Banking (prudential standard) determination No. 6 of 2006 - Prudential Standard APS 120 - Funds Management and Securitisation
Representations and warrantiesRepresentations and warranties
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Representations and warranties
- An ADI that provides facilities and services, or supplies assets, to a SPV, may make representations and warranties concerning those functions or assets. The ADI will not be required to hold capital against such representations and warranties where the following conditions are met:
(a) any representation or warranty is provided only by way of a formal written agreement, and the ADI is able to demonstrate that it accords with market practice (unless otherwise approved by APRA);
(b) the ADI undertakes appropriate due diligence before providing or accepting any representation or warranty;
(c) the representation or warranty refers to an existing state of facts that is capable of being verified by the ADI at the time the services are contracted or the assets are sold; and
(d) the representation or warranty is not open‑ended and, in particular, does not relate to the future creditworthiness of the assets, the performance of the SPV and/or the securities the SPV issues.
- The exercise of a representation or warranty, requiring an ADI to purchase or replace assets (or any parts of them) sold to a SPV or third party, must be:
(a) undertaken within 120 days of the transfer of assets to the SPV; and
(b) conducted on the same terms and conditions as the original sale.
The 120-day limit does not preclude the subsequent payment of damages by an ADI for breach of warranty or representation, provided that the agreement to pay damages complies with paragraph 15.
- An ADI that is required to pay damages for breach of representation or warranty can do so without prior APRA approval, provided that the agreement to pay damages meets the following conditions:
(a) there exists documentary evidence that the negotiation of the agreement to pay damages was conducted in good faith;
(b) the onus of proof for breach of representation or warranty remains at all times with the party so alleging;
(c) the party alleging the breach serves a written Notice of Claim on the ADI, specifying the basis for the claim; and
(d) damages are limited to losses directly incurred as a result of the breach.
- An ADI should notify APRA of any instance where it has agreed to pay damages arising out of any representation or warranty.