¹³

An in-house legal opinion or 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) and (b) at the transaction level.

The sponsor should be able to assess thoroughly the credit risk of the asset pool prior to its decision to provide full support to any given transaction or to the conduit.

The sponsor should ensure that the transactions in the conduit effect true sale such that the underlying credit claims or receivables:

1.Are enforceable against the obligor;
2.Are beyond the reach of the seller, its creditors, or liquidators and are not subject to material re-characterization risks or claw-back risks (in which the insolvency or bankruptcy of the seller could result in the assets being taken back from the pool by creditors or liquidators);
3.Are not effected through credit default swaps, derivatives or guarantees, but by a transfer¹⁴ of the credit claims or the receivables to the transaction; and
4.Demonstrate effective recourse to the ultimate obligation for the underlying credit claims or receivables and are not a re-securitisation position.

The sponsor should ensure that, in applicable jurisdictions, for conduits employing transfers of credit claims or receivables by other means, sellers can demonstrate to it the existence of material obstacles preventing true sale at issuance¹⁵ and should clearly demonstrate the method of recourse to ultimate obligors.¹⁶ In such jurisdictions, any conditions where the transfer of the credit claims or receivables is delayed or contingent upon specific events and any factors affecting timely perfection of claims by the conduit should be clearly disclosed.

The sponsor should ensure that it receives from the individual sellers (in their capacity either as original lender or servicer) representations and warranties that the credit claims or receivables being transferred to or through the transaction 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

Conduit level

To assist investors in conducting appropriate due diligence prior to investing in a new program offering, the sponsor should provide to potential investors sufficient aggregated data that illustrate the relevant risk characteristics of the underlying asset pools in accordance with applicable laws.

To assist investors in conducting appropriate and ongoing monitoring of their investments’ performance and so that investors who wish to purchase commercial paper have sufficient information to conduct appropriate due diligence, the sponsor should provide timely and sufficient aggregated data that convey the relevant risk characteristics of the underlying pools in accordance with applicable laws. The sponsor should ensure that standardized investor reports are readily available to current and potential investors at least monthly. Cut-off dates of the aggregated data should be aligned with those used for investor reporting.

Transaction level

The sponsor should ensure that the individual sellers (in their capacity as servicers) provide it with:

(a)sufficient asset-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 before transferring any credit claims or receivables to such underlying pool; and
(b)Timely asset-level data in accordance with applicable laws or granular pool stratification data on the risk characteristics of the underlying pool on an ongoing basis. Those data should allow the sponsor to fulfil its fiduciary duty at the conduit level in terms of disclosing information to investors, including the alignment of cut-off dates of the asset-level or granular pool stratification data with those used for investor reporting.

The seller may delegate some of these tasks, in which case the sponsor should ensure that there is appropriate oversight of the outsourced arrangements.

The standardized investor reports that are made readily available to current and potential investors at least monthly should include the following information:

•Materially relevant data on the credit quality and performance of underlying assets, including data allowing investors to identify dilution, delinquencies and defaults, restructured receivables, forbearance, repurchases, losses, recoveries and other asset performance remedies in the pool;
•The form and amount of credit enhancement provided by the seller and sponsor at the transaction and the conduit level, respectively;
•Relevant information on the support provided by the sponsor; and
•The status and definitions of relevant triggers (such as performance, termination or counterparty replacement triggers).

¹¹ Payments on operating and financing lease are typically considered to be rental payments rather than payments of principal and interest.

¹² This condition would not apply to borrowers that previously had credit incidents but were subsequently removed from credit registries as a result of the borrowers cleaning their records. This is the case in jurisdictions in which borrowers have the “right to be forgotten.”

¹³ Provided they are not actively selected or otherwise cherry-picked, 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.

¹⁴ This 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.

¹⁵ For instance, the immediate realization of transfer tax or the requirement to notify all obligors of the transfer.

¹⁶ For instance, equitable assignment or perfected contingent transfer.