Prudential Regulation Authority Rulebook

1

Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall verify that:

1. (a) where the originator or original lender is established in the UK and is not a CRR firm or an FCA investment firm as defined in points (2A) and (2AB) of Article 4(1) of CRR, the originator or original lender grants all the credits giving rise to the underlying exposures (unless they are trade receivables not originated in the form of a loan) on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1) of this Chapter (or equivalent FCA rules);
2. (b) where the originator or original lender is not established in the UK, the originator or original lender grants all the credits giving rise to the underlying exposures (unless they are trade receivables not originated in the form of a loan) on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes to ensure that credit-granting is based on a thorough assessment of the obligor’s creditworthiness;
3. (c) if established in the UK, the originator, sponsor original lender retains on an ongoing basis a material net economic interest in accordance with Article 6 of this Chapter and Chapter 4 (or equivalent FCA rules) and the risk retention is disclosed to the institutional investor in accordance with Article 7 of this Chapter and Chapters 5 and 6 (or equivalent FCA rules);
4. (d) if not established in the UK, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, shall not be less than 5%, determined in accordance with Article 6 of this Chapter and Chapter 4 (or equivalent FCA rules), and discloses the risk retention to institutional investors;
5. (e) the originator, sponsor or SSPE has made available sufficient information to enable the institutional investor independently to assess the risks of holding the securitisation position and has committed to make further information available on an ongoing basis, as appropriate. That information must include at least the following:
   1. (i) in the case of a securitisation which is not an ABCP programme or an ABCP transaction, details of the underlying exposures, which is to be provided on at least a quarterly basis;
   2. (ii) in the case of an ABCP programme or an ABCP transaction, information on the underlying receivables or credit claims, which is to be provided on at least a monthly basis;
   3. (iii) investor reports providing periodic updates on the credit quality and performance of the underlying exposures, any relevant financial or other triggers contained in the transaction documentation including information on events which trigger changes to the priority of payments or a substitution of any counterparty to the transaction, data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation and the calculation and modality of retention of a material net economic interest in the transaction by the originator, sponsor or original lender, which is to be provided on at least a quarterly basis in the cases referred to in point (i) and on at least a monthly basis in the cases referred to in point (ii);
   4. (iv) all information on the legal documentation needed to understand the transaction, including detail of the legal provisions governing the structure of the transaction, any credit enhancement or liquidity support features, the cash flows and loss waterfalls, investors’ voting rights and any triggers or other events that could result in a material impact on the performance of the securitisation position, which is to be provided:
   5. for primary market investments, in draft or initial form before pricing or commitment to invest and in final form no later than 15 days after closing of the transaction, or
   6. for secondary market investments, in final form before a commitment to invest,
   7. and for both primary and secondary market investments an updated version as soon as practicable following any material change;
   8. (v) information describing any changes or events materially affecting the transaction, including breaches of obligations under the transaction documents, which is to be provided as soon as practicable following the material change or event;
   9. (vi) any approved prospectus or other offering or marketing document prepared with the cooperation of the originator or sponsor which is to be provided:
   10. for primary market investments, in draft or initial form before pricing or commitment to invest and in final form no later than 15 days after closing of the transaction, or
   11. for secondary market investments, in final form before a commitment to invest; and
   12. (vii) if there is an STS notification or a notification falling within regulation 12(3)(b) of the Securitisation Regulations in respect of the transaction, that STS notification, which is to be provided:
   13. for primary market investments, in draft or initial form before pricing or commitment to invest and in final form no later than 15 days after closing of the transaction, or
   14. for secondary market investments, in final form before a commitment to invest,
   15. and for both primary and secondary market investments an updated version as soon as practicable following any material change.

2

As regards fully supported ABCP transactions, the requirement specified in point (a) of paragraph 1 of this Article shall apply to the sponsor and not to the institutional investor. In such cases, the sponsor shall verify that the originator or original lender which is not a CRR firm or an FCA investment firm as defined in points (2A) and (2AB) of Article 4(1) of CRR grants all the credits giving rise to the underlying exposures on the basis of sound and well-defined criteria and clearly established processes for approving, amending, renewing and financing those credits and has effective systems in place to apply those criteria and processes in accordance with Article 9(1) of this Chapter (or equivalent FCA rules).

3

Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall carry out a due-diligence assessment which enables it to assess the risks involved. That assessment shall consider at least all of the following:

1. (a) the risk characteristics of the individual securitisation position and of the underlying exposures;
2. (b) all the structural features of the securitisation that can materially impact the performance of the securitisation position, including the contractual priorities of payment and priority of payment-related triggers, credit enhancements, liquidity enhancements, market value triggers, and transaction-specific definitions of default;
3. (c) with regard to a securitisation included on the list maintained under regulation 10(2) of the Securitisation Regulations, compliance with the STS criteria and with any applicable designated activity rules relating to the notification mentioned in regulation 10(1) of the Securitisation Regulations;
4. (d) with regard to a securitisation that appears to the institutional investor to be an overseas STS securitisation as defined in regulation 12(2) of the Securitisation Regulations, whether the securitisation falls within a description of securitisation specified in regulations made from time to time under regulation 13(1) of the Securitisation Regulations in relation to a country or territory designated under such regulations;
5. (e) with regard to a securitisation falling within paragraph (3)(b) and (c) of regulation 12 of the Securitisation Regulations, compliance with the requirements referred to in paragraph (3)(a) of that regulation and with Article 27 of Regulation (EU) 2017/2402 as it had effect in relation to the European Union at the time of the notification mentioned in paragraph (3)(b) of that regulation;
6. (f) in considering the matter referred to in point (c), an institutional investor may rely to an appropriate extent on the STS notification and on the information disclosed by the originator, sponsor and SSPE concerning compliance with the STS criteria, without solely or mechanistically relying on that notification or information;
7. (g) in considering the matter referred to in point (e), an institutional investor may rely to an appropriate extent on the notification referred to in regulation 12(3)(b) of the Securitisation Regulations and on the information disclosed by the originator, sponsor and SSPE to the European Securities and Markets Authority concerning compliance with the requirements referred to in regulation 12(3)(a) of the Securitisation Regulations, without solely or mechanistically relying on that notification or information; and
8. Notwithstanding points (a) and (b) of the first subparagraph, in the case of a fully supported ABCP programme, institutional investors in the commercial paper issued by that ABCP programme shall consider the features of the ABCP programme and the full liquidity support.

3A

The requirements in paragraphs 1 and 3 of this Article continue to apply where a third party has provided services under SECN 2.5.2R of the FCA Handbook.

4

An institutional investor, other than the originator, sponsor or original lender, holding a securitisation position, shall at least:

1. (a) establish appropriate written procedures that are proportionate to the risk profile of the securitisation position and, where relevant, to the institutional investor’s trading and non-trading book, in order to monitor, on an ongoing basis, compliance with paragraphs 1 and 3 of this Article and the performance of the securitisation position and of the underlying exposures. Where relevant with respect to the securitisation and the underlying exposures, those written procedures shall include monitoring of the exposure type, the percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, recovery rates, repurchases, loan modifications, payment holidays, collateral type and occupancy, and frequency distribution of credit scores or other measures of credit worthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan to value ratios with band widths that facilitate adequate sensitivity analysis. Where the underlying exposures are themselves securitisation positions, in accordance with Article 8 of this Chapter or SECN 7.2.1(2)(b) of the FCA Handbook, institutional investors shall also monitor the exposures underlying those positions;
2. (b) in the case of a securitisation other than a fully supported ABCP programme, regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures or, in the absence of sufficient data on cash flows and collateral values, stress tests on loss assumptions, having regard to the nature, scale and complexity of the risk of the securitisation position;
3. (c) in the case of fully supported ABCP programmes, regularly perform stress tests on the solvency and liquidity of the sponsor;
4. (d) ensure internal reporting to its management body so that the management body is aware of the material risks arising from the securitisation position and so that those risks are adequately managed;
5. (e) be able to demonstrate to the PRA, upon request, that it has a comprehensive and thorough understanding of the securitisation position and its underlying exposures and that it has implemented written policies and procedures for the risk management of the securitisation position and for maintaining records of the verifications and due diligence in accordance with paragraphs 1 and 2 of this Article and of any other relevant information; and
6. (f) in the case of exposures to a fully supported ABCP programmes, be able to demonstrate to the PRA, upon request, that it has a comprehensive and thorough understanding of the credit quality of the sponsor and of the terms of the liquidity facility provided.

5

Without prejudice to paragraphs 1 to 4 of this Article, where an institutional investor has been given authority by the institutional investor described below to make investment management decisions that might expose it to a securitisation, the following paragraphs apply in respect of any exposure to a securitisation arising from those decisions. Unless specified below, the responsibility for fulfilling the relevant obligations under paragraphs 1 to 4 shall remain with the institutional investor.

Where an institutional investor who is subject to this Article (‘the managing party’) is instructed under this paragraph to fulfil any of the obligations of another institutional investor who is subject to this Article and fails to do so, the managing party is responsible for the failure to comply with the relevant obligation and not the institutional investor who is exposed to the securitisation.

Where an institutional investor who is subject to this Article (‘the managing party’) is instructed under this paragraph to fulfil any of the obligations of another institutional investor who is subject to equivalent rules made by the FCA or to regulations 32A to 32D of the Securitisation Regulations and fails to do so, the managing party is responsible for the failure to comply with the relevant obligation.

Where an institutional investor who is subject to equivalent rules made by the FCA is instructed under this paragraph to fulfil any of the obligations of another institutional investor who is subject to this Article and fails to do so, the institutional investor who is exposed to the securitisation is not responsible for the failure to comply.