“Clean sale” supply of assets“Clean sale” supply of assets

“Clean sale” supply of assets

3. An ADI will be required to hold capital against the value of any assets sold to a SPV or third party unless the transfer of the assets constitutes a “clean sale”. A “clean sale” will occur where the following conditions are addressed:

(a) the ADI retains no beneficial interest in the assets transferred;

(b) the ADI retains, in relation to the assets sold, no obligation, risk or return other than arising out of facilities covered by Prudential Standard APS 120 Funds Management and Securitisation;

(c) the SPV or third party has no formal recourse to the ADI for costs, expenses or losses resulting from the transfer of the assets except where such losses arise from breach of any service agreement, or other representations or warranties made to the SPV or third party;

(d) where the ADI transfers an undrawn commitment to lend, the transfer is effected by novation or assignment, and accompanied by a formal acknowledgement of the transfer by the borrower/debtor;

(e) the ADI receives a fixed amount of consideration for the assets no later than at the time of the transfer of the assets;

(f) the ADI is under no obligation to repurchase any part of the assets except where the obligation arises as a result of representations or warranties made by the ADI; and

(g) the document of transfer specifies that, if cashflows relating to an asset are re-scheduled or re-negotiated, the purchaser/SPV will be subject to the re-scheduled or re-negotiated terms.

4. The ADI should provide confirmation from appropriately qualified internal or external legal advisers that any obligations, risks or rewards relating to the assets subject to sale will be transferred.

5. Where an ADI is under an obligation to:

(a) substitute other assets for assets held by a SPV or third party except pursuant to any representations or warranties made; or under a revolving structure to replace performing assets which have been paid out in part or full; or to replace defaulting assets which have been repaid through recovery; or

(b) provide additional assets to a SPV to maintain a “coverage ratio” of collateral to issued securities except as permitted under a revolving structure,

the obligation should be regarded as a credit enhancement.

6. Where an ADI transfers assets to a SPV or third party at below-book value (e.g. pursuant to an over-collateralisation agreement or by sale at a discounted price), the amount short of book value should be considered as a first loss credit enhancement unless it is written off in the ADI’s profit and loss (and capital) accounts.