Clarifications concerning the protection provider in the case of financial leases and reverse repurchase agreements

Question

Section 9.4.3 in Part II of the Manual states that the leased assets in financial leases function as implicit protection. Hence, the protection is reported as a protection item under the applicable type of protection. However, as regards the question as to which counterparty is the protection provider, Example 55 therein seems to be inconsistent with Case 12 in the examples of complete reports, where it is shown that the protection provider is the debtor. Could you please clarify this inconsistency? In the same vein, could you please confirm that the protection provider in the case of reverse repurchase agreements is the debtor of the instrument?

Answer

The protection received in the form of (pledged) assets may be explicit (e.g. mortgage claims or securities pledged as collateral) or implicit (e.g. financial leases and reverse repurchase agreements) in the contract.

Nonetheless, irrespective of how the protection is received, the protection provider is necessarily a counterparty that is different from the creditor as protection is essentially about a transfer of the credit risk where the loss absorption in the event of a default is transferred from the creditor to a counterparty other than the creditor (see Article 1(11) and 1(13) of the AnaCredit Regulation).

In the context of AnaCredit, financial leases are economically equivalent to protected loans from the lessor (i.e. the legal owner of an asset such as a durable good) to the lessee (i.e. the economic owner of the leased asset, which is the party to whom the lessor lends this asset), enabling the lessee to rent the asset, where the leased asset is treated as collateral (see Section 6.1.1 in Part I of the Manual).

Consequently, please note that in the case of financial leases:

  • the legal owner of the leased assets (the lessor) is the creditor;
  • the economic owner (the lessee) is the debtor; and
  • the lessee is also reported as the protection provider.

In this connection, please note that Example 55 (i.e. Table 106 in particular) has been amended, where the protection provider is the debtor (the lessee), which is the economic owner of the leased assets.

Revised Table 106 Protection received dataset for the financial lease (selected data attributes)

Reporting reference date

Protection identifier

Type of protection

Protection provider identifier

30/04/2019

Prot#1

Other physical collaterals

Lessee#A OA#1

Notably, the lessee is correctly shown as the protection provider in Case 12 of the examples of complete reports.

As regards reverse repurchase agreements, these transactions are economically equivalent to a secured loan, where the cash loaned out in exchange for assets is reported as an instrument, and the assets underlying the reverse repurchase transaction, which in essence collateralise the instrument, are recorded as protection (see Section 6.1.1 in Part I of the Manual).

Please note that the counterparty receiving the assets is the creditor and the counterparty receiving the loan is the debtor. Notably, also in this case, the protection provider is the debtor because it remains the economic owner of the assets given as collateral to the creditor and will hence absorb the loss in the event of a default.

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See also Clarifications regarding the reporting of off-balance-sheet amounts for financial leases, Protection items extended from the head office to its branch

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