Minimum Capital Requirements for Credit Risk

To understand fully the terms, conditions and legal information prior to including a new transaction in the ABCP conduit and ensure that this information is set out in a clear and effective manner, the sponsor should ensure that it receives sufficient initial offering documentation for each transaction and that it is provided within a reasonably sufficient period of time prior to the inclusion in the conduit, with full disclosure of the legal information and comprehensive risk factors needed to supply liquidity and/or credit support facilities. The initial offering document for each transaction should be composed such that readers can readily find, understand and use relevant information. The sponsor should also ensure that the terms and documentation of a transaction are reviewed and verified by an appropriately experienced and independent legal practice prior to the acquisition of the transaction and in the case of material changes. Criterion B13: Alignment of Interest (Conduit Level Only) 18.149 In order to align the interests of those responsible for the underwriting of the credit claims and receivables with those of investors, a material net economic exposure should be retained by the sellers or the sponsor at transaction level, or by the sponsor at the conduit level. Ultimately, the sponsor should disclose to investors how and where a material net economic exposure is retained by the seller at transaction level or by the sponsor at transaction or conduit level, and demonstrate the existence of a financial incentive in the performance of the assets. Criterion B14: Cap on Maturity Transformation (Conduit Level Only) 18.150 Maturity transformation undertaken through ABCP conduits should be limited. 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. This number should be calculated as the higher of: (1) The exposure-weighted average residual maturity of the conduit’s beneficial interests held or the assets purchased by the conduit in order to finance the transactions of the conduit 103 ; and (2) The exposure-weighted average maturity of the underlying assets financed by the conduit calculated by: (a) Taking an exposure-weighted average of residual maturities of the underlying assets in each pool; and (b) Taking an exposure-weighted average across the conduit of the pool-level averages as calculated in Step 2a. 104 103 Including purchased securitization notes, loans, asset-backed deposits and purchased credit claims and/or receivables held directly on the conduit’s balance sheet. 104 Where it is impractical for the sponsor to calculate the pool-level weighted average maturity in Step 2a (because the pool is very granular or dynamic), sponsors may instead use the maximum maturity of the assets in the pool as defined in the legal agreements governing the pool (e.g. investment guidelines). Criterion C15: Financial Institution (Conduit Level Only) 18.151 The sponsor should be a financial institution that is licensed to take deposits from the public, and is subject to appropriate prudential standards and levels of supervision. Criterion C16: Fiduciary and Contractual Responsibilities (Conduit Level) 18.152 The sponsor should, based on the representations received from seller(s) and all other parties responsible for originating and servicing the asset pools, make representations and warranties to investors that: (1) The various criteria defined at the level of each underlying transaction are met, and explain how; (2) Seller(s)’s policies, procedures and risk management controls are well- documented, adhere to good market practices and comply with the relevant regulatory regimes; and that strong systems and reporting capabilities are in place to ensure appropriate origination and servicing of the underlying assets.