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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.
Where an ADI sells its assets to a SPV, it may be entitled to surplus income or payments generated by the securitisation scheme. Such arrangements may take the form of a residual interest, excess servicing income, a spread account or similar arrangement.
The transfer of assets under such arrangements should be considered a clean sale where:
(a) the ADI makes no payment to the SPV in exchange for an income stream, unless the payment is written off in the ADI’s profit and loss (and capital) accounts;
(b) the ADI has no right, and is under no obligation as a result of its entitlement to receive fees or other income, to repurchase any non-performing assets, or otherwise cover losses on assets or losses of investors;
(c) the ADI is under no obligation to return any fees or income once received; and
(d) the ADI does not recognise, for profit and loss (and capital) purposes, such fees or income until irrevocably received.
Where an ADI provides funds to establish a spread, reserve or similar account, those amounts should be treated as a first loss credit enhancement unless the funds are written off in the ADI’s profit and loss (and capital) accounts. The funds should be treated as a first loss credit enhancement until such time as the funds are irrevocably repaid to the ADI. Where the future earning capacity of any “excess spread” is recognised as an asset, it need not be included in credit risk assets for capital adequacy purposes provided the ADI deducts the amount of the asset from its capital.
Where an ADI contributes to the start-up costs of a funds management or securitisation scheme, the amounts involved need not be treated as a credit enhancement provided:
(a) the funds contributed are not intended to protect investors against loss;
(b) the funds involved represent a one-off commitment;
(c) the amounts involved are strictly limited and are in line with normal market expenses for similar schemes;
(d) there is no direct repayment of the contributions or direct fee earned for contributing to the start-up costs; and
(e) the contribution of funds is not linked to the provision of any specific facilities by the ADI.