ROLE OF TRUSTEES IN OPERATION OF THE TRANSACTION
The role of trustees in securitization transactions is far from standardized. The institution of trustees comes up for purely logistical reasons or to comply with legal requirements, but investors seem to place increasing reliance on the trustees.
The legal role of trustees is to act as a single window conduit for the investors. Trustees hold the legal title over the assets or the securities in trust for the investors. They enforce all covenants on the part of the contracting parties, and ensure that the servicer is performing his duties as per contract. The trustees would seek a noteholders’ vote in exceptional circumstances.
In addition, the traditional role of the trustees includes acting as authenticating agent, registrar, transfer agent, asset and account custodian and analytics provider, in addition to holding legal or security interest on the assets. These responsibilities can be expanded or reduced by a trust deed. Sometimes, trustees may get involved in actual operations and provide services as backup servicers. But trustees taking over the role of servicers may raise issues of conflict of interest.
Like most other spheres of activity, technology is fast entering to make trustees’ discharge of duties more efficient. Tadie (2005) mentions how technology is assisting trustees in better discharge of trustee functions:
• Covenant maintenance. An automated electronic ticker system enables periodic reviews of an asset-backed security’s covenant to be conducted on an ongoing basis for the life of a transaction.
• Funds collection and investment. Electronic collection and tracking technologies facilitate the flow of incoming cash from servicers and its eventual investment according to the bondholder’s wishes.
• Bond analytics. Proprietary programs calculate cash flow water-falls and allocate bond payments for multiclass structures; historical data-capture systems help generate customized reports for issuers, projecting valuations for residuals under varying economic assumptions.
• Investor communications. The Internet, proprietary electronic bulletin boards, and automated voice response systems enable communication with investors through multiple channels in addition to telephone and face-to-face interactions with relationship managers.
As for servicers, there have been attempts to standardize trustees’ reports too. For instance, in 2005 the Bond Market Association (now the Securities Industry and Financial Markets Association) in 2005 finalized a format of trustee report for collateralized debt obligations.
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