DRAFT SECURITIZATION RISK MANAGEMENT GUIDELINE April 2009 Securitization Risk Management Guideline 1 Autorité des marchés financiers April 2009March 2019 Mois et année DRAFT DRAFT SECURITIZATION RISK MANAGEMENT GUIDELINE Initial publication: April 2009 Updated: March 2019 Securitization Risk Management Guideline 2 Autorité des marchés financiers April 2009March 2019 DRAFT TABLE OF CONTENTS Preamble ............................................................................................................. 4 Scope ............................................................................................................. 6 Coming into effect and updating ............................................................................. 7 Introduction ............................................................................................................. 8 1. Securitization risk management ....................................................................... 8 1.1 Securitization risk management .................................................................. 8 2. Risk management related to classic and synthetic securitizations ............. 12 2.1 Securitization process management ......................................................... 12 2.2 Scenario analyses and stress tests ........................................................... 19 3. Process of developing criteria for simple, transparent and comparable (STC) securitizations .................................................................................................. 20 3.1 Eligibility criteria for long-term STC securitizations .................................... 21 3.2 Eligibility criteria for short-term STC securitizations ................................... 32 4. Supervision of sound and prudent management practices .......................... 45 Appendix 1 Possible securitization roles assumed by financial institutions .. 47 Securitization Risk Management Guideline 3 Autorité des marchés financiers April 2009March 2019 DRAFT Preamble The Autorité des marchés financiers (“AMF") establishes guidelines”) has established this guideline setting out its expectations with respect to financial institutions’ legal requirement to follow sound and prudent management practices. These guidelinesThis guideline therefore covercovers the execution, interpretation and application of this requirement. In setting out its expectations, the AMF favours a principles-based approach rather than a specific rules-based approach. As such, the guidelines provide financial institutions with the necessary latitude to determine the requisite strategies, policies and procedures for the implementation of such management principles and to apply sound practices based on the nature, size and complexity of their activities as well as their risk profile. In this respect, a guideline illustrates how to comply with the principles set out therein. AMF Note: The AMF considers governance, integrated risk management and compliance (GRC) as the foundation stones for sound and prudent management of financial institutions and, consequently, as the basis for the prudential framework provided by the AMF. This guideline is part of this approach and sets out the AMF'sAMF’s expectations regarding the sound and prudent securitization risk management practices. Introduction Securitization is a technique used by financial institutions in particular to manage supplemental cash flows. This technique, which consists in transforming generally illiquid assets into securities that can be traded in the capital markets (asset-backed securities (ABS)), necessitates a relatively detailed execution process involving multiple parties. Appendix 1 explains the concept of securitization, the roles a financial institution may assume as part of a securitization, and the risks arising from securitization. Appendix 2 presents a securitization process diagram. An English-French glossary of securitization terms is provided in Appendix 3. Securitization exposes a financial institution to several risks, including credit, market, liquidity, operational and legal risk. In view of these numerous risks, securitization can be highly complex. Inadequate management or a misunderstanding of securitization may therefore threaten an institution's strength and, ultimately, tarnish its reputation. The core principles and guidance published by the Basel Committee on Banking Supervision ("Basel Committee") clearly explain the need for financial institutions to manage their risks in a sound manner. Regulators are encouraged to provide financial institutions with the framework to do so. The AMF supports the principles and guidance published by the Basel Committee that foster sound and prudent management practices. Pursuant to the authority1 conferred upon it under the Act respecting financial services cooperatives ("FSCA"), the AMF is 1 An Act respecting financial services cooperatives, R.S.Q. c. C-67.3, s. 565. Securitization Risk Management Guideline 4 Autorité des marchés financiers April 2009March 2019 DRAFT issuing this guideline to explicitly inform financial services cooperatives of its expectations regarding securitization risk management. This guideline sets out the principles of securitization risk governance and the practices for managing these risks. The AMF expects effective governance to underpin the management of securitization risks. To that end, financial institutions should implement an adequate risk management framework and a risk-adjusted, performance-based compensation system. The AMF also expects financial institutions to adopt sound and prudent securitization risk management practices throughout the securitization process. Securitization Risk Management Guideline 5 Autorité des marchés financiers April 2009March 2019 DRAFT Scope This Securitization Risk Management Guideline is intended for financial services cooperatives, which are governed by the FSCA. More specifically, it applies to financial services cooperatives that are members of a federation, to a federation, to a financial services cooperative that acts as treasurer of a group, as well as to a subsidiary of a federation that acts as manager of the assets of a group.2insurers of persons3 (life and health), damage insurers, portfolio management companies controlled by an insurer, as well as trust and savings companies, which are governed by the following Acts: • An Act respecting insurance, CQLR, c. A-32; • An Act respecting financial services cooperatives, CQLR, c. 67.3; • An Act respecting trust companies and savings companies, CQLR, c. S-29.01. This guideline applies to financial institutions operating independently as well as to financial institutions operating as members of a financial group.4 In the case of financial services cooperatives and mutual insurance associations5 that are members of a federation, the standards or policies adopted by the federationSecuritization risk management standards or policies adopted by a federation for its members should be consistent with—and even converge on—the principles of sound and prudent management prescribed by law and detailed in this guideline. The generic terms "“financial institution"” and "“institution"” refer to all financial entities covered by the scope of this guideline.6 2 For purposes of this guideline, a "group" is formed by a federation, its member credit unions and a security fund, as well as any other legal person or partnership controlled by one of the credit unions or by the federation (Act respecting financial services cooperatives, R.S.Q. c. C-67.3, s. 3). 3 Like the financial institutions that were already subject to the guideline before March 31, 2019, the AMF expects the newly-reporting financial institutions to modulate the implementation of the principles according to the importance of the Securitization activities within their institution. 4 For purposes of this guideline, “financial group” refers to any group of legal persons composed of a parent company (financial institution or holding company) and legal persons affiliated therewith. 5 Mutual insurance associations are damage insurers governed by the scope of this guideline. 6 The provisions of this guideline apply to any securitization, whether or not it is already regulated under a framework, such as the securitization of mortgages insured under the National Housing Act, R.S.C. (1985), chapter N-11. Securitization Risk Management Guideline 6 Autorité des marchés financiers April 2009March 2019 DRAFT Coming into effect and updating This securitization risk management guideline will come into effect as ofThe Securitization Risk Management Guideline has been effective since April 1, 2009. With respect to the legal requirement of institutions to follow sound and prudent management practices, the AMF expects each institution to developadopt the principles of this guideline by developing strategies, policies and procedures based on its nature, size, complexity and risk profile, to ensure the adoption of the principles underlying this guideline by and that they have implemented them since April 1, 2011. Where an institution has already implemented such a framework, the AMF may verify whether it enables the institution to satisfy the requirements prescribed by law. In order to reflect the evolution of sound and prudent management principles established by international bodies and in order to be consistent with the guidelines on governance and integrated risk management, the Securitization Risk Management Guideline has been revised as of March