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Banking (prudential standard) determination No. 6 of 2006 - Prudential Standard APS 120 - Funds Management and Securitisation
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Turn the raw legal text into a practical explanation grounded in Banking (prudential standard) determination No. 6 of 2006 - Prudential Standard APS 120 - Funds Management and Securitisation.
A “first loss facility” provides a primary level of financial support to a SPV and/or its investors. The provider of the facility bears the bulk (or all) of the risk associated with the issued securities, or the assets held by the SPV.
A first loss credit enhancement also arises where an ADI provides an undertaking covering the payment of interest on assets held by a SPV and/or the payment of interest to investors (except where the undertaking is provided as part of a second loss facility covering the repayment of principal and accrued interest). This includes an undertaking to provide cover against reinvestment/ prepayment/ extension risk. Any undertaking to pay interest should specify the total dollar amount that the ADI can be required to pay as a result of its undertaking.
An ADI that provides a first loss facility should, for capital adequacy purposes, deduct the amount of the facility from its capital base. The deduction will be capped at the amount of capital the ADI would be required to hold against the full value of all securities issued by the SPV.[6]