Circular 2/2016 of the National Securities Market Commission on Accounting Standards, Annual Accounts, Public Financial Statements and Statistical Information Reports of Securitization Funds

OFFICIAL STATE GAZETTE No. 104 Saturday, April 30, 2016 Sec. I. Page 28900 I. GENERAL PROVISIONS NATIONAL SECURITIES MARKET COMMISSION 4141 Circular 2/2016, of April 20, of the National Securities Market Commission, on accounting standards, annual accounts, public financial statements and reserved statistical information reports of securitization funds. I Law 5/2015, of April 27, on the promotion of business financing, modifies the legal regime of securitizations with a view to their revitalization. One of the axes around which the reform is articulated involves strengthening the requirements in matters of transparency and investor protection, in line with international best practices. In this sense, Chapter III of Title III collects the transparency regime of Securitization Funds. Among the information obligations established by Law 5/2015, of April 27, Article 34 states that the management company of Securitization Funds must prepare and publish on its website the annual report and the quarterly reports of each of the Funds it manages. The same article empowers the National Securities Market Commission (hereinafter, CNMV) to determine the form, content and other conditions for the preparation and publication of the information referred to in the aforementioned Chapter III, including therefore the quarterly and annual reports. Likewise, Article 35 specifies that the CNMV may establish the obligation to include, in the Fund's annual report, any other information it deems appropriate. Additionally, paragraph 4 of the aforementioned Article 35 of Law 5/2015, of April 27, establishes that the CNMV may establish and modify the accounting standards and the models to which the financial statements of the Funds and the scope and content of special reports by auditors or other independent experts must be subject. Therefore, this Circular develops the content, form and other conditions for the preparation and publication of the financial and accounting information obligations established by Law 5/2015, of April 27, in its Articles 34 and 35. The regulatory adaptation in accounting matters for Securitization Funds has been addressed in this Circular taking into account both their nature, legal configuration and way of functioning as well as the accounting principles and standards contained in the Commercial Code and in the General Accounting Plan approved by Royal Decree 1514/2007, of November 16. In particular, among the special characteristics of Securitization Funds stand out: – As established in Law 5/2015, of April 27, Securitization Funds are separate estates, lacking legal personality, with a net asset value of zero. – As a consequence of the Fund's zero net asset value, any possible benefit resulting from its activity is generally passed on to the assignor of the securitized assets and any possible loss is charged to the Fund's liabilities, respecting the reverse order of payment priority, established in the constitution agreement for each payment date. – Considering the legal nature of Securitization Funds, the substitution of the statement of changes in equity, provided for in the Commercial Code, by the statement of income and expenses recognized is justified, which will present the concepts that according to the General Accounting Plan must be registered in equity. Taking into account the special nature of the Funds, any expense (income) recognized directly in equity implies the pass-through of an income (expense) of the opposite sense, which maintains the null equity. Therefore, at the end of each period, the net balance of the amounts registered directly in this state will be passed on to the balance sheet, for which the heading "Adjustments passed on to the balance sheet of income and expenses recognized" has been provided, which will be presented separately in the liability with the corresponding sign. – Likewise, the accounting criteria applicable to synthetic securitizations, provided for in Law 5/2015, of April 27, are included, through which Funds synthetically securitize loans and other credit rights, assuming the Funds, totally or partially, the credit risk of such loans or other credit rights, either by contracting credit derivatives with third parties, or by granting financial guarantees or sureties in favor of the holders of such loans or credit rights. The information breakdowns contained in this Circular pursue two different but complementary purposes: to facilitate greater transparency to the market and to allow adequate monitoring and evolution at the European level of asset securitization structures. Consequently, the submission of public financial information and reserved statistical information reports is required on a quarterly basis. II It is important to highlight that this rule clearly connects with the previously valid and operative regulation in Spain. In fact, this Circular is the heir to Circular 2/2009, of March 25, of the CNMV, on accounting standards, annual accounts, public financial statements and reserved statistical information reports of Securitization Funds. It is based on the same principles, replicates much of its structure and provisions and must be understood as an instrument that consolidates the previous regulation and completes it with the modifications and new information requirements introduced by Law 5/2015, of April 27. Circular 2/2009, of March 25, of the CNMV, has proven robust since its approval, reflecting the specificities inherent to securitization structures and extending to this type of institution the transparency regime provided for by Directive 2004/109/EC of the European Parliament and of the Council, of December 15, 2004, on the harmonization of transparency requirements relating to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. This Circular had been published using the express authorization referred to in the Single Final Provision of Royal Decree 926/1998, of May 14, regulating asset securitization funds and management companies of securitization funds, which was repealed by Law 5/2015, of April 27. The fact that this Circular opts for the repeal of the previous Circular, instead of modifying it, is due only to the effort to improve the systematicity and clarity of financial rules. Likewise, this is also another of the axes around which the reform of the securitization regime contained in Law 5/2015, of April 27, is articulated, which, in the face of the enormous regulatory dispersion in the Spanish legal regime of securitizations, proceeds to its necessary consolidation, to guarantee the coherence and systematicity of all the provisions governing this matter, providing greater clarity and legal certainty to the regulatory framework. III The Circular consists of thirty-four rules, divided into eight sections, a transitional provision, a repealing provision, a final provision and two annexes. The first section of the Circular is dedicated to formal and procedural matters. It covers the scope of application of the Circular, which includes Securitization Funds regulated by Law 5/2015, of April 27, as well as Mortgage Securitization Funds and Asset Securitization Funds regulated respectively by Law 19/1992, of July 7, on the Regime of Real Estate Investment Companies and Funds and on Mortgage Securitization Funds, and Royal Decree 926/1998, of May 14, which had been constituted prior to the approval of Law 5/2015, of April 27, as well as the form of presentation of the information. The second section collects the general accounting criteria, in line with those contained in the General Accounting Plan. Likewise, and following the principles and criteria contained in the aforementioned Plan, certain specific rules are included in the third section that take into consideration the particular structure and legal and operational configuration of Securitization Funds. Specifically, the following specific rules stand out in the third section: – The impairment criteria for financial assets incorporate an impairment provisioning schedule similar to that established in Annex IX of Circular 4/2004, of December 22, of the Bank of Spain, to credit institutions, on public and reserved financial information standards and models of financial statements. This allows obtaining a specific impairment regime for the assets of Securitization Funds similar to that existing for a significant part of the assets of the originators of said Funds (credit institutions). In this way, coherence in information and simplicity in the consolidation of Securitization Funds in the balance sheets of credit institutions are facilitated. – The accounting registration criteria for financial guarantees issued by Securitization Funds, especially relevant for synthetic Securitization Funds, are based on the treatment provided for in Circular 4/2004, of December 22, of the Bank of Spain. Likewise, specific information breakdowns for these Funds are included in the fourth section. – Regarding the initial recognition of assigned assets, in accordance with the general principles provided for in the General Accounting Plan, it will be carried out at their fair value less selling costs. However, the non-existence of profit will be presumed, in the absence of a valuation, carried out by an independent expert, of less than 6 months old. – The accounting registration treatment of the variable commission of Securitization Funds is established, whether this is determined by the difference between income and expenses or by the difference between receipts and payments, as well as the criteria for the allocation of previous profits and losses, considering the premise that the final accounting result of the year must be zero. The fourth section includes the models of public financial statements, to be sent to the CNMV, and the periodicity and deadline for submission. This section develops rules relating to the preparation and completion of the main public statements, incorporating clarifications, regarding the presentation of information, that arise from the application of the specific accounting rules contained in the previous section. The most outstanding aspect of this section lies in the inclusion of a greater breakdown of information, so that, in addition to the balance sheet, the income statement, the cash flow statement and the statement of income and expenses recognized, certain tables are incorporated that supply additional details that complete the framework of necessary information for the investor. These additional breakdowns refer to the securitized assets, the liabilities issued by the fund, credit enhancements, commitments arising from derivatives contracted by the fund, commissions, compliance with the Fund's operating rules and, where applicable, the report on compliance with asset and risk management policies. Part of the information contained in these additional breakdowns must be incorporated into the notes to the Fund's annual accounts. The fifth section refers to the annual accounts of a public nature. The models to which the balance sheet, the income statement, the cash flow statement and the statement of income and expenses recognized must conform are those provided for in the fourth section for public financial information models. This section also collects the minimum content of the notes. The sixth section refers to the content of the Fund's management report, which must include a faithful exposition of the evolution of the business and its situation, together with a description of the main risks and uncertainties it faces. Likewise, the management report will include a forecast of the Fund's cash inflows and outflows until the maturity of its assets and liabilities, based on the update, at the date of the annual accounts, of the assumptions made regarding the rates of delinquency, defaults and early amortization of the securitized assets. The seventh section refers to the internal accounting development and management control of the Fund. The eighth section, in line with the initiatives marked by the European Central Bank and for better control and supervision of Securitization Funds, incorporates the models of quarterly statistical information, to be sent by the management companies of said Funds. Finally, the Circular includes two annexes: the first contains the models of public financial statements referred to in the fourth section and the second, the models of reserved statistical information reports referred to in the eighth section. Consequently, by virtue of the authorization collected in Articles 34 and 35 of Law 5/2015, of April 27, the Council of the CNMV, prior to the report of the Institute of Accounting and Auditing of Accounts and the CNMV Advisory Committee, in accordance with the Council of State, in its meeting on April 20, 2016, has ordered the following: FIRST SECTION Formal and Procedural Matters Rule 1. Scope of application.

1. This Circular regulates the specific accounting rules, annual accounts, public financial statements and reserved statistical information reports of Securitization Funds.
2. Securitization Funds regulated by Law 5/2015, of April 27, on the promotion of business financing, as well as Mortgage Securitization Funds and Asset Securitization Funds regulated by Law 19/1992, of July 7, on the Regime of Real Estate Investment Companies and Funds and on Mortgage Securitization Funds, and Royal Decree 926/1998, of May 14, regulating asset securitization funds and management companies of securitization funds, respectively, which had been constituted prior to the approval of Law 5/2015, of April 27 (hereinafter "Fund" or "Funds"), are subject to compliance with this Circular.
3. The inclusion in this Circular of accounting rules and valuation and classification criteria for certain operations will not authorize the Fund to carry them out, if by the nature of the Fund or of them, by limitations on their operation imposed by applicable current provisions, by contractual agreement of issuance or its prospectus, or because specific authorization was needed for it, they could not be carried out. Rule 2. Accounting framework.
4. The specific accounting rules that Funds must comply with are those contained in this Circular.
5. In matters not provided for by this Circular, the provisions of the General Accounting Plan, approved by Royal Decree 1514/2007, of November 16 (hereinafter General Accounting Plan), shall apply.
6. Funds whose equity is divided into independent compartments, from which securities may be issued or obligations assumed of different classes and which may be settled independently, shall keep in their accounting separate accounts that differentiate the assets and liabilities, and income and expenses attributable to each compartment, without prejudice to the unity of the Fund's annual accounts. Rule 3. Scope of affected information.
7. This Circular shall apply to the information contained in the annual accounts, in the public financial statements and in the reserved statistical information reports of the Funds.
8. The National Securities Market Commission may require, in the development of its functions, any other additional information to that required by this Circular. Rule 4. Auxiliary development of accounting data.
9. Accounting records must contain the necessary detail on the characteristics of assets, liabilities, commitments, income and expenses, so that all the information contained in the annual accounts and different statements to be rendered can be clearly derived from them, which will maintain the necessary correlation both with each other and with that accounting basis.
10. The management company will establish adequate policies, methods and procedures for the correct valuation of asset risks and will have detailed documentation on the operations carried out by the Fund. Rule 5. Delimitation of the financial year. All Funds will adjust the financial year to the calendar year. Rule 6. Form of presentation of information.
11. Public financial statements and reserved statistical information reports shall be sent to the National Securities Market Commission within the deadlines and conditions established in Rules 21 and 34 of this Circular, respectively, without prejudice to the obligation to submit annual accounts and audit report.
12. The quarterly financial statements corresponding to the year-end shall be understood as presented to the National Securities Market Commission with the provisional nature implied by the subsequent mandatory formulation of the annual accounts by the Administrative Body of the Fund's management company. In the event that the audited annual accounts are not approved in the same terms in which the fourth quarter financial statements were sent to the National Securities Market Commission, the management company will be obliged to send the corrected quarterly statements within ten business days following the formulation of the annual accounts, highlighting and explaining the changes introduced.
13. The Fund, or its management company, may not modify the models of public and reserved statements established, nor suppress any of its items, which must always appear, even if their balances are zero.
14. The presentation to the National Securities Market Commission of the models of public financial statements and reserved statistical information reports must be made electronically through the electronic headquarters of the National Securities Market Commission, or another similar system, in accordance with the technical requirements established by said Commission at any time. The information must be presented signed by a person of the management company who has the authority to do so.
15. The currency for the presentation of the annual accounts of the Funds and the statements collected in this Circular, to be submitted to the National Securities Market Commission, shall be the euro. SECOND SECTION General Accounting Criteria Rule 7. True and fair view.
16. The annual accounts, periodic public information and reserved statistical information reports must be drafted clearly, showing the true and fair view of the financial situation, cash flows and results of the Fund, in accordance with the requirements of this Circular. To this end, in the accounting of operations, attention will be paid to their economic reality and not only to their legal form.
17. The information included in the annual accounts, in periodic public information and in reserved statistical information reports must be relevant, reliable, complete, clear and comparable. Rule 8. Accounting principles. The Fund's accounting and, in particular, the recording and valuation of the elements comprising the annual accounts and periodic public information, shall be developed by applying the accounting principles indicated below: (a) Going concern. It will be considered, unless proven otherwise, that the Fund's management will continue in the foreseeable future. In those cases where this principle does not apply because the Fund is in a situation of final liquidation or early liquidation, full information will be given in the notes to the annual accounts regarding such liquidation and its order of payment priority. (b) Accruals. The effects of transactions or economic events will be recorded when they occur, charging to the period to which the information refers the expenses and income that affect it, regardless of their payment or receipt date. (c) Uniformity. Once a criterion has been adopted within the alternatives that, where applicable, are allowed, it must be maintained over time and applied uniformly for transactions, other events and conditions that are similar, as long as the assumptions that motivated its choice are not altered. If these assumptions are altered, the criterion adopted at the time may be modified; in such a case, these circumstances will be recorded in the notes to the annual accounts, indicating the quantitative and qualitative impact of the variation on said annual accounts. (d) Prudence. Prudence must be exercised in estimates and valuations to be made under conditions of uncertainty. Prudence does not justify that the valuation of the elements comprising the annual accounts, periodic public information and statistical information of the reserved statements does not respond to the true and fair view that they must reflect. Likewise, only profits obtained up to the date to which the published information refers will be accounted for. On the contrary, all risks, originating in the period or in a previous one, must be taken into account as soon as they are known, even if they are only known between the date of closing the annual accounts and the date on which they are formulated. In such cases, full information will be given in the notes, without prejudice to its reflection, when a liability and an expense have been generated, in other documents comprising the annual accounts. Amortizations and impairment corrections of assets must be taken into account. (e) Non-compensation. Unless a rule expressly provides otherwise, assets and liabilities or expenses and income items may not be offset, and the elements comprising the accounts shall be valued separately.