medium · Asset-Backed Securities regulatory
Under US GAAP (ASC 810), a sponsor must consolidate an ABS trust if it is determined to be the 'Primary Beneficiary' of the Variable Interest Entity (VIE).
Which two factors are used to make this determination?
- The legal ownership of more than 50% of the trust's outstanding voting shares, combined with the contractual right to appoint a majority of its Board of Directors overall.
- The power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses/right to receive benefits that could be significant.
- The retention of at least 5% of credit risk under the Dodd-Frank risk retention rules and the entity's status as a 'Qualified Special Purpose Entity' (QSPE) exempt from GAAP consolidation.
- The rendering of a formal 'True Sale' legal opinion by outside counsel and the transfer of all 'Effective Control' over the assets to a bankruptcy-remote special purpose entity.
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