When setting up a securitisation transaction, a robust legal framework and clear roles are essential to secure the investment and guarantee market confidence. Although powerful, this financial mechanism relies on the coordinated involvement of players with well-defined and strictly regulated functions. Among them, the portfolio management company and the custodian institution form an operational tandem whose reliability determines the success of the whole. Understanding their status, their respective missions and their responsibilities is therefore fundamental for all stakeholders. Our firm, dedicated to banking and finance lawThis article sets out to explain the prerogatives and obligations of these two pillars. The purpose of this article is to detail the prerogatives and obligations of these two pillars, based on the legal framework governing securitisation vehicles in France. For an overview, please refer to our general presentation on the participants in a securitisation transaction.
The portfolio management company (PMC): the backbone of the securitisation transaction
The portfolio management company (PMC) is much more than a mere administrator; it is the real conductor of the securitisation vehicle. Its role has changed significantly, particularly since the Order of 4 October 2017, which clarified and strengthened its central position, especially in the formation of securitisation pools.
sgp status: amf-approved investment services provider
To carry out its functions, an asset management company must obtain the status of investment services provider (ISP). This status is granted only after a rigorous authorisation procedure conducted by the Autorité des marchés financiers (AMF). The AMF carries out in-depth checks on a number of criteria to ensure sound and prudent management. Firstly, the company must have its registered office and effective management in France. It must also have sufficient initial capital and financial resources to support its business programme.
The AMF also takes a close look at share ownership. The identity of shareholders, whether direct or indirect, holding a qualifying interest must be disclosed, and their quality is assessed to ensure that they will not stand in the way of prudent management. Governance is another area of focus. The effective management of the SGP must be ensured by at least two persons of sufficiently good repute and experience. It is only after these checks have been carried out that authorisation is granted, sometimes subject to special conditions designed to preserve the structure's financial equilibrium.
Functions of the sgp: constitution, management and representation of the organisation
The tasks of the asset management company are threefold and cover the entire life cycle of the securitisation vehicle. Firstly, the asset management company is responsible for setting up the securitisation vehicle. This is a major change, since the previous system required the fund to be co-founded by the SGP and the custodian institution. Positive law now enshrines the principle of "monofoundation": the asset management company (or, in some cases, the sponsor of the transaction) is solely responsible for creating the fund, which clarifies responsibilities from the outset.
Secondly, it manages the organisation, whether it is a CTF or a securitisation company. This management is comprehensive and covers legal, financial and accounting aspects. The SGP is responsible for issuing securities, calculating coupons, monitoring debt eligibility criteria and drawing up management reports and accounting documents. Its role also includes monitoring the underlying assets, which may involve actions relating to recovery of securitised receivables.
Lastly, the SGP represents the securitisation undertaking in dealings with third parties and in any legal proceedings. It acts by virtue of a specific legal mandate. The nature of this representation is unusual, particularly for CTFs which have no legal personality. The SGP therefore acts on behalf of the co-ownership formed by the unitholders, who cannot be considered as principals in the traditional sense of civil law.
The custodian institution: guarantor of security and regularity
While the asset management company is the driving force behind the operation, the custodian institution is its guardian. Its role is essential to ensure the protection of the fund's assets and to monitor the regularity of the operations carried out by the management company. Its independence is the keystone of its function.
Status of custodian institution: authorised and compatible institutions
Only an entity meeting strict criteria may be a custodian. This mainly concerns credit institutions established in a State of the European Economic Area. The Minister for the Economy may also authorise other entities, such as the Banque de France or the Caisse des Dépôts et Consignations, to perform this function. To prevent any conflict of interest, the law lays down a fundamental rule of incompatibility: the same entity may not perform the functions of management company and custodian for the same securitisation undertaking. This separation guarantees the impartiality of the supervision exercised by the depositary.
Custodian functions: custody of assets and control
The role of the custodian is twofold. The first is the safekeeping of the organisation's assets. Custody covers several aspects. The custodian safeguards the financial instruments, either by registering them in its books or by physically holding them. It also holds the legal documents evidencing the receivables, such as transfer slips, and keeps the register of these receivables. It verifies their existence on a random basis. For other assets, it keeps a register and checks that they are real. While custody of financial instruments may be delegated to a third party, custody of debt instruments may be entrusted, under the custodian's responsibility, to the assignor or the entity responsible for collection.
Its second function is control. The custodian ensures that the decisions taken by the management company are in order. This control is carried out a posteriori and covers compliance with legal, regulatory and statutory provisions. It is also responsible for monitoring the fund's cash flows. In particular, it ensures that all payments made by investors when subscribing for shares have been received and correctly accounted for.
Custodian liability: a strict regime but possible exemptions
The depositary is liable directly to the holders of its units or shares. The regime is particularly strict as regards the loss of financial instruments entrusted to its safekeeping. In the event of loss by the fund itself or by a third party to whom it has delegated custody, it is obliged to return identical financial instruments or the corresponding sum without delay. He may only be exempted from this liability by proving that the loss resulted from an unforeseeable and irresistible external event, the consequences of which could not have been avoided despite all reasonable efforts.
However, where custody of assets is delegated, the custodian may be relieved of its responsibility under three very specific cumulative conditions. Firstly, the custodian must prove that all legal obligations relating to the delegation have been fulfilled. Secondly, a written contract must exist with the third party, expressly transferring liability to the third party and allowing the securitisation undertaking to take direct action against the third party. Thirdly, a written contract between the depositary and the securitisation undertaking (or its PMC) must expressly authorise this discharge of liability for objective reasons.
Solent avocats: your advice on the legal framework for securitisation players
The structuring of a securitisation transaction is based on a complex balance between the desired performance and legal certainty. The roles and responsibilities of the asset management company and the custodian are defined by a dense regulatory framework, every detail of which is important. Failure to comply with these obligations can have significant consequences for all stakeholders. Our firm, with its strong practice in banking and finance lawWe work with the players involved in these arrangements to secure their transactions and defend their interests. For an analysis of your situation, contact our team.
Sources
- Monetary and Financial Code
- Commercial code
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