- Type of Publication: Advisory
- Category: Prudential Limits and Restrictions
- Date: January 2005
- Audiences: Banks /
Companies provide liquidity
support to Special Purpose Entities (SPEs) through various types
of liquidity facilities having differing degrees of credit risk.
Examples of such liquidity facilities may include loan facilities
containing general market disruption clauses, Liquidity Asset Purchase
Agreements (LAPAs), and loan facilities structured in a manner similar
to those supporting the issuance of corporate commercial paper.
OSFI expects companies to prudentially manage both their credit
exposure and liquidity exposure to SPEs. This Advisory clarifies
the treatment of exposures to SPEs through certain liquidity support
facilities and should be read in conjunction with OSFI Guidelines
Exposure Limits (DTIs), and Large
Exposure Limits (Life) and Guidelines B-5: Asset
Securitization and B-5A Asset
2. Liquidity Facilities Containing Market Disruption Clauses
For the purpose of calculating an exposure to a single counterparty
under Guideline B-2, where the documentation for a liquidity facility
contains a restriction that permits drawdown only in the event of
a general market disruption, as defined in section 2.3 of Guideline
B-5, the undrawn portion of the facility should be excluded from
the calculation of the exposure to that single counterparty. For
internal risk management and approval purposes, general market disruption
liquidity exposure should be aggregated with all other exposures
of a company to the SPE for which the liquidity facility has been
granted. Where a liquidity facility contains multiple tranches,
the exclusion from the calculation of the exposure to that SPE is
restricted to those tranches that are available only in the event
of a general market disruption.
3. Liquidity Asset Purchase Agreement (LAPAs)
For the purpose of this Advisory, LAPAs are facilities used in
securitization activities referred to in Guideline B-5. When exercised,
LAPAs require the company granting the facility to purchase specified
assets from the SPE on a non-recourse basis (except for the normal
legally actionable scenarios of fraud, misrepresentation, etc.).
The exercise of the facility by the SPE is not a loan to the SPE.
As such, the SPE has no liability for repayment to the company for
assets purchased by the company and does not create a credit exposure
to the SPE.
Recognizing that the company ultimately has an exposure to the
assets purchased and not to the SPE, LAPAs should be excluded from
the calculation of an exposure to the SPE under Guideline B-2. An
exposure to the obligor against whom the company would have legal
recourse if the LAPA were drawn should be aggregated with all other
exposures to that obligor.