b'TABLE OF CONTENTSrelationship in substance should be conductedconstitutes a meaningful level of cash flows and what and documented by a reporting entity at theconstitutes substantive credit enhancement. time such an investment is acquired. The level ofAs a practical expedient to determining whether a documentation and analysis required tocash-generating non-financial asset is expected to demonstrate that the rebuttable presumptionproduce meaningful cash flows, the Glossary has been overcome may vary based on thestates that an insurer may consider an asset for characteristics of the individual debt instrument,which less than 50% of the original principal relies on as well as the level of third-party and/or non- sale or refinancing to meet the meaningful insurer market validation to which the issuancecriterion. In applying this practical expedient, only has been subjected. For example, a debtcontractual cash flows of the non-financial asset may instrument backed by fewer, less diversifiedbe considered. The Glossary notes that this practical funds would require more extensive andexpedient should not be construed to mean that persuasive documented analysis than oneassets cannot meet the meaningful criterion if they backed with a larger number of diversifiedrely on sale or refinancing to service greater than funds. Likewise, a debt instrument that has been50% of the original principal or if they rely on cash successfully marketed to unrelated and/orflows that are not contracted at origination. Rather, non-insurer investors, may provide enhancedsuch instances would require a more complete, market validation of the structure compared tomulti-factor analysis described in the Glossary.one held only by related party and/or insurer investors where capital relief may be the primaryThe Glossary (as amended by the December 11, motivation for the securitization. 2021 exposure draft) explains that the substantive credit enhancement required to be Significantly, the proposal provides a path forin a different economic position is specific to each CFOswhich were targeted to lose bond treatmenttransaction, determined at origination and refers to under the now-superseded March 2020 draft issuethe level of credit enhancement a market paperto continue to be treated as bonds if theyparticipant (i.e., knowledgeable investor satisfy the above three criteria. Among other things,transacting at arms length) would conclude is the proposal notes that in instances where thesubstantive. It goes on to explain:assets owned by the ABS Issuer are equity interests, the debt instrument must have pre-determinedThe intent of the criteria requiring the holder to principal and interest payments (whether fixedbe in a different economic position is to interest or variable interest) with contractualdistinguish qualifying bonds from instruments amounts that do not vary based on the appreciationwith equity-like characteristics or where the or depreciation of the equity interests. substance of the transaction is more closely aligned with that of the underlying collateral. To Key Terms Used in the Bond Definition qualify as a bond under this standard, there is a The proposal includes a Glossary, explaining two of therequirement that there are substantive credit key concepts in the ABS part of the definition: whatenhancements within the structure that absorb MAYER BROWN |63'