## _sdn1507annexii

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---

### Executive Summary and Background
- Purpose and scope:
  - Introduces a harmonized set of key attributes for high-quality securitization (HQS) (‘General Criteria’) to inform a principles-based definition of simple, transparent, and comparable forms of securitization.
  - Lays out specific principles for the structure of HQS (exclusion criteria, binding requirements, and alignment of interest) and requirements for greater disclosure of underlying asset quality and performance monitoring.
  - Introduces additional criteria for SME loans as securitized assets (‘Additional Criteria’) but does not consider jurisdiction- and asset class-specific criteria.
  - All proposed criteria aim to foster convergence of best market practice and create incentives for originators and issuers to maintain minimum standards of prudent lending and risk management.
- Basis and influences:
  - Synthesizes and augments elements from existing initiatives and market standards including EU Commission implementations in Solvency II, LCR and leverage ratio under CRR; EIOPA “Type 1 standard”; European Commission Green Paper on Building the Capital Markets Union; EBA (2014) Discussion Paper on “Simple, Standard and Transparent Securitizations”; ECB collateral eligibility (2010); Bank of England guidance (2010); BCBS/IOSCO joint consultative document (2014) in consultation with IAIS and IASB; German securitization standard (“Deutscher Verbriefungsstandard”); AFME review of HQS; EIF suggestions on HQS for SME debt finance.
- Common characteristics across prior approaches:
  - Restriction to asset structures with a real funding need (re-securitization is excluded).
  - Minimum credit rating threshold(s).
  - Exclusion of nonperforming loans and loans to self-certifying borrowers or credit-impaired borrowers at origination.
  - Homogeneous cash flows from underlying portfolios (no mixed pools, no re-securitizations).
  - Comprehensive documentation with detailed data about securitized assets and tranche valuation at launch and regularly.

### I. General Criteria — A. Asset characteristics: underwriting process and asset eligibility
- 1. Sound underwriting practices:
  - Securitized assets originated (or originated and acquired) in ordinary course of originator’s business with adequate borrower creditworthiness assessment.
  - Risk governance:
    - Established framework and operational processes for management of loan accounts, delinquency procedures and internal audits, applying to securitized and non-securitized assets.
    - Securitized assets selected as part of ongoing balance sheet operations (with seasoned, senior, and fully-disbursed loans only) without affecting organizational origination structure and distribution channel, including risk management and control.
  - No selection bias:
    - Securitized assets subject to same credit laws, prudential standards, and underwriting practices as non-securitized assets.
    - Securitized assets should not materially differ from non-securitized assets; credit process within originator's normal business practice.
    - Securitization process has no bearing on originator’s/issuer’s compliance with minimum prudential standards applicable to loan origination and impairment administration, including risk management and control processes.
  - Prohibition of self-certification:
    - Assets eligible only if origination includes complete verification of all obligor information relevant for credit assessment; excludes loans marketed and underwritten on premise that applicant information might not be verified (“self-certification”).
    - For residential loans or consumer credit (auto loans or leases, consumer loans or credit facilities), creditworthiness must be assessed in accordance with requirements set out in Art. 14 Par. 1 and Par. 2(a) of the Mortgage Credit Directive (Directive 2014/17/EU) and Art. 8 Par. 1 Consumer Credit Directive (Directive 2008/48/EC), respectively.
    - Effectively excludes flawed securitization models relying on unsound underwriting practices.
- 2. Strong funding relation to real economic activity and no re-securitization:
  - Transaction should directly support funding satisfying credit demand for investment by nonfinancial corporates and households.
  - Re-securitization is excluded because it introduces layering and complexity and removes transactions from the risk profile of real economic activity.
- 3. Asset eligibility (at issuance and at any time after issuance):
  - Business relevance:
    - Asset classes should represent a material type of asset class of the originator’s balance sheet.
    - Selection criteria correspond to general risk characteristics of same asset type in issuer’s overall loan portfolio at the “cut-off date”.
    - Securitized assets exhibit no systematic and/or material differences in credit-specific criteria (for example, funding purpose, maturity tenor, and/or lending conditions) and borrower type.
    - Loan-by-loan level data need to be issuance and on a regular basis.
    - The volume of a single transaction cannot exceed one-third of the issuer’s balance sheet for the duration of the transaction.
  - Asset characteristics:
    - Selection subject to limits on single group/region/industry and maturity concentration corresponding to threshold values established by capital assessment under Pillar II of CRR/CRD-IV (or similar criteria specified by the relevant NCA).
    - Limits on share of loans featuring balloon payments or switching interest rate could be additional restriction.
  - Asset quality:
    - Assets subject to an external review by an independent third-party that examines adequate valuation and risk assessment prior to issuance (“pool audit”).
  - Homogeneous cash flows, asset types, and portfolio diversification:
    - Portfolio should comprise only one type of asset; no general restriction on asset classes but included loans/leases should not be syndicated and/or inflation-linked.
    - Assets from related parties cannot be included.
    - Asset portfolio must be sufficiently granular in accordance with Arts. 261(1) and 261(2) of CRR.
  - Restricted use of derivatives/transferable financial instruments and full funding:
    - Underlying portfolio should not include derivatives without genuine hedging interest; derivatives may only be used for hedging foreign exchange and interest rate risk.
    - Securitized assets must not include transferable financial instruments, except instruments issued by the special purpose vehicle itself to accommodate master trust structures.
  - Domicile:
    - Assets originated in, and governed by the laws of, the same jurisdiction in which the issuer is incorporated.
    - Domicile must be in a jurisdiction with an internationally enforceable credit and securities law.
  - Encumbrance and enforceability:
    - Immediately prior to sale, title to the assets must be owned solely by the originator free from any security interest.
    - Each asset is an enforceable payment obligation of the obligor, free from right of termination, rescission, contractual set off (excluding set-off in relation to off-set or flexible mortgage loans), counterclaim or defense.
    - No restriction on transfer of assets not consented to by relevant parties and associated ancillary rights in effect.
  - No credit impairment of obligors and guarantors:
    - Assets must not include exposures to obligors (and/or guarantors) that are credit-impaired (that is, not in severe arrears for the past 12 months) or are in default under another financial obligation at time of issuance or when incorporated in the pool.
    - Assessment of credit impairment may be backward-looking (for example, bankruptcy, debt dismissal/reschedule or creditor enforcement within three years prior to date of origination, official register of persons with adverse credit history) or forward-looking (market accepted ECAI assessment or credit score indicating significant risk of non-payment relative to the average obligor/guarantor).
  - Positive balance and exclusion of nonperforming assets:
    - Each securitized asset has a positive net present value or outstanding principal balance; no securitized asset has more than one scheduled payment outstanding due and unpaid.
    - None of the securitized assets are overdrawn credit facilities, loans in arrears, nonperforming or defaulted loans, restructured loans or loans with delinquent associated payments (for example, insurance premiums), except clearly defined technical overdrafts.
  - Payment record of the borrower (and guarantor):
    - At time of issuance, each obligor (and guarantor, if applicable) has made at least one scheduled payment under the asset agreement.
  - Timings:
    - Time between the cut-off date of selecting eligible assets and the closing date of the actual asset portfolio should not exceed three months.

### I. General Criteria — B. Structural features
- 4. Asset transfer:
  - Assets shall be acquired by asset agreement through a risk transfer agreement enforceable against any third party and beyond the reach of the seller and its creditors including in seller insolvency (consistent with “true sale” or other form of credit risk transfer ensuring bankruptcy remoteness).
  - Additional conditions:
    - No severe clawback provisions in seller jurisdiction; no confidentiality provisions that restrict issuer’s exercise of ownership rights.
    - Asset agreement must comply with consumer protection legislation to the extent failure to comply would materially adversely affect enforceability or collectability.
    - If obligor consent to transfer is required, written evidence of such consent has been or will be received prior to issue date.
    - Risk transfer must be legal, contractually binding, and irrevocable and comply with governing laws to the extent failure to comply would materially adversely affect enforceability or collectability.
    - No asset agreement modification that adversely affects terms or that was entered into fraudulently by the obligor.
    - Transaction should not transfer to the investor significant market risk (for example, foreign exchange and/or interest rate risk) and/or risks unrelated to the risk profile of the underlying asset portfolio.

### 5. Risk retention: The compliance with HQS does not affect the obligation for the
- Risk retention requirement:
  - Originator/issuer should retain sufficient material net economic interest in the contractual performance of securitized assets (“skin in the game”) in full compliance with Articles 394-399 of CRR (fmr. Article 122a of CRD-II) and without any exemptions for certain asset structures and types of securitized assets.
  - The original lender or sponsor must retain, on an ongoing basis, a net economic interest of at least five percent of the securitization in one of the following ways (“minimum retention requirement”):
    - Vertical slice (retaining no less than five percent of the nominal value of each of the tranches sold or transferred to the investors);
    - Pari passu share (retaining no less than five percent of the nominal value of the securitized (revolving) exposures);
    - Random selection (retaining randomly selected exposures, equivalent to no less than five percent of the nominal amount of the securitized exposures); or
    - First loss piece (retention of the most junior tranche and, if necessary, other tranches having the same or more severe risk profile than those transferred or sold to investors, and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total to no less than five percent of the nominal value of the securitized exposures).
  - The volume of a single transaction cannot exceed a pre-defined limit of the issuer’s balance sheet for the duration of the transaction.
  - Note: the retention requirement for European issuers does not apply to specified exempt categories described in the source text (enumeration omitted here in accordance with content-selection rules).
- Payment process:
  - Self-liquidating asset portfolio and no reliance on borrowings and asset sales:
    - Scheduled payment obligations must be fully met by predicted cash flows from the asset portfolio, with included assets generating payments at least semiannually.
    - Repayment should not be dependent, in whole or in part, on borrowings and/or the sale of assets securing the underlying exposures; exposures may subsequently be rolled over or refinanced.
  - Payment structure and portfolio management:
    - Payment structure should be simple and transparent, with limited cash proceeds retained by the issuer.
    - Cash reserve should cover both principal and interest payments of the senior tranche for at least two interest payment dates (IPDs).
    - Non-revolving exposures should be amortizing and not actively managed; non-revolving structures with bullet payments would not comply.
    - Revolving structures must include provisions for early amortization upon predefined adverse events at least including:
      - Failure to generate sufficient new assets of at least similar credit quality,
      - Deterioration in credit quality of underlying exposures, and
      - Occurrence of an insolvency-related event with regard to the originator or the servicer.
  - Payment priority:
    - Noteholders are paid sequentially in order of the highest external credit rating after occurrence of a transaction-specific acceleration event.
  - Circularity of support mechanisms:
    - Transaction should not benefit from intragroup funding or committed/uncommitted contingent credit/liquidity arrangements with related parties.
  - Taxation:
    - If securitized assets are subject to withholding tax, this tax has been disclosed in the prospectus and the transaction is structured and cash flows calculated to fully account for such tax.
- Continuity provisions for servicing, derivatives counterparties and liquidity providers:
  - Servicing remains responsibility of the originator (or a pre-determined third-party agent), subject to pre-defined servicing standards including credit process, relationship management and insolvency proceedings.
  - Servicing terms should be the same for securitized and non-securitized loans, including continuity provisions so originator default/insolvency does not lead to servicing termination.
  - Documentation must include continuity provisions for replacement of servicer, derivatives counterparties, and liquidity providers upon their default or insolvency (“back-up servicing and counterparty replacement mechanism”).
  - Default is defined as missed payments of more than nine months.
  - A suspension of interest payments is not allowed.
- Investor rights and collateral access:
  - All voting and enforcement rights related to securitized assets are transferred from the issuer to the investors.
  - Clearly defined seniority structure governing all rights associated with liabilities of the securitization transaction.
  - If cash flows are secured by collateral, investors must have the most senior claim on the collateral.
  - Workout process of impaired assets involves pre-defined rules, control mechanisms, and internal audits, applying equally to securitized and non-securitized assets.
- Comprehensive documentation and reporting requirements:
  - Transactions must comply with disclosure requirements under Article 409 of CRR and the Regulatory Technical Standards (RTS) under Article 8b(3) of the CRA3 Regulation.
  - Issuers/originators should publish information on credit quality and performance of securitized assets, asset structure, cash flows, collateral, and any information necessary to conduct comprehensive stress tests.
  - If not incorporated in the EU, originators or sponsors required to disclose comprehensive loan-level data in compliance with generally accepted standards must make such data available to existing and potential investors and regulators at issuance and on a regular basis.
  - The following information should be provided publicly free of charge: (i) final version of the offering circular, (ii) the new issue and presale reports of the involved ECAIs (if available and approved for publication by the respective ECAIs), (iii) all investor reports.
  - Asset and transaction performance:
    - Detailed summary statistics on asset characteristics and performance must be updated periodically with quarterly frequency as a minimum in standardized formats satisfying Article 409 of CRR and the RTS under Article 8b (3) of CRA3 and approved by NCAs.
    - Transaction-related data should be more widely available in standardized machine-readable formats and made more reliable through tighter pre-origination due diligence and quality assurance processes.
    - Comprehensive loan-level data in compliance with generally accepted standards are made available to existing and potential investors and regulators at issuance and on a regular basis until the final maturity date.
    - The originator/issuer has to receive an “A1” compliance score by the European Datawarehouse (EDW).
  - Initial disclosure:
    - Prior to the issue date, the issuer publicly discloses (i) when the information about the transaction will be made available, (ii) where such information will be made available, and (iii) how investors will be able to access it; and confirms that, once made available, such information will remain available until the final maturity date.
    - The issuer also discloses the amount of the securities it intends to (i) pre-place privately with investors that are not a related party, (ii) retained by a related party, and (iii) publicly offered to investors that are not a related party.
  - Investor due diligence:
    - Detailed disclosure of asset pool characteristics and regular performance monitoring at both asset and transaction levels facilitate investor due diligence and align interests.
    - Reporting should be consistent with the CRA3 Regulation.
- Structural integrity and quality assessment:
  - All tranches above the lesser of the applicable minimum retention requirement and the most junior tranche need assessment by two or more ECAIs and must comply with rating and subordination requirements.
  - Rating requirement:
    - The most senior tranche is expected to be rated to the highest level achievable in the relevant jurisdiction on issuance and at any time thereafter; the amount of structural subordination supporting the senior tranche should receive an external credit assessment consistent with the minimum credit quality for collateral assets governed by the risk control standards of the Eurosystem.
  - Subordination requirement:
    - HQS designation can include all tranches above the greater of the first loss provision and the regulatory minimum retention requirement as long as:
      - (i) the credit quality of the respective tranche is enhanced compared to the credit quality of the entire pool and remains so at all times, and
      - (ii) relative seniority of the tranche remains unaffected by enforcement or acceleration notices (or similar events).
    - Possible additional structural criteria include limits on expected life of a tranche (for example, senior tranches with a legal maturity of no more than five years), excess spread trapping in favor of the senior tranche on collateral deterioration, and/or minimum coverage period for senior expenses for a certain number of IPDs.
  - Portfolio assessment:
    - Credit quality (including tenor) of securitized assets is not lower than that of comparable assets retained by the originator or previously securitized.
    - Assets subject to an external review by an independent third-party (“pool audit”) according to agreed procedures of a random sample as follows:
      - Static asset portfolios: (i) a review on or about the issue date, or (ii) a general review of originator’s overall portfolio (or a randomly selected sample) from which securitized assets were selected within the last 12 months prior to the issue date;
      - Revolving asset portfolios (single issuance): a review either (i) on or about the issue date or (ii) at the earlier of 12 months following the issue date and the date on which 40 percent or more of the asset portfolio is replenished; and
      - Revolving asset portfolios (repeat issuance): a review on or about the issue date if either no review has taken place in the 12 months prior to the issue date or no audit was required since no new issuance or replenishment occurred in the preceding 12 months.
- Listing and trading requirement:
  - The transaction shall be listed on a regulated market/recognized exchange, tradable on generally accepted repurchase markets, or admitted to trading on another organized venue, with a robust market infrastructure in jurisdictions with an internationally recognized supervisory authority deemed sufficiently compliant with international standards and codes based on the most recent IMF FSAP assessment or by a peer assessment of a supra-regional association of supervisory authorities.
- Prospectus requirements:
  - Prospectus must meet the requirements of the Prospectus Directive (Directive 2003/71/EC) in combination with Article 4 of Directive 2010/73/EU.
  - The preliminary prospectus (‘red herring’) must be available to investors at least two weeks before the closing date and should contain all information required for comprehensive valuation and assessment of investment risks.
  - Prospectus provides overview of transaction structure, credit enhancement mechanisms, mechanics of the payment process (“cash flow waterfall”), payment frequency of securitized assets, and servicing processes and standards.
  - Prospectus describes underwriting criteria, processes and standards applied in originating securitized assets.
  - Prospectus contains sufficient information about the risk transfer and securitized assets (based on available loan-level data) and associated investment risks in accordance with the Prospectus Directive (2003/71/EC).
  - Rights, responsibilities and obligations of all relevant parties are described in detail and the prospectus discloses entities with ongoing involvement and whether participation is contingent on external assessments or rating-triggered remedial measures.
  - A minimum of two joint lead managers is mandatory for each transaction, explicitly named in the prospectus.
  - Transaction shall be admitted to trading on a regulated market in jurisdictions with an internationally recognized supervisory authority deemed sufficiently compliant with international standards and codes based on the most recent IMF FSAP assessment or membership of supra-regional association of supervisory authorities.
  - Issuer confirms belief that secondary market trading activity will occur in compliance with trading transparency requirements.
  - Registration for trading does not mean that the securitization is actually listed.
  - Prospectus discloses all relevant general representations, warranties and undertakings given by the originator/issuer including compliance with eligibility and replenishment criteria, origination and servicing standards, title and ownership, validity of asset/risk transfer, and no credit impairment of obligors.

*This Annex was written by Andreas A. Jobst. May 7, 2015.*

### 13. Securitization transactions where the underlying assets are SME loans should comply with
- A. Definition of asset class:
  - SME obligor and minimum standard:
    - Asset portfolio comprises loans to firms that meet the EC definition of SME with a standalone credit assessment (that is, ≤250 employees, ≤€50 million revenues, and ≤€43 million balance sheet size) in accordance with EU recommendation 2003/361.
    - Securitized assets would conform to the terms and conditions for EIB-intermediated lending to SMEs.
  - Type of SME lending:
    - Permissible types:
      - (i) financing leases to SME borrowers without residual value (other forms of leases not permissible),
      - (ii) credit lines and guarantees,
      - (iii) promissory note bonds,
      - (iv) debentures/certificates of indebtedness,
      - (v) development/concessionary loans, and/or
      - (vi) other loans that meet the above requirements of SME-related lending with a real investment purpose.
  - Ongoing balance sheet operation and creditor track record:
    - Asset portfolio should include loans originated to obligors with whom the originator maintained an uninterrupted borrowing relationship over at least one annual reporting period.
- B. Structural characteristics:
  - Granularity and diversification (at the cut-off date):
    - (i) comprises loans to at least 100 different obligors;
    - (ii) the aggregate outstanding principal balance from any a single obligor does not exceed an amount equal to 0.75 percent of the aggregate outstanding principal balance of the securitized asset portfolio; and
    - (iii) securitized assets exhibit no systematic and/or material differences in terms of credit-specific criteria relative to the general risk characteristics of the same type of asset in the issuer’s overall loan portfolio.
  - Payment profile:
    - The aggregate outstanding principal balance of the securitized assets without any scheduled principal payments up to five years after issue date is not greater than an amount equal to 25 percent of the aggregate outstanding principal balance of all securitized assets at time of issuance.

*Source: _sdn1507annexii - 5. Risk retention: The compliance with HQS does not affect the obligation for the*

### Executive Summary and Background

### Executive Summary and Background

### Purpose and scope
- Introduces a harmonized set of key attributes for high-quality securitization (HQS) (‘General Criteria’) to inform a principles-based definition of simple, transparent, and comparable forms of securitization.
- Lays out specific principles for the structure of HQS (exclusion criteria, binding requirements, and alignment of interest) and requirements for greater disclosure of underlying asset quality and performance monitoring.
- Introduces additional criteria for SME loans as securitized assets (‘Additional Criteria’) but does not consider jurisdiction- and asset class-specific criteria.
- All proposed criteria aim to foster convergence of best market practice and create incentives for originators and issuers to maintain minimum standards of prudent lending and risk management.

### Basis and influences
- The proposed attributes synthesize and augment elements from several existing initiatives and market standards, including:
  - The European Commission’s implementation of HQS concepts in contexts such as Solvency II and the liquidity coverage ratio (LCR) and leverage ratio for EU banks under CRR.
  - EIOPA’s recommendation on a “Type 1 standard” for securitization transactions.
  - The European Commission’s Green Paper on Building the Capital Markets Union and the EBA (2014) Discussion Paper on “Simple, Standard and Transparent Securitizations”.
  - Collateral eligibility criteria for ECB refinancing operations (2010) and Bank of England guidance (2010).
  - The BCBS/IOSCO joint consultative document on “Simple, Transparent and Comparable Securitizations” (2014), in consultation with IAIS and IASB.
  - The German securitization standard (“Deutscher Verbriefungsstandard”) by True Sale International GmbH.
  - AFME’s review of HQS (Hopkin, Bak, and Ulker 2014) and EIF suggestions on HQS for SME debt finance.

### Common characteristics across prior approaches
- The most salient common characteristics reflected in this proposal include:
  - Restriction to asset structures with a real funding need (re-securitization is excluded).
  - Minimum credit rating threshold(s).
  - Exclusion of nonperforming loans and loans to self-certifying borrowers or credit-impaired borrowers at the time of loan origination.
  - Homogeneous cash flows from underlying portfolios (securitization of mixed pools and re-securitizations are excluded).
  - Comprehensive documentation by providing detailed data about securitized assets and the valuation of tranches at launch and on a regular basis.

---

### I. General Criteria — A. Asset characteristics: underwriting process and asset eligibility

- 1. Sound underwriting practices: Securitized assets have been originated, or originated and acquired, in the ordinary course of the originator’s business, subject to an adequate process for assessing the creditworthiness of the borrower.
  - i. Risk governance:
    - Established framework and necessary operational processes for management of loan accounts, delinquency procedures and internal audits, applying to both securitized and non-securitized assets.
    - Securitized assets selected as part of ongoing balance sheet operations (with seasoned, senior, and fully-disbursed loans only) without affecting organizational structure and distribution channel supporting origination, including risk management and control.
  - ii. No selection bias:
    - Securitized assets subject to same credit laws, prudential standards, and underwriting practices as non-securitized assets.
    - Securitized assets should not materially differ from non-securitized assets; credit process within originator's normal business practice.
    - Securitization process has no bearing on originator’s/issuer’s compliance with minimum prudential standards applicable to loan origination and impairment administration, including risk management and control processes.
  - iii. Prohibition of self-certification:
    - Assets eligible only if origination includes complete verification of all obligor information relevant for credit assessment, excluding loans marketed and underwritten on premise that applicant information might not be verified (“self-certification”).
    - For residential loans or consumer credit (auto loans or leases, consumer loans or credit facilities), creditworthiness must be assessed in accordance with requirements set out in Art. 14 Par. 1 and Par. 2(a) of the Mortgage Credit Directive (Directive 2014/17/EU) and Art. 8 Par. 1 Consumer Credit Directive (Directive 2008/48/EC), respectively.
    - This requirement effectively excludes flawed securitization business models relying on unsound underwriting practices.

- 2. Strong funding relation to real economic activity and no re-securitization:
  - Transaction should directly support funding satisfying credit demand for investment by nonfinancial corporates and households.
  - Re-securitization introduces layering and complexity and removes transactions from the risk profile of real economic activity.

- 3. Asset eligibility: Securitized assets (and ancillary rights and financing agreements, if applicable) meet the following eligibility criteria at the time of issuance and at any time after issuance.
  - i. Business relevance:
    - Asset classes should represent a material type of asset class of the originator’s balance sheet.
    - Selection criteria correspond to general risk characteristics of same asset type in issuer’s overall loan portfolio at the “cut-off date” (date when portfolio is selected).
    - Securitized assets exhibit no systematic and/or material differences in credit-specific criteria (for example, funding purpose, maturity tenor, and/or lending conditions) and borrower type.
    - Loan-by-loan level data need to be issuance and on a regular basis.
    - The volume of a single transaction cannot exceed one-third of the issuer’s balance sheet for the duration of the transaction.
  - ii. Asset characteristics:
    - Selection of assets subject to limits on single group/region/industry and maturity concentration corresponding to threshold values established by capital assessment under Pillar II of CRR/CRD-IV (or similar criteria specified by the relevant NCA).
    - Limits on share of loans featuring balloon payments or switching interest rate could be additional restriction.
  - iii. Asset quality:
    - Assets should be subject to an external review by an independent third-party that examines adequate valuation and risk assessment prior to issuance (“pool audit”).
  - iv. Homogeneous cash flows, asset types, and portfolio diversification:
    - Portfolio should comprise only one type of asset to increase soundness, simplicity, and transparency.
    - No general restriction on asset classes, but included loans/leases should not be syndicated and/or inflation-linked.
    - Assets from related parties cannot be included in the reference portfolio.
    - Asset portfolio must be sufficiently granular in accordance with Arts. 261(1) and 261(2) of CRR.
  - v. Restricted use of derivatives/transferable financial instruments and full funding:
    - Underlying asset portfolio should not include derivatives instruments without genuine hedging interest.
    - Derivatives may only be used for hedging foreign exchange and interest rate risk.
    - Securitized assets must not include transferable financial instruments, except financial instruments issued by the special purpose vehicle itself to accommodate master trust structures.
  - vi. Domicile:
    - Securitized assets were originated in, and are governed by the laws of, the same jurisdiction in which the issuer is incorporated.
    - Domicile must be in a jurisdiction with an internationally enforceable credit and securities law.
  - vii. Encumbrance and enforceability:
    - Immediately prior to sale by the originator, title to the assets must be owned solely by the originator free from any security interest.
    - Each securitized asset is an enforceable payment obligation of the corresponding obligor, free from right of termination, rescission, contractual set off (excluding set-off in relation to off-set or flexible mortgage loans), counterclaim or defense.
    - No restriction on transfer of assets not consented to by relevant parties and associated ancillary rights in effect.
  - viii. No credit impairment of obligors and guarantors:
    - Securitized assets must not include exposures to obligors (and/or guarantors) that are credit-impaired (that is, not in severe arrears for the past 12 months) or are in default under another financial obligation at time of issuance or when incorporated in the pool.
    - Assessment of credit impairment may be backward-looking (for example, obligor/guarantor (i) declared bankruptcy, agreed debt dismissal/reschedule or had court grant creditor enforcement within three years prior to date of origination, or (ii) is on an official register of persons with adverse credit history) or forward-looking (for example, obligor/guarantor (i) has an assessment of creditworthiness by a market accepted ECAI or has a credit score indicating significant risk of non-payment relative to the average obligor/guarantor for type of loan in either the relevant industry or jurisdiction (whichever is greater), that is, significantly higher expected losses compared to the average expected losses).
    - Note: This definition of credit-impaired obligors draws largely on EIOPA (2013).
  - ix. Positive balance and exclusion of nonperforming assets:
    - Each securitized asset has a positive net present value or outstanding principal balance; no securitized asset has more than one scheduled payment outstanding due and unpaid.
    - None of the securitized assets are overdrawn credit facilities, loans in arrears, nonperforming or defaulted loans, restructured loans or loans with delinquent associated payments (for example, insurance premiums), except clearly defined technical overdrafts.
  - x. Payment record of the borrower (and guarantor):
    - At time of issuance, each obligor (and guarantor, if applicable) has made at least one scheduled payment under the asset agreement to preclude securitization of newly originated loans without a payment record.
  - xi. Timings:
    - Time between the cut-off date of selecting eligible assets and the closing date of the actual asset portfolio should not exceed three months.

---

### I. General Criteria — B. Structural features

- 4. Asset transfer:
  - Securitized assets shall be acquired by means of an asset agreement through a risk transfer agreement that must be enforceable against any third party, and be beyond the reach of the seller (originator, sponsor or original lender) and its creditors including in the event of the seller’s insolvency (consistent with “true sale” or any other form of credit risk transfer that ensures bankruptcy remoteness of the securitized assets and collateral access by investors in cases of issuer insolvency).
  - Additional conditions:
    - i. No severe clawback provisions:
      - No severe clawback provisions in jurisdictions where seller is incorporated, including rules under which sale can be invalidated by the liquidator solely because it was concluded within a certain “suspect period” before insolvency.
      - No confidentiality provisions that restrict issuer’s exercise of its rights as owner of securitized assets.
    - ii. Obligor rights:
      - Asset agreement concluded in compliance with all applicable consumer protection legislation to the extent failure to comply would materially adversely affect enforceability or collectability.
      - If securitized asset requires obligor consent to transfer rights, written evidence of such consent has been, or prior to issue date will be, received.
    - iii. Validity of transaction:
      - Risk transfer governed by asset agreement is legal, contractually binding, and irrevocable.
      - Complies with laws of governing jurisdiction to the extent failure to comply would have material adverse effect on enforceability or collectability.
    - iv. Modification and fraud:
      - No asset agreement has been/is subject to any modification that adversely affects terms of any securitized asset and/or has been entered into fraudulently by the obligor.
    - v. Limits to risk transfer:
      - Transaction should not transfer to the investor significant market risk (for example, foreign exchange and/or interest rate risk) and/or risks that are unrelated to the risk profile of the underlying asset portfolio.

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*This Annex was written by Andreas A. Jobst. May 7, 2015.*

### 5. Risk retention: The compliance with HQS does not affect the obligation for the

### 5. Risk retention: The compliance with HQS does not affect the obligation for the

### Risk retention requirement
- The originator/issuer should retain sufficient material net economic interest in the contractual performance of securitized assets (“skin in the game”) in full compliance with the provisions under Articles 394-399 of CRR (fmr. Article 122a of CRD-II) and without any exemptions for certain asset structures and types of securitized assets.
- The original lender or sponsor of a securitization transaction would need to retain, on an ongoing basis, a net economic interest of at least five percent of the securitization in one of the following ways (“minimum retention requirement”):
  - Vertical slice (that is, retaining no less than five percent of the nominal value of each of the tranches sold or transferred to the investors);
  - Pari passu share (that is, retaining no less than five percent of the nominal value of the securitized (revolving) exposures);
  - Random selection (that is, retaining randomly selected exposures, equivalent to no less than five percent of the nominal amount of the securitized exposures); or
  - First loss piece (that is, retention of the most junior tranche of the transaction) and, if necessary, other tranches having the same or more severe risk profile than those transferred or sold to investors, and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total to no less than five percent of the nominal value of the securitized exposures.
- The volume of a single transaction cannot exceed a pre-defined limit of the issuer’s balance sheet for the duration of the transaction.
- Note: the retention requirement for European issuers does not apply to specified exempt categories described in the source text (enumeration omitted here in accordance with content-selection rules).

### Payment process
- Self-liquidating asset portfolio and no reliance on borrowings and asset sales:
  - Scheduled payment obligations must be fully met by the predicted cash flows from the asset portfolio, with included assets generating payments at least semiannually.
  - The repayment should not be dependent, in whole or in part, actually or potentially, on borrowings and/or the sale of assets securing the underlying exposures; however, this shall not prevent such exposures from being subsequently rolled over or refinanced.
- Payment structure and portfolio management:
  - The payment structure should be simple and transparent, with a limited amount of cash proceeds from securitized assets being retained by the issuer.
  - The cash reserve should cover both principal and interest payments of the senior tranche of the transaction for at least two interest payment dates (IPDs).
  - Non-revolving exposures should be amortizing and not be actively managed; non-revolving structures with bullet payments would not comply with this pass-through profile.
  - Revolving structures must include provisions for early amortization of all payments at the occurrence of pre-defined adverse events, which shall include, at a minimum, all of the following:
    - The failure to generate sufficient new assets of at least similar credit quality as the existing asset portfolio underlying the structure,
    - The deterioration in the credit quality of the underlying exposures, and
    - The occurrence of an insolvency-related event with regard to the originator or the servicer.
- Payment priority:
  - Noteholders are paid sequentially in order of the highest external credit rating after the occurrence of a transaction-specific acceleration event.
- Circularity of support mechanisms:
  - The transaction should not benefit from intragroup funding or committed/uncommitted contingent credit/liquidity arrangements with related parties to avoid that an originator/sponsor can also act as provider of structural support.
- Taxation:
  - If some or securitized assets are subject to withholding tax in the relevant jurisdiction, this tax has been disclosed in the prospectus and the transaction is structured and the cash flows calculated in such a way as to fully account for such tax.

### Continuity provisions for servicing, derivatives counterparties and liquidity providers
- Servicing shall remain the responsibility of the originator (or a pre-determined third-party agent), subject to pre-defined servicing standards including the credit process, relationship management and insolvency proceedings.
- Servicing terms and conditions should be the same for securitized and non-securitized loans, including servicing continuity provisions so that the default and/or insolvency of the originator should not lead to the termination of servicing.
- Documentation must include continuity provisions for replacement of the servicer, derivatives counterparties, and liquidity providers upon their default or insolvency (“back-up servicing and counterparty replacement mechanism”).
- Default is defined as missed payments of more than nine months.
- A suspension of interest payments is not allowed.

### Investor rights and collateral access
- All voting and enforcement rights related to the securitized assets are transferred from the issuer to the investors.
- There is a clearly defined seniority structure governing all rights associated with the liabilities of the securitization transaction.
- If cash flows are secured by collateral, investors must have the most senior claim on the collateral.
- The workout process of impaired assets involves pre-defined rules, control mechanisms, and internal audits, applying equally to securitized and non-securitized assets.

### Comprehensive documentation and reporting requirements
- Scope of disclosure:
  - Transactions must comply with the disclosure requirements for securitization transactions under Article 409 of CRR and the Regulatory Technical Standards (RTS) under Article 8b(3) of the CRA3 Regulation.
  - Issuers/originators should publish information on credit quality and performance of securitized assets, asset structure, cash flows, collateral, and any information necessary to conduct comprehensive stress tests.
  - If not incorporated in the EU, originators or sponsors required to disclose comprehensive loan-level data in compliance with generally accepted standards must make such data available to existing and potential investors and regulators at issuance and on a regular basis.
  - The following information should be provided publicly free of charge: (i) final version of the offering circular, (ii) the new issue and presale reports of the involved ECAIs (if available and approved for publication by the respective ECAIs), (iii) all investor reports.
- Asset and transaction performance:
  - Detailed summary statistics on asset characteristics and performance must be updated periodically with quarterly frequency as a minimum in standardized formats satisfying Article 409 of CRR and the RTS under Article 8b (3) of CRA3 and approved by NCAs.
  - Transaction-related data should be more widely available in standardized machine-readable formats and made more reliable through tighter pre-origination due diligence and quality assurance processes.
  - Comprehensive loan-level data in compliance with generally accepted standards are made available to existing and potential investors and regulators at issuance and on a regular basis until the final maturity date.
  - The originator/issuer has to receive an “A1” compliance score by the European Datawarehouse (EDW).
- Initial disclosure:
  - Prior to the issue date, the issuer publicly discloses (i) when the information about the transaction will be made available, (ii) where such information will be made available, and (iii) how investors will be able to access it; and confirms that, once made available, such information will remain available until the final maturity date.
  - The issuer also discloses the amount of the securities it intends to (i) pre-place privately with investors that are not a related party, (ii) retained by a related party, and (iii) publicly offered to investors that are not a related party.
- Investor due diligence:
  - Detailed disclosure of asset pool characteristics and regular performance monitoring at both asset and transaction levels facilitate investor due diligence and align interests.
  - Reporting should be consistent with the CRA3 Regulation.

### Structural integrity and quality assessment
- All tranches above the lesser of the applicable minimum retention requirement and the most junior tranche need assessment by two or more ECAIs and must comply with rating and subordination requirements.
- Rating requirement:
  - The most senior tranche is expected to be rated to the highest level achievable in the relevant jurisdiction on issuance and at any time thereafter; the amount of structural subordination supporting the senior tranche should receive an external credit assessment consistent with the minimum credit quality for collateral assets governed by the risk control standards of the Eurosystem.
- Subordination requirement:
  - HQS designation is not limited to senior tranches only and can include all tranches above the greater of the first loss provision and the regulatory minimum retention requirement as long as:
    - (i) the credit quality of the respective tranche is indeed enhanced compared to the credit quality of the entire pool of underlying exposures, and remains so at all times, and
    - (ii) relative seniority of the tranche remains unaffected by enforcement or acceleration notices (or similar events).
  - Possible additional structural criteria include limits on expected life of a tranche (for example, senior tranches with a legal maturity of no more than five years), excess spread trapping in favor of the senior tranche on collateral deterioration, and/or minimum coverage period for senior expenses for a certain number of IPDs.
- Portfolio assessment:
  - The credit quality (including tenor) of securitized assets is not lower than that of comparable assets retained by the originator or previously securitized.
  - Assets should be subject to an external review by an independent third-party (“pool audit”) according to agreed procedures of a random sample as follows:
    - Static asset portfolios: (i) a review of the securitized assets on or about the issue date, or (ii) a general review of the originator’s overall portfolio (or a randomly selected sample) from which the securitized assets were selected within the last 12 months prior to the issue date;
    - Revolving asset portfolios (single issuance): a review of the securitized assets either (i) on or about the issue date or (ii) at the earlier of 12 months following the issue date and the date on which 40 percent or more of the asset portfolio is replenished; and
    - Revolving asset portfolios (repeat issuance): a review of the securitized assets on or about the issue date if either no review has taken place in the 12 months prior to the issue date or no audit of the securitized assets was required since no new issuance or replenishment of the relevant asset pool had occurred in the preceding 12 months.

### Listing and trading requirement
- The transaction shall be listed on a regulated market/recognized exchange, tradable on generally accepted repurchase markets, or admitted to trading on another organized venue, with a robust market infrastructure in jurisdictions with an internationally recognized supervisory authority deemed sufficiently compliant with international standards and codes based on the most recent IMF FSAP assessment or by a peer assessment of a supra-regional association of supervisory authorities.

### Prospectus requirements
- The prospectus ensures sufficient information on the transaction and the securitized assets is readily available to investors and should meet the requirements of the Prospectus Directive (Directive 2003/71/EC) in combination with Article 4 of Directive 2010/73/EU.
- The preliminary prospectus (‘red herring’) must be available to investors at least two weeks before the closing date and should contain all information required for comprehensive valuation and assessment of investment risks.
- Structure and payment process:
  - The prospectus provides an overview of (i) the transaction structure, (ii) characteristics of any credit enhancement mechanisms, (iii) the mechanics of the payment process (“cash flow waterfall”), including the payment frequency of the securitized assets, and (iv) the processes and standards applied in servicing securitized assets.
- Underwriting of securitized assets:
  - The prospectus describes the criteria, processes and standards applied in originating the securitized assets.
- Asset and risk transfer:
  - The prospectus contains sufficient information about the risk transfer together with a description of the securitized assets (based on available loan-level data) and associated investment risks in accordance with the Prospectus Directive (2003/71/EC).
- Role and assessment of relevant parties:
  - Rights, responsibilities and obligations of all relevant parties are described in detail.
  - The prospectus discloses entities with ongoing involvement and whether participation is contingent on their external assessment of creditworthiness and any rating-triggered remedial measures (collateral, third-party guarantee, replacement).
- Lead managers:
  - A minimum of two joint lead managers is mandatory for each transaction, explicitly named in the prospectus.
- Trading:
  - The transaction shall be admitted to trading on a regulated market in jurisdictions with an internationally recognized supervisory authority deemed sufficiently compliant with international standards and codes based on the most recent IMF FSAP assessment or the membership of supra-regional association of supervisory authorities.
  - The issuer confirms belief that secondary market trading activity will occur in compliance with all applicable regulatory requirements relating to trading transparency.
  - Registration for trading does not mean that the securitization is actually listed.
- General representations, warranties and undertakings:
  - The prospectus discloses all relevant general representations, warranties and undertakings given by the originator/issuer in respect of the securitized assets, including areas such as compliance with eligibility and replenishment criteria, origination and servicing standards, title and ownership, validity of asset/risk transfer and no untrue information, validity and enforceability of claims, no adverse claims or other pledges, and no credit impairment of obligors.

*Source: _sdn1507annexii - 5. Risk retention: The compliance with HQS does not affect the obligation for the*

### 13.  Securitization transactions where the underlying assets are SME loans should comply with

### 13.  Securitization transactions where the underlying assets are SME loans should comply with

### A. Definition of asset class

- SME obligor and minimum standard:
  - The asset portfolio comprises loans to firms that meet the EC definition of SME with a standalone credit assessment (that is, ≤250 employees, ≤€50 million revenues, and ≤€43 million balance sheet size) in accordance with EU recommendation 2003/361.
  - Securitized assets would conform to the terms and conditions for EIB-intermediated lending to SMEs.

- Type of SME lending:
  - The type of SME-related credit obligation is clearly defined to be one or more of the following types:
    - (i) financing leases to SME borrowers without residual value (that is, other forms of leases are not permissible),
    - (ii) credit lines and guarantees,
    - (iii) promissory note bonds,
    - (iv) debentures/certificates of indebtedness,
    - (v) development/ concessionary loans, and/or
    - (vi) other loans that meet the above requirements of SME-related lending with a real investment purpose.

- Ongoing balance sheet operation and creditor track record:
  - The asset portfolio should only include loans that were originated to obligors with whom the originator maintained an uninterrupted borrowing relationship over at least one annual reporting period.

### B. Structural characteristics

- Granularity and diversification:
  - At the cut-off date the asset portfolio satisfies the following conditions:
    - (i) it comprises loans to at least 100 different obligors;
    - (ii) the aggregate outstanding principal balance from any a single obligor does not exceed an amount equal to 0.75 percent of the aggregate outstanding principal balance of the securitized asset portfolio; and
    - (iii) securitized assets exhibit no systematic and/or material differences in terms of credit-specific criteria relative to the general risk characteristics of the same type of asset in the issuer’s overall loan portfolio.

- Payment profile:
  - The aggregate outstanding principal balance of the securitized assets without any scheduled principal payments up to five years after issue date is not greater than an amount equal to 25 percent of the aggregate outstanding principal balance of all securitized assets at time of issuance.

*Source: _sdn1507annexii - 13.  Securitization transactions where the underlying assets are SME loans should comply with*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/ft/sdn/2015/_sdn1507annexii.pdf_