Banking (prudential standard) determination No. 6 of 2006 - Prudential Standard APS 120 - Funds Management and Securitisation
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- 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;
(c) the transactions involve specified principal amounts and cover specified time periods;
(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).
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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.
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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.