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1This chapter applies to:
institutional investors who are not PRA-authorised persons or an occupational pension scheme, except for SECN 4.3; and
in the case of SECN 4.3, sponsors who are not PRA-authorised persons and who are established in the United Kingdom.
Prior to holding a securitisation position, an institutional investor, other than the originator, sponsor or original lender, shall verify that:
where the originator or original lender is established in the United Kingdom and is not a CRR firm or FCA investment firm, 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,
1and has effective systems in place to apply those criteria and processes, in accordance with SECN 8.2 (or equivalent PRA rules);
where the originator or original lender is not established in the United Kingdom, 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,
1and 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;
if established in the United Kingdom, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest in accordance with SECN 5 (or equivalent PRA rules) and the risk retention is disclosed to the institutional investor in accordance with SECN 6, SECN 11 and SECN 12 (or equivalent PRA rules);
if not established in the United Kingdom, the originator, sponsor or original lender retains on an ongoing basis a material net economic interest which, in any event, must not be less than 5%, determined in accordance with SECN 5 (or equivalent PRA rules), and discloses the risk retention to institutional investors; and
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:
Information | Frequency | |
11 | In the case of a securitisation which is not an ABCP programme or an ABCP transaction, details of the underlying exposures. | At least quarterly. |
2 | In the case of an ABCP programme or an ABCP transaction, information on the underlying receivables or credit claims. | At least monthly. |
3 | Investor reports providing periodic updates on: (i) the credit quality and performance of the underlying exposures; (ii) 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; (iii) data on the cash flows generated by the underlying exposures and by the liabilities of the securitisation; and (iv) the calculation and modality of retention of a material net economic interest in the transaction by the originator, sponsor or original lender. | (i) At least quarterly in the case of a securitisation which is not an ABCP programme or an ABCP transaction. (ii) At least monthly in the case of an ABCP programme or an ABCP transaction. |
4 | 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. | In the case of primary market investments: (i) before pricing or commitment to invest in draft or initial form; (ii) no later than 15 days after closing of the transaction in final form; and (iii) an updated version as soon as practicable following any material change. In the case of secondary market investments: (i) before a commitment to invest in final form; and (ii) an updated version as soon as practicable following any material change. |
5 | Information describing any changes or events materially affecting the transaction, including breaches of obligations under the transaction documents. | As soon as practicable following that material change or event. |
6 | Any approved prospectus or other offering or marketing document prepared with the cooperation of the originator or sponsor. | In the case of primary market investments: (i) before pricing or commitment to invest in draft or initial form; and (ii) no later than 15 days after closing of the transaction in final form. In the case of secondary market investments, before a commitment to invest in final form. |
7 | If there is an STS notification or a notification falling within regulation 12(3)(b) of the Securitisation Regulations 2024 in respect of the transaction, that STS notification or that notification falling within regulation 12(3)(b) of the Securitisation Regulations 2024. | In the case of primary market investments: (i) before pricing or commitment to invest in draft or initial form; (ii) no later than 15 days after closing of the transaction in final form; and (iii) an updated version as soon as practicable following any material change. In the case of secondary market investments: (i) before a commitment to invest in final form; and (ii) an updated version as soon as practicable following any material change. |
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:
the risk characteristics of the individual securitisation position and of the underlying exposures;
all of 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;
with regard to a securitisation included on the list maintained under regulation 10(2) of the Securitisation Regulations 2024, compliance with SECN 2;
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 2024, 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 2024 in relation to a country or territory designated under such regulations;
with regard to a securitisation falling within paragraph (3)(b) and (c) of regulation 12 of the Securitisation Regulations 2024, compliance with the requirements referred to in paragraph (3)(a) of that regulation and with Article 27 of the Securitisation Regulation as it had effect in relation to the EU at the time of the notification mentioned in paragraph (3)(b) of that regulation;
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; and
in considering the matter referred to in point (d), an institutional investor may rely to an appropriate extent on the notification referred to in regulation 12(3)(b) of the Securitisation Regulations 2024 and on the information disclosed by the originator, sponsor and SSPE to ESMA concerning compliance with the requirements referred to in regulation 12(3)(a) of the Securitisation Regulations 2024, without solely or mechanistically relying on that notification or information.
Notwithstanding (1)(a) and (b), 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.
The requirements in SECN 4.2.1R and SECN 4.2.2R continue to apply where a third party verifier has provided services under SECN 2.5.2R.
As regards fully supported ABCP transactions the requirement specified in SECN 4.2.1R(1)(a) shall apply to the sponsor and not to the institutional investor.
In such cases, the sponsor must verify that the originator or original lender which is not a CRR firm or an FCA investment firm grants all the credits giving rise to the underlying exposures (other than any underlying exposures that are trade receivables not in the form of a loan) on the basis of:
sound and well-defined criteria; and
clearly established processes for their approving, amending, renewing and financing those credits,
1and has effective systems in place to apply those criteria and processes, in accordance with SECN 8.2 (or equivalent PRA rules).
An institutional investor, other than the originator, sponsor or original lender, holding a securitisation position, shall at least:
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 SECN 4.2.1R and SECN 4.2.2R 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 creditworthiness across underlying exposures, industry and geographical diversification, frequency distribution of loan-to-value ratios with bandwidths that facilitate adequate sensitivity analysis;
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;
in the case of fully supported ABCP programmes, regularly perform stress tests on the solvency and liquidity of the sponsor;
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;
be able to demonstrate to the FCA, 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 SECN 4.2.1R and SECN 4.3 and of any other relevant information; and
in the case of exposures to a fully supported ABCP programme, be able to demonstrate to the FCA, 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.
Where the underlying exposures of a securitisation are themselves securitisation positions, in accordance with SECN 7 or Article 8 of Chapter 2 of the Securitisation Part of the PRA Rulebook, institutional investors shall also monitor the exposures underlying those securitisation positions.
Without prejudice to SECN 4.2 and SECN 4.4, where the managing party 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 obligations under SECN 4.1, SECN 4.2 and SECN 4.4 shall remain with the institutional investor:
Where an institutional investor who is subject to SECN 4.5.1R (‘the managing party’) is instructed under SECN 4.5.1R to fulfil any of the obligations of another institutional investor who is also subject to SECN 4.5.1R 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 SECN 4.5.1R (‘the managing party’) is instructed under SECN 4.5.1R to fulfil any of the obligations of another institutional investor who is subject to Article 5 of Chapter 2 of the Securitisation Part of the PRA Rulebook or to regulation 32A to 32D of the Securitisation Regulations 2024 and fails to do so, the managing party is responsible for the failure to comply with the relevant obligation.
Where an institutional investor (‘the managing party’) who is subject to Article 5 of Chapter 2 of the Securitisation Part of the PRA Rulebook is instructed under SECN 4.5.1R to fulfil any of the obligations of another institutional investor who is subject to SECN 4.5.1R and fails to do so, the institutional investor who is exposed to the securitisation is not responsible for the failure to comply.
