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

1.Redemption cash flows
 

Liabilities subject to the refinancing risk of the underlying credit claims or receivables are likely to require more complex and heightened analysis. To help ensure that the underlying credit claims or receivables do not need to be refinanced over a short period of time, there should not be a reliance on the sale or refinancing of the underlying credit claims or receivables in order to repay the liabilities, unless the underlying pool of credit claims or receivables is sufficiently granular and has sufficiently distributed repayment profiles. Rights to receive income from the assets specified to support redemption payments should be considered as eligible credit claims or receivables in this regard.⁸

2.Currency and interest rate asset and liability mismatches
 

To reduce the payment risk arising from the different interest rate and currency profiles of assets and liabilities and to improve investors’ ability to model cash flows, interest rate and foreign currency risks should be appropriately mitigated at all times, and if any hedging transaction is executed the transaction should be documented according to industry- standard master agreements. Only derivatives used for genuine hedging of asset and liability mismatches of interest rate and / or currency should be allowed.

The term “appropriately mitigated” should be understood as not necessarily requiring a completely perfect hedge. The appropriateness of the mitigation of interest rate and foreign currency through the life of the transaction must be demonstrated by making available to potential investors, in a timely and regular manner, quantitative information including the fraction of notional amounts that are hedged, as well as sensitivity analysis that illustrates the effectiveness of the hedge under extreme but plausible scenarios.

If hedges are not performed through derivatives, then those risk-mitigating measures are only permitted if they are specifically created and used for the purpose of hedging an individual and specific risk, and not multiple risks at the same time (such as credit and interest rate risks). Non-derivative risk mitigation measures must be fully funded and available at all times.

3.Payment priorities and observability
 

To prevent investors being subjected to unexpected repayment profiles during the life of a securitisation, the priorities of payments for all liabilities in all circumstances should be clearly defined at the time of securitisation and appropriate legal comfort regarding their enforceability should be provided.

Junior liabilities should not have payment preference over senior liabilities that are due and payable. The securitisation should not be structured as a “reverse” cash flow waterfall such that junior liabilities are paid where due and payable senior liabilities have not been paid.

To help provide investors with full transparency into any changes, all triggers affecting the cash flow waterfall, payment profile, or priority of payments of the securitisation should be clearly and fully disclosed both in offering documents and in investor reports, with information in the investor report that clearly identifies the breach status, the ability for the breach to be reversed and the consequences of the breach. Investor reports should contain information that allows investors to monitor the evolution of indicators that are subject to triggers. Any triggers breached between payment dates should be disclosed to investors on a timely basis in accordance with the terms and conditions of all underlying transaction documents.

Securitisations featuring a revolving period should include provisions for appropriate early amortization events and/or triggers of termination of the revolving period, including, notably: (i) deterioration in the credit quality of the underlying exposures; (ii) a failure to acquire sufficient new underlying exposures of similar credit quality; and (iii) the occurrence of an insolvency-related event with regard to the originator or the servicer.

Following the occurrence of a performance-related trigger, an event of default or an acceleration event, the securitisation positions should be repaid in accordance with a sequential amortization priority of payments, in order of tranche seniority, and there should not be provisions requiring immediate liquidation of the underlying assets at market value.

To assist investors in their ability to appropriately model the cash flow waterfall of the securitisation, the originator or sponsor should make available to investors, both before pricing of the securitisation and on an ongoing basis, a liability cash flow model or information on the cash flow provisions allowing appropriate modelling of the securitisation cash flow waterfall.

To ensure that debt forgiveness, forbearance, payment holidays and other asset performance remedies can be clearly identified, policies and procedures, definitions, remedies and actions relating to delinquency, default or restructuring of underlying debtors should be provided in clear and consistent terms so that investors can clearly identify debt forgiveness, forbearance, payment holidays, restructuring and other asset performance remedies on an ongoing basis.

4.Voting and enforcement rights
 

To help ensure clarity for securitisation note holders of their rights and ability to control and enforce on the underlying credit claims or receivables, upon insolvency of the originator or sponsor, all voting and enforcement rights related to the credit claims or receivables should be transferred to the securitisation. Investors’ rights in the securitisation should be clearly defined in all circumstances, including the rights of senior versus junior note holders.

5.Documentation disclosure and legal review
 

To help investors to fully understand the terms, conditions, legal and commercial information prior to investing in a new offering and to ensure that this information is set out in a clear and effective manner for all programs and offerings, sufficient initial offering⁹ and draft underlying¹⁰ documentation should be made available to investors (and readily available to potential investors on a continuous basis) within a reasonably sufficient period of time prior to pricing, or when legally permissible, such that the investor is provided with full disclosure of the legal and commercial information and comprehensive risk factors needed to make informed investment decisions. Any type of securitisation can fulfil these requirements once it meets its prescribed standards of disclosure and legal review. Final offering documents should be available from the closing date and all final underlying transaction documents shortly thereafter. These should be composed such that readers can readily find, understand, and use relevant information.

To ensure that all the securitisation’s underlying documentation has been subject to appropriate review prior to publication, the terms and documentation of the securitisation should be subject to appropriate third-party legal review, such as experienced legal counsel already instructed by one of the transaction parties (for example, by the arranger or the trustee). Investors should be notified in a timely fashion of any changes in such documents that have an impact on the structural risks in the securitisation.

6.Alignment of interest
 

In order to align the interests of those responsible for the underwriting of the credit claims or receivables with those of investors, the originator or sponsor of the credit claims or receivables should retain a material net economic exposure and demonstrate a financial incentive in the performance of these assets following their securitisation.

⁸ For example, associated savings plans designed to repay principal at maturity.

⁹ E.g., draft offering circular, draft offering memorandum, draft offering document or draft prospectus, such as a “red herring”.

¹⁰ For example, asset sale agreement, assignment, novation or transfer agreement; servicing, backup servicing, administration and cash management agreements; trust/management deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement as applicable; any relevant inter-creditor agreements, swap or derivative documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements; and any other relevant underlying documentation, including legal opinions.

1.Fiduciary and contractual responsibilities
 

To help ensure that servicers have extensive workout expertise, thorough legal and collateral knowledge and a proven track record in loss mitigation, such parties should be able to demonstrate expertise in the servicing of the underlying credit claims or receivables, servicing should be supported by a management team with extensive industry experience. The servicer should at all times act in accordance with reasonable and prudent standards. Policies, procedures and risk management controls should be well documented and adhere to good market practices and relevant regulatory regimes. There should be strong systems and reporting capabilities in place. In assessing whether “strong systems and reporting capabilities” are in place for non-banking entities, well-documented policies, procedures and risk management controls, as well as strong systems and reporting capabilities, may be substantiated by an independent third-party review.

The party or parties with fiduciary responsibility should act on a timely basis in the best interests of the securitisation note holders, and both the initial offering and all underlying documentation should contain provisions facilitating the timely resolution of conflicts between different classes of note holders by the trustees, to the extent permitted by applicable law. The party or parties with fiduciary responsibility to the securitisation and to investors should be able to demonstrate sufficient skills and resources to comply with their duties of care in the administration of the securitisation vehicle.

To increase the likelihood that those identified as having a fiduciary responsibility towards investors as well as the servicer execute their duties in full on a timely basis, remuneration should be such that these parties are incentivized and able to meet their responsibilities in full and on a timely basis.

2.Transparency to investors
 

To help provide full transparency to investors, to assist investors in the conduct of their due diligence, and to prevent investors from being subject to unexpected disruptions in cash flow collections and servicing, the contractual obligations, duties, and responsibilities of all key parties to the securitisation, both those with a fiduciary responsibility and ancillary service providers, should be defined clearly both in the initial offering and all underlying documentation. Provisions should be documented for the replacement of servicers, bank account providers, derivatives counterparties and liquidity providers in the event of failure, non-performance, insolvency, or other deterioration of creditworthiness of any such counterparty to the securitisation.

To enhance transparency and visibility of all receipts, payments, and ledger entries at all times, the performance reports to investors should report the securitisation’s income and disbursements, such as scheduled principal, redemption principal, scheduled interest, prepaid principal, past due interest and fees and charges, delinquent, defaulted and restructured amounts under debt forgiveness and payment holidays, and should include accurate accounting for amounts attributable to principal and interest deficiency ledgers. The term “income and disbursements” should also be understood as including deferment, forbearance, and repurchases.

1.Credit risk of underlying exposures
 

At the cut-off date for addition of exposures to the pool, the underlying exposures must meet the conditions to be assigned a risk weight equal to or smaller than:

• •40% on a value-weighted average exposure basis for a portfolio where the exposures are loans secured by residential mortgages or fully guaranteed residential loans;
• •50% on an individual exposure basis where the exposure is a loan secured by a commercial mortgage;
• •75% on an individual exposure basis where the exposure is a retail exposure; or
• •100% on an individual exposure basis for any other exposure.

These risk weights should be after taking into account any eligible credit risk mitigation. The thresholds as set are based on the current Standardized Approach to credit risk, and may be revisited if the Standardized Approach for credit risk is subsequently revised.

2.Granularity of the pool
 

At the portfolio cut-off date, the aggregate value of all exposures to a single obligor shall not exceed 1% of the aggregated outstanding exposure value of all exposures in the portfolio.