Meet the board charged with saving securitization theory

Does my securitization meet the sale criteria Accounting Standards Board and International Accounting. Standard The rules here are consistent with the theory that the trust beyond losses charged to its beneficial interest (i.e., it could (BHC), savings and loan holding companies (SLHC) (except those that are. The theory of securitization simply states that the institution, where it . and convince Congress to adopt legislation permitting the capital markets to meet the REMIC provisions were first employed during the savings and loan (S&L) crisis by It allows financial intermediaries to charge fees for matching borrowers with . to meet the regulatory requirements for removal from the balance sheet might mean substantial cost savings by having avoided .. Along these same lines, the Securities Exchange Commission is currently . charged off, collateral value, etc. . It must review .. In theory, credit card receivables might be expected to have.

Uncertainty around the impact of future, tighter regulatory measures affecting the securitisation market. The introduction of the Securitisation Regulation from 1 January will address some of these issues.

However, there is uncertainty in the market as to whether once in force the regulation will actually assist in bringing more diverse asset classes to the market or further entrench issuance within the more established asset classes.

Transferring the receivables from the originator to the SPV How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

The most common method of transferring receivables is by way of assignment equitable or legal. To perfect an assignment of receivables express notice in writing is required to be given to the obligor.

The giving of such notice will not in itself result in the assignment becoming a legal rather than equitable assignment and certain other formalities are also required under section of the Law of Property Act LPAnamely the assignment has to be: In writing and signed under hand by the assignor. Of the whole of the debt. Absolute and not purporting to be by way of charge only. Where the sale of a receivable falls short of these requirements it will take effect as an equitable assignment and any subsequent assignment effected by the seller and notified to the obligor before the date on which the original assignment is notified to the obligor will take priority.

Alternative methods to transfer receivables include: A novation which transfers the rights and obligations in respect of the receivables and requires written consent from each of the obligor, transferor and transferee.

A declaration of trust over the receivables, or over the proceeds of the receivables coupled with a power of attorney. A sub-participation essentially a limited recourse loan to the seller in exchange for an economic interest in the receivables. Specific statutory requirements may also apply for assignments of certain receivables, such as intellectual property rights and certain policies of insurance. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction for example, future receivables?

Subject to certain exceptional categories of receivables differentiated mainly on public policy grounds see Question 15it is possible to transfer any type of receivable, including future receivables arising out of an existing contract, provided that the receivables can be described with sufficient specificity to be distinguished from the remainder of the seller's estate at the moment of transfer.

It is possible to securitise future receivables. An assignment for value of an identifiable receivable, which does not exist at the time of the receivables purchase agreement but which will be clearly ascertainable in the future, is treated as an agreement to assign which gives rise to an equitable assignment of the receivable as soon as it comes into existence. Where a receivables purchase agreement provides that no further action is required by the seller for the receivables including receivables arising in the future to be transferred, the agreement will generally continue to be effective to transfer the receivables even after the initiation of insolvency proceedings.

However, either party could exercise a contractual right to terminate and, in certain circumstances, a liquidator may pursuant to the Insolvency Actbe able to disclaim and thereby terminate an ongoing receivables purchase agreement if it is considered to be a transaction at an undervalue, a preference, an extortionate credit transaction or a transaction defrauding creditors.

Where the agreement requires further action from the seller, the insolvency official may choose not to take that action and, in that situation, the buyer's remedy is likely to be limited to an unsecured claim in any insolvency proceedings. It is also possible to restrict a specific assignment of receivables of any asset class by imposing contractual restrictions on their transfer see Question How is any security attached to the receivables transferred to the SPV?

What are the perfection requirements? Security for a receivable can typically be assigned in the same manner as the receivable itself, but it will depend on how the security is constituted.

The perfection of a transfer of some types of security may require additional formalities such as registration or payment of a fee. For example, with respect to mortgages over real property in England and Wales, as well as giving notice, certain other formalities such as registration of the transfer at HM Land Registry must be complied with to effect a legal assignment.

Prohibitions or restrictions on transfer Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data? Contractual restrictions The most commonly encountered prohibition or restriction on transferring receivables is contractual. If a contract is silent on assignability, the contract and the receivables under it are freely assignable.

Structured finance and securitisation in the UK (England and Wales): overview | Practical Law

However, contractual restrictions on transfer by one method such as assignment may permit transfer by another such as novation or trust. Whether a transfer is effectively restricted by contract will be a question of contractual construction.

Restrictions on assignments or transfers are generally enforceable. In very limited circumstances, such as on the death of an individual or in certain limited statutory transfers, assignment may take place by operation of law, overriding an express contractual provision prohibiting assignment. If an assignment is effected in breach of a contractual prohibition on assignment, although ineffective between the obligor and the seller to whom the obligor can still look for performance of the contractthe assignment may still be effective between the seller and buyer, if it complies with the governing law and explicit terms of the receivables purchase agreement.

If the seller can establish that the obligor has accepted the assignment through its conduct or by waiver for example, by course of dealing the obligor may be estopped from denying the assignment, even where there is a contractual prohibition on assignment. Legislative restrictions Although the LPA imposes conditions on effecting a legal assignment see Question 12there is no legislation that restricts the assignment of receivables in general.

In fact, recent legislative attempts in the UK have been intended to tackle barriers to the ability of businesses to access invoice finance and other forms of receivables financing by targeting restrictions that may be included in business contracts preventing the assignment of debts see Practice note: However, the transfer of certain exceptional categories of receivables has been prohibited outright or further regulated by statute for example, a purported assignment of certain benefits is void under the Social Security Administration Act as amended.

As in most such cases these statutory restrictions are imposed on public policy grounds or because the receivables are deemed to be of a very personal nature, they are rarely relevant for commercial securitisations. In addition to limited and exceptional statutory restrictions on transfer, the transfer of certain types of receivables may subject the buyer or seller to additional requirements such as: A transferee of regulated consumer receivables including consumer credit loans and residential mortgage loans may require an authorisation under the FSMA, where an exemption cannot be applied.

A third party servicer of regulated consumer receivables such as consumer credit loans and residential mortgage loans will require FCA authorisation under the FSMA for as appropriate debt administration, debt collection and mortgage administration activities. The handling and processing of information on living individuals is currently regulated by the Data Protection Act as amended, but from 25 May it is expected to be governed by the EU General Data Protection Regulation. If the buyer is considered a data controller, it must be registered with the UK Information Commissioner's Office and comply with the relevant requirements, unless limited exemptions apply.

Avoiding the transfer being re-characterised Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so, can this risk be avoided or minimised? A transaction expressed to be a sale may be re-characterised as a secured loan if it is found to be a sham such as where the documents do not reflect the actual agreement between the parties. Irrespective of the label given to a transaction by the parties, an English court will look at the substance of the transaction and examine whether it creates rights and obligations consistent with a sale.

As such, the re-characterisation risk in relation to a transfer of title to receivables depends on the facts of a specific transfer of receivables. English case law has established a number of key questions to be considered when concluding that a transaction is a true sale rather than a secured financing: Do the transaction documents accurately reflect the intention of the parties, and are the terms of the transaction documents consistent with a sale as opposed to a secured financing?

Structured finance and securitisation in the UK (England and Wales): overview

Does the seller have the right to repurchase the receivables sold? Does the buyer have to account to the seller for any profit made on any disposition by it of the receivables? Is the seller required to compensate the buyer if it ultimately realises the acquired receivables for an amount less than the amount paid? A transaction may still be upheld as a sale despite the presence of one or more of these factors. The intention of the parties, their conduct after the original contract and the express terms of the contract are all factors when a court decides, as a whole, whether a contract is inconsistent with that of a sale.

The following are not, in each case, generally considered to be inherently inconsistent with a sale treatment: The seller entering into arm's length hedging with the buyer. The seller assuming some degree of credit risk by assuming a first loss position including pursuant to risk retention regulations. The right of a seller or the option of the buyer to require the seller to repurchase receivables in certain limited circumstances such as breach of warranty.

However, the seller retaining an equity of redemption in respect of a transfer of receivables may lead a court to conclude that the transaction is a security arrangement and not an outright transfer. True sale legal opinions are typically delivered in relation to securitisations involving a transfer of assets under English law where there is a requirement for comfort on the transfer. Ensuring the transfer cannot be unwound if the originator becomes insolvent Can the originator or a liquidator or other insolvency officer of the originator unwind the transaction at a later date?

If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised? An insolvency official would need a court order to reverse a transaction made prior to an insolvency, except for a disposition of property made after a winding-up petition has been presented assuming a winding-up order is subsequently made. Such dispositions are void and any receivables purportedly transferred during that period would remain the property of the seller.

Otherwise, the court may set aside a transaction made at an undervalue in the two years ending with the commencement of an administration or liquidation if the company was at that time, or as a result of the transaction became, unable to pay its debts as they fell due.

A transaction is made at an undervalue where the company receives no consideration or consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company. There is a defence if the court is satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business with reasonable grounds for believing that it would benefit the company.

If a transaction at an undervalue is done with the purpose of putting assets beyond the reach of creditors, there is no requirement to prove contemporaneous insolvency and no time limit for bringing court proceedings.

Consequently, exposures resulting from the tranching of the risks of nonfinancial assets are not subject to the proposed rule's securitization framework, but generally are subject to the proposal's rules for wholesale exposures. The agencies request comment on the appropriate treatment of tranched exposures to a mixed pool of financial and non-financial underlying exposures. The agencies specifically are interested in the views of commenters as to whether the requirement that all or substantially all of the underlying exposures of a securitization be financial exposures should be softened to require only that some lesser portion of the underlying exposures be financial exposures.

Equity exposures The proposed rule defines an equity exposure to mean: For example, a short position in an equity security or a total return equity swap would be characterized as an equity exposure.

Nonconvertible term or perpetual preferred stock generally would be considered wholesale exposures rather than equity exposures. Financial instruments that are convertible into an equity exposure only at the option of the holder or issuer also generally would be considered wholesale exposures rather than equity exposures provided that the conversion terms do not expose the bank to the risk of losses arising from price movements in that equity exposure.

Upon conversion, the instrument would be treated as an equity exposure. The agencies note that, as a general matter, each of a bank's exposures will fit in one and only one exposure category.

One principal exception to this rule is that equity derivatives generally will meet the definition of an equity exposure because of the bank's exposure to the underlying equity security and the definition of a wholesale exposure because of the bank's credit risk exposure to the counterparty.

In such cases, as discussed in more detail below, the bank's risk-based capital requirement for the derivative generally would be the sum of its risk-based capital requirement for the derivative counterparty credit risk and for the underlying exposure.

Boundary between operational risk and other risks With the introduction of an explicit risk-based capital requirement for operational risk, issues arise about the proper treatment of operational losses that could also be attributed to either credit risk or market risk.

The agencies recognize that these boundary issues are important and have significant implications for how banks would compile loss data sets and compute risk-based capital requirements under the proposed rule. Consistent with the treatment in the New Accord, the agencies propose treating operational losses that are related to market risk as operational losses for purposes of calculating risk-based capital requirements under this proposed rule.

For example, losses incurred from a failure of bank personnel to properly execute a stop loss order, from trading fraud, or from a bank selling a security when a purchase was intended, would be treated as operational losses. The agencies generally propose to treat losses that are related to both operational risk and credit risk as credit losses for purposes of calculating risk-based capital requirements.

For example, where a loan defaults credit risk and the bank discovers that the collateral for the loan was not properly secured operational riskthe bank's resulting loss would be attributed to credit risk not operational risk.

This general separation between credit and operational risk is supported by current U. The proposed exception to this standard is retail credit card fraud losses. More specifically, retail credit card losses arising from non-contractual, third party-initiated fraud for example, identity theft are to be treated as external fraud operational losses under this proposed rule.

All other third party-initiated losses are to be treated as credit losses. Based on discussions with the industry, this distinction is consistent with prevailing practice in the credit card industry, with banks commonly considering these losses to be operational losses and treating them as such for risk management purposes. The agencies seek commenters' perspectives on other loss types for which the boundary between credit and operational risk should be evaluated further for example, with respect to losses on HELOCs.

The New Accord sets forth additional criteria for positions to be eligible for application of the MRA. The agencies propose to incorporate these additional criteria into the MRA through a separate notice of proposed rulemaking concurrently published in the Federal Register. Advanced approaches banks not subject to the MRA would use this proposed rule for all of their exposures.

The agencies generally seek comment on the proposed treatment of the boundaries between credit, operational, and market risk. In addition, a bank must identify within the wholesale exposure category certain exposures that receive a special treatment under the wholesale framework.

These exposures include HVCRE exposures, sovereign exposures, eligible purchased wholesale receivables, eligible margin loans, repo-style transactions, OTC derivative contracts, unsettled transactions, and eligible guarantees and eligible credit derivatives that are used as credit risk mitigants.

The treatment of HVCRE exposures and eligible purchased wholesale receivables is discussed below in this section. In addition, sovereign exposures and exposures to or directly and unconditionally guaranteed by the Bank for International Settlements, the International Monetary Fund, the European Commission, the European Central Bank, and multi-lateral development banks 45 are exempt from the 0. In addition, a bank must identify any on-balance sheet asset that does not meet the definition of a wholesale, retail, securitization, or equity exposure, as well as any non-material portfolio of exposures to which it chooses, subject to supervisory review, not to apply the IRB risk-based capital formulas.

As a part of the process of assigning wholesale obligors to rating grades, a bank must identify which of its wholesale obligors are in default. In addition, a bank must divide its retail exposures within each retail subcategory into segments that have homogeneous risk characteristics. In general, retail segments should not cross national jurisdictions. A bank would have substantial flexibility to use the retail portfolio segmentation it believes is most appropriate for its activities, subject to the following broad principles: Accordingly, in developing its risk segmentation system, a bank should consider the chosen risk drivers' ability to separate risk consistently over time and the overall robustness of the bank's approach to segmentation.

A bank might choose to segment exposures by common risk drivers that are relevant and material in determining the loss characteristics of a particular retail product. For example, a bank may segment mortgage loans by LTV band, age from origination, geography, origination channel, and credit score.

Statistical modeling, expert judgment, or some combination of the two may determine the most relevant risk drivers. Alternatively, a bank might segment by grouping exposures with similar loss characteristics, such as loss rates or default rates, as determined by historical performance of segments with similar risk characteristics. Banks commonly obtain tranched credit protection, for example first-loss or second-loss guarantees, on certain retail exposures such as residential mortgages.

The agencies recognize that the securitization framework, which applies to tranched wholesale exposures, is not appropriate for individual retail exposures. The agencies therefore are proposing to exclude tranched guarantees that apply only to an individual retail exposure from the securitization framework. An important result of this exclusion is that, in contrast to the treatment of wholesale exposures, a bank may recognize recoveries from both an obligor and a guarantor for purposes of estimating the ELGD and LGD for certain retail exposures.

The agencies seek comment on this approach to tranched guarantees on retail exposures and on alternative approaches that could more appropriately reflect the risk mitigating effect of such guarantees while addressing the agencies' concerns about counterparty credit risk and correlation between the credit quality of an obligor and a guarantor. Banks have expressed concern about the treatment of retail margin loans under the New Accord.

Due to the highly collateralized nature and low loss frequency of margin loans, banks typically collect little customer-specific information that they could use to differentiate margin loans into segments. The agencies believe that a bank could appropriately segment its margin loan portfolio using only product-specific risk drivers, such as product type and origination channel.

For a segment of retail eligible margin loans, a bank would associate an ELGD and LGD with the segment that do not reflect the presence of collateral. The agencies seek comment on wholesale and retail exposure types for which banks are not able to calculate PD, ELGD, and LGD and on what an appropriate risk-based capital treatment for such exposures might be. A bank must segment defaulted retail exposures separately from non-defaulted retail exposures and should base the segmentation of defaulted retail exposures on characteristics that are most predictive of current loss and recovery rates.

This segmentation should provide meaningful differentiation so that individual exposures within each defaulted segment do not have material differences in their expected loss severity. Purchased wholesale receivables A bank may also elect to use a top-down approach, similar to the treatment of retail exposures, for eligible purchased wholesale receivables.

To be an eligible purchased wholesale receivable, several criteria must be met: Wholesale lease residuals The agencies are proposing a treatment for wholesale lease residuals that differs from the New Accord. A wholesale lease residual typically exposes a bank to the risk of a decline in value of the leased asset and to the credit risk of the lessee.

Accordingly, the proposed rule would require a bank to treat its net investment in a wholesale lease as a single exposure to the lessee. There would not be a separate capital calculation for the wholesale lease residual. In contrast, a retail lease residual, consistent with the New Accord, would be assigned a risk-weighted asset amount equal to its residual value as described in more detail above.

A bank should base its estimation of the values assigned to PD, ELGD, LGD, and EAD 47 on historical reference data that are a reasonable proxy for the bank's current exposures and that provide meaningful predictions of the performance of such exposures.

A "reference data set" consists of a set of exposures to defaulted wholesale obligors and defaulted retail exposures in the case of ELGD, LGD, and EAD estimation or to both defaulted and non-defaulted wholesale obligors and retail exposures in the case of PD estimation.

The reference data set should be described using a set of observed characteristics. Banks may use more than one reference data set to improve the robustness or accuracy of the parameter estimates. A bank should then apply statistical techniques to the reference data to determine a relationship between risk characteristics and the estimated risk parameter.

The result of this step is a model that ties descriptive characteristics to the risk parameter estimates. In this context, the term 'model' is used in the most general sense; a model may be simple, such as the calculation of averages, or more complicated, such as an approach based on advanced regression techniques.

This step may include adjustments for differences between this proposed rule's definition of default and the default definition in the reference data set, or adjustments for data limitations.

This step should also include adjustments for seasoning effects related to retail exposures. A bank may use more than one estimation technique to generate estimates of the risk parameters, especially if there are multiple sets of reference data or multiple sample periods. If multiple estimates are generated, the bank must have a clear and consistent policy on reconciling and combining the different estimates. Variables or characteristics that are available for the existing portfolio would be mapped or linked to the variables used in the default, loss-severity, or exposure amount model.

In order to effectively map the data, reference data characteristics would need to allow for the construction of rating and segmentation criteria that are consistent with those used on the bank's portfolio.

An important element of mapping is making adjustments for differences between reference data sets and the bank's exposures. Finally, a bank would apply the risk parameters estimated for the reference data to the bank's actual portfolio data. If multiple data sets or estimation methods are used, the bank must adopt a means of combining the various estimates at this stage.

The proposed rule, as noted above, permits a bank to elect to segment its eligible purchased wholesale receivables like retail exposures. The bank must estimate ECL for the receivables without regard to any assumption of recourse or guarantees from the seller or other parties.