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Guidance Note AGN 120.5

Servicing, Managing and Treasury Dealings

This Guidance Note applies where an authorised deposit-taking institution (ADI) acts as a service provider to a special purpose vehicle (SPV). Services which may be provided include servicing and managing funds management or securitisation schemes, advising investors or SPVs, and conducting treasury transactions with a SPV.
An ADI should not subordinate, defer or waive the receipt of fees or other income for its role as service provider without consulting with APRA.

Offering advice

An ADI may act as adviser to a SPV.
An ADI may offer investment advice to investors regarding securities issued by SPVs or insurance and other funds management products. It may also act as a broker in obtaining securities (and other products) on behalf of investors or market such products directly to investors. In conducting such business, there is a risk that investors may be confused as to the relationship between an ADI and the issuer of a security (or other product), and a possibility of the ADI feeling some moral or commercial obligation to investors as a result of its actions.
To minimise the moral risks with providing advice, an ADI should ensure that where it undertakes these activities:

(a) they are conducted with investors or the SPV on an arm’s length basis and on market terms and conditions;

(b) the decision making rests with investors or the SPV, who are aware that they are responsible for, and will bear all risks associated with, the decision taken; and

(c) policies and procedures are in place to ensure that staff (and any agents of the ADI) dealing with investors are appropriately trained and avoid misleading or confusing them concerning the risks involved or the ADI’s relationship with (or support for) the securities and products recommended or offered for sale.

Where an ADI makes investment decisions or purchases securities for customers or a SPV at the ADI’s own initiative or discretion, the ADI will be deemed to be acting as a “manager” and the provisions below regarding managing will apply.

Servicing

A funds management or securitisation scheme may involve the participation of an entity acting as a “servicer” or “servicing agent”. An ADI may undertake the role of servicing a pool of assets held by a SPV provided:

(a) there is a formal written agreement in place which specifies the services to be provided and any required standards of performance. These standards should be reasonable and in accordance with normal market practice. There should be no recourse to the ADI beyond the fixed contractual obligations so specified. The agreement should not obligate an ADI to the provision of any other services (e.g. funding of payments to investors, recompense investors for losses, absorb losses on assets or purchase of securities, etc);

(b) that the ADI is able to demonstrate that the agreement is undertaken on an arm’s length basis, on market terms and conditions (including remuneration), and is subject to the ADI’s normal approval and review processes;

(c) the agreement is limited as to a specified time period (i.e. the earlier of the date on which all claims connected with the issue of securities are paid out or the ADI’s replacement as party to the agreement). A fixed termination date need not be specified provided the ADI is able, at its absolute discretion, to withdraw from its commitments at any time following a reasonable period of notice. Withdrawal must not be conditional upon the appointment of an alternative service provider. As a general rule, an ADI should be able to relinquish its role after giving 90 days notice;

(d) subject to reasonable qualifying conditions, the SPV and/or investors have the express right to select an alternative party to provide the facility;

(e) the agreement is documented in a fashion which clearly separates it from any other facility provided by the ADI. An ADI’s obligations under each facility should be stand‑alone; and

(f) the ADI’s operational systems are adequate to meet its obligations as a servicer.

An ADI acting as servicer should be under no obligation to remit funds to the SPV or investors until the funds are received from the underlying assets (unless otherwise provided for in terms of a separate liquidity facility). This may not preclude, subject to conditions set by APRA, the provision of very limited short‑term advances by a servicer, at its sole discretion, to cover unexpected cash shortfalls arising from delayed payments on assets.
A member of an ADI may receive a performance‑related payment (or benefit from any surplus income generated) for its role as servicer, in addition to its base fee, provided that the base fee is on market terms and conditions and any performance‑related payment does not commit the ADI to any additional obligations. Such payment should be recognised for profit and loss (and capital) purposes only after it has been irrevocably received.
Where a servicing agreement does not meet the conditions above, an ADI will be required to hold capital against the assets it is servicing as if they were held on its balance sheet.

Managing

Funds management and securitisation schemes usually involve an entity acting as “manager”. An ADI, in its capacity as an authorised deposit‑taker, cannot act as a manager. Subsidiaries or associates of an ADI can act as a manager, provided that the management agreement meets conditions (a)-(e) in paragraph 7 above. A member of an ADI acting as manager may also receive a performance-related payment for its role as manager, as long as the provisions described in paragraph 9 are met.
Where a managing agreement does not meet the conditions above, the ADI will be required to hold capital against the assets it is managing as if they were held on its balance sheet.
An ADI, acting as manager, may enter into a contractual undertaking to provide a limited buy‑back facility to repurchase securities from investors provided:

(a) any obligation to buy back is specified in the management agreement and limitations on the entity’s obligations are prominently and clearly noted in the documentation associated with the issue of the securities;

(b) the obligation to buy back is entered into only as part of a management facility provided by the entity. The obligation should terminate immediately if the entity ceases to act as manager; and

A buy‑back facility should be treated as a credit enhancement (refer Guidance Note AGN 120.2 Credit Enhancement (AGN 120.2)). The ADI should ensure the potential effect of buy‑backs is considered in its liquidity management plans.
The above provisions do not apply where the entity is required by statute to provide a buy-back facility or exercises a completely discretionary right to buy back investments in special circumstances (e.g. such as personal hardship). Investors should, however, be put on notice that any buy-backs under these circumstances need to be undertaken at market prices and may invoke interest penalties. It is expected that over the life of a funds management or securitisation scheme the total value of such buy-backs would not be substantial relative to the amount of securities on issue.

Treasury operations

An ADI may enter into treasury (market‑related) transactions with a SPV provided such transactions are undertaken in accordance with the following conditions:

(a) the ADI is not obliged to enter into any transactions with the SPV;

(b) the ADI is able to demonstrate that the transactions are conducted on an arm’s length basis and are subject to the ADI’s normal approval and review processes. Transactions should be undertaken on market terms and conditions (including price/fee). Where a market price is impossible to determine, the ADI should seek APRA’s approval before undertaking the transaction;

(d) the SPV has the express right to select an alternative party with whom to deal before entering into any transaction (subject to any contractual arrangements/qualifying conditions);

(e) the ADI has reasonably satisfied itself that the counterparty has the power to undertake the transactions, and the counterparty could reasonably be expected to be aware of the risks that it might face from the transaction; and

(f) the transactions do not involve the acquisition of securities issued or assets held (including a beneficial interest in assets held) by a SPV, except as permitted by Guidance Note AGN 120.3 Purchase and Supply of Assets (including Securities Issued by Special Purpose Vehicles).

A transaction can cover an undetermined amount provided the contract fixes a maximum principal amount, e.g. a swap contract covering the amount of mortgage loans held at any point in time is permissible provided the amount of the potential advances in relation to the underlying mortgages is capped. Transactions that involve mismatches of more than 90 days between the payment by the ADI to, and subsequent receipt from, the SPV of underlying cashflows, should receive the prior approval of APRA.
Where the conditions in paragraphs 16 and 17 are satisfied, an ADI may treat treasury transactions involving SPVs as market-related transactions for the purposes of Prudential Standard APS 112 Capital Adequacy: Credit Risk. Where these conditions are not met, the transaction should be regarded as a credit enhancement, and assessed in accordance with AGN 120.2.

Guidance Note AGN 120.5Guidance Note AGN 120.5