18. Securitization: General Provisions

Investor analysis should be simpler and more straightforward where the securitization is of credit claims or receivables that satisfy materially nondeteriorating 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 securitization have been originated in the ordinary course of the originator’s business to materially non-deteriorating 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. These should be credit claims or receivables which have satisfied materially nondeteriorating underwriting criteria and for which the obligors have been assessed as having the ability and volition to make timely payments on obligations; or on granular pools of obligors originated in the ordinary course of the originator’s business where expected cash flows have been modelled to meet stated obligations of the securitization under prudently stressed loan loss scenarios. (1) 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. (2) The originator/sponsor of the securitization is expected, where underlying credit claims or receivables have been acquired from third parties, to review the underwriting standards (i.e. to check their existence and assess their quality) of these third parties and to ascertain that they have assessed the obligors’ “ability and volition to make timely payments on obligations”. Criterion A5: Asset Selection and Transfer 18.77 Whilst recognizing that credit claims or receivables transferred to a securitization will be subject to defined criteria, 82 the performance of the securitization should not rely upon the ongoing selection of assets through active management 83 on a discretionary basis of the securitization’s underlying portfolio. Credit claims or receivables transferred to a securitization should satisfy clearly defined eligibility criteria. Credit claims or receivables transferred to a securitization 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. 18.78 In order to meet the principle of true sale, the securitization should effect true sale such that the underlying credit claims or receivables: (1) Are enforceable against the obligor and their enforceability is included in the representations and warranties of the securitization; (2) Are beyond the reach of the seller, its creditors or liquidators and are not subject to material recharacterisation or clawback risks; (3) Are not effected through credit default swaps, derivatives or guarantees, but by a transfer of the credit claims or the receivables to the securitization; (4) Demonstrate effective recourse to the ultimate obligation for the underlying credit claims or receivables and are not a securitization of other securitizations; and (5) For regulatory capital purposes, 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 the points under 18.78 (1) to 18.78 (4).