• IBANK Division 10.2.B IBANK Division 10.2.B Securitisation process

    Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.2.6 Sukuk securitisation

      The process of a sukuk securitisation is:

      (a) first, the origination of assets;
      (b) second, the transfer of the assets to an SPE which is created to issue the securities and manage the assets on behalf of the sukuk holders; and
      (c) third, the issuance of the sukuk to investors.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.2.7 Special purpose entities

      (1) A special purpose entity (or SPE) is a legal entity that is created solely for a particular financial transaction or series of transactions.
      (2) An SPE may take the form of a limited partnership, limited liability company, corporation, trust or collective investment fund. An SPE may also be established under a special law that allows the creation of SPEs.
      (3) Most sukuk securitisations require the creation of an SPE to:
      (a) hold the assets transferred by the originator;
      (b) issue sukuk based on the assets; and
      (c) act as intermediary between the originator and the sukuk holders.

      Guidance
      1 In conventional securitisations, the SPE must not have any other business. In a sukuk securitisation, the SPE can be organised, for example, as a mudarabah, musharakah or wakalah, but the requirement for the SPE to have no other business continues to apply.
      2 By its nature, an SPE is a legal shell with only the specific assets transferred by the originator (that is, the SPE has no other property in which any other party could have an interest). The transferred assets are effectively owned, legally or through a trust, by the sukuk holders.
      (4) An SPE must be bankruptcy-remote from the originator. It must not be consolidated with the originator for tax, accounting or legal purposes.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.2.8 Criteria for true sale

      (1) For asset-backed sukuk, ownership of the underlying assets must be transferred to the sukuk holders (or to an SPE for their benefit) by a true sale under Shari'a.
      (2) The 4 main criteria for a true sale are:
      (a) the transfer must be such that:
      (i) it cannot be re-characterised by a court or other body as a secured loan; or
      (ii) it cannot be avoided in a bankruptcy or insolvency proceeding involving the originator of the assets;

      Example

      The sale should not be a fraudulent transfer in anticipation of bankruptcy or a preference payment
      (b) the bankruptcy or insolvency of the originator must not affect the assets transferred and the issuer of the sukuk must be able to enforce collection and other rights against the source of the income without any hindrance resulting from the bankruptcy or insolvency of the originator;
      (c) the transfer must be perfectible at the election of the issuer; and
      (d) the sale must be free and clear of all prior overriding liens.
      (3) The transfer of assets must be evidenced by a written contract for their sale to the sukuk holders.

      Note For the covenants and declarations that must be included in the transaction documents, see rule 10.2.27.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.2.9 Effects of true sale on originator

      For asset-backed sukuk, the effects of a true sale on the originator include:

      (a) derecognition, from the originator's balance sheet, of the assets sold, so that the assets become bankruptcy-remote (and therefore not subject to claw back by a liquidator in the event of the originator's liquidation); and
      (b) the originator ceasing to have any financial liability to the sukuk holders in relation to the assets.
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.2.10 Effects of true sale on sukuk holders

      For asset-backed sukuk, the effects of a true sale on sukuk holders include:

      (a) giving the holders a legally recognised ownership interest over the underlying assets;
      (b) giving the holders realisable security over the underlying assets;
      (c) giving the holders a right to payments of the principal and profits;
      (d) insulating the holders from exposure to any financial problems of the originator;
      (e) exposing the holders (as owners) to losses in the event of impairment of the assets; and
      (f) in case of a default of the sukuk (for example, because ijarah lessees of the assets fail to pay what is due), giving the holders a claim to the assets (but not to the originator).

      Note In contrast to rule 10.2.10 (f), recourse to the originator is possible in some asset-based sukuk (see rule 10.2.14 (2) (b) (iii))
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).

    • IBANK 10.2.11 Prohibition against advanced undertaking to repurchase

      (1) If a sukuk issuance satisfies the criteria for a true sale of the assets, the risks to the sukuk holders of the payments of the principal and profits must depend on the performance of the underlying assets and not on any other mechanism such as a repurchase undertaking.

      Note In a sukuk securitisation, the applicable risks are those of the underlying assets, and these will, in principle, be reflected in any credit rating issued by an ECRA.
      (2) The mudarib (investment manager), sharik (partner) or wakeel (agent) must not undertake in advance to repurchase the underlying assets at maturity for their nominal or par value.
      (3) A repurchase undertaking to cover risks arising from mudarabah sukuk, musharakah sukuk or wakalah sukuk may be built into the structure of the sukuk only if the mudarib, sharik or wakeel undertakes to repurchase the assets at maturity for:
      (a) their net value;
      (b) their market value;
      (c) their fair value; or
      (d) a price to be agreed at the time of repurchase.
      (4) However, the originator (as lessee) of a securitisation of a pool of ijarah assets may undertake to purchase the assets at maturity for their nominal or par value, but only if the originator is not also a mudarib, sharik or wakeel in relation to the securitisation.
      (5) In this rule:

      repurchase undertaking means a unilateral binding promise, made by the originator to the issuer or trustee, to purchase the sukuk assets at a future date or on the occurrence of certain events (such as maturity of the sukuk or exercise of early redemption right by sukuk holders).
      Inserted by QFCRA RM/2017-1 (as from 1st April 2017).