b'INSURANCE REGULATORY|US/NAIClosses before the debt instrument beingThe examples in Appendix II to the proposal evaluated would be expected to absorb losses.provide similar indications for the contemplated This is inherent in the context of an Issuer Creditdeterminations of meaningful cash flows and Obligation as the owners of the equity in thesubstantive credit enhancement.operating entity are the first to absorb any variability in performance of the operatingIssues Remaining to Be Resolvedentity. The same concept applies to asset- Some issues not addressed in the proposal include:backed securities. If substantive creditTreatment of synthetics (e.g., credit-linked enhancement did not exist, the substance of thenotes)are these permissible issuer credit debt instrument being evaluated would be moreobligations? What if they reference asset-closely aligned with that of the underlyingbacked-like pools?collateral than that of a bond. Credit enhancement that is merely nominal or lacksTransactions like future flow securitizations economic substance does not put a holder in a(i.e., not primarily derived from existing different economic position.financial assets but from obligations to originate additional financial assets)e.g., The proposal also includes two appendices withstranded cost tariff bonds.illustrative examples. Examples 1, 2 and 3 inCertain equity arrangements like collateral Appendix I indicate how the drafters think thattrust certificates and whole pool pass-the creditor relationship is to be analyzed. Ofthrough interests.particular interest, Example 1 describes a typical rated private equity (PE) feeder structure inAt the December 11, 2021 SAP WG meeting, it was which each investor (i) owns a pro rata share ofannounced that the informal working group is the unsecured debt investments and equitycurrently discussing the following topics:interests outstanding, and (ii) is restricted fromDefining an operating entity for purposes of selling, assigning or transferring the unsecureddetermining what is an issuer credit obligation;debt investment without also selling, assigning, or transferring the equity interest to the sameHow to address holdings of debt and equity party. The drafters conclude that the debtinterests in the same issuer; andinvestment does not have the required creditorWhat should be the statutory reporting relationship. It is unclear if this same resulttreatment of investments that are excluded applies when the underlying fund is not equity- from bond treatment under the new definition like and instead something else (e.g., privateafter it is adopted.credit, real estate or infrastructure debt, etc.). Also, it would appear from the example that in aPotential Reporting Changescase where the debt and equity investments areThe December 11, 2021 SAP WG meeting also not stapled (i.e., one can be sold without theexposed for comment a draft proposal for more other) a different conclusion may apply.64|Global Insurance Industry Year in Review 2021'