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  • (iii) Requirements for Recognition of Financial Receivables

    • — Definition of Eligible Receivables

      • CA-5.8.121

        Eligible financial receivables are claims with an original maturity of less than or equal to one year where repayment will occur through the commercial or financial flows related to the underlying assets of the borrower. This includes both self-liquidating debt arising from the sale of goods or services linked to a commercial transaction and general amounts owed by buyers, suppliers, renters, national and local governmental authorities, or other non-affiliated parties not related to the sale of goods or services linked to a commercial transaction. Eligible receivables do not include those associated with securitisations, sub- participations or credit derivatives.

        Apr 08

    • — Operational Requirements

      • a. Legal Certainty

        • CA-5.8.122

          The legal mechanism by which collateral is given must be robust and ensure that the lender has clear rights over the proceeds from the collateral.

          Apr 08

        • CA-5.8.123

          Banks must take all steps necessary to fulfill local requirements in respect of the enforceability of security interest, e.g. by registering a security interest with a registrar. There should be a framework that allows the potential lender to have a perfected first priority claim over the collateral.

          Apr 08

        • CA-5.8.124

          All documentation used in collateralised transactions must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

          Apr 08

        • CA-5.8.125

          The collateral arrangements must be properly documented, with a clear and robust procedure for the timely collection of collateral proceeds. Banks' procedures should ensure that any legal conditions required for declaring the default of the customer and timely collection of collateral are observed. In the event of the obligor's financial distress or default, the bank must have legal authority to sell or assign the receivables to other parties without consent of the receivables' obligors.

          Apr 08

      • b. Risk Management

        • CA-5.8.130

          The bank should have a documented process for collecting receivable payments in distressed situations. The requisite facilities for collection should be in place, even when the bank normally looks to the borrower for collections.

          Apr 08

        • CA-5.8.129

          The receivables pledged by a borrower should be diversified and not be unduly correlated with the borrower. Where the correlation is high, e.g. where some issuers of the receivables are reliant on the borrower for their viability or the borrower and the issuers belong to a common industry, the attendant risks should be taken into account in the setting of margins for the collateral pool as a whole. Receivables from affiliates of the borrower (including subsidiaries and employees) will not be recognised as risk mitigants.

          Apr 08

        • CA-5.8.128

          The bank must maintain a continuous monitoring process that is appropriate for the specific exposures (either immediate or contingent) attributable to the collateral to be utilised as a risk mitigant. This process may include, as appropriate and relevant, ageing reports, control of trade documents, borrowing base certificates, frequent audits of collateral, confirmation of accounts, control of the proceeds of accounts paid, analyses of dilution (credits given by the borrower to the issuers) and regular financial analysis of both the borrower and the issuers of the receivables, especially in the case when a small number of large-sized receivables are taken as collateral. Observance of the bank's overall concentration limits should be monitored. Additionally, compliance with loan covenants, environmental restrictions, and other legal requirements should be reviewed on a regular basis.

          Apr 08

        • CA-5.8.127

          The margin between the amount of the exposure and the value of the receivables must reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the bank's total exposures.

          Apr 08

        • CA-5.8.126

          The bank must have a sound process for determining the credit risk in the receivables. Such a process should include, among other things, analyses of the borrower's business and industry (e.g. effects of the business cycle) and the types of customers with whom the borrower does business. Where the bank relies on the borrower to ascertain the credit risk of the customers, the bank must review the borrower's credit policy to ascertain its soundness and credibility.

          Apr 08

      • c. Requirements for Recognition of other Collateral

        • CA-5.8.131

          CBB may, on a case by case basis, allow for recognition of the credit risk mitigating effect of certain other physical collateral if the bank can demonstrate that such collateral meets the following two standards:

          (a) Existence of liquid markets for disposal of collateral in an expeditious and economically efficient manner; and
          (b) Existence of well established, publicly available market prices for the collateral. CBB will seek to ensure that the amount a bank receives when collateral is realised does not deviate significantly from these market prices.
          Amended: April 2011
          Apr 08

        • CA-5.8.132

          In order for a given bank to receive recognition for additional physical collateral, it must meet all the standards in paragraphs CA-5.8.119 and CA-5.8.120, subject to the following modifications:

          (a) First Claim: Only first liens on, or charges over, collateral are permissible. As such, the bank must have priority over all other lenders to the realised proceeds of the collateral;
          (b) The loan agreement must include detailed descriptions of the collateral plus detailed specifications of the manner and frequency of revaluation;
          (c) The types of physical collateral accepted by the bank and policies and practices in respect of the appropriate amount of each type of collateral relative to the exposure amount must be clearly documented in internal credit policies and procedures and available for examination and/or audit review;
          (d) Bank credit policies with regard to the transaction structure must address appropriate collateral requirements relative to the exposure amount, the ability to liquidate the collateral readily, the ability to establish objectively a price or market value, the frequency with which the value can readily be obtained (including a professional appraisal or valuation), and the volatility of the value of the collateral. The periodic revaluation process must pay particular attention to "fashion-sensitive" collateral to ensure that valuations are appropriately adjusted downward of fashion, or model-year, obsolescence as well as physical obsolescence or deterioration; and
          (e) In cases of inventories (e.g. raw materials, work-in-process, finished goods, dealers' inventories of autos) and equipment, the periodic revaluation process must include physical inspection of the collateral.
          Amended: April 2011
          Apr 08