Module: | MODULE B: RISK MANAGEMENT
Q395: Consider the following statements regarding the True Sale criteria under the RBI Master Direction on Securitisation of Standard Assets:
1. The transfer of assets from the originator to the Special Purpose Entity must permanently isolate the originator from all associated risks.
2. The originator is permitted to maintain a call option to repurchase the transferred assets if their credit quality deteriorates significantly.
3. In the event of the originator's bankruptcy, the transferred securitised assets must remain completely protected and isolated from the originator's general creditors.
Which of the statements given above is/are correct?
2. The originator is permitted to maintain a call option to repurchase the transferred assets if their credit quality deteriorates significantly.
3. In the event of the originator's bankruptcy, the transferred securitised assets must remain completely protected and isolated from the originator's general creditors.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: The foundational requirement of a securitisation transaction is the True Sale.
The transfer of assets to the Special Purpose Entity (SPE) must ensure that the originator is permanently divested of all legal and beneficial risks associated with the assets.
Statement 3 is correct: A True Sale ensures Bankruptcy Remoteness.
Even if the originator goes into liquidation or bankruptcy, the transferred assets in the SPE belong strictly to the investors and are shielded from the originator's creditors.
Statement 2 is incorrect: An originator is strictly prohibited from holding a call option or an obligation to repurchase underlying assets merely because their credit quality deteriorates.
Doing so constitutes implicit support and recourse, which completely nullifies the True Sale structure, forcing the assets back onto the originator's balance sheet along with the full capital charge.
The transfer of assets to the Special Purpose Entity (SPE) must ensure that the originator is permanently divested of all legal and beneficial risks associated with the assets.
Statement 3 is correct: A True Sale ensures Bankruptcy Remoteness.
Even if the originator goes into liquidation or bankruptcy, the transferred assets in the SPE belong strictly to the investors and are shielded from the originator's creditors.
Statement 2 is incorrect: An originator is strictly prohibited from holding a call option or an obligation to repurchase underlying assets merely because their credit quality deteriorates.
Doing so constitutes implicit support and recourse, which completely nullifies the True Sale structure, forcing the assets back onto the originator's balance sheet along with the full capital charge.