Banking (prudential standard) determination No. 6 of 2006 - Prudential Standard APS 120 - Funds Management and Securitisation
Liquidity facilitiesLiquidity facilities
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Liquidity facilities
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Liquidity facilities enable SPVs to make timely payments of principal and interest to investors for reasons including, but not limited to, market disruption or timing differences in the payment and receipt of interest and principal from the pooled assets. Such facilities are needed when SPVs hold long-term assets funded by the issuance of short-term securities.
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Where a liquidity facility fails to meet the following conditions, it should be treated as a credit enhancement for capital adequacy purposes:
(a) the conditions set out in sub-paragraphs 3(a)-(e) of AGN 120.2;
(b) funding is provided to the SPV and not directly to investors;
(c) the facility is not capable of being drawn for the purpose of credit support. The commitment should only be capable of being drawn where there is a sufficient level of non-defaulted assets to cover drawings, or the full amount of non-performing assets are covered by a substantial credit enhancement;
(d) the facility is not available for funding additional assets to be held by a SPV, to acquire the assets of the vehicle, to fund the final scheduled repayment of investors, or to cover against dilution of seller’s risk;[16] and
(e) repayment of drawings under the facility are not subordinated to the interests of investors.[17]
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Where drawings under a liquidity facility remain outstanding after three months, an ADI should inform APRA of the advances involved and the reasons for non-repayment.
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Where an ADI alone provides a liquidity facility in the absence of a substantial credit enhancement from an independent party, the facility should be regarded as a credit enhancement for capital adequacy purposes.
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An exception to paragraph 6 arises where an ADI provides a limited liquidity facility (up to 10 per cent of outstanding securities on an unsecured basis and up to 20 per cent on a fully secured basis) for the purpose of:
(a) providing short-term funding for smoothing time differences in payment flows (excluding the retirement of securities at maturity or on roll-overs); and/or
(b) meeting margin payments on futures transactions; and/or
(c) covering delays in settling asset transactions involving the SPV.
An ADI may treat such a facility as a commitment to provide finance for capital adequacy purposes.[18]
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Where a substantial credit enhancement (refer AGN 120.2) covering a SPV is provided by an independent party, and an ADI alone provides a liquidity facility, the facility may be treated as a commitment to provide finance for capital adequacy purposes.