| a) | An early amortisation mechanism, when triggered, allows investors to be paid out prior to the originally stated maturity of the senior commercial paper held by them, that is, investors will be paid out on an earlier date than what would have been the case had an early amortisation event not occurred. The implication is that once the early amortisation mechanism has been triggered, the institution will become exposed to any subsequent exposures arising from the underlying pool of accounts and the said institution will have to fund the said exposures. |
Such an early amortisation mechanism can in effect partly shield investors from fully sharing in the losses of the underlying accounts to the extent that the early amortization provision trigger is generally related to deterioration in the quality of the underlying pool of exposures.
| b) | Early amortisation provisions may provide for either a controlled or an uncontrolled mechanism. A controlled early amortization mechanism shall comply with the requirements specified in item (a) of subparagraph (2) below, resulting in a somewhat lower potential risk for the institution acting as an originator. |
| c) | An early amortisation mechanism that does not comply with the conditions for a controlled mechanism specified in item (a) of subparagraph (2) below shall be regarded as an uncontrolled mechanism for purposes of this Schedule. |
| 2) | Conditions relating to a controlled early amortisation mechanism in respect of revolving assets |
| a) | As a minimum, a controlled early amortisation mechanism in respect of revolving assets shall comply with the conditions specified below. |
| i) | The institution acting in a primary role shall have in place an appropriate capital and liquidity plan to ensure that it has sufficient capital and liquidity available in the event of an early amortisation. |
| ii) | Throughout the duration of the amortisation period, there shall be a pro rata sharing between investors in the said securitisation scheme and the institution that acts as an originator of interest, principal, expenses, losses and recoveries based on the beginning-of-the-month balance of the originator's and investor's relative share of receivable amounts outstanding. |
| iii) | The institution that acts as an originator shall set a period for amortisation that would be sufficient for a minimum of 90 per cent of the total debt outstanding at the beginning of the early amortisation period to have been repaid or recognised as being in default. |
| iv) | The pace of repayment shall not be any more rapid than would be the case if a straight-line amortisation over the period set out in sub-item (iii) above had been applied. |
