Eligibility Criteria and Conditions for Accepting Asset-Backed Commercial Paper (ABCP) as Collateral for the Bank of Canada's Standing Liquidity Facility (SLF)
On 5 March 2008, the Bank released for comment its proposed eligibility criteria for accepting ABCP and noted that two broad policy objectives guided the Bank's assessment. First, the eligibility criteria should mitigate any risks to the Bank that might be associated with accepting ABCP securities as collateral for the SLF. Second, the eligibility criteria should facilitate the development of a well-functioning market for ABCP by promoting more transparency for investors and by encouraging an active secondary market for these securities.
Comments were received from 11 market participants and are summarized in the attached document. Overall, participants supported the initiative and were open to increasing the transparency of ABCP. Some of the issues raised will, however, require additional time to assess, particularly those related to previously securitized assets and associated disclosure practices. The Bank of Canada intends to continue to review the criteria applied to ABCP and will announce the results of that review no later than 30 June 2009.
Effective immediately, the following eligibility criteria and conditions will apply to ABCP as collateral for the Bank of Canada's Standing Liquidity Facility:
The Bank will consider ABCP programs that meet the following criteria:
- The program must be sponsored by a deposit-taking institution that is federally or provincially regulated and that has a minimum stand-alone credit rating equivalent to at least A. 1 The credit-rating requirement must be evidenced by the sponsor receiving the equivalent of at least an A as the second-highest rating from a minimum of two senior, unsecured, long-term credit ratings.
- The liquidity agreement(s) must obligate the liquidity provider to provide funding, except in the event of insolvency of the conduit or under defined circumstances related to the default rate of the underlying assets.
- The program must not contain any actual or potential exposure to assets that were securitized prior to being acquired by the conduit, with the exception of National Housing Act mortgage-backed securities.
- The program must not utilize financial leverage to acquire assets.
In addition to the above criteria, the following transparency requirements also apply:
- At the time of a request to review an ABCP program, the Bank must receive a single, concise document that is provided by and validated by the sponsor, and that includes all relevant investment information.
- This document must be accessible to all investors.
- The sponsor must agree to provide timely disclosure to all investors of any significant change to the information contained in this document.
- At a minimum, the relevant investment information to be disclosed in this document must include:
- the identity of the sponsor, the financial services agent or administrative agent, as well as the liquidity providers.
- the range of assets that may be held by the program, including maximum or minimum proportion, if applicable, and when/how asset composition could change.
- evidence that assets are not acquired by financial leverage or were not securitized prior to being acquired by the conduit (except National Housing Act mortgage-backed securities).
- characteristics of the asset pools, including, at a minimum: composition, foreign currency exposures, performance measures, credit enhancements, number of sellers and obligors, average remaining term and hedging methods. Other information, such as current payment speeds and geographic locations, should be disclosed if relevant to the investor.
- asset performance triggers and their consequences for investors.
- where the investor can obtain updates of relevant investment information.
- the nature of the liquidity facilities, including the amount of support from each liquidity provider.
- the nature and amount of program-wide credit enhancements.
- the flow of funds, including payment allocations, rights, and distribution priorities.
The Bank will also consult other available documents, including credit-rating reports, to assess whether an ABCP program meets its criteria.
For those programs that qualify, the following conditions will apply:
- The pledgor may not be the sponsor, financial services agent, or administrative agent. Nor can the pledgor provide liquidity support to the program.
- The ABCP has received the highest possible short-term credit rating from at least two rating agencies.
- Only senior tranches will be accepted.
- The security must not contain an embedded option, such as extendability.
- No more than 20 per cent of the value of the collateral pledged by one institution can be ABCP sponsored by a single institution.
- Only Canadian-dollar securities are eligible to be pledged as collateral.
- The margin requirement is 7.5 per cent (adjusted by the term to maturity divided by 365).
The Bank retains the right to refuse any ABCP or ABCP program for which the risk to the Bank is inappropriately high.