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  • (x) Requirements Specific to Estimating PD and LGD (or EL) for Qualifying Purchased Receivables

    • CA-5.8.101

      The following minimum requirements for risk quantification must be satisfied for any purchased retail receivables making use of the top-down treatment of default risk and/or the IRB treatments of dilution risk.

      Apr 08

    • CA-5.8.102

      The purchasing bank will be required to group the receivables into sufficiently homogeneous pools so that accurate and consistent estimates of PD and LGD (or EL) for default losses and EL estimates of dilution losses can be determined. In general, the risk bucketing process will reflect the seller's underwriting practices and the heterogeneity of its customers. In addition, methods and data for estimating PD, LGD, and EL must comply with the existing risk quantification standards for retail exposures. In particular, quantification should reflect all information available to the purchasing bank regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing bank, or by external sources. The purchasing bank must determine whether the data provided by the seller are consistent with expectations agreed upon by both parties concerning, for example, the type, volume and on-going quality of receivables purchased. Where this is not the case, the purchasing bank is expected to obtain and rely upon more relevant data.

      Apr 08

    • — Minimum Operational Requirements

      • CA-5.8.103

        A bank purchasing receivables has to justify confidence that current and future advances can be repaid from the liquidation of (or collections against) the receivables pool. To qualify for the top-down treatment of default risk, the receivable pool and overall lending relationship should be closely monitored and controlled. Specifically, a bank will have to demonstrate the following:

        Apr 08

    • — Legal Certainty

      • CA-5.8.104

        The structure of the facility must ensure that under all foreseeable circumstances the bank has effective ownership and control of the cash remittances from the receivables, including incidences of seller or servicer distress and bankruptcy. When the obligor makes payments directly to a seller or servicer, the bank must verify regularly that payments are forwarded completely and within the contractually agreed terms. As well, ownership over the receivables and cash receipts should be protected against bankruptcy 'stays' or legal challenges that could materially delay the lender's ability to liquidate/assign the receivables or retain control over cash receipts.

        Apr 08

    • — Effectiveness of Monitoring Systems

      • CA-5.8.105

        The bank must be able to monitor both the quality of the receivables and the financial condition of the seller and servicer. In particular:

        (a) The bank must (i) assess the correlation among the quality of the receivables and the financial condition of both the seller and servicer, and (ii) have in place internal policies and procedures that provide adequate safeguards to protect against such contingencies, including the assignment of an internal risk rating for each seller and servicer;
        (b) The bank must have clear and effective policies and procedures for determining seller and servicer eligibility. The bank or its agent must conduct periodic reviews of sellers and servicers in order to verify the accuracy of reports from the seller/servicer, detect fraud or operational weaknesses, and verify the quality of the seller's credit policies and servicer's collection policies and procedures. The findings of these reviews must be well documented;
        (c) The bank must have the ability to assess the characteristics of the receivables pool, including (i) over-advances; (ii) history of the seller's arrears, bad debts, and bad debt allowances; (iii) payment terms, and (iv) potential contra accounts;
        (d) The bank must have effective policies and procedures for monitoring on an aggregate basis single-obligor concentrations both within and across receivables pools; and
        (e) The bank must receive timely and sufficiently detailed reports of receivables ageings and dilutions to (i) ensure compliance with the bank's eligibility criteria and advancing policies governing purchased receivables, and (ii) provide an effective means with which to monitor and confirm the seller's terms of sale (e.g. invoice date ageing) and dilution.
        Amended: April 2011
        Apr 08

    • — Effectiveness of Work-out Systems

      • CA-5.8.106

        An effective programme requires systems and procedures not only for detecting deterioration in the seller's financial condition and deterioration in the quality of the receivables at an early stage, but also for addressing emerging problems pro-actively. In particular:

        (a) The bank should have clear and effective policies, procedures, and information systems to monitor compliance with (i) all contractual terms of the facility (including covenants, advancing formulas, concentration limits, early amortisation triggers, etc.) as well as (ii) the bank's internal policies governing advance rates and receivables eligibility. The bank's systems should track covenant violations and waivers as well as exceptions to established policies and procedures;
        (b) To limit inappropriate draws, the bank should have effective policies and procedures for detecting, approving, monitoring, and correcting over-advances; and
        (c) The bank should have effective policies and procedures for dealing with financially weakened sellers or servicers and/or deterioration in the quality of receivable pools. These include, but are not necessarily limited to, early termination triggers in revolving facilities and other covenant protections, a structured and disciplined approach to dealing with covenant violations, and clear and effective policies and procedures for initiating legal actions and dealing with problem receivables.
        Amended: April 2011
        Apr 08

    • — Effectiveness of Systems for Controlling Collateral, Credit Availability and Cash

      • CA-5.8.107

        The bank must have clear and effective policies and procedures governing the control of receivables, credit, and cash. In particular:

        (a) Written internal policies must specify all material elements of the receivables purchase programme, including the advancing rates, eligible collateral, necessary documentation, concentration limits, and how cash receipts are to be handled. These elements should take appropriate account of all relevant and material factors, including the seller's/servicer's financial condition, risk concentrations, and trends in the quality of the receivables and the seller's customer base; and
        (b) Internal systems must ensure that funds are advanced only against specified supporting collateral and documentation (such as servicer attestations, invoices, shipping documents, etc.).
        Amended: April 2011
        Apr 08

    • — Compliance with the Bank's Internal Policies and Procedures

      • CA-5.8.108

        Given the reliance on monitoring and control systems to limit credit risk, the bank must have an effective internal process for assessing compliance with all critical policies and procedures, including:

        (a) Regular internal and/or external audits of all critical phases of the bank's receivables purchase programme; and
        (b) Verification of the separation of duties (i) between the assessment of the seller/servicer and the assessment of the obligor and (ii) between the assessment of the seller/servicer and the field audit of the seller/servicer.
        Amended: April 2011
        Apr 08

      • CA-5.8.109

        A bank's effective internal process for assessing compliance with all critical policies and procedures should also include evaluations of back office operations, with particular focus on qualifications, experience, staffing levels, and supporting systems.

        Apr 08