CFM72400 - Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: the note-issuing company: incidental activities

SI2006/3296: regulation 5(5)

Meaning of ‘incidental activities’

Incidental activities include activities that are incidental to the management of the assets. These include entering into derivative contracts to hedge the assets, borrowing money for short term liquidity, raising subordinated loans from the originator or from banks to fund the payment of expenses or establishing reserves against impairment losses, entering into agreements with third parties who provide services connected with the issuance of the capital market instruments, and ongoing administration of the securitised assets.

Current market practice reflects that fact that the portfolio of financial assets tends now to be more heavily managed than in the periods prior to the financial crisis in 2008. Permitted activities of the note-issuing company include the servicing of the financial assets and certain debt enforcement functions where such activities are carried out with the purpose of repaying the capital market debt.

A typical ‘enforcement’ example which occurs in practice is where there is a sale of the financial assets back to the Originator or original seller as a result of a breach of warranty. This type of ‘enforcement’ would not cause the note-issuing company to fall outside of the scope of the permitted activities set out in the Regulations.

Another example of a permissible activity is where there is a sale of the financial assets back to the Originator or original seller where the terms of the loan would otherwise require the securitisation company to provide additional funds.

A company would not be excluded from the regime because of such activities. A trading activity involving any other activities than those mentioned would exclude a company from the regime. For example, the trading company whose income stream is securitised in a whole business securitisation could never be a securitisation company.

Equally, a group finance company with a range of borrowing activities as part of its overall responsibility for a group’s treasury function, which was party to a securitisation arrangement, could not be said to have non-qualifying activities which were only incidental to its involvement in the securitisation.

‘Acquiring’ an asset can be taken as including the creation of the asset in the first place.