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2024-09-23 | NDMC-36

Technical Standards for the Valuation of Assets Susceptible to Securitization and Assets Integrating a Securitization Fund

The Central Bank of El Salvador's Standards Committee issued Technical Standards NBCR-09/2024 to establish mandatory valuation guidelines for assets forming securitization funds. The regulations require securitization companies to ensure assets are valued by qualified experts using principles aligned with IFRS and IVS, with specific protocols for real estate and financial assets. Furthermore, the document mandates monthly reporting of fair values, internal control policies, and defines procedures for handling extraordinary asset substitutions and liquidations.

El Salvador

Superintendencia del Sistema Financiero

CNBCR-09/2024 NDMC-36 TECHNICAL STANDARDS FOR THE VALUATION OF ASSETS SUSCEPTIBLE TO SECURITIZATION AND OF ASSETS THAT INTEGRATE A SECURITIZATION FUND Approval: 09/23/2024 Validity: 10/09/2024 Alameda Juan Pablo II, between 15 and 17 Norte Ave, San Salvador, El Salvador. Tel. (503) 2281-8000 www.bcr.gob.sv Page 1 of 9

THE STANDARDS COMMITTEE OF THE CENTRAL BANK OF RESERVE OF EL SALVADOR,

CONSIDERING: I. That Article 46, letter a) of the Securitization of Assets Law, establishes that Securitization Funds may be constituted and integrated with real estate assets that must be valued by experts registered with the Superintendent of the Financial System or in other registries recognized by it. II. That Article 51, second paragraph of the Securitization of Assets Law, establishes that prior to the alienation of assets by the originator to a Securitization Fund, the assets must be subjected to the opinion of an appraiser qualified by the Superintendent of the Financial System. III. That Article 5, letter a) of the Law on Supervision and Regulation of the Financial System establishes that it is the responsibility of the Superintendent to authorize, suspend, or cancel the public offering of securities and the operation of persons or transactions carried out in the stock market, in accordance with what is established in the applicable provisions. IV. That Article 7, letter q) of the Law on Supervision and Regulation of the Financial System establishes that securitization companies are subject to the provisions of said Law and therefore to the supervision of the Superintendent of the Financial System. V. That Article 99 of the Law on Supervision and Regulation of the Financial System establishes that the Central Bank of Reserve, by virtue of said Law, is the institution responsible for the approval of the technical regulatory framework that must be issued in accordance with this Law and other laws regulating the supervised entities. In the fulfillment of this responsibility, the Central Bank of Reserve must ensure that the regulatory framework applicable to the financial system is periodically reviewed, seeking its timely update.

THEREFORE, by virtue of the regulatory powers conferred upon it by Article 99 of the Law on Supervision and Regulation of the Financial System, AGREES to issue the following:

TECHNICAL STANDARDS FOR THE VALUATION OF ASSETS SUSCEPTIBLE TO SECURITIZATION AND OF ASSETS THAT INTEGRATE A SECURITIZATION FUND

CHAPTER I OBJECT, SUBJECTS, AND TERMS

Object Art. 1.- These Standards aim to establish general guidelines for the valuation of assets susceptible to securitization and of assets that integrate a Securitization Fund.

Subjects Art. 2.- The subjects obliged to comply with the provisions established in these Standards are the Securitization Companies.

Terms Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning: a) Assets: The assets that integrate a Securitization Fund; b) Central Bank: Central Bank of Reserve of El Salvador; c) Fund(s): Securitization Funds; d) Securitization Law: Securitization of Assets Law; e) Methodology: Valuation model that incorporates technical and statistical criteria, considering economic variables provided by specialized official sources in this matter, which provides for each of the assets according to its nature, a fair value for its valuation; f) Originator: Person owning assets susceptible to securitization in accordance with the Securitization of Assets Law; g) Expert or Appraiser: Natural or legal person authorized to perform the valuation of assets in accordance with what is established in the Securitization Law and norms issued by the Standards Committee of the Central Bank of Reserve of El Salvador, as applicable; h) Representative of Security Holders: Legal person in charge of representing the owners of the securities of each Fund in accordance with what is established in the Securitization of Assets Law; i) Superintendent: Superintendent of the Financial System; j) Securitization Company: Legal person that administers the Securitization Funds, registered with the Superintendent of the Financial System; k) Fair Value: The amount for which a certain security or financial asset can be exchanged between an informed buyer and seller, or cancel an obligation between an informed debtor and creditor, who carry out a free transaction between independent parties, acting under market conditions. It is assumed, in any case, that the going concern principle is fulfilled for both parties participating in the transaction; and l) Replacement Value: The amount estimated to be necessary to replace a building or asset, if it were destroyed totally or partially by natural causes or by the own decision of an originator.

CHAPTER II VALUATION CRITERIA FOR REAL ESTATE ASSETS SUSCEPTIBLE TO SECURITIZATION

Valuation Art. 4.- The valuation of real estate assets for the purpose of constituting a Securitization Fund shall be carried out by an expert registered with the Superintendent or in another registry recognized by it for the Recognition and Qualification of Appraiser Experts for Assets -37), approved by the Central Bank through its Standards Committee.

Basic principles of real estate valuation Art. 5.- The valuation of real estate assets shall be subject to the basic principles -27), approved by the Central Bank through its Standards Committee. Likewise, the appraiser in charge of the valuation of any real estate must state in the report issued the description of the method used for its valuation, based on their technical criteria and experience, in accordance with what is established in the aforementioned Standards.

Technical methods of valuation Art. 6.- The principles, techniques, and methods for the valuation of real estate assets shall be based on the standards and criteria defined in the International Financial Reporting Standards (IFRS) and in the International Valuation Standards, issued by the International Valuation Standards Council (IVSC), provided that there is no Law or local norm that provides for a different treatment than that established by said standards.

Minimum content of the appraisal report Art. 7.- The valuation report must be signed by an appraiser registered with the Superintendent or another registry recognized by it. In any case, the report must include as a minimum the requirements mentioned in the -27) approved by the Central Bank through its Standards Committee, and if it concerns a company, it must be signed by its legal representative.

CHAPTER III VALUATION CRITERIA FOR FINANCIAL ASSETS SUSCEPTIBLE TO SECURITIZATION

Valuation Art. 8.- The valuation of financial assets for the purpose of constituting a Securitization Fund shall be carried out by an expert qualified by the Superintendent, in accordance with what is established in the -37), approved by the Central Bank through its Standards Committee.

Valuation principles Art. 9.- The valuation of financial assets shall be carried out attending to the following principles: a) Efficiency: The estimates must adequately reflect the realization value in the market of the assets susceptible to securitization; b) Independence: In the development of valuation functions, appropriate mechanisms must be established to minimize the possible emergence of conflicts of interest; c) Responsibility: The responsibility for the estimation of the value of financial assets susceptible to securitization must be clearly assigned; d) Timeliness: The valuation of assets susceptible to securitization must be carried out prior to the alienation of the financial assets, in order to have a professional parameter in the onerous transaction that is carried out; e) Objectivity: The determination and assignment of the fair exchange value or price of a security or title must be carried out based on technical and professional criteria, which recognize the effects derived from changes in the behavior of variables that may affect said price; f) Transparency: The fair exchange value or price of a security or financial asset must be determined and assigned with the purpose of revealing a certain, neutral, verifiable, and representative economic result of the rights incorporated in the respective security or financial asset; and g) Professionalism: The determination of the fair exchange value or price of a financial asset susceptible to securitization must be based on the analysis and study that a prudent and diligent expert would carry out, aimed at the search, obtaining, knowledge, and evaluation of all relevant available information, in such a way that the determined value reflects the amounts that would reasonably be received for its sale.

Art. 10.- The general principles for the valuation of financial assets susceptible to securitization shall be those defined by the International Financial Reporting Standards (IFRS), provided that there is no Law or local norm that provides for a different treatment than that established by said standards.

Art. 11.- In the valuation report of financial assets susceptible to securitization, the appraiser must describe the principles, techniques, and methods used for the valuation of financial assets that will form the Fund; likewise, they must incorporate information such as its source and other economic variables originated by specialized official entities, specific for each of the assets, according to their nature. If there are no changes in the valuation method, this information may be presented only once, adding a summary of the valuation in subsequent valuation reports.

Methods for determining fair value Art. 12.- The methodology used for the calculation of the fair value of financial assets susceptible to securitization must consider as fair value the following: a) For Funds to be constituted by securities traded on the stock exchange, that provided by some specialized agent in the valuation of securities authorized by the Superintendent; and b) For Funds to be constituted by financial assets other than those established in the previous letter, that determined through financial valuation methods of assets. In any case, the expert must evaluate the reasonableness of the assumptions that have been considered to establish the future cash flows of the underlying assets to be securitized.

CHAPTER IV VALUATION OF ASSETS THAT INTEGRATE A SECURITIZATION FUND

Asset individualization report Art. 13.- The Securitization Company shall be responsible for sending to the Superintendent a monthly report on the individualized assets that make up the Securitization Funds it administers. In the case of future financial flows, the Securitization Company must include in said report an evaluation of the projections initially presented for the constitution of the Fund, comparing them with the real flows generated by the underlying assets.

Fair value of the Fund Art. 14.- The Securitization Company must send to the Superintendent, in the monthly trial balance of each of the Securitization Funds, the total fair value of them calculated based on the methodology described in the policies and procedures as required in these Standards, considering that the prices come from, according to the following criteria: a) For Funds constituted by securities traded on the stock exchange, those provided by some specialized agent in the valuation of securities authorized by the Superintendent. In the event that there are no price vectors from specialized agents, the price vector published by the Superintendent regarding the pension topic will be used. For the valuation of securities and other financial assets traded in international markets, financial information systems recognized by the Superintendent will be used; b) For Funds constituted by rights on future financial flows, the Securitization Company will use the present value of the future flows determined through financial asset valuation methods; likewise, it must evaluate the reasonableness of the assumptions considered to calculate the future flows. When deemed necessary, it may require the valuation of the rights on future financial flows carried out by an expert qualified by the Superintendent, who must also issue an opinion on the reasonableness of the assumptions to calculate said flows; c) In the case of Funds constituted by credit portfolios and other assets of a credit nature, the Securitization Company must calculate the fair value of the Fund monthly. When deemed necessary, it may require that an expert qualified by the Superintendent values the portfolios from the date the last valuation report was issued; and d) The valuation reports of real estate assets that integrate the Fund must be valued at least once every twelve months, for which the date on which they were acquired must be considered and they must be carried out by experts recognized by the Superintendent. The Securitization Company must calculate the fair value of the Fund monthly considering the last appraisal carried out by an expert recognized by the Superintendent.

Art. 15.- When there is an event that, according to the Securitization Company, may significantly and negatively affect the value of the securitized asset, the Securitization Company must obtain, no later than eleven business days after the event has occurred, a valuation report from an expert qualified for such effect.

Art. 16.- The accounting records must reflect the fair value of the assets that make up the Fund, in accordance with the provisions of these Standards.

CHAPTER V GENERAL STANDARDS FOR THE CONTRACTING OF APPRAISER EXPERTS

Contracting of the expert Art. 17.- In the contract signed by the Securitization Company with the appraiser, the deadline for the issuance and delivery of the valuation report must be defined. Likewise, the method for resolving potential conflicts of interest arising from the contracted expert must be recorded.

Valuation reports Art. 18.- The expert must deliver within ten business days after the date of completion of the respective report, the notarially certified copies that the Securitization Company needs.

Art. 19.- The Securitization Company is the entity responsible for sending the certifications on appraisal reports to the Superintendent and keeping them available to the Representative of Security Holders - Techniques for the Submission and Disclosure of Information of Companies -34), approved by the Central Bank through its Standards Committee.

CHAPTER VI VALUATION AND LIQUIDATION OF EXTRAORDINARY ASSETS AND SUBSTITUTION OF ASSETS OF THE FUND

Art. 20.- For the purposes of what is established in the first paragraph of Article 23 of the Securitization Law, the extraordinary assets that the Securitization Company intends to sell or pledge on behalf of the Securitization Fund must be valued previously by an expert qualified or recognized by the Superintendent, according to the nature of the asset.

Art. 21.- In the case that Funds are constituted that consider the substitution of assets, the Securitization Company must establish the rules and percentages of substitution in the securitization contract.

Art. 22.- The Securitization Company, prior to the substitution being carried out, must have an appraisal by an expert qualified or recognized by the Superintendent and the approval of the Representative of Holders.

CHAPTER VII OTHER PROVISIONS AND VALIDITY

Internal control and database Art. 23.- For the valuation of assets that integrate the Securitization Funds, the Securitization Company must have policies and procedures to determine the fair value of the Funds it administers, which must contain at least the following: a) Description of the methodology to determine the fair value, according to the type of assets to be valued; b) Definition of roles of the people and authorities involved in the valuation process, as well as those responsible for making decisions when situations arise where the application of a procedure defined in the methodology is not viable; and c) Description of the procedures that will be used to periodically monitor the valuation and the correct application of the methodology. The Securitization Company must send to the Superintendent the policies and procedures to determine the fair value for each Fund it administers, five business days after approval by its Board of Directors, with the corresponding minutes point of approval. When there are deviations from the application of the methodology, the Board of Directors must reason before the Superintendent the reasons that originated the deviation. The Board of Directors shall be responsible for the determination of the fair value of the Funds that the Securitization Company administers.

Art. 24.- The Securitization Company must maintain the information of the price vectors and the amounts of the appraisals it uses to value the assets of each of the Securitization Funds it administers, including the database and the source of information used for its respective calculation, as well as that provided by appraiser experts or by specialized agents in the valuation of securities.

Constitution of reserves Art. 25.- The constitution of reserves or provisions for deterioration of the quality of financial assets is optional for each Fund. The policy adopted regarding this matter, together with other prudential measures, shall be expressly recorded in the securitization contract of the Fund, in accordance with the -28), approved by the Central Bank through its Standards Committee.

Sanctions Art. 26.- Non-compliance with the provisions contained in these Standards shall be sanctioned in accordance with what is established in the Law on Supervision and Regulation of the Financial System.

Repeal Art. 27.- These Standards repeal the Standards for the Valuation of Assets (RCTG-15/2010), approved by the Board of Directors of the Superintendent of Securities in Session on May 25, 2010, whose Organic Law was repealed by Legislative Decree No. 592 containing the Law on Supervision and Regulation of the Financial System, published in the Official Journal No. 23, Volume No. 390, dated February 2, 2011.

Unforeseen Aspects Art. 28.- The aspects not provided for in the regulatory matter in these Standards shall be resolved by the Central Bank through its Standards Committee.

Validity Art. 29.- These Standards shall enter into force from the ninth of October of two thousand twenty-four.