Securitization Law and Practice

In the Face of the Credit Crunch

Table of Contents

List of Abbreviations xxvii

About the Author xxix

xxxi

xxxiii

xxxv

Foreword

Introduction

Acknowledgements

PARTI -

Building Blocks

Chapter 1Introduction

1.011.02

1.03

1.041.05

-DefinitionRationale1.02.1 Funding1.02.2 Regulatory Capital Relief1.02.3 Arbitrage1.02.4 Balance Sheet ConsiderationsSecuritization Types1.03.1 True Sale1.03.2 Synthetic1.03.3 Whole BusinessAsset ClassesSub-prime Crisis and the Credit Crunch

3333455566667

viii Table of Contents

Chapter 2Structure and Documentation 9I Introduction 9

2.01 Introduction 92.02 Chapter Set-up 92.03 Documentation 10

II The Originator Perspective,., 11A Originator 11

11121213

B SPV 1515151616161717171818181919192020202122232324242525262727282829

D Credit Risk Transfer 30

2.042.052.062.07SPV2.082.092.102.112.12

2.13True2.142.152.162.172.182.192.202.21

2.222.232.242.252.262.272.282.29

OriginatorAsset SelectionOriginate/Warehouse/Distribute (OWD)Arranger

PurposeNo SPVDifferent SPVsJurisdictionBankruptcy Remoteness2.12.1 SPV Control2.12.2 Business Restrictions2.12.3 Note Holders Restrictions2.12.4 Limited Recourse2.12.5 Non-petitionMultiple Issues

SaleIntroductionTrue SaleReceivablesMain Legal IssuesAssets Assignable under ContractAssignmentTitle Perfection EventsClaw-back2.21.1 Transaction at an Undervalue2.21.2 Voidable Preference2.21.3 Defrauding CreditorsAddressing Claw-back RiskRe-characterizationRe-characterization in SecuritizationDue DiligencePurchase AgreementSecuritization without a SaleWarehouse FacilitiesRe-assignment/Substitution

Table of Contents ix

2.30 Means to Transfer Credit Risk 302.31 Credit Default Swap 302.32 Generic Risks in Synthetic Transactions 30

2.32.1 Originator Risk 312.32.2 Documentation Risk 312.32.3 Termination Risk 312.32.4 No Recourse 32

2.33 Green Bottle Structure 322.34 Partially Funded 332.35 Cost Efficiency 332.36 Super Senior Swap 34

E The Borrowers/Debtors 342.37 Data Protection 342.38 Commingling 35

III The Liability Side 36A The Note Holders 36

2.39 Note Holders 363637

B Trustee 373737373838404041414243434345

D Rating Agencies 454547474747484848484950

2.402.41

ProspectusRetail Investors

Trustee2.422.432.442.452.462.472.482.492.502.512.52

TransferabilityTrustee RolesSecurity TrusteeSecurity PackageDeed of ChargeContextSPV AssetsTrust DeedRoleDiscretionLiability

Servicer2.532.54Rating2.552.562.57

ServicerRating Agency Provisions

; AgenciesRating AgenciesPre-sale ReportsKey Rating Agency Terms

The Notes2.582.59Terms2.602.612.622.63

TranchingNote Types

and Conditions of the NotesKey TermsWaterfallPre-default WaterfallPost-default Waterfall

IV

2.642.652.662.672.682.692.702.71

2.722.732.74

Issues for WaterfallsRedemption of the NotesOptional TerminationOptional Termination in SyntheticsMandatory RedemptionFinal RedemptionDeferred RedemptionNote Event of Defaults2.71.1 Failure to Pay2.71.2 Other Non-compliance2.71.3 SPV Events2.71.4 Structural Events of Default2.71.5 ConsequencesNote CovenantsRamp-upNegative Carry

G Informing Investors2.752.762.772.782.792.802.812.82

Assets2.832.84

Informing InvestorsFinancial ReportingReporting in PracticeMeasuring PerformanceBest PracticeBenchmarkingSelective DisclosureMis-selling

Asset EligibilityCDO Structure

A Matched Funding2.852.862.87

B Credit2.88

2.892.90

Matched FundingDocumentationSet-off2.87.1 Set-off in Securitization2.87.2 Set-off and Originator2.87.3 Set-off and Insolvency2.87.4 Set-off and Account Bank

EnhancementCredit Enhancement2.88.1 Tranching/Subordination2.88.2 Over-collateralization2.88.3 Monoline Insurance2.88.4 Reserve Funds2.88.5 Excess Spread2.88.6 Synthetic Excess SpreadChoiceOther Structural Features

Table of Contents

51515152535454555555555656565757585859606161626262636363646464646565666667676767687070717272

Table of Contents xi

2.90.1 Cash Diversion 722.90.2 Turbo 73

C Static and Dynamic Pools 73737474747575777878797979808080818181818282828283838384848585868686868787

8989

D Other Documentation 892.124 Other Documentation 89

2.912.922.932.942.952.962.972.982.99

Dynamic PoolsStatic PoolsReplenishmentSubstitution .Revolving TransactionsManaged TransactionsCollateral ManagerManager ReportsAdditional Risks

D Balancing Interests2.1002.1012.102

Balancing InterestsAligning the Note HoldersAligning the Collateral Manager2.102.1 Waterfall2.102.2 Fee Structure2.102.3 Churning

Other Structural RisksA Counterparty Risk

2.103B Swap (

2.1042.1052.1062.1072.1082.1092.1102.1112.1122.1132.114

Counterparty RiskCounterparties

Swap CounterpartiesRating Agency RelianceInterest Rate Risk: True SaleInterest Rate: SyntheticCurrency RiskAmortizing SwapsRating Agency CriteriaBank Swap CounterpartySchedule AdaptationsConsequences of Early TerminationTermination Payments

C Collateral Risk2.1152.1162.1172.1182.1192.1202.1212.1222.123

Collateral RiskAddressing Collateral RiskEligible CollateralCollateral in Synthetic DealsRepurchase AgreementPut OptionTotal Return SwapDerivative Counterparty EligibilityDeposit Bank

xii Table of Contents

2.125 Cash Management Agreement 902.126 GIC 902.127 Liquidity Facility 91

VI Execution and Post-Closing 912.128 Execution 912.129 Conditions Precedent 922.130 Legal Opinion - . 92

PART IISynthetic Structures

Chapter 3Credit DerivativesI Introduction

A Introduction3.013.023.03

B Trading3.043.053.063.073.083.093.103.11

IntroductionPurposeChapter Set-UpCredit RiskCredit Risk ManagementAdjustment of Contractual TermsGuaranteesCredit WrapInsurance ContractsLoan SyndicationsSecuritizationParticipations

C Credit Derivatives3.123.133.14

3.153.163.173.183.193.203.21

[I Drivers andA Drivers

3.22

DefinitionParties to Credit Derivative TransactionCharacteristics <3.14.1 Trade Credit Risk Only3.14.2 No Need for Transfer of Underlying3.14.3 Unfunded and Leveraged Instrument3.14.4 (No) Relationship with Reference Entity3.14.5 FlexibilityCredit Derivatives MarketCRT ReportComparison with Emergence of IRSRelationship with Corporate Bond MarketCommon Credit Derivative Products.Market ParticipantsLiquidityRisks

Credit Derivatives Drivers

95

97979797979898989899

100101102103104105105106107107107107108108108109110110110111112112112112

Table of Contents

3.233.243.253.263.273.283.293.303.313.32

B Risks3.33

3.343.353.363.373.383.393.403.413.42

3.433.443.45

Credit Risk ManagementTrading ToolArbitrageRegulatory Capital ReliefRequirements as to Legal DocumentationAdditional RequirementsConfidentialityTransparent PricingAccessibilityCross-Sector Transfer

Risks in Credit Derivatives3.33.1 Counterparty Risk3.33.2 Concentration Risk3.33.3 Correlation Risk3.33.4 Basis Risk3.33.5 Liquidity Risk3.33.6 Operational RiskLegal RisksAuthority RiskMisrepresentationDocumentation Risk, •Moral HazardRe-characterization RiskGambling Contract "Contract of Insurance: RelevanceDistinguishing from Insurance Contract3.42.1 No Indemnity3.42.2 No Insurable Interest3.42.3 No Proof of Loss3.42.4 Intention of the Parties3.42.5 Lack of Recourse3.42.6 FloodgatesMitigating Re-characterization RiskCompliance RiskRegulatory Risk

III Credit Derivatives DocumentationA Documentation Structure

3.463.473.483.49

B Types3.503.513.523.53

DocumentationISDA Master AgreementCredit Derivatives DefinitionsConfirmations

of Credit DerivativesTypes of Credit DerivativesCredit Default SwapTotal Return SwapCredit Spread Transaction

xiii

113113113114115116117118118119119119120121121122122123124124125127128129129130131132133133133133134134135135135135135135136137137137138138139

xiv Table of Contents

C Credit Default Swap 139139140140141141142142143143

D Credit Events 144144145145146148148149149150150152153154154155155156157158158158158

: 159159160161161161162162163166166168169

3.543.553.563.573.583.593.603.613.62Credit3.633.643.653.663.673.683.693.703.713.723.733.743.753.763.773.783.793.803.81

Credit Default TransactionUnfunded Notional InstrumentCash FlowKey PillarsReference EntitiesIdentity of Reference EntitySuccessor EntityReference ObligationCalculation Agent

EventsCredit EventsStandard Credit Events in OTC MarketBankruptcyFailure to PayRestructuringContentiousMultiple Holder ObligationBifurcationRepudiationBack to Back TransactionsSoft Credit EventsObligationsObligation CategoriesGuaranteesObligation CharacteristicsConditions to SettlementCredit Event NoticeNotice of Publicly Available InformationNotice of Physical Settlement

Settlement3.823.833.843.853.863.873.883.893.903.913.923.933.943.953.96

Two Forms of SettlementPhysical SettlementTimelineAdvantages of Physical SettlementDeliveryDeliverable ObligationsDeliverable Obligation CategoryDeliverable Obligation CharacteristicsRisks in Physical SettlementDefining Deliverable ObligationsUnavailabilityCheapest to Deliver OptionFluctuations in the MarketCDS and Bondholder PositionsMove to Cash Settlement

Table of Contents xv

3.97 Cash Settlement3.98 Prepayment3.99 Standardization

3.99.1 Master Confirmations3.99.2 CDS Matrices3.99.3 Unwinding Transactions3.99.4 Novation

3.100 Exchange-Listed Credit DerivativesIV Structured Credit

A Introduction3.101 Work in Progress3.102 Structured Credit Products

B Credit Default Swap Products3.103 Credit Default Swap Products3.104 First: CDS Variations3.105 Self-referencing CDS3.106 Recovery Lock CDS3.107 Contingent CDS3.108 Loan-Only CDS3.109 Constant Maturity CDS3.110 CD Swaptions3.111 Second: CDS on Securitized Products3.112 CDS on ABS3.113 Documentation3.114 Credit Events in CDS on ABS

3.114.1 Bankruptcy3.114.2/ Failure to Pay3.114.3 Failure to Pay Principal3.114.4 Loss Event3.114.5 Ratings Downgrade

3.115 Settlement3.116 Third: Portfolio Products3.117 Portfolio CDS3.118 First-to-Default CDS3.119 Credit Indices3.120 Settlement Protocols3.121 Documentation

C Total Return Swap Products3.122 TRS Products

Chapter 4CoUateralized Loan Obligations (CLOs) and CoUateralizedDebt Obligations (CDOs)I Introduction

4.01 CDOs4.02 CDO in the Squeeze

169170171171173173174174175175175176176176176176177178178181181182182183185186187188188188188189189190190192192195195

197197197197

xvi Table of Contents

4.03 CDO Battleground 198II Synthetic CLOs 199

A Introduction 1994.04 Definition 1994.05 Market 199

B Drivers and Risks 1994.06 Drivers in Synthetic CLOs 199

N 4.07 Risks in Synthetic CLOs 2004.08 No Contractual Relationship 2004.09 Conflicts of Interest 201

4.09.1 Cherry Picking 2014.09.2 Conflict of Interest: Servicer 2024.09.3 Conflict of Interest: Originator 2024.09.4 Compliance of Reference Assets 2034.09.5 Valuation of the Reference Asset 203

C Structure and Documentation 204i Structure and Due Diligence 204

4.10 Basic CLO Structure 2044.11 Preamble Due Diligence 205

4.11.1 Disclosure 2054.11.2 Deliverability 205

4.12 No Cash Row Restrictions 206ii Documentation 206

4.13 Documentation Overview 2064.14 Credit Events 2074.15 Conditions for Settlement 2084.16 Settlement 209

4.16.1 Market Valuation 2104.16.2 Actual Recovery 2114.16.3 Fixed Recovery , 212

4.17 Total Return Swaps 2134.18 ISDA Master Agreement 2144.19 Super Senior Swap 2144.20 Credit-linked Notes 2154.21 Combination Notes 2164.22 Terms and Conditions ' 216

4.22.1 Note Events of Default 2164.22.2 Early Redemption 2174.22.3 Waterfall 217

4.23 Termination Payments 2184.24 Collateral '" 219

4.24.1 Repurchase Agreements 2204.24.2 Contingent Forward Agreement 220

4.25 Hedges 220D Transactions in Practice 221

4.26 Asset Classes 221

Table of Contents

i Corporate Loans4.274.284.294.304.314.324.334.344.354.364.374.384.394.40

ii SME ]4.414.424.434.444.454.464.474.484.494.50.4.51 '4.524.534.544.554.56

Bilateral Loans CLOsRegulatory Capital ReliefStructural FeaturesTerm SheetSectoral Credit Risk TransferBank IntermediaryStructureDocumentationSettlementJumbo Synthetic CLODiversified Pool of Reference LoansReference Portfolio CharacteristicsFunding and/or Capital ReliefCLOs in the Asia-Pacific

LoansSME Loans CLOsMarketKfW PlatformOriginatorsStructureTypical Transaction under KfW PlatformSub-participationListingReplenishmentCash SettlementTrusteeEarly TerminationSpecial FeaturesModificationsJumbo SMESME Loan Criteria

iii Sovereign Loans4.574.584.594.604.61

Sovereign LoansAriesCredit EventsConditions to SettlementCash Settlement

iv Project Finance Loans4.624.634.644.654.664.674.68

Project Finance CLOPPP and PFIPFI PrinciplesLengthStructureStandard DocumentationRisk in Project Finance Loans

xvii

221221222222222223224224225225226226226227227228228228228229229229230231231231232232233233233234234234235235235236236236237237237238238238

xviii Table of Contents

4.69 Further Risks 2394.69.1 Availability and Operating Risk 2394.69.2 Demand Risk 2404.69.3 Supervening Events 2404.69.4 Dependency on Monolines 241

4.70 Eligibility Criteria 2414.71 Loan Level Criteria 2414.72 First Synthetic CDOs of PFI Loans 242

" 4.73 Transaction Structure 2424.74 Two Originators 2434.75 Reference Loans 2434.76 Replenishment 2434.77 Credit Events 244

4.77.1 Bankruptcy 2444.77.2 Failure to Pay 2444.77.3 Restructuring 245

4.78 Syndicate 2454.79 Valuation Process 2464.80 Cash Settlement 2464.81 Credit-linked Notes 2474.82 Tenor 2474.83 Re-characterization 2484.84 Regulatory Capital 2484.85 Further Transactions 249

vi Emerging Markets 2504.86 Emerging Market 2504.87 Emerging Market CLO Risk 2504.88 Sovereign 2514.89 Multilaterals 2514.90 The Role of Local Law 252

III Synthetic CDOs 252A Introduction 252

4.91 Synthetic CDO 2524.92 Rationale 2524.93 Differences with CLOs 2534.94 Chapter Set-Up 253

B Managed Synthetic CDOs 2534.95 Definition 2534.96 Other Debt 2534.97 Sovereign Risk 2544.98 Geography . 255

i Drivers and Risks 2554.99 Drivers 2554.100 Arbitrage 2554.101 Diversification 256

Table of Contents

4.1024.1034.1044.105

Rating StabilityConsequencesManager RoleRisks4.105.1 Managerial Expertise4.105.2 Manager Discretion4.105.3 Key Man Risk4.105.4 Moral Hazard4.105.5 Fees

ii Structure4.1064.1074.1084.1094.1104.111

Trading in Synthetic CDOs"ControlsEligibility CriteriaTrading Gains and LossesRe-investmentLoss Triggers

iii Documentation4.1124.1134.114

Credit Default SwapResponsibilitiesFee Structure

C Retail CDOs4.1154.116

-' 4.117

Retail CDOsInvestor DisclosureLegal Issues

D CoUateralized Swap Obligations4.118

i Drivers4.119

CSO> and Risks

Key Driversii Structure

4.1204.1214.1224.1234.124

Structural IssuesDealersInvestor BenefitIntermediary SwapsBullet Structure

iii Documentation4.1254.1264.1274.1284.1294.1304.1314.1324.133

DocumentationDocumentationPhysical SettlementFurther TermsOther Uses of CDSOffsetting CDSNaked CDSDisclosureCSA

XIX

256257257257258258258259259259259260260261261261262262262262263263263264264264265265266266266267267267268268268269270271271272273273

E Single Tranche C D O 273

XX

4.134 Single Tranche CDOi Drivers and Risks

4.135 Tailored Product4.136 Hedging Technology

ii Structure4.137 Attachment and Detachment Points

iii Documentation4.138 Term Sheet

Structured Finance CDOs4.139 Structured Finance CDO4.140 Products4.141 Market

i Drivers and Risks4.142 Drivers4.143 Leverage4.144 Risks4.145 Overlap and Correlation4.146 The Underlying Product: CDS of ABS4.147 Drivers4.148 Collateral Managers4.149 Originators and Issuers

ii Structure4.150 Structure4.151 Cross-Subordination4.152 Collateral Arrangements4.153 Managing Structured Finance CDOs

iii Documentation4.154 Diffuse Documentation4.155 Disclosure4.156 Amortization4.157 (Publicly) Available Information4.158 Credit Events

4.158.1 Bankruptcy4.158.2 Restructuring4.158.3 Failure to Pay4.158.4 PIK Securities4.158.5 Principal Reduction4.158.6 Failure to Pay ABS

4.159 Ratings Downgrade4.160 Rating Agencies Role4.161 Cash Settlement: Valuation4.162 Cash Settlement4.163 Credit-Linked Notes4.164 Redemption4.165 Holdback Amount4.166 Waterfall

Table of Contents

213274274275275275276276276276276277277277278278279279279280280280280281282282282282283283284284284285285286286286287287287288288288289289

Table of Contents

4.1674.1684.1694.1704.1714.1724.173

Termination PaymentsRe-characterizationInsuranceParties' IntentionMis-sellingSettlementDrafting Process

XXI

290290291291292293293

G Hybrid and Esoteric CDOs 2944.174 Hybrid CDOs 2944.175 Liquidity Facilities 2944.176 Alternative CDOs 295

Chapter 5Non-Credit Risk Securitization 297I Introduction 297

297II Equity Risk Securitization 297

297297298299299301301301302303303303303304304305305305306307308308308309309309310310311

Introduction5.01 Introduction

Equity Risk SecuritizationA

B

C

D

Introduction5.025.035.045.05

MarketDriversRiskInvestor Considerations

Structure5.065.075.085.095.105.115.125.135.14

Equity Default SwapDigital Put OptionDistinct from a CDSNature of RiskBenchmarkRecovery and Equity AmountTransparencyEDO/ECOSecuritization of Equity Risk

Documentation5.155.165.175.185.195.205.21

DefinitionsSpecific IssuesMarket DisruptionExtraordinary EventsOverlapDisclosureRecharacterization

Transactions in Practice5.225.235.245.255.26

Example TransactionsPublic RatingACEOManaged TransactionsConclusion

xxii Table of Contents

III Commodity Risk Securitization 311A Introduction 311

5.27 Commodity Risk 3115.28 Market 3125.29 Drivers 313

B Structure and Documentation 313313314315315317318318320321322323323324324325326326327327327327328328328329

331

Chapter 6Managed Fund-Style Securitization 333Paul U. AHI Introduction 333II Managed Funds and Debt Returns 335III A Secondary Market in Life Insurance Policies 337IV Securitizing Life Insurance Policies 339V Insurable Interest Risk 341VI Securitizing Private Equity Funds and Hedge Funds 342VII Conclusion 346

5.305.315.325.335.34

ISDA FrameworkCommodity SwapMarket DisruptionCommodity Trigger SwapsSecuritization of Commodity Risk

C Transactions in Practice5.355.365.375.385.395.405.415.425.435.445.45

ApolloCash FlowTiming of LossesReference PortfolioPortfolio CTSFurther TransactionsMagnoliaAmadeusRating AgenciesFlexibleConclusion

IV Foreign Exchange Risk Securitization5.465.475.485.49

FX RiskStructurePrometheusTerms

V Derivatives Securitization: Next Steps5.505.51

PART III

Property Risk SecuritizationCombined Structures

Niche Transactions

Table of Contents

Chapter 7Insurance SecuritizationPaul U. AHI IntroductionII Putting Insurance Securitization in ContextIII Catastrophe BondsIV Weather BondsV Recharacterization RiskVI Conclusion

Chapter 8Whole BusinessPaul U. AHI IntroductionII Commercial

Securitization

ConsiderationsIII UK Model of Whole Business SecuritizationIV Conclusion

Chapter 9Microfinance Securitization

9.019.029.039.049.059.069.079.089.099.109.119.129.13

9.149.159.169.179.189.199.209.21

Microfinance and SecuritizationMicrofinanceMFIsMarketDFIsSecuritizationExamples in PracticeDifferent Structures, Similar ProblemsProCreditMFI CLOsBoldStructurePrevalent Risks9.13.1 Credit Risk9.13.2 Servicer Risk9.13.3 Currency Risk9.13.4 Counterparty RiskCredit EnhancementVG MicrofinanceRamp-UpThe LoansGlobal Microfinance FacilityRating Agency ConsiderationsBraeAssets

XXlll

349

349352357361364370

373

373375376380

381381381382382383383384384385385387387388389389389390391391392392393393394394

9.229.239.249.259.269.279.289.29

PART IVGame Rules

StructureCash FlowConsiderationsRisksLegal RisksThe Proof of the PuddingSynthetic Transaction?Conclusion ' r

xxiv Table of Contents

395396397397398400400401

403

Chapter 10Regulatory Capital Standards for Securitization 405I Introduction 405

10.01 Introduction 405II The Basel II Framework 405

10.02 Basel Framework 40510.03 History 40610.04 Basel I 40610.05 Basel II 40810.06 Minimum Capital Requirements 40810.07 Supervisory Review Process 40810.08 Market Discipline 40810.09 Models 40910.10 Standardized and IRB Approach 40910.11 IRB 41010.12 Regulatory Capital Arbitrage 410

III The Securitization Framework in Basel II 41010.13 Scope 41010.14 Risk Transfer Requirements 41210.15 Investments and Retained Exposure Charges 41310.16 Collateral 41310.17 364 41510.18 Recognized External Credit Assessment 41510.19 Granularity 41610.20 External Ratings 41710.21 Implicit Support 41810.22 Pillar 2 41910.23 Pillar 3 42010.24 Synthetic Securitization _ 42110.25 Effective Risk Transfer Requirements 42110.26 Credit Derivatives 42210.27 Solvency Treatment of Collateral and Guarantees 42410.28 Maturity Mismatch 42510.29 Step-up 426

Table of Contents xxv

10.30 Legal Opinions 426IV Implementation of Basel II 427

10.31 Implementation 42710.32 Changes 42710.33 Conclusion 428

Chapter 11Accounting for Securitizations: The Post-IFRS World 431I Introduction 431II Securitization: an Australian/European Perspective 433III Implications of the Adoption of Ifrs in Australia 435IV Application of Uig 112 435V Application of Aasb 139 437VI General Rules - Sales With 'Strings Attached' 437

A Should the Derecognizing Principles be Applied to Part orAll of a Financial Asset? 438

B Have the Rights to the Cash Rows Expired? 439C Has the Entity Transferred Substantially All Risks

and Rewards? 439D Has the Entity Retained Substantially All Risks

and Rewards? 439E Has the Entity Retained Control of the Asset? 439F Continue to Recognize the Asset to the Extent of the

Entity's Continuing Involvement 440VII Recognition of Gains and Losses on Transfer 440VIII Securitizations 441

A Consolidation of SPEs 441B Has the Entity Transferred its Rights to Receive the Cash

Flows from the Assets? 441C Has the Entity Assumed an Obligation to Pay the Cash Flows

from the Assets that Meet the Pass-through Criteria? 441D Risks and Rewards 443E Control 444F Continuing Involvement 444

IX Accounting Analysis of Certain Financing Structures Using Spes 444A Example 1. CoUateralized Debt Obligations (CDOs) 444

i Overview of Structure 445ii Accounting Analysis - Applying the Flow Chart 445iii Consolidation of the SPE? 445iv Has the Entity Transferred its Rights to Receive

Cash Flows from the Assets? 446v Have the Pass-through Conditions been Met? 446vi Has the Entity Transferred Substantially all the Risks

and Rewards? 446B Example 2. Residential Mortgage-Backed Securitizations 446

i Overview of Structure 447

xxvi Table of Contents

ii Accounting Analysis - Applying the Row Chart 447iii Consolidation of the SPE? 447iv Has the Entity Transferred its Rights to Receive Cash

Rows from the Assets? 447v Have the Pass:Through Criteria been Met? 447vi Has the Entity Transferred Substantially all the Risks

and Rewards? 448C Example 3. Trade Receivables 448

i Overview of Structure 448ii Accounting Analysis 449

a Consolidation of the SPE? 449b Has the Entity Transferred its Rights to the

Cash Rows? 450c Have the Pass-through Conditions been Met? 450

iii Has the Entity Transferred Substantially all theRisks and Rewards? 450

iv Has the Entity Transferred Control of the Asset? 450D Example 4. Credit Linked Notes 450

i Overview of Structure 451ii Accounting Analysis: Consolidation of the SPE? 451iii Has the Entity Transferred its Rights to Receive

Cash Flows from the Asset? 451iv Have the Pass-through Criteria been Met? 451

X Has the Us Moved Yet? 452XI Us Accounting Overview 453

A Sale Criteria - 454i Legal Isolation 454ii Right to Pledge or Exchange 454iii Effective Control Criteria 456

B Current Developments Impacting the Sale Criteria 456XII Consolidation 457XIII Qualifying Special Purpose Entities (QSPEs) 458

A Demonstrably Distinct Nature of a QSPE 458B Activities of a QSPE 458C Assets a QSPE May Hold 459D Selling of Noncash Financial Assets Held by a QSPE 459

XIV Current Developments Impacting Qspes 459XV Variable Interest Entity 461XVI Variable Interest Entities 462XVII Determining Consolidation of Vie Based On Variability 462XVIII Decision Tree to Determine if Sale or Secured Borrowing 463XIX Initial Accounting/Gain-on-Sale Calculation 463XX Impact of Proposed Changes 464XXI Subsequent Accounting 465XXII Conclusion 466XXIII PostScript 466

Index 469