Canada: OSFI Issues Updated Securitization Framework For Insurers

The Office of the Superintendent of Financial Institutions (OSFI) recently published Draft Guideline B-5: Asset Securitization (Draft Guideline), which sets out an updated regulatory framework for the securitization activities of federally regulated insurers, including foreign insurer branches and mortgage insurers (Insurers). The Draft Guideline will replace the existing OSFI Guideline B-5 published in November 2004, and the related OSFI Advisory: Securitization – Expected Practices (Advisory) published in October 2008.

OSFI notes that the existing Guideline B-5 and Advisory applicable to Insurers do not adequately address the impact of the financial crisis and the ensuing updates to the Basel securitization framework. OSFI has issued the Draft Guideline to remedy these deficiencies. The Draft Guideline largely aligns the regulatory framework for the securitization activities of Insurers with the operational and qualitative requirements applicable to the securitization activities of banks and federal trust and loan companies, as currently reflected in OSFI's Basel III-compliant Capital Adequacy Requirements (CAR) Guideline, Chapter 7. Insurers can anticipate that OSFI may further amend its guidance in the future to address changes to the Basel securitization framework under the final set of Basel III reforms released in December 2017.

The Draft Guideline sets out OSFI's general expectations with respect to securitization transactions by Insurers and supplements OSFI's capital guidelines for Insurers (that is, LICAT, MCT or MICAT) by specifying the capital treatment for securitization exposures. OSFI intends to release the final version of the Draft Guideline in January 2019.

This bulletin summarizes certain key requirements of the Draft Guideline.

CRITERIA FOR EXCLUDING SECURITIZED EXPOSURES FROM CAPITAL REQUIREMENTS

The Draft Guideline sets out a comprehensive list of requirements that an originating Insurer must satisfy in order exclude securitized exposures from capital requirements.

The originating Insurer must be sufficiently removed from a securitization special-purpose vehicle (SPV) that it has set up, and OSFI's requirements in this respect have not materially changed. Where these requirements are not satisfied, the originating Insurer is required to hold capital against all debt instruments issued by the SPV to third parties.

The Draft Guideline also sets out a number of operational requirements that must be satisfied before an originating Insurer may exclude securitized exposures from the calculation of required capital. These requirements are analogous to the requirements currently set out in OSFI's CAR Guideline. The operational requirements for traditional (non-synthetic) securitizations are as follows:

  • Significant credit risk associated with the securitization must be transferred to third parties. The originating Insurer must establish policies and procedures to ensure that the amount of risk retained and transferred is assessed on an ongoing basis.
  • The capital requirement for exposures retained by the originating Insurer following the issuance must be no greater than 30 per cent of the capital requirement applicable to assets supporting all tranches of the securitization structure.
  • The originating Insurer may not maintain effective or indirect control over the transferred exposures and the assets must be legally isolated from the Insurer beyond the reach of its creditors. This must be supported by a legal opinion acceptable to OSFI.
  • The securities issued may not be obligations of the original Insurer.
  • The entity to which the risk is transferred must be an SPV and the holders of beneficial interests in the SPV must have the right to pledge or exchange those rights without restriction.
  • Any clean-up calls must satisfy the requirements set out in the Draft Guideline.
  • The securitization may not contain clauses that: (a) require the originating Insurer to systematically alter the underlying exposures such that the pool's weighted average credit quality is improved (unless this is achieved by selling assets to independent and unaffiliated third parties at market prices); (b) allow for increases in a retained first loss position or credit enhancement provided by the originating insurer after the transaction's inception; or (c) increase the yield payable to parties other than the originating Insurer, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool.
  • There are no termination options or triggers except for eligible clean-up calls or due to specific changes in tax and regulation.

The Draft Guideline includes a separate set of operational requirements for synthetic securitizations.

The Draft Guideline sets out certain expectations in respect of the capital treatment of securitized assets where the terms of the securitization include clean-up calls, payment collection activities, and servicer activities to be performed by the Insurer. These requirements are included in the current Guideline B-5 and have not significantly changed in the Draft Guideline.

The Draft Guideline also outlines OSFI's position on implicit support provided by an Insurer to a securitization, consistent with OSFI's CAR Guideline. Implicit support refers to an insurer providing support to a securitization in excess of its predetermined contractual obligation. Some examples of implicit support include the purchasing deteriorating credit exposures, purchasing assets from the underlying pool at above-market prices, increasing the originator-provided first loss position, and achieving the same results indirectly via other lending arrangements. When an Insurer provides implicit support, it cannot exclude securitized assets from its calculation of regulatory capital, must make public that it has provided non-contractual support, and disclose publicly the capital impact of providing such support.

Additionally, if OSFI determines that an Insurer has provided implicit support in a securitization, the Insurer will be ineligible to exclude the securitized assets from the calculation of the required capital for the longer of two years, or until all notes issued benefiting from the implicit support have matured. If OSFI finds that an insurer has provided implicit support on more than one occasion, the Insurer will be ineligible to exclude any of its securitized assets from the calculation of required capital for a minimum of five years. These punitive measures are new under the Draft Guideline.

REQUIRED CAPITAL FOR SECURITIZATION EXPOSURES

The Draft Guideline sets out a framework for calculating an Insurer's regulatory capital requirements for an Insurer's credit exposure to a securitization (securitization exposure). Insurers are required to hold regulatory capital against all of their securitization exposures, including those arising from investments in asset-backed securities, the provision of credit risk mitigation to a securitization transaction, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement.

The regulatory capital requirement for a securitization exposure is generally calculated by multiplying the exposure amount of the securitization (the sum of the on- and off- balance sheet amounts of the exposure, subject to certain deductions) by a credit risk factor set out in the OSFI capital guideline applicable to the federal insurer (that is, LICAT, MCT or MICAT). However, certain securitization exposures listed in the Draft Guideline are deemed to fall within the highest-risk category of securitization exposures provided for in the applicable OSFI capital guideline. Certain exceptions also apply to mortgage insurers.

OSFI's capital guidelines assign a credit risk factor to a securitization exposure based on external assessments in a number of circumstances. The Draft Guideline sets out a list of operational requirements that an Insurer must satisfy in order to be able to rely on external credit assessments for securitization exposures. These operational requirements are largely aligned with the analogous requirements in OSFI's CAR Guideline.

The Draft Guideline also permits an Insurer to infer a credit rating for an unrated securitization exposure if the exposure ranks equally with, or senior to, an externally rated reference exposure, subject to satisfying a number of requirements.

SOUND BUSINESS PRACTICES

The Draft Guideline sets out expectations regarding Insurers' practices relating to securitizations. In particular, the Draft Guideline introduces new due diligence requirements that are more onerous than the expectations set out in the existing Guideline B-5. In particular, the Draft Guideline will require Insurers to have the information described below for each securitization exposure; otherwise, the exposure would be classified within the highest risk category for capital purposes:

  • The Insurer should, on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitization exposures and the underlying pools.
  • The Insurer should be able to access performance information on the underlying pools on an ongoing basis in a timely manner. For resecuritizations, insurers should have information not only on the underlying securitization tranches but also on the characteristics and performance of the pools underlying the securitization tranches.
  • The Insurer should have a thorough understanding of all structural features of a securitization transaction that would materially impact the performance of the Insurer's exposures to the transaction, such as the contractual waterfall and related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default.

The industry has until October 12, 2018 to provide comments on the Draft Guideline. OSFI will publish a non-attributed summary of the comments it receives, together with OSFI's responses, on its website when the final version of Guideline B-5 is released.

For permission to reprint articles, please contact the Blakes Marketing Department.

© 2018 Blake, Cassels & Graydon LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions