Allen & Overy Securitisation Event | Luxembourg 27 May 2014

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© Allen & Overy 2014 1 Henri Wagner Frank Mausen Paul Péporté Florent Trouiller Client Seminar 27 May 2014 Securitisation Act 2014

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Transcript of Allen & Overy Securitisation Event | Luxembourg 27 May 2014

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Henri WagnerFrank MausenPaul PéportéFlorent Trouiller

Client Seminar 27 May 2014

Securitisation Act 2014

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Overview:

1. Securitisation Act 2004 – Overview

2. Impact of AIFMD on Luxembourg Securitisation

3. Recent trends

4. Securitisation Act 2004 – Taxation framework

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Topic 1:

Henri Wagner

Securitisation Act 2004 – Overview

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Securitisation Act 2004

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Agency Agreement

ISSUER SPV

CORPORATE SERVICES PROVIDER

TRUSTEE

LEAD MANAGER, UNDERWRITERS

SHARE TRUSTEE

ORIGINATOR/SERVICER INVESTORS

BACK-UP SERVICER

GIC PROVIDER

UNDERLYING DEBTORS

MONOLINE INSURER/

GUARANTOR

PAYING AGENTS

SWAP COUNTERPARTY

LIQUIDITY PROVIDER

Corporate Services

Agreement

Trust Deed, Deed of Charge,

Security Documents Subscription Agreement

Terms and Conditions of the Notes, Deed of Covenant, Offering

Circular

Reimbursement Agreement

Servicing Agreement

Sale Agreement

Declaration of Trust

Underlying Asset Contracts

Note Insurance Policy or

Guarantee

ACCOUNTBANK

Bank AccountAgreement

ISDA Master Agreement, Swap

ConfirmationGuaranteedInvestment Contract

(GIC)Liquidity

Facility Agreement

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Securitisation Act 2004

1. Legal Framework

The Luxembourg act dated 22 March 2004 relating to securitisation, as amended (the Securitisation Act 2004)

covers all types of securitisation transactions

covers all types of assets

aims at isolating the securitised assets within a specific estate (patrimoine) and shifting the risks relating to these assets to the investors and creditors

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To that effect, the Securitisation Act 2004 contains, and recognises the enforceability of, provisions on:

– bankruptcy remoteness– true sale– compartments (segregation of assets and ring fencing)– limited recourse (by operation of law)– subordination– no seizure of assets– no petition

Securitisation Act 2004

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Securitisation Act 2004

2. Key features – what can be securitised?

– any risks relating to (i) claims (créances), (ii) moveable or immoveable assets or (iii) obligations assumed by third parties or inherent to all or part of the activities carried out by third parties

– by way of illustration (any assets which produce a regular and predictable flow of funds)

– residential and commercial mortgage loans, corporate loans, credit card receivables or trade receivables

– debt securities and equity securities ( constraints)

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Securitisation Act 2004

– rights and claims relating to financial contracts (such as rights under derivative agreements; rights in respect of synthetic transactions where there is no transfer of assets but where risks are transferred under, eg, a credit default swap)

– rights and claims relating to operating businesses (such as airports, private hospitals, water utilities, pubs or forests whole or partial business securitisations)

– risks relating to insurance policies

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Securitisation Act 2004

2. Key features (continued) – how are securitisations financed?

– through the issue of securities (valeurs mobilières) the value or return of which depends on the securitised assets

– securities means any kind of (i) debt securities and (ii) equity securities including shares ( constraints) and beneficiary shares

– flexibility:warehouse financing by loan leverage finance portion short-term refinancing of loan via securities note issuance facility agreement

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Securitisation Act 2004

2. Key features (continued) – who can securitise assets?

– choice between a securitisation undertaking and a securitisation fund managed by a management company

– possibility to use a two-tier structure comprising an issuing vehicle and an acquisition vehicle

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1• Public limited liability

company (sociétéanonyme)

2• Partnership limited by

shares (société en commandite par actions)

3• Private limited liability

company (société à responsabilité limitée( constraints))

4• Co-operative society

organised as a société anonyme

Securitisation Act 2004

A securitisation undertaking may take the form of a:

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Securitisation Act 2004

3. Regulated versus unregulated securitisation undertaking

– A securitisation undertaking will be regulated and must obtain an authorisation (agrément) from the CSSF if:

– it issues securities to the public

– on a continuous basis ( if these two cumulative conditions are not met, the securitisation undertaking will be unregulated and the CSSF will not be competent)

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Securitisation Act 2004

An unregulated securitisation undertaking– benefits from all the provisions of the Securitisation Act 2004

– must appoint one or more external auditors

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4. Safe harbour – no insurance contract

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Securitisation transactions that are subject to the Securitisation Act2004 do not constitute contracts of insurance ( safe harbourprovisions, among others, for credit derivative transactions and forthe assumption of risks relating to insurance policies)

5. Reporting requirements to Banque Centrale de Luxembourg (BCL Regulation 2009/224)*

Please see Annex 1BCL Regulation will be replaced by BCL Regulation 2014/236 as from 31 December 2014

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Securitisation Act 2004

6. Risk retention

– definition of securitisation (article 4.1 (61) of the Capital Requirements Regulation N°575/2013 (the CRR))– credit-risk associated with expossure is trancher– payments are dependant upon performance of exposure– tranching determines distribution of loss (during the ongoing

life)

– exemption (recital (50) CRR)– financing of “physical assets” (eg, new loan provided to an

operation entity)

– general regime of 5% economic interest retention (articles 404 to 407CRR)

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Securitisation Act 2004

7. EMIR

– Legal Entity Identifier (LEI) have been mandated to be used in relation to reporting obligations under EMIR

– LEI will be used to facilitate reporting obligations under relevant legislation

– LEI is required by any entity (FC and NFC) that uses derivatives instruments falling under EMIR (or Dodd Frank Act)

– On 28 April 2014, LuxCSD (jointly owned by BCL and Clearstream), has received the pre-approval status to attribute LEI numbers for Luxembourg (Lux CSD will be operational in this new role as from June 2014)

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– Securitisation undertakings – an LEI per undertaking or a separate LEI per compartments (LEIs are attributed to “legal persons” only)?

– no public information (eg RCS registration) is available– no legal own personality

However

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ESMA considers sub-funds as separate entities for EMIR purposes LuxCSD would have interest to allow compartments to have separate LEIs

as it would better capture legal and systemic risks

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Topic 2:

Paul Péporté

Impact of AIFMD on Luxembourg Securitisation

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AIFMD – Background

– AIFMD regulates the managers (AIFMs) of entities that fall within the term AIF (alternative investment funds)

– Very wide definition of AIF captures much more than traditional funds

– ESMA’s Guidelines on Key Concepts of the AIFMD published in August 2013 – but still uncertainty on scope

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Impact of AIFMD on Luxembourg Securitisation

What is an “AIF”?“a collective investment undertaking, including investment compartments thereof, which

(i) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and(ii) do not require authorisation under the UCITS Directive”

Risk: Luxembourg securitisation vehicle considered as „selfmanaged“ AIF or managed by an AIFM

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Are Luxembourg securitisation structures AIFs?

Key questions to ask when determining whether or not a structure/entity falls within the scope of the AIFMD:

– is it an AIF? otherwise “out of scope”

– does one of the exclusions in the AIFMD apply? For SVs, a key exclusion is the securitisation special purpose entities (SSPE) exclusion.

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Are Luxembourg securitisation structures AIFs?

1 - SSPE exclusion“Securitisation special purpose entities” whose sole purpose is to carry on securitisation within the meaning of article 1(2) of ECB regulation 24/2009

Scope of definition?

Interpretation by ECB: Guidance Note Feb 2012

Revamping of ECB regulation 24/2009 by ECB Regulation No 1075/2013 of November 2013

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SSPE exclusion - definitionThe ECB Regulation defines “securitisation” as follows:– “securitisation” means “a transaction or scheme whereby an asset or pool of assets is

transferred to an entity that is separate from the originator and is created for or serves the purpose of the securitisation and/or the credit risk of an asset or pool of assets, or part thereof, is transferred to the investors in the securities, securitisation fund units, other debt instruments and/or financial derivatives issued by an entity that is separate from the originator and is created for or serves the purpose of the securitisation; and

– (a) in the case of transfer of credit risk, the transfer is achieved by:– the economic transfer of the assets being securitised to an entity separate from the

originator created for or serving the purpose of the securitisation. This is accomplished by the transfer of ownership of the securitised assets from the originator or through sub-participation; or

– the use of credit derivatives, guarantees or any other similar mechanism; and

– (b) where such securities, securitisation fund units, debt instruments and/or financial derivatives are issued, they do not represent the originator's payment obligations.”

“originator” is defined in the ECB Regulation as “the transferor of the assets, or a pool of assets, and/or the credit risk of the asset or pool of assets to the securitisation structure”

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Are Luxembourg securitisation structures AIFs?

2 – out of scope transactions (i.e. not an AIF)

– Securitisation structures only issuing debt instruments ≠ AIF– FAQ European Commission (FAQs of 25 March 2013, ID 1169)– CSSF revised FAQs on securitisation (FAQs of 23 October 2013)

– No defined investment policy– ESMA criteria– CSSF revised FAQs hedging assets only

– Single investor?

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Who can be the AIF: compartment of SV or SV?

– Where an investment compartment of an undertaking exhibits all the elements in the definition of ‘AIF’ in Article 4(1)(a) of the AIFMD (ie ‘collective investment undertaking’, ‘raising capital’, ‘number of investors’ and ‘defined investment policy’) this should be sufficient to determine that the undertaking as a whole is an “AIF”

each compartment of an SV needs to be considered

– If one issue under a programme is an AIF or falls outside the SSPE exclusion, all issues under that programme become subject to the AIFMD

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AIFMD and structured issuances: What are other jurisdictions doing?– Examples:

– Ireland: published FAQ considering that debt issuance SPVs as well as securitisation vehiclesshould not be caught by the AIFMD

– UK: “pending any future clarification at the EU level, we shall assume that an SPV issuing debtsecurities in the way described in the answer to this question will not be an AIF if the arrangements meet the exclusion in paragraph 5 of the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (Debt Securities)”

– Netherlands: currently considering whether the issue of debt instruments does not cause the issuer to be an AIF

– France: taking conservative and restrictive approach; pending French decree “anti-contournement”

– Germany: taking conservative and restrictive approach: “Es kommt auch nicht darauf an, in welcher Form der Anleger an dem Vermögen beteiligt ist. Die Beteiligung des Anlegers kann gesellschaftsrechtlich, mitgliedschaftlich oder schuldrechtlicher Natur sein. Folglich ist jede Art der Beteiligung des Anlegers denkbar (z.B. stille Beteiligung, Genussrecht oder Schuldverschreibung).“

– Do foreign AIFMD regimes have to be taken into account by Luxembourg SVs?

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Conclusion: How to structure SV issuances going forward

– definition of securitisation under Securitisation Act 2004 very broad case-by-case analysis necessary

– restrictions likely for:– financing via equity– “first lender”; synthetic (not credit-linked)

– check potential treatment in jurisdictions in whichsecurities are offered

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Topic 3:

Frank Mausen

Recent trends

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Recent trends (1)

– Repackaging of fund units

– via public offer by SV of– funds admitted for public distribution– funds not admitted for public distribution

CSSF requires local authorities’ consent

– via private placement by SV

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Recent trends (2)

– Changes to securitised collateral (active management)

– to replace collateral that has come to maturity– fire sale– to enable SV to make necessary payments– in accordance with clearly defined guidelines

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securitisation undertaking must not act as investment fundsynthetic structures (actively managed index)

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Recent trends (3)

Single securitisation structure– SV issues securities and acquires the underlying risks or assets

Dual securitisation structure– Issue vehicle issues securities– Acquisition vehicle acquires the underlying risks or assets– Issue proceeds can be forwarded in the form of a loan or in any

other form to acquisition vehicle

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enables efficient issue of tailor made products to achieve requested risk profile

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Comp 1

Bonds

Comp 2

Units

Comp 3

Commodities

Comp 4

Govies

Comp 1 Comp 2 Comp 3

Acquisitionvehicle

Comp 4Issuevehicle

Investor

Investor Investor Investor

Investor

Investor

Recent trends (4)

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Recent trends (5)

Cash held by SV

– Cash cannot be securitised– CSSF assimilates managed account structures to

securitisation of cash

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Cash held by SV may constitute hedging assets in synthetic transaction

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Recent trends (6)

– Repackaging of commodities– The seller of the commodities is using the transaction for

financing or refinancing purposes and commodities represent the security

– The transaction does not trigger activities typical of a trading company

– The commodities themselves do not pose a risk (crude oil as opposed to precious metal)

– Synthetic transactions with commodities are always possible

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Consideration needs to be given to insurance aspects, security interest, etc.

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Recent trends (7)

– SV may enter into repos and securities lending transactions

the transaction and the resulting risks must be clearly described in the issue documentation

the transaction must result in added value for investors

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Recent trends (8)

– Revival of index plus swap transactions: new platforms are being set up

– SV conquers Asia and Latin Amercia

– Technical listings of an S.à r.l.

– New asset classes: planes & ships

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Recent trends (9)

– Multi-compartment issuer doing secured and unsecured English law governed issuances

floating charge, article 61.3 of the Securitisation Act & breach of representations

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Topic 4:

Florent Trouiller

Securitisation Act 2004 –Taxation framework

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Securitisation Act 2004 – Taxation framework

1. Income taxation: securitisation companies remain tax-efficient and (nearly) tax-neutral vehicles

– Fully taxable company – Deduction of distributions and of commitments towards investors

for tax purposes– Subject to a minimum lump sum taxation of EUR3,210 in most

cases (regulated securitisation vehicles are no longer exempt) – Exemption from net wealth tax – Excluded from the scope of the Luxembourg transfer pricing rules– Availability of tax residence certificates– Access to double tax treaties from a Luxembourg standpoint– Increase of substance requirements in order to have access to

double tax treaties from foreign tax authorities

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Securitisation Act 2004 – Taxation framework

2. Savings Directive: automatic exchange of information as from 1 January 2015

– Abolition of the Luxembourg withholding system at the current rate of 35% applicable to EU individual residents and certain residual entities (Bill of law 6668)

– Withholding tax of 10% applicable to Luxembourg individual residents remains applicable under the Relibi law

– Interest paid under debt securities issued by the securitisation vehicle may be caught by these provisions (as opposed to dividend distributions)

– Amendments to the Savings Directive adopted on 24 March 2014 and applicable in principle as from 1 January 2017

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Securitisation Act 2004 – Taxation framework

3. FATCA: points of attention (1)

– IGA signed between Luxembourg and the U.S. on 28 March 2014– MoU provides that Luxembourg FIs will be FATCA compliant even

if IGA should not be ratified until 30 September 2015 (under certain circumstances even 30 September 2016)

– Main benefits of IGA:Luxembourg entities can determine their FATCA obligations in accordance with Luxembourg law instead of the more complex US FATCA regulations

In principle no withholding on payments made to and by Luxembourg Fis

Luxembourg FIs need to provide GIIN number to US withholding agents only as of 1 January 2015 (final registration deadline: 22 December 2014, earlier registration strongly recommended)

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Securitisation Act 2004 – Taxation framework

3. FATCA: points of attention (2)

– Official Luxembourg guidance from the tax administration expected in coming months

– Main Luxembourg professional associations have issued (ALFI, ABBL) or are in the process of issuing (ACA) guidance for their members

– Luxembourg securitisation vehicles are likely to be treated as FIs – Registration per entity versus registration per compartment

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Securitisation Act 2004 – Taxation framework

4. Value-added tax

– Securitisation vehicles are considered as a VAT taxpayer

– No automatic registration with VATanalysis of the services received and carried out to be undertaken

– VAT exemption applicable on management services broad interpretation

– Debt collection services remain taxable

– VAT exemption applicable on risk management services (Circular 723 ter dated 7 November 2013)

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Questions?

These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings.

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Securitisation Act 2004

ECB Reporting Requirements for Euro Area Securitisation SPVs

As part of its statistical function, the European Central Bank (ECB) puts in place new reporting requirements for “financial vehicle corporations” (FVCs) (basically, certain euro area established SPVs) engaged in securitisations. Under the requirements, an FVC will be required to notify the National Central Bank (NCB) in the euro area state where the FVC is resident of its existence and to meet certain quarterly reporting obligations.

Although it appears that the requirements are intended to assist with data collection in respect of securitisations that involve a significant connection to a monetary financial institution (MFI, being a credit or other financial institution) (e.g. where such an entity acts as originator or servicer), the requirements are widely drafted and will capture any FVC incorporated or resident in the Eurozone.

The requirements will apply throughout euro area states, with the notification requirements applying from March 2009 and the quarterly reporting requirements applying from December 2009.

Annex 1

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Background and definitions

The reporting requirements are set out in ECB Regulation (EC) No 24/2009 (ECB/2008/30) (Regulation) (linked at ECB/2008/30). The stated purpose of the requirements is to provide the ECB with adequate statistics on the financial activities of FVCs. Inaddition, as noted above, the requirements appear to be intended to provide the ECB with more complete statistical data in respect of the securitisation activities undertaken by MFIs.

FVC is widely defined to include a range of undertakings whose principal activity meets both of the following criteria: (a) “it intends to carry out, or carries out, one or more securitisation transactions…” and (b) “it issues, or intends to issue, securities, securitisation fund units, other debt instruments and/or financial derivatives and/or legally or economically owns, or may own, assets underlying the issue of securities, securitisation fund units, other debt instruments and/or financial derivatives…”. This definition will catch both issuer SPVs and SPVs which own underlying assets. There is no grandfathering for pre-existing FVCs orcarve-out for FVCs involved in private deals.

Securitisation is also widely defined and would seem to extend to, e.g., true sale and synthetic securitisations.

The Regulation applies generally to FVCs resident in the territory of a euro area Member State. Based on the definition of “resident” set out in the Regulation and given that most SPVs do not have a centre of operations or a physical presence, in general an FVC will be resident in the jurisdiction in which it is incorporated.

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Securitisation Act 2004

Under Article 3 of the Regulation, an FVC is required to inform the NCB in the jurisdiction in which it is resident/incorporated of its existence within one week of the FVC “taking up business”. “Taking up business” is defined as any activity or preparatory measure related to a securitisation (including the establishment of the FVC where the FVC expects to commence securitisation activity within six months). Helpfully, the ECB has now removed wording included in earlier drafts of the Regulation which wouldhave required an FVC to provide notification upon the earlier of its establishment and its taking up business (thus potentially requiring notification by inactive SPVs and/or shelf companies without an assigned function or business).

With respect to timing, under Article 9, an FVC that has taken up business prior to and including 24 March 2009 shall inform therelevant NCB of its existence by the end of March 2009. An FVC that has taken up business after 24 March 2009 shall inform the relevant NCB of its existence within one week of taking up business. The obligation to report an FVC’s existence will apply irrespective of whether the FVC expects to be subject to the quarterly reporting requirements under the Regulation as described below.

The ECB’s Executive Board will establish and maintain a list of all FVCs, which list will be published.

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Securitisation Act 2004

Under Article 4 of the Regulation, an FVC is required to provide to the relevant NCB (i.e. the NCB in the jurisdiction in which the FVC is resident/incorporated), on a quarterly basis, data on end-of-quarter outstanding amounts, financial transactions and write-offs/write-downs on its assets and liabilities. The detailed statistical reporting requirements and minimum standards are set out in Annexes I, II and III to the Regulation.

Under Article 6, data must be submitted by the relevant NCB to the ECB within 28 working days following the end of the quarter to which the data relate, meaning that corresponding timelines will be set for reporting agents. Note that the data to be provided are required to be up to date as at the relevant quarter end date, whether or not that date coincides with the date on which theFVC in question actually measures its assets, liabilities and transactions. Accordingly, additional reporting and calculationactivities will need to be undertaken in respect of such quarter dates, even if this is not contemplated in the original securitisation documents.

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Securitisation Act 2004

Article 5 of the Regulation provides that a NCB may, in certain circumstances, grant derogations to the quarterly reporting requirements. Under this Article, derogations may be granted:

• for loans originated by euro area MFIs and broken down by maturity, sector and residency of debtors, and where the MFIs continue to service the securitised loans (on the basis that MFIs are required to report such data under Regulation (EC) No 25/2009 (ECB/2008/32));

• to the extent that the information can be derived from other statistical, public or supervisory data sources;

• to exempt FVCs from the reporting requirements set out in Annex I (apart from the requirement to report end-of-quarter outstanding data on total assets), provided that the FVCs that contribute to the quarterly aggregated assets/liabilities accountfor at least 95% of the total of FVCs’ assets in terms of outstanding amounts.

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Securitisation Act 2004

Sanctions

The Regulation indicates that the sanctions for FVCs which do not comply with the obligations under the Regulation will be as set out in Article 7 of Regulation (EC) No 2533/98. Under the relevant provisions, significant fines (up to EUR 200,000 for certain activities) may be imposed.

Practice point - documentation

In general, FVCs are “brain dead” entities. Accordingly, it will be necessary to include provision in transaction documents (including in the context of existing deals) so that appropriate service providers (e.g. corporate service providers and servicers) undertake to perform the necessary functions to ensure compliance with the obligations.