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Prudential Standard APS 120

Funds Management and Securitisation

Objective and key requirements of this Prudential Standard

This Prudential Standard aims to ensure that authorised deposit-taking institutions adopt prudent practices to manage the risks arising out of their involvement in funds management and securitisation activities, and to ensure that appropriate capital is held against the risks involved.

Authority and application

1. This Prudential Standard, made under section 11AF of the Banking Act 1959 (the Act), applies to all authorised deposit-taking institutions (ADIs) authorised under the Act.
2. Guidance Notes AGN 120.1 Disclosure and Separation (AGN 120.1), AGN 120.2 Credit Enhancement (AGN 120.2), AGN 120.3 Purchase and Supply of Assets (including Securities Issued by Special Purpose Vehicles) (AGN 120.3), AGN 120.4 Liquidity, Underwriting and Lending Facilities (AGN 120.4) and AGN 120.5 Servicing, Managing and Treasury Dealings (AGN 120.5) form part of this Prudential Standard.
3. This Prudential Standard does not apply to foreign ADIs,[1] except for the provisions relating to disclosure and separation. In their conduct of funds management or securitisation activities in Australia, foreign ADIs should have regard to all the disclosure and separation requirements.

Overview

4. Funds management encompasses the provision of investment and related services for the management of investors’ funds. Securitisation involves the pooling of assets, or interests in assets, in a special purpose vehicle (SPV), which is funded by the issue of securities.

5. ADIs can incur financial, credit, operational and legal risks arising from the obligations associated with their funds management and securitisation activities. Involvement in these activities can also yield moral risk - the possibility that an ADI will feel a moral obligation or a commercial need to support a funds management or securitisation scheme, or the investors involved in such schemes, beyond any explicit legal obligation to do so.[2]

6. It is the responsibility of the Board and management of an ADI to put in place clear strategies and policies to govern an ADI’s involvement in funds management and securitisation activities. These should incorporate appropriate management systems to identify, measure and control risks, including liquidity risks and potential conflicts of interest, arising from the ADI’s involvement in these activities.

ADI’s involvement in funds management & securitisation activities