The Basel Committee and IOSCO Issue Criteria to Identify “Simple, Transparent and Comparable” Short-Term Securitisations

by Cadwalader, Wickersham & Taft LLP
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Cadwalader, Wickersham & Taft LLP

Introduction

On 14 May 2018, the Basel Committee on Banking Supervision (the “Basel Committee”) and the Board of the International Organization of Securities Commissions (“IOSCO”) issued criteria for identifying “simple, transparent and comparable” (“STC”) short-term securitisations (the “Short-Term STC Criteria”).[1]

The criteria build upon the principles in the “Criteria for identifying simple, transparent and comparable securitisations” issued by the Basel Committee and IOSCO in July 2015 (the “July 2015 STC Criteria”). Given that the structures of short-term securitisations, notably those using an asset-backed commercial paper (“ABCP”) conduit to issue commercial paper, differ from those of term securitisations, the July 2015 STC Criteria have been amended so as to make them applicable to short-term securitisations.

On the same day, the Basel Committee issued a Standard on the capital treatment of STC short-term securitisations (the “Standard”). The Standard sets out additional guidance and requirements regarding applying preferential regulatory capital treatment for banks acting as investors in, or as sponsors of, STC short-term securitisations.[2]

What is meant by “Simple, Transparent and Comparable”?

The purpose of the various Basel STC criteria is to identify those securitisations that are simple, transparent and comparable, there being lower regulatory capital requirements relating to banks’ exposures to securitisations that are STC-compliant. “Simplicity” refers to the homogeneity of underlying assets with simple characteristics and to a transaction structure that is not overly complex. “Transparent” refers to providing investors with sufficient information on the underlying assets, the structure of, and the parties in, the transaction. This is with the aim of ensuring that investors have a comprehensive understanding of the risks involved in the transaction. The “comparable” requirement is intended to enable a more straightforward comparison across securitisations within an asset class, taking into account differences between jurisdictions.

Background - The Revised Securitisation Framework

In 2014, the Basel Committee published its “Revisions to the Securitisation Framework” Basel III document,[3] which set out revised methodologies for the calculation of regulatory capital requirements for securitisation exposures held by banks in their banking book, in order to address certain shortcomings identified by the Basel Committee under the previous securitisation framework.[4] A revised version of this document was published in July 2016[5] and included an alternative regulatory capital treatment for securitisation transactions which meet the criteria for identifying STC securitisations (the “July 2016 Framework”). We discussed this document in our Clients & Friends Memorandum dated 3 August 2016.[6]

Background - The July 2015 STC Criteria

The July 2015 STC Criteria were intended to identify and assist in the development of simple and transparent securitisation structures. The 14 STC criteria, if satisfied, could indicate that a securitisation possesses a level of simplicity, transparency and comparability that could assist market participants in evaluating the risks of a securitisation transaction. The criteria were divided into three categories: (a) generic criteria relating to the underlying asset pool (“asset risk”); (b) transparency around the securitisation structure (“structural risk”); and (c) governance of key parties to the securitisation process (“fiduciary and servicer risk”). The criteria were set out and discussed in our Clients & Friends Memo dated 3 August 2016. These criteria apply only to term securitisations, hence the need for specific criteria applicable to short-term securitisations.

The July 2017 Consultations

Given that short-term securitisations, which typically use an ABCP conduit to issue commercial paper, differ in structure from term securitisations, the July 2015 STC Criteria cannot be applied to them without amendment. Therefore, in July 2017, the Basel Committee and IOSCO published consultation papers on the criteria for identifying STC short-term securitisations[7] and on the capital treatment for STC short-term securitisations.[8] The May 2018 publications took account of feedback received to these consultations.

The May 2018 Short-Term STC Securitisation Publications

In their May 2018 Short-Term STC Criteria paper, the Basel Committee and IOSCO developed 17 Short-Term STC Criteria focusing on exposures related to ABCP conduits. At the same time, the Basel Committee issued its Standard setting out how the Short-Term STC Criteria would be incorporated into the capital framework.

Amendments to the July 2015 STC Criteria for Short-Term STC Securitisations

Application of the Short-Term STC Criteria to ABCP conduits

The Short-Term STC Criteria cover ABCP conduits that mainly finance themselves by the issue of commercial paper, normally involving one or more sellers of assets (such as short-term trade receivables) to the ABCP conduit, and so focus on the characteristics of the ABCP conduit and the underlying transactions. The criteria do not depend on the legal form of the instruments used to fund the ABCP conduit (e.g. whether it issues short-term commercial paper or accepts loans from lenders secured against the underlying assets/transactions) and do not prevent single-seller conduits from qualifying for STC status.

Reflection of the Characteristics of ABCP Conduits

The principles underlying the July 2015 STC Criteria are relevant for short-term securitisations, but some criteria have been amended to reflect specific aspects of ABCP conduits, notably: (a) the short maturity of the commercial paper issued by ABCP conduits; (b) the different forms of programme structures (multi-seller, single seller); and (c) the existence of multiple forms of liquidity and credit support facilities on different levels of the ABCP structure (i.e. conduit level or transaction level).

Reflection of the Significance of Sellers and Sponsors in ABCP Conduits

The Short-Term STC Criteria also differ from the July 2015 STC Criteria so as to reflect the roles played by the sellers and the sponsor in ABCP Conduits.

The sellers are: (a) (i) the original lenders who entered into the original agreement that created the obligations (e.g. receivables) of an obligor, or (ii) the parties who purchased the obligations from the original lenders; and who (b) transferred those assets through a transaction (or passed on the interest) to the ABCP conduit.

The sponsor is key in: (a) establishing and managing the ABCP conduit; (b) providing credit and liquidity support for the ABCP conduit; and (c) assuming a fiduciary responsibility as regards the investors (e.g. holders of the commercial paper or the lenders to the ABCP conduit) in ensuring that the transactions financed by the ABCP conduit and their underlying assets meet the transaction-level standards, and in reporting to investors on how these criteria are met.

Transaction level and Conduit level Criteria

As well as taking account of the roles played by the sellers and the sponsor in ABCP conduits, the Short-Term STC Criteria distinguish between criteria relevant at the transaction level (which must be separately met by each transaction in the conduit) and at the conduit level (which must be met by the ABCP conduit as a whole). Most criteria are relevant at both levels, but have a slightly different focus to reflect the differences in risk, parties and structure at each level. The obligations of the sponsor at the conduit level in large part relate to the information, representation and warranties to be provided to investors regarding its compliance with its various obligations.

Changes made to the Short-Term STC Criteria following Feedback received to the July 2017 Consultation

The 17 Short-Term STC Criteria included a number of minor changes to the criteria proposed in July 2017 to address the feedback received. The amendments made included: (i) expanding the definition of “seller” so that it does not only refer to original lenders, but also to those who purchased obligations from original lenders; (ii) adding a footnote to clarify that the criteria do not automatically exclude securitisations of equipment leases and securitisations of auto loans and leases from the short-term STC framework; and (iii) in Criterion 16 (“Fiduciary and contractual responsibilities”) that the sponsor’s role is limited to ensuring that it has received the relevant representations from the sellers (as regards well documented procedures, strong systems and reporting capabilities), rather than having to make the verification itself.

The Short-Term STC Criteria

The 17 Short-Term STC Criteria broadly follow those criteria set out in the July 2017 consultation and are summarised in Appendix A to this memorandum.

Basel Committee Standard for the Capital treatment for Short-Term STC Securitisations

The Short-Term STC Criteria have implications for the regulatory capital requirements in relation to Short-Term STC securitisations. Accordingly, also on 14 May 2018, the Basel Committee issued its Standard on the capital treatment for STC short-term securitisations. The Standard sets out additional guidance and requirements in relation to applying preferential regulatory capital treatment for banks acting as investors in, or as sponsors of, STC short-term securitisations.

The Standard explained that, whilst the Short-Term STC Criteria are sufficiently detailed to serve as guidance for good practice, the use of the criteria for the setting of alternative regulatory capital requirements requires greater prescriptiveness. Furthermore, the Short-Term STC Criteria focus more on the perspective of investors of notes issued under an ABCP programme rather than on the role of a bank as a sponsor, which is normally the main role played by banks in ABCP structures. The Basel Committee therefore supplemented the Short-Term STC Criteria with additional criteria for the specific purpose of applying preferential capital treatment for banks acting as investors and sponsors (the “Short-Term STC Capital Criteria”).

The Standard provides that the scope and identification of STC securitisations for the purposes of alternative capital treatment in the July 2016 Framework is expanded to include exposures to ABCP conduits and/or transactions financed by ABCP conduits, where the conduit and/or transactions financed by it meet the Short-Term STC Capital Criteria. In other words, such exposures are STC-compliant for the purposes of alternative capital treatment for STC securitisations in the July 2016 Framework.

Short-Term STC Capital Criteria: Additional Criteria for Capital Purposes

The additional criteria for capital purposes in the Short-Term STC Capital Criteria (being either guidance or a requirement depending on the criteria) are outlined in Appendix B to this memorandum. There are two additional Short-Term STC Capital Criteria, making 19 in all.

Banks’ Compliance with the Short-Term STC Capital Criteria

Banks’ Exposures at the Conduit Level

For banks’ exposures at the conduit level (e.g. exposures arising from investing in the commercial paper issued by the ABCP programme, or sponsoring at the conduit/programme level), the Short-Term STC Capital Criteria have to be complied with fully at both the conduit level and the transaction level. The requirement for compliance with the Short-Term STC Capital Criteria for both the conduit and for all the transactions in the ABCP conduit will make compliance at this level difficult to achieve in practice (particularly as regards the compliance of any existing transactions).  

Banks’ Exposures at the Transaction Level

For banks’ exposures at the transaction level to qualify for STC capital treatment, compliance with the transaction-level Short-Term STC Capital Criteria alone would suffice (ie independently of whether the overall conduit/other transactions underlying the conduit qualified) (the “Transaction Level Approach”).

This contrasts with the preferred approach set out in the July 2017 consultative paper in which the Basel Committee proposed that the Short-Term STC Capital Criteria would have to be fully complied with at both the conduit level and the transaction level (with an exception regarding the full support criterion for sponsors’ exposures) (termed by the Basel Committee as the “Baseline Approach”).

One of two alternatives to the Baseline Approach set out in the July 2017 consultative paper was the Transaction Level Approach subsequently adopted in the May 2018 Standard. Advantages of such a Transaction Level Approach, as set out in the July 2017 consultation, are: (i) that assessing STC capital treatment on a transaction-by-transaction basis provides an incentive to structure STC-compliant transactions (i.e. there continues to be an incentive to be STC-compliant even when other transactions under the ABCP structure are not); (ii) any increase in risk exposure resulting from non-STC transactions under the ABCP structure has no impact on the transaction sponsored by the sponsor bank; and (iii) it provides an incentive to transaction-level participants to reinforce the sponsor’s STC attestation by carrying out their own due diligence regarding the transactions to which they are exposed.

The adoption of the Transaction Level Approach over the Baseline Approach is to be welcomed, as the former would have made it difficult in practice for banks’ exposures at transaction level to have been eligible for STC capital treatment.

Determination of Compliance with the Short-Term STC Capital Criteria

The Standard provides that the bank must disclose to investors and relevant parties the information necessary to allow them to determine whether the exposure is compliant with the Short-Term STC Capital Criteria. The determination of compliance with the Short-Term STC Capital Criteria depends on the relationship of the party concerned with the ABCP conduit:

(a) Notes issued by the ABCP conduit

As regards the notes issued by the ABCP conduit, the determination of compliance with the Short-Term STC Capital Criteria is performed by the investor only. The sponsor, though not required to assert that the Short-Term STC Capital Criteria are met, must make sufficient disclosures to enable the investor to make the assessment that the criteria are met at both the transaction and the conduit level. Requiring the investor to make its own assessment helps ensure that the investor conducts the necessary due diligence. The Basel Committee did not proceed with one of the alternatives put forward in its July 2017 consultation which would have required the sponsor also to have assessed compliance with the Short-Term STC Capital Criteria.

(b) For other exposures to an ABCP structure

As regards a sponsor’s exposure to an ABCP structure, only the main sponsor would need to assess that the criteria have been met. In the case of a third-party support provider, it must undertake its own due diligence to assess whether the criteria are met.

Capital treatment for Exposures to ABCP Conduits or Transactions that are Compliant with the Short-Term STC Capital Criteria

The Standard stated that since the Short-Term STC Capital Criteria have been designed to be as stringent as the STC capital criteria for term securitisations, exposures to ABCP conduits or transactions that are compliant with the Short-Term STC Capital Criteria should benefit from the same extent of capital reduction as exposures to STC-compliant term securitisations.

The Basel Committee points out that, in its capacity as an investor, a bank’s exposure to notes issued by an ABCP conduit is economically the same as its exposures to a term securitisation tranche and so that as long as the ABCP conduit meets the Short-Term STC Capital Criteria, the capital treatment for the exposures to the issued notes should be equal to that of risk positions of comparable maturity within STC term securitisations published in the July 2016 Framework.[9]

The Standard explains that a bank providing liquidity and/or credit facilities to an ABCP structure is akin to taking a position in a term STC securitisation and so the capital treatment would follow the treatment for STC term securitisations in the July 2016 Framework.

EU Initiatives on Simple, Transparent and Standardised Securitisation.

In a separate process, the EU has developed its own regime in the Securitisation Regulation (Regulation (EU) 2017/2402)[10] for what are termed simple, transparent and standardised (“STS”) securitisations. The Securitisation Regulation and a parallel CRR Amendment Regulation (Regulation (EU) 2017/2401)[11] entered into force in January 2018 and will apply to securitisations, the securities of which are issued on or after 1 January 2019.

The Securitisation Regulation sets out the criteria for identifying STS securitisations, while the CRR Amendment Regulation sets out a framework for a more risk-sensitive regulatory treatment of exposures to securitisations complying with such criteria. As with the Basel STC criteria, the Securitisation Regulation provides for different STS criteria for term (i.e. non-ABCP) securitisations, as distinguished from short-term (i.e. ABCP) securitisations. Although the criteria are similar, those for ABCP securitisations focus on the distinction between transaction, sponsor and programme level criteria.

The Securitisation Regulation provides that by 18 October 2018 the European Banking Authority (the “EBA”) shall adopt guidelines and recommendations on the harmonised interpretation and application of the STS requirements for both ABCP and non-ABCP securitisations. On 20 April 2018 the EBA published consultation papers on its draft guidelines for ABCP and non-ABCP securitisations[12]. The EBA noted that where possible and appropriate the existing recommendations in the Basel July 2016 Framework had been taken into account when developing their interpretation.

Conclusion

The STC framework is generally welcome for both term and short-term securitisations. However, there are practical points that may preclude against the regime being applied widely.

First, the Basel STC framework has to a large extent been superseded in the EU by the STS criteria in the EU’s new Securitisation Regulation. These STS criteria are already set out in EU law and are similar to, but not identical to, the STC criteria. There is some scope for the EBA’s new guidelines to reflect aspects of the STC criteria, but the Basel Short-Term STC Criteria were published after the EU primary legislation on this subject had already been finalised.

Furthermore, the criteria may be too restrictive, and the regulatory benefits may not be sufficiently significant, for the criteria to be widely adopted. The adoption of the Transaction Level Approach over the Baseline Approach for banks’ exposures at the transaction level is to be welcomed, but there remain practical difficulties in complying with all the applicable Short-Term STC Capital Criteria. We await to see whether the regulatory capital benefits justify banks’ compliance costs in complying with the short-term STC framework. In addition, although the short-term STC framework takes effect immediately, its implementation is not mandatory and jurisdictions which consider that the implementation costs outweigh the potential benefits retain the option not to implement the STC framework. 

*   *   * 

Appendix A - Criteria for Identifying STC Short-Term Securitisations

(NB This is a summary only. The full criteria are set out in the May 2018 criteria for identifying “simple, transparent and comparable” short-term securitisations.)

A.  Asset Risk

1.  Nature of assets (relevant to the conduit and transaction level)

The underlying assets should be homogeneous, in terms of asset type. The underlying assets should not be composed of “securitisation exposures”. 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. Credit claims or receivables underlying a transaction in a conduit should have contractually identified periodic payment streams.

At the conduit level, the sponsor should make representations and warranties to investors that the transaction level criteria are met

2.  Asset performance history (relevant to the conduit and transaction level)

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 sufficiently long period to allow investors to carry out their evaluation of expected loss.

3.  Payment status (relevant to the conduit and transaction level) 

The sponsor should obtain representations from sellers that the credit claims or receivables underlying each individual transaction are not in default, or delinquent, or subject to a material increase in expected losses or enforcement actions.

At the conduit level, the sponsor should make representations and warranties to investors that the transaction level criteria are met

4.  Consistency of underwriting (relevant to the conduit and transaction level) 

The sponsor should ensure that sellers (in their capacity as original lenders) in transactions with the conduit demonstrate to it that any credit claims or receivables being transferred to the conduit have been originated in the ordinary course of the seller’s business and are subject to underwriting standards no less stringent than those applied to credit claims and receivables retained on the balance sheet of the seller and that the obligors have been assessed as having the ability and volition to make timely payments.

At the conduit level, the sponsor should make representations and warranties to investors that the transaction level criteria are met

5.  Asset selection and transfer (relevant to the conduit and transaction level) 

The sponsor should ensure that credit claims or receivables transferred to the conduit satisfy clearly defined eligibility criteria; and are not actively selected after the closing date, actively managed or otherwise cherry-picked.

The sponsor should ensure that the transactions effect true sale such that the underlying credit claims or receivables are enforceable against the obligor and are not subject to material re-characterisation or clawback risks. Re-securitisations are excluded.

At the conduit level, the sponsor should make representations and warranties to investors that the transaction level criteria are met

6.  Initial and ongoing data (relevant to the conduit and transaction level) 

The sponsor should ensure that the individual sellers (in their capacity as servicers) provide it with sufficient asset-level data 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 on an ongoing basis.

At the conduit level, to assist investors in conducting due diligence and ongoing monitoring of their investments’ performance, the sponsor should provide sufficient aggregated data that convey the relevant risk characteristics of the underlying pools at least monthly.

B.  Structural risk

7.  Full support (relevant to the conduit level only) 

The sponsor should provide the liquidity facilities and the credit protection support for any ABCP programme issued by a conduit so that investors should be able to rely on the sponsor to ensure timely and full repayment of the commercial paper.

8.  Redemption cash flow (relevant to the transaction level only) 

The sponsor should ensure that, unless the pool is sufficiently granular, there is no reliance on the sale or refinancing of underlying credit claims or receivables to repay the liabilities and that repayment relies primarily on the general ability and willingness of the obligor to pay.

9.  Currency and interest rate asset and liability mismatches (relevant to the conduit and transaction level) 

The sponsor should ensure that any interest rate and foreign currency risks are appropriately mitigated. The sponsor should also ensure that derivatives are used for genuine hedging purposes only and that hedging transactions are documented according to industry-standard master agreements.

At the conduit level, the sponsor should provide sufficient information to investors to allow them to assess how the payment risk arising from the different interest rate and currency profiles of assets and liabilities is appropriately mitigated

10.  Payment priorities and observability (relevant to the conduit and transaction level) 

To prevent the conduit from being subjected to unexpected repayment profiles from the transactions, the sponsor should ensure that priorities of payments are clearly defined and appropriate legal comfort regarding the enforceability is provided.

All triggers affecting the cash flow waterfall, payment profile or priority of payments should be clearly and fully disclosed to the sponsor.

For any of the transactions where the conduit holds a securitisation position, the sponsor should ensure that any subordinated positions do not have inappropriate payment preference over payments to the conduit (which should always rank senior to any other position).

Transactions featuring a revolving period should include provisions for appropriate early amortisation events and/or triggers of termination of the revolving period.

Policies and procedures, remedies and actions relating to delinquency, default, dilution or restructuring of underlying debtors should be provided so that the sponsor can identify debt forgiveness, forbearance, payment holidays, restructuring, dilution and other asset performance remedies on an ongoing basis.

The sponsor should ensure that it receives cash flow analysis or information allowing analysis of the cash flow waterfall of securitisations in which the conduit has a beneficial interest.

At the conduit level, the commercial paper issued by the ABCP programme should not include extension options or other features which may extend the final maturity of the asset-backed commercial paper, where the right to trigger does not belong exclusively to investors. At the conduit level, the sponsor should make representations and warranties to investors that the transaction level criteria are met.

11.  Voting and enforcement rights (relevant to the conduit and transaction level) 

The sponsor should ensure that all voting and enforcement rights related to the credit claims or receivables are clearly defined            

At the conduit level, the sponsor should make sufficient information available in order for investors to understand their enforcement rights on the underlying credit claims or receivables in the event of insolvency of the sponsor.

12.  Documentation disclosure and legal review (relevant to the conduit level only)

The sponsor should ensure that offering documentation for the ABCP programme is provided to investors prior to issuance, so that investors are provided with full information needed to make informed investment decisions. The sponsor should ensure a legal review of the terms and documentation of a conduit and the ABCP programme it issues prior to publication.

13.  Alignment of interest (relevant to the conduit level only)

To align the interests of those underwriting the credit claims and receivables with those of investors, a material net economic exposure should be retained by the sellers or the sponsor at the transaction level, or by the sponsor at the conduit level. The sponsor should disclose to investors how a material net economic exposure is retained and demonstrate the existence of a financial incentive in the performance of the securitised assets.

14.  Cap on maturity transformation (relevant to the conduit level only) 

The sponsor should verify and disclose to investors that the weighted average maturity of all the transactions financed under the ABCP conduit is three years or less.

C.  Fiduciary and servicer risk

15.  Financial institution (relevant to the conduit level only)

The sponsor should be a financial institution licensed to take deposits and subject to appropriate prudential standards and levels of supervision.

16.  Fiduciary and contractual responsibilities (relevant to the conduit and transaction level)

The sponsor should ensure that it receives representations from the sellers (and all other parties responsible for originating and servicing the asset pools) that they have; (i) well documented procedures and policies in place to ensure appropriate origination and servicing of the underlying assets; and (ii) expertise in the origination of assets similar to those in the asset pools; and (iii) extensive servicing expertise.

At the conduit level, the sponsor should make representations and warranties to investors that the transaction level criteria are met and that the sellers have strong systems and reporting capabilities in place to ensure appropriate origination and servicing of the underlying assets.

The sponsor should be able to demonstrate expertise in providing liquidity and credit support in the context of ABCP conduits. The sponsor should have well documented policies, procedures and risk management controls and act in accordance with reasonable and prudent standards. The party or parties with fiduciary responsibility should act in the best interests of the investors.

17.  Transparency to investors (relevant to the conduit level only)

The sponsor should ensure that the contractual obligations, duties and responsibilities of all key parties to the conduit are defined clearly in the initial offering and in any relevant underlying documentation of the conduit and the ABCP programme it issues. The sponsor should ensure that the initial offering documentation contains provisions regarding the replacement of key parties (eg bank account providers and derivatives counterparties) in the event of failure or non-performance of such parties.

The sponsor should also make representations and warranties to investors that these duties and responsibilities are clearly defined and that the replacement of key counterparties at the transaction level are well documented.

The sponsor should provide information to investors about the liquidity facilities and credit support provided to the ABCP programme, so that they can understand its functioning and key risks.

Appendix B - Short-Term STC Capital Criteria: Additional Criteria for Capital Purposes

(NB This is an outline summary only. The full criteria are set out in the May 2018 Standard on the capital treatment for short-term “simple, transparent and comparable” securitisations.)

The additional criteria for capital purposes (being either guidance or a requirement depending on the criteria) are outlined below - these are in addition to the Short-Term STC Criteria summarised in Appendix A above.

A.  Asset Risk

1.  Nature of assets 

The additional guidance for capital purposes concerns: the bases for assessing homogeneity; examples of “commonly encountered market interest rates”; clarification of “exotic derivatives”; and a clarification of the requirement that the underlying assets should not be composed of “securitisation exposures”.

2.  Asset performance history

To meet the Short-Term STC Capital Criteria, investors must request confirmation from the sponsor on the performance history of the originator and the original lender for claims or receivables substantially similar to those being securitised has been established for a period of at least five years for non-retail exposures, and of at least three years for retail exposures.

3.  Payment status 

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 prescribed conditions for each transaction mainly concerning the creditworthiness of the obligor.

4.  Consistency of underwriting

The 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 and to ascertain that they have assessed the obligors’ “ability and volition to make timely payments” on their obligations.

5.  Asset selection and transfer

A legal opinion must support the claim that the true sale and the transfer of assets satisfy clearly defined eligibility criteria and are not actively selected after the closing date, actively managed or otherwise cherry-picked at the transaction level.

6.  Initial and ongoing data

The standardised investor reports which are to be made readily available to current and potential investors at least monthly should include prescribed information.

B.  Structural risk

7.  Full support

Under the terms of the liquidity facility agreement: (a) upon specified events affecting its creditworthiness, the sponsor shall be obliged to collateralise its commitment in cash to the benefit of the investors or otherwise replace itself with another liquidity provider; and (b) if the sponsor does not renew its funding commitment for a specific transaction or the conduit in its entirety, the sponsor shall collateralise its commitments regarding a specific transaction or, if relevant, to the conduit in cash at the latest 30 days prior to the expiration of the liquidity facility, and no new receivables should be purchased under the affected commitment.

8.  Redemption cash flow

For capital purposes, sponsors cannot use support provided by their own liquidity and credit facilities towards meeting the criterion that there is no reliance on the sale or refinancing of underlying credit claims or receivables to repay the liabilities and that repayment relies primarily on the general ability and willingness of the obligor to pay.

9.  Currency and interest rate asset and liability mismatches

The term “appropriately mitigated”, in the context of the requirement that the sponsor should ensure that any interest rate and foreign currency risks are appropriately mitigated, must be demonstrated by making available quantitative information on the hedge used.

10.  Payment priorities and observability

N/A

11.  Voting and enforcement rights

N/A

12.  Documentation disclosure and legal review

Prior to including a new transaction in the ABCP conduit, the sponsor should ensure a legal review of the terms and documentation of the transaction.

13.  Alignment of interest

N/A      

14.  Cap on maturity transformation

N/A

C.  Fiduciary and servicer risk    

15.  Financial institution

N/A

16.  Fiduciary and contractual responsibilities

A third-party review for sellers who are non-banking entities may be utilised in substantiating that they have “strong systems and reporting capabilities” in place to ensure appropriate origination and servicing of the underlying assets (to ensure an assessment that is comparable with that of banking entities).

17.  Transparency to investors

N/A

D.  Additional Criteria for Capital purposes

There are two further STC criteria for capital purposes.

18.  Credit risk of underlying exposures

At the date of acquisition of the assets, the underlying exposures have to meet the conditions under the Standardised Approach for credit risk. The Basel Committee was concerned that inconsistent underwriting practices across jurisdictions could result in different risk characteristics within a single asset class. It also considered that criterion based on regulatory risk weights under the Standardised Approach for credit risk: (a) has the merit of using globally consistent regulatory risk measures; and (b) has the benefit of applying a filter to ensure that higher-risk underlying exposures are not granted an alternative capital treatment as STC-compliant transactions.

19.  Granularity of the pool

At the date of acquisition of any assets securitised by one of the conduits’ transactions, the aggregated value of all exposures to a single obligor shall not exceed 2% of the aggregated outstanding exposure value of all exposures in the programme (subject to a possible increase to 3% for corporate exposures subject to the satisfaction of specified conditions).

 

 

[1]   https://www.bis.org/bcbs/publ/d441.pdf

[2]   https://www.bis.org/bcbs/publ/d442.pdf

[3]   https://www.bis.org/bcbs/publ/d303.pdf

[4]   Please see our Clients & Friends Memo entitled “Revisions to the Securitisation Framework: Final Rules published by the Basel Committee” dated 15 May 2015. https://www.cadwalader.com/uploads/cfmemos/56318c38ce234a2e026229f5af2adbf1.pdf

[5]   https://www.bis.org/bcbs/publ/d374.pdf

[6]   https://www.cadwalader.com/uploads/cfmemos/0bc491b52c899119ffbbd747d3a6a572.pdf

[7]   http://www.iosco.org/library/pubdocs/pdf/IOSCOPD572.pdf

[8]   https://www.bis.org/bcbs/publ/d413.pdf

[9] The capital treatment for Simple, Transparent and Comparable Securitisations was explained in our Clients And Friends memorandum dated 3 August 2016: https://www.cadwalader.com/uploads/cfmemos/0bc491b52c899119ffbbd747d3a6a572.pdf

[10] http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R2402&from=en

[11] http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R2401&from=EN

[12] https://www.eba.europa.eu/-/eba-consults-on-its-guidelines-interpreting-the-sts-criteria-in-securitisation

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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