Transfers and Servicing of Financial Assets and Extinguishments of Liabilities SSAP No. 103
Exposure Draft
SSAP No. 103R—Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Hearing Date: June 2016 Call or 2016 Summer NM / Location: June 2016 Call or 2016 Summer NMDeadline for Written Notice of Intent to Speak: May 20, 2016 / Deadline for Receipt of Written Comments: May 20, 2016
Notice of Public Hearing and Request for Written Comments
Basis for hearings. The Statutory Accounting Principles Working Group (SAPWG) will hold a public hearing to obtain information from and views of interested individuals and organizations about the standards proposed in this Exposure Draft. The SAPWG will conduct the hearing in accordance with the National Association of Insurance Commissioners (NAIC) policy statement on open meetings. An individual or organization desiring to speak must notify the NAIC in writing by May 20, 2016. Speakers will be notified as to the date, location, and other details of the hearings.
Oral presentation requirements. The intended speaker must submit a position paper, a detailed outline of a proposed presentation or comment letter addressing the standards proposed in the Exposure Draft by May 20, 2016. Individuals or organizations whose submission is not received by that date will only be granted permission to present at the discretion of the SAPWG chair. All submissions should be addressed to the NAIC staff at the address listed below.
Format of the hearings. Speakers will be allotted up to 10 minutes for their presentations to be followed by a period for answering questions from the SAPWG. Speakers should use their allotted time to provide information in addition to their already submitted written comments as those comments will have been read and analyzed by the SAPWG. Those submissions will be included in the public record and will be available at the hearings for inspection.
Copies. Exposure Drafts can be obtained on the Internet at the NAIC Home Page (http://www.naic.org). The documents can be downloaded using Microsoft Word.
Written comments. Participation at a public hearing is not a prerequisite to submitting written comments on this Exposure Draft. Written comments are given the same consideration as public hearing testimony.
The Statutory Accounting Principles Statement of Concepts was adopted by the Accounting Practices & Procedures (EX4) Task Force on September 20, 1994, in order to provide a foundation for the evaluation of alternative accounting treatments. All issues considered by the SAPWG will be evaluated in conjunction with the objectives of statutory reporting and the concepts set forth in the Statutory Accounting Principles Statement of Concepts. Whenever possible, establish a relationship between your comments and the principles defining statutory accounting.
The exposure period is not meant to measure support for, or opposition to, a particular accounting treatment but rather to accumulate an analysis of the issues from other perspectives and persuasive comments supporting them. Therefore, form letters and objections without valid support for their conclusions are not helpful in the deliberations of the working group. Comments should not simply register your agreement or disagreement without a detailed explanation, a description of the impact of the proposed guidelines, or possible alternative recommendations for accomplishing the regulatory objective.
Any individual or organization may send written comments addressed to the Working Group to the attention of Julie Gann at , Robin Marcotte at , Josh Arpin at and Fatima Sediqzad at no later than May 20, 2016. Electronic submission is preferred. Julie Gann is the NAIC Staff that is the project lead for this topic.
National Association of Insurance Commissioners
1100 Walnut Street, Suite 1500, Kansas City, MO 64106-2197
(816) 842-3600
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Transfers and Servicing of Financial Assets and Extinguishments of Liabilities SSAP No. 103
Statement of Statutory Accounting Principles No. 103
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Status
Type of Issue: Common Area
Issued: March 3, 2012
Effective Date: January 1, 2013
Affects: Supersedes SSAP No. 91R
Nullifies and incorporates INT 99-22, INT 03-05
Affected by: No other pronouncements
Interpreted by: INT 01-31, INT 04-21, INT 09-08
Status 1
Scope of statement 3
Summary conclusion 3
Accounting for Transfers and Servicing of Financial Assets 3
Accounting for Transfers of Participating Interests 5
Accounting for Transfers of an Entire Financial Asset or Group of Entire Financial Assets 6
Secured Borrowing 6
Recognition and Measurement of Servicing Assets and Liabilities 7
Financial Assets Subject to Prepayment 7
Secured Borrowings and Collateral 7
Extinguishments of Liabilities 8
Disclosures 9
Application Guidance 16
Unit of Account 16
Participating Interests in an Entire Financial Asset 17
Isolation Beyond the Reach of the Transferor and Its Creditors 18
Conditions That Constrain a Transferee 19
Transferor’s Rights or Obligations to Reacquire Transferred Assets or Beneficial Interests 20
Effective Control Over Transferred Financial Assets or Beneficial Interests 21
Agreement to Repurchase or Redeem Transferred Financial Assets 21
Unilateral Ability to Cause the Return of Specific Transferred Financial Assets 22
Arrangements to Reacquire Transferred Financial Assets 22
Changes That Result in the Transferor’s Regaining Control of Financial Assets Sold 23
Measurement of Interests Held after a Transfer of Financial Assets 23
Assets Obtained and Liabilities Incurred as Proceeds 23
Participating Interests in Financial Assets That Continue to be Held by a Transferor 23
Servicing Assets and Liabilities 23
Securitizations 25
Isolation of Transferred Financial Assets in Securitizations 25
Sales of Future Revenues 27
Removal-of-Accounts Provisions 27
Short Sales 27
Securities Lending Transactions 28
Securities Lending Transactions – Collateral Requirements 29
Securities Borrowing Transactions – Sale Criteria is Not Met (Secured Borrowing) 30
Repurchase Agreements and "Wash Sales" 30
Repurchase Agreements 31
Repurchase Financing 32
Reverse Repurchase Agreements 33
Collateral Requirements – Repurchase and Reverse Repurchase Agreements 33
Dollar Repurchase Agreements 34
Separate Transactions 34
Offsetting 34
Loan Syndications 35
Loan Participations 35
Factoring Arrangements 35
Transfers of Receivables with Recourse 35
Extinguishments of Liabilities 36
Relevant Literature 36
Effective Date and Transition 39
REFERENCES 39
Relevant Issue Papers 39
EXHIBIT A – GLOSSARY 40
EXHIBIT B – ILLUSTRATIONS 44
Illustration—Recording Transfers with Proceeds of Cash, Derivatives, and Other Liabilities 44
Illustration—Recording Transfers of Participating Interests 45
Illustration—Sale of Receivables with Servicing Obtained 46
Illustration—Securities Lending Transaction Treated as a Secured Borrowing 47
Illustration - Short Sale Settled with Securities Borrowed Under a Secured Borrowing Agreement 49
Illustration—Initial Transfer and Repurchase Financing 50
103-39
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities SSAP No. 103
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Scope of statement
- Transfers of financial assets take many forms. Accounting for transfers in which the transferor has no continuing involvement with the transferred financial assets or with the transferee are generally straightforward. However, transfers of financial assets often occur in which the transferor has some continuing involvement either with the assets transferred or with the transferee. Examples of continuing involvement include, but are not limited to, servicing arrangements, recourse or guarantee arrangements, agreements to purchase or redeem transferred financial assets, options written or held, derivative financial instruments that are entered into contemporaneously with, or in contemplation of the transfer, arrangements to provide financial support, pledges of collateral, and the transferor’s beneficial interests in the transferred financial assets. Transfers of financial assets with continuing involvement raise issues about the circumstances under which the transfers should be considered as sales of all or part of the assets or as secured borrowings. An objective in accounting for transfers of financial assets is for each reporting entity that is a party to the transaction to recognize only assets it controls and liabilities it has incurred, to derecognize assets only when control has been surrendered, and to derecognize liabilities only when they have been extinguished. Sales and other transfers may frequently result in a disaggregation of financial assets and liabilities into components, which become separate assets and liabilities.
2. This statement focuses on the issues of accounting for transfers[1] and servicing of financial assets and extinguishments of liabilities. This statement establishes statutory accounting principles for transfers and servicing of financial assets, including asset securitizations and securitizations of policy acquisition costs, extinguishments of liabilities, repurchase agreements, repurchase financing and reverse repurchase agreements, including dollar repurchase and dollar reverse repurchase agreements that are consistent with the Statutory Accounting Principles Statement of Concepts and Statutory Hierarchy (Statement of Concepts). This statement discusses generalized situations. Facts and circumstances and specific contracts need to be considered carefully in applying this statement. Securitizations of nonfinancial assets are outside the scope of this statement. Transfers of financial assets that are in substance real estate shall be accounted for in accordance with SSAP No. 40R—Real Estate Investments. Additionally, retained beneficial interests from the sale of loan-backed or structured securities are to be accounted for in accordance with SSAP No. 43R—Loan-Backed and Structured Securities, Revised.
3. SSAP No. 25—Affiliates and Other Related Parties (SSAP No. 25) shall be followed for accounting and disclosure requirements for all related party transactions.
4. SSAP No. 91R—Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SSAP No. 91R) has been superseded by this statement.
5. This statement does not address the securitization of mortality or morbidity risk. The National Association of Insurance Commissioners’ (NAIC’s) Insurance Securitization Working Group of the Financial Condition (E) Committee is charged with the development of model laws, model regulations and proposed accounting guidance for the securitization of mortality and morbidity risk. When such proposed accounting guidance is finalized the development of a statement will be considered.
Summary conclusion
Accounting for Transfers and Servicing of Financial Assets
- The objective of paragraph 8 and related implementation guidance is to determine whether a transferor has surrendered control over transferred financial assets. This determination must consider the transferor’s continuing involvement in the transferred financial assets and requires the use of judgment that must consider all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer.
7. The requirements of paragraph 8 apply to transfers of an entire financial asset, transfers of a group of entire financial assets, and transfers of a participating interest in an entire financial asset (all of which are referred to collectively in this statement as transferred financial assets). A participating interest has all of the following characteristics:
a. From the date of the transfer, it represents a proportionate (pro rata) ownership interest in an entire financial asset. The percentage of ownership interests held by the transferor in the entire financial asset may vary over time, while the entire financial asset remains outstanding as long as the resulting portions held by the transferor (including any participating interest retained by the transferor or its agents) and the transferee(s) meet the other characteristics of a participating interest. For example, if the transferor’s interest in an entire financial asset changes because it subsequently sells another interest in the entire financial asset, the interest held initially and subsequently by the transferor must meet the definition of a participating interest.
b. From the date of the transfer, all cash flows received from the entire financial asset are divided proportionately among the participating interest holders in an amount equal to their share of ownership. Cash flows allocated as compensation for services performed, if any, shall not be included in that determination provided those cash flows are not subordinate to the proportionate cash flows of the participating interest and are not significantly above an amount that would fairly compensate a substitute service provider, should one be required, which includes the profit that would be demanded in the marketplace. In addition, any cash flows received by the transferor as proceeds of the transfer of the participating interest shall be excluded from the determination of proportionate cash flows provided that the transfer does not result in the transferor receiving an ownership interest in the financial asset that permits it to receive disproportionate cash flows.
c. The rights of each participating interest holder (including the transferor in its role as a participating interest holder) have the same priority, and no participating interest holder’s interest is subordinated to the interest of another participating interest holder. That priority does not change in the event of bankruptcy or other receivership of the transferor, the original debtor, or any other participating interest holder. Participating interest holders have no recourse to the transferor, its agents or to each other, other than standard representations and warranties, ongoing contractual obligations to service the entire financial asset and administer the transfer contract, and contractual obligations to share in any set-off benefits received by any participating interest holder. That is, no participating interest holder is entitled to receive cash before any other participating interest holder under its contractual rights as a participating interest holder. For example, if a participating interest holder also is the servicer of the entire financial asset and receives cash in its role as servicer, that arrangement would not violate this requirement.
d. No party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to pledge or exchange the entire financial asset.
If a transfer of a portion of an entire financial asset meets the definition of a participating interest, the transferor shall apply the guidance in paragraph 8. If a transfer of a portion of a financial asset does not meet the definition of a participating interest, the transferor and transferee shall account for the transfer in accordance with the guidance in paragraph 14 as a secured borrowing. However, if the transferor transfers an entire financial asset in portions that do not individually meet the participating interest definition, paragraph 8 shall be applied to the entire financial asset once all portions have been transferred.
8. A transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the transferor surrenders control over those financial assets shall be accounted for as a sale if, and only if, all of the following conditions are met: