CA-6 CA-6 Credit Risk — Securitisation Framework
CA-6.1 CA-6.1 Scope and Definitions of Transactions Covered under the Securitisation Framework
CA-6.1.1
Banks must apply the securitisation framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitisations or similar structures that contain features common to both.
Apr 08CA-6.1.1A
A bank must meet all the requirements listed in the paragraph CA-6.1.1B below, to use any of the approaches specified in the securitisation framework. If a bank does not perform the level of the due diligence specified, it must deduct the amount of the securitisation (or re-securitisation) exposure from its regulatory capital using the approach outlined in the paragraphs CA-6.4.2 to CA-6.4.4.
Added: January 2012CA-6.1.1B
In order for a bank to use the securitisation framework, a bank must have the information specified below or deduct the exposure from regulatory capital:
(a) A bank must have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on-balance sheet or off-balance sheet, as well as the risk characteristics of the pools underlying its securitisation exposures;(b) A bank must be able to access performance information on the underlying pools on an on-going basis in a timely manner. Such information should include: exposure type, percentage of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans in foreclosure, property type, occupancy, average credit score or other measures of creditworthiness, average loan-to-value ratio, and industry and geographic diversification. For re-securitisations, a bank must have not only information on the underlying securitisation tranches, such as the issuer name and credit quality, but also the characteristics and performance of the pools underlying the securitisation tranches; and(c) A bank must have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the bank's exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default.Added: January 2012CA-6.1.2
Since securitisations may be structured in many different ways, the capital treatment of a securitisation exposure must be determined on the basis of its economic substance rather than its legal form. Similarly, CBB will look to the economic substance of a transaction to determine whether it should be subject to the securitisation framework for purposes of determining regulatory capital. Banks are encouraged to consult with the CBB when there is uncertainty about whether a given transaction should be considered a securitisation. For example, transactions involving cash flows from real estate (e.g. rents) may be considered specialised lending exposures, if warranted.
Amended: January 2012
Apr 08CA-6.1.3
A traditional securitisation is a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterise securitisations differ from ordinary senior/subordinated debt instruments in that junior securitisation tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation.
Apr 08CA-6.1.4
A synthetic securitisation is a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool.
Apr 08CA-6.1.5
Banks' exposures to a securitisation are hereafter referred to as "securitisation exposures". Securitisation exposures can include but are not restricted to the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivatives and tranched cover as described in paragraph CA-4.5.11. Reserve accounts, such as cash collateral accounts, recorded as an asset by the originating bank must also be treated as securitisation exposures.
Apr 08CA-6.1.5A
A re-securitisation exposure is a securitisation exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitisation exposure. In addition, an exposure to one or more re-securitisation exposures is a re-securitisation exposure.
Added: January 2012CA-6.1.5B
Given the complexity of many securitisation transactions, licensees are encouraged to consult with the CBB when there is uncertainty about whether a particular structured credit position should be considered a re-securitisation exposure. The CBB will consider the exposure's economic substance when making a determination on whether a structured credit position is a re-securitisation exposure.
Added: January 2012CA-6.1.5C
Re-securitisation exposures include collateralised debt obligations (CDOs) of asset-backed securities (ABS) including, for example, a CDO backed by residential mortgage-backed securities (RMBS). Moreover, it also captures a securitisation exposure where the pool contains many individual mortgage loans and a single RMBS. This means that even if only one of the underlying exposures is a securitisation exposure, then any tranched position (such as senior or subordinated ABS) exposed to that pool is considered a re-securitisation exposure.
Added: January 2012CA-6.1.5D
Furthermore, when an instrument's performance is linked to one or more re-securitisation exposures, generally that instrument is a re-securitisation exposure. Thus a credit derivative providing credit protection for a CDO squared tranche is a re-securitisation exposure.
Added: January 2012CA-6.1.5E
The definition of re-securitisation also applies to ABCP programmes. The ratings based risk approach tables include weightings for both securitisation and re-securitisation exposures (see CA-6.4.8 onward).
Added: January 2012CA-6.1.6
Underlying instruments in the pool being securitised may include but are not restricted to the following: loans, commitments, asset-backed and mortgage-backed securities, corporate bonds, equity securities, and private equity investments. The underlying pool may include one or more exposures.
Apr 08CA-6.2 CA-6.2 Definitions and General Terminology
Originating Bank
CA-6.2.1
For risk-based capital purposes, a bank is considered to be an originator with regard to a certain securitisation if it meets either of the following conditions:
(a) The bank originates directly or indirectly underlying exposures included in the securitisation; or(b) The bank serves as a sponsor of an asset-backed commercial paper (ABCP) conduit or similar programme that acquires exposures from third-party entities. In the context of such programmes, a bank would generally be considered a sponsor and, in turn, an originator if it, in fact or in substance, manages or advises the programme, places securities into the market, or provides liquidity and/or credit enhancements.Apr 08Asset Backed Commercial Paper (ABCP) Programme
CA-6.2.2
An asset-backed commercial paper (ABCP) programme predominately issues commercial paper with an original maturity of one year or less that is backed by assets or other exposures held in a bankruptcy-remote, Special Purpose Securitisation Vehicle (SPSV).
Apr 08Clean-up Call
CA-6.2.3
A clean-up call is an option that permits the securitisation exposures (e.g. asset-backed securities) to be called before all of the underlying exposures or securitisation exposures have been repaid. In the case of traditional securitisations, this is generally accomplished by repurchasing the remaining securitisation exposures once the pool balance or outstanding securities have fallen below some specified level. In the case of a synthetic transaction, the clean-up call may take the form of a clause that extinguishes the credit protection.
Apr 08Credit Enhancement
CA-6.2.4
A credit enhancement is a contractual arrangement in which the bank retains or assumes a securitisation exposure and, in substance, provides some degree of added protection to other parties to the transaction.
Apr 08Credit Enhancing Interest-Only strip
CA-6.2.5
A credit-enhancing interest-only strip (I/O) is an on-balance sheet asset that (i) represents a valuation of cash flows related to future margin income, and (ii) is subordinated.
Apr 08Early Amortization
CA-6.2.6
Early amortisation provisions are mechanisms that, once triggered, allow investors to be paid out prior to the originally stated maturity of the securities issued. For risk-based capital purposes, an early amortisation provision will be considered either controlled or non-controlled. A controlled early amortisation provision must meet all of the following conditions:
(a) The bank must have an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an early amortisation;(b) Throughout the duration of the transaction, including the amortisation period, there is the same pro-rata sharing of interest, principal, expenses, losses and recoveries based on the bank's and investors' relative shares of the receivables outstanding at the beginning of each month;(c) The bank must set a period for amortisation that would be sufficient for at least 90% of the total debt outstanding at the beginning of the early amortisation period to have been repaid or recognised as in default; and(d) The pace of repayment should not be any more rapid than would be allowed by straight-line amortisation over the period set out in criterion (c).Amended: April 2011
Apr 08CA-6.2.7
An early amortisation provision that does not satisfy the conditions for a controlled early amortisation provision must be treated as a non-controlled early amortisation provision.
Apr 08Excess Spread
CA-6.2.8
Excess spread is generally defined as gross finance charge collections and other income received by the trust or SPSV (specified in paragraph CA-6.2.10) minus certificate interest, servicing fees, charge-offs, and other senior trust or SPSV expenses.
Apr 08Implicit Support
CA-6.2.9
Implicit support arises when a bank provides support to a securitisation in excess of its predetermined contractual obligation.
Apr 08SPSV
CA-6.2.10
An SPSV is a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPSV, and the structure of which is intended to isolate the SPSV from the credit risk of an originator or seller of exposures. SPSVs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.
Apr 08CA-6.3 CA-6.3 Operational Requirements for the Recognition of Risk Transference
CA-6.3.1
The following operational requirements are applicable to both the standardised and IRB approaches of the securitisation framework.
Apr 08Operational Requirements for Traditional Securitisations
CA-6.3.2
An originating bank may exclude securitised exposures from the calculation of risk weighted assets under paragraph CA-6.4.1, only if all of the following conditions have been met. Banks meeting these conditions must still hold regulatory capital against any securitisation exposures they retain:
(a) Significant credit risk associated with the securitised exposures has been transferred to third parties;(b) The transferor does not maintain effective or indirect control54 over the transferred exposures. The assets are legally isolated from the transferor in such a way (e.g. through the sale of assets or through sub-participation) that the exposures are put beyond the reach of the transferor and its creditors, even in bankruptcy or receivership. These conditions must be supported by an opinion provided by a qualified legal counsel;(c) The securities issued are not obligations of the transferor. Thus, investors who purchase the securities only have claim to the underlying pool of exposures;(d) The transferee is an SPSV and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction;(e) Clean-up calls must satisfy the conditions set out in paragraph CA-6.3.5; and(f) The securitisation does not contain clauses that (i) require the originating bank to alter systematically the underlying exposures such that the pool's weighted average credit quality is improved unless this is achieved by selling assets to independent and unaffiliated third parties at market prices; (ii) allow for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception; or (iii) increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool.
54 The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it: (i) is able to repurchase from the transferee the previously transferred exposures in order to realise their benefits; or (ii) is obligated to retain the risk of the transferred exposures. The transferor's retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures.
Amended: April 2011
Apr 08Operational Requirements for Synthetic Securitisations
CA-6.3.3
For synthetic securitisations, the use of CRM techniques (i.e. collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognised for risk-based capital purposes only if the conditions outlined below are satisfied:
(a) Credit risk mitigants must comply with the requirements as set out in Chapter CA-4 of this Module;(b) Eligible collateral is limited to that specified in paragraphs CA-4.3.1 and CA-4.3.2. Eligible collateral pledged by SPSVs may be recognised;(c) Eligible guarantors are defined in paragraph CA-4.5.7. Banks may not recognise SPSVs as eligible guarantors in the securitisation framework;(d) Banks must transfer significant credit risk associated with the underlying exposure to third parties;(e) The instruments used to transfer credit risk may not contain terms or conditions that limit the amount of credit risk transferred, such as those provided below:• Clauses that materially limit the credit protection or credit risk transference (e.g. significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs or those that allow for the termination of the protection due to deterioration in the credit quality of the underlying exposures);• Clauses that require the originating bank to alter the underlying exposures to improve the pool's weighted average credit quality;• Clauses that increase the banks' cost of credit protection in response to deterioration in the pool's quality;• Clauses that increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the reference pool; and• Clauses that provide for increases in a retained first loss position or credit enhancement provided by the originating bank after the transaction's inception.(f) An opinion must be obtained from a qualified legal counsel that confirms the enforceability of the contracts in all relevant jurisdictions; and(g) Clean-up calls must satisfy the conditions set out in paragraph CA-6.3.5.Amended: April 2011
Apr 08CA-6.3.4
For synthetic securitisations, the effect of applying CRM techniques for hedging the underlying exposure are treated according to chapter CA-4. In case there is a maturity mismatch, the capital requirement will be determined in accordance with paragraphs CA-4.6.1 to CA-4.6.4. When the exposures in the underlying pool have different maturities, the longest maturity must be taken as the maturity of the pool. Maturity mismatches may arise in the context of synthetic securitisations when, for example, a bank uses credit derivatives to transfer part or all of the credit risk of a specific pool of assets to third parties. When the credit derivatives unwind, the transaction will terminate. This implies that the effective maturity of the tranches of the synthetic securitisation may differ from that of the underlying exposures. Originating banks of synthetic securitisations must treat such maturity mismatches in the following manner. A bank applying the standardised approach for securitisation must deduct all retained positions that are unrated or rated below investment grade. A bank applying the IRB approach must deduct unrated, retained positions if the treatment of the position is deduction specified in paragraphs CA-6.4.51 to CA-6.4.88. Accordingly, when deduction is required, maturity mismatches are not taken into account. For all other securitisation exposures, the bank must apply the maturity mismatch treatment set forth in paragraphs CA-4.6.1 to CA-4.6.4.
Apr 08Operational Requirements and Treatment of Clean-up Calls
CA-6.3.5
For securitisation transactions that include a clean-up call, no capital will be required due to the presence of a clean-up call if the following conditions are met:
(a) The exercise of the clean-up call must not be mandatory, in form or in substance, but rather must be at the discretion of the originating bank;(b) The clean-up call must not be structured to avoid allocating losses to credit enhancements or positions held by investors or otherwise structured to provide credit enhancement; and(c) The clean-up call must only be exercisable when 10% or less of the original underlying portfolio, or securities issued remain, or, for synthetic securitisations, when 10% or less of the original reference portfolio value remains.Amended: April 2011
Apr 08CA-6.3.6
Securitisation transactions that include a clean-up call that does not meet all of the criteria stated in paragraph CA-6.3.5 result in a capital requirement for the originating bank. For a traditional securitisation, the underlying exposures must be treated as if they were not securitised. Additionally, banks must not recognise in regulatory capital any gain-on-sale, as defined in paragraph CA-6.4.3. For synthetic securitisations, the bank purchasing protection must hold capital against the entire amount of the securitised exposures as if they did not benefit from any credit protection. If a synthetic securitisation incorporates a call (other than a cleanup call) that effectively terminates the transaction and the purchased credit protection on a specific date, the bank must treat the transaction in accordance with paragraph CA-6.3.4 and paragraphs CA-4.6.1 to CA-4.6.4.
Apr 08CA-6.3.7
If a clean-up call, when exercised, is found to serve as a credit enhancement, the exercise of the clean-up call must be considered a form of implicit support provided by the bank and must be treated in accordance with the supervisory guidance pertaining to securitisation transactions.
Apr 08CA-6.4 CA-6.4 Treatment of Securitisation Exposures
Calculation of Capital Requirements
CA-6.4.1
Except as stated in paragraph CA-6.3.2, banks are required to hold regulatory capital against all of their securitisation exposures and re-securitisation exposures, including those arising from the provision of credit risk mitigants to a securitisation transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the following sections. Repurchased securitisation exposures must be treated as retained securitisation exposures.
Amended: January 2012
Apr 08(i) Deduction
CA-6.4.2
When a bank is required to deduct a securitisation exposure from regulatory capital, the deduction must be taken 50% from Tier 1 and 50% from Tier 2 with the one exception noted in paragraph CA-6.4.3. Credit enhancing I/Os (net of the amount that must be deducted from Tier 1 as in paragraph CA-6.4.3) are deducted 50% from Tier 1 and 50% from Tier 2. Deductions from capital may be calculated net of any specific provisions taken against the relevant securitisation exposures.
Apr 08CA-6.4.3
Banks must deduct from Tier 1 any increase in equity capital resulting from a securitisation transaction, such as that associated with expected future margin income (FMI) resulting in a gain-on-sale that is recognised in regulatory capital. Such an increase in capital is referred to as a "gain-on-sale" for the purposes of the securitisation framework.
Apr 08CA-6.4.4
For the purposes of the EL-provision calculation as set out in Section CA-5.7, securitisation exposures do not contribute to the EL amount. Similarly, any specific provisions against securitisation exposures are not to be included in the measurement of eligible provisions.
Apr 08(ii) Implicit Support
CA-6.4.5
When a bank provides implicit support to a securitisation, it must, at a minimum, hold capital against all of the exposures associated with the securitisation transaction as if they had not been securitised. Additionally, banks would not be permitted to recognise in regulatory capital any gain-on-sale, as defined in paragraph CA-6.4.3. Furthermore, the bank is required to disclose publicly that (a) it has provided non-contractual support and (b) the capital impact of doing so.
Apr 08Operational Requirements for use of External Credit Assessments
CA-6.4.6
The following operational criteria concerning the use of external credit assessments apply in the standardised and IRB approaches of the securitisation framework:
(a) To be eligible for risk-weighting purposes, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest;(b) The exteral credit assessments must be from an eligible ECAI as recognised by the CBB in accordance with section CA-3.4 with the following exception. In contrast with (c) of paragraph CA-3.4.1, an eligible credit assessment must be publicly available. In other words, a rating must be published in an accessible form and included in the ECAI's transition matrix. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement;(c) Eligible ECAIs must have a demonstrated expertise in assessing securitisations, which may be evidenced by strong market acceptance;(d) A bank must apply external credit assessments from eligible ECAIs consistently across a given type of securitisation exposure. Furthermore, a bank cannot use the credit assessments issued by one ECAI for one or more tranches and those of another ECAI for other positions (whether retained or purchased) within the same securitisation structure that may or may not be rated by the first ECAI. Where two or more eligible ECAIs can be used and these assess the credit risk of the same securitisation exposure differently, paragraphs CA-3.4.5 and CA-3.4.6 will apply;(e) Where CRM is provided directly to an SPSV by an eligible guarantor defined in paragraph CA-4.5.7 and is reflected in the external credit assessment assigned to a securitisation exposure(s), the risk weight associated with that external credit assessment should be used. In order to avoid any double counting, no additional capital recognition is permitted. If the CRM provider is not recognised as an eligible guarantor in paragraph CA-4.5.7, the covered securitisation exposures should be treated as unrated; and(f) In the situation where a credit risk mitigant is not obtained by the SPSV but rather applied to a specific securitisation exposure within a given structure (e.g. ABS tranche), the bank must treat the exposure as if it is unrated and then use the CRM treatment outlined in chapter CA-4 or in the foundation IRB approach of chapter CA-5, to recognise the hedge.Amended: April 2011
Apr 08CA-6.4.6A
A bank is not permitted to use any external credit assessment for risk-weighting purposes where the assessment is at least partly based on unfunded support provided by the bank. For example, if a bank buys ABCP where it provides an unfunded securitisation exposure extended to the ABCP programme (e.g. liquidity facility or credit enhancement), and that exposure plays a role in determining the credit assessment on the ABCP, the bank must treat the ABCP as if it were not rated. The bank must continue to hold capital against the other securitisation exposures it provides (e.g. against the liquidity facility and/or credit enhancement). The treatment described above is also applicable to exposures held in the trading book. A bank's capital requirement for such exposures held in the trading book can be no less than the amount required under the banking book treatment. Banks are permitted to recognise overlap in their exposures, consistent with CA-6.4.23. For example, a bank providing a liquidity facility supporting 100% of the ABCP issued by an ABCP programme and purchasing (for its own account) 20% of the outstanding ABCP of that programme could recognise an overlap of 20% (100% liquidity facility + 20% CP held – 100% CP issued = 20%). If a bank provided a liquidity facility that covered 90% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if 10% of the two exposures overlapped (90% liquidity facility + 20% CP held – 100% CP issued = 10%). If a bank provided a liquidity facility that covered 50% of the outstanding ABCP and purchased 20% of the ABCP, the two exposures would be treated as if there were no overlap.
Added: January 2012Standardised Approach for Securitisation Exposures
(i) Scope
CA-6.4.7
Banks that apply the standardised approach to credit risk for the type of underlying exposure(s) securitised must use the standardised approach under the securitisation framework.
Apr 08(ii) Risk Weights
CA-6.4.8
The risk-weighted asset amount of a securitisation exposure is computed by multiplying the amount of the position by the appropriate risk weight determined in accordance with the following tables. For off-balance sheet exposures, banks must apply a CCF and then risk weight the resultant credit equivalent amount. If such an exposure is rated, a CCF of 100% must be applied. For positions with long-term ratings of B+ and below and short-term ratings other than A-1/P-1, A-2/P-2, A-3/P-3, deduction from capital as defined in paragraph CA-6.4.2 is required. Deduction is also required for unrated positions with the exception of the circumstances described in paragraphs CA-6.4.12 to CA-6.4.16.
The following risk weights are applied in the standardised approach.
Long term rating50 Securitisation Exposure Re-securitisation Exposure AAA to AA- 20% 40% A+ to A- 50% 100% BBB+ to BBB- 100% 225% BB+ to BB- 350% 650% B+ and below or unrated Deduction Deduction
Short term rating Securitisation Exposure Re-securitisation Exposure A-1/P-1 20% 40% A-2/P-2 50% 100% A-3/P-3 100% 225% All other ratings or unrated Deduction Deduction
50 The rating designations used in the following tables are for illustrative purposes only and do not indicate any preference for, or endorsement of, any particular external assessment system.
Amended: January 2012
Apr 08Recognition of Ratings on Below-investment Grade Exposures
CA-6.4.10
Only third-party investors, as opposed to banks that serve as originators, may recognise external credit assessments that are equivalent to BB+ to BB- for risk weighting purposes of securitisation exposures.
Apr 08Originators to Deduct Below-investment Grade Exposures
CA-6.4.11
Originating banks as defined in paragraph CA-6.2.1 must deduct all retained securitisation exposures rated below investment grade (i.e. BBB-).
Apr 08(iii) Exceptions to General Treatment of Unrated Securitisation Exposures
CA-6.4.12
As noted in the tables above, unrated securitisation exposures must be deducted with the following exceptions: (i) the most senior exposure in a securitisation, (ii) exposures that are in a second loss position or better in ABCP programmes and meet the requirements outlined in paragraph CA-6.4.15, and (iii) eligible liquidity facilities.
Apr 08Treatment of Unrated Most Senior Securitisation Exposures
CA-6.4.13
If the most senior exposure in a securitisation of a traditional or synthetic securitisation is unrated, a bank that holds or guarantees such an exposure may determine the risk weight by applying the "look-through" treatment, provided the composition of the underlying pool is known at all times. Banks are not required to consider interest rate or currency swaps when determining whether an exposure is the most senior in a securitisation for the purpose of applying the "look-through" approach.
Apr 08CA-6.4.14
In the look-through treatment, the unrated most senior position receives the average risk weight of the underlying exposures subject to CBB review. Where the bank is unable to determine the risk weights assigned to the underlying credit risk exposures, the unrated position must be deducted.
Apr 08Treatment of Exposures in a Second Loss Position or Better in ABCP Programmes
CA-6.4.15
Deduction is not required for those unrated securitisation exposures provided by sponsoring banks to ABCP programmes that satisfy the following requirements:
(a) The exposure is economically in a second loss position or better and the first loss position provides significant credit protection to the second loss position;(b) The associated credit risk is the equivalent of investment grade or better; and(c) The bank holding the unrated securitisation exposure does not retain or provide the first loss position.Apr 08CA-6.4.16
Where these conditions are satisfied, the risk weight is the greater of (i) 100% or (ii) the highest risk weight assigned to any of the underlying individual exposures covered by the facility.
Apr 08Risk Weights for Eligible Liquidity Facilities
CA-6.4.17
For eligible liquidity facilities as defined in paragraph CA-6.4.19 and where the conditions for use of external credit assessments in paragraph CA-6.4.6 are not met, the risk weight applied to the exposure's credit equivalent amount is equal to the highest risk weight assigned to any of the underlying individual exposures covered by the facility.
Apr 08(iv) Credit Conversion Factors for Off-balance Sheet Exposures
CA-6.4.18
For risk-based capital purposes, banks must determine whether, according to the criteria outlined below, an off-balance sheet securitisation exposure qualifies as an 'eligible liquidity facility' or an 'eligible servicer cash advance facility'. All other off-balance sheet securitisation exposures will receive a 100% CCF.
Apr 08Eligible Liquidity Facilities
CA-6.4.19
Banks are permitted to treat off-balance sheet securitisation exposures as eligible liquidity facilities if the following minimum requirements are satisfied:
(a) The facility documentation must clearly identify and limit the circumstances under which it may be drawn. Draws under the facility must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements. In addition, the facility must not cover any losses incurred in the underlying pool of exposures prior to a draw, or be structured such that draw-down is certain (as indicated by regular or continuous draws);(b) The facility must be subject to an asset quality test that precludes it from being drawn to cover credit risk exposures that are in default as defined in paragraphs CA-5.8.63 to CA-5.8.70. In addition, if the exposures that a liquidity facility is required to fund are externally rated securities, the facility can only be used to fund securities that are externally rated investment grade at the time of funding;(c) The facility cannot be drawn after all applicable (e.g. transaction-specific and programme-wide) credit enhancements from which the liquidity would benefit have been exhausted; and(d) Repayment of draws on the facility (i.e. assets acquired under a purchase agreement or loans made under a lending agreement) must not be subordinated to any interests of any note holder in the programme (e.g. ABCP programme) or subject to deferral or waiver.Apr 08CA-6.4.20
Where these conditions are met, the bank may apply a 50% CCF to the eligible facility regardless of the maturity of the facility. However, if an external rating of the facility itself is used for risk-weighting the facility, a 100% CCF must be applied.
Amended: January 2012
Apr 08[Deleted]
Deleted: January 2012CA-6.4.21 [Deleted]
[This Paragraph has been deleted in January 2012].
Deleted: January 2012CA-6.4.22 [Deleted]
[This Paragraph has been deleted in January 2012].
Deleted: January 2012Treatment of Overlapping Exposures
CA-6.4.23
A bank may provide several types of facilities that can be drawn under various conditions. The same bank may be providing two or more of these facilities. Given the different triggers found in these facilities, it may be the case that a bank provides duplicative coverage to the underlying exposures. In other words, the facilities provided by a bank may overlap since a draw on one facility may preclude (in part) a draw under the other facility. In the case of overlapping facilities provided by the same bank, the bank does not need to hold additional capital for the overlap. Rather, it is only required to hold capital once for the position covered by the overlapping facilities (whether they are liquidity facilities or credit enhancements). Where the overlapping facilities are subject to different conversion factors, the bank must attribute the overlapping part to the facility with the highest conversion factor. However, if overlapping facilities are provided by different banks, each bank must hold capital for the maximum amount of the facility (see also Paragraph CA-6.4.6A).
Amended: January 2012
Apr 08Eligible Servicer Cash Advance Facilities
CA-6.4.24
If contractually provided for, servicers may advance cash to ensure an uninterrupted flow of payments to investors so long as the servicer is entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying pool of exposures. A 0% CCF must be applied to such un-drawn servicer cash advances or facilities provided that these are unconditionally cancellable without prior notice.
Apr 08Treatment of Credit Risk Mitigation for Securitisation Exposures
CA-6.4.25
The treatment below applies to a bank that has obtained a credit risk mitigant on a securitisation exposure. Credit risk mitigants include guarantees, credit derivatives, collateral and on-balance sheet netting. Collateral in this context refers to that used to hedge the credit risk of a securitisation exposure rather than the underlying exposures of the securitisation transaction.
Apr 08CA-6.4.26
When a bank other than the originator provides credit protection to a securitisation exposure, it must calculate a capital requirement on the covered exposure as if it were an investor in that securitisation. If a bank provides protection to an unrated credit enhancement, it must treat the credit protection provided as if it were directly holding the unrated credit enhancement.
Apr 08Collateral
Guarantees and Credit Derivatives
CA-6.4.28
Credit protection provided by the entities listed in paragraph CA-4.5.7 may be recognised. SPSVs cannot be recognised as eligible guarantors. A bank must not recognise any support provided by itself (see also Paragraph CA-6.4.6).
Amended: January 2012
Apr 08(vi) Capital Requirement for Early Amortisation Provisions
Scope
CA-6.4.32
As described below, an originating bank is required to hold capital against all or a portion of the investors' interest (i.e. against both the drawn and un-drawn balances related to the securitised exposures) when:
(a) It sells exposures into a structure that contains an early amortisation feature; and(b) The exposures sold are of a revolving nature. These involve exposures where the borrower is permitted to vary the drawn amount and repayments within an agreed limit under a line of credit (e.g. credit card receivables and corporate loan commitments).Apr 08CA-6.4.33
The capital requirement should reflect the type of mechanism through which an early amortisation is triggered.
Apr 08CA-6.4.34
For securitisation structures wherein the underlying pool comprises revolving and term exposures, a bank must apply the relevant early amortisation treatment (outlined below in paragraphs CA-6.4.36 to CA-6.4.47) to that portion of the underlying pool containing revolving exposures.
Apr 08CA-6.4.35
Banks are not required to calculate a capital requirement for early amortisations in the following situations:
(a) Replenishment structures where the underlying exposures do not revolve and the early amortisation ends the ability of the bank to add new exposures;(b) Transactions of revolving assets containing early amortisation features that mimic term structures (i.e. where the risk on the underlying facilities does not return to the originating bank);(c) Structures where a bank securitises one or more credit line(s) and where investors remain fully exposed to future draws by borrowers even after an early amortisation event has occurred;(d) The early amortisation clause is solely triggered by events not related to the performance of the securitised assets or the selling bank, such as material changes in tax laws or regulations.Apr 08Maximum Capital Requirement
CA-6.4.36
For a bank subject to the early amortisation treatment, the total capital charge for all of its positions will be subject to a maximum capital requirement (i.e. a 'cap') equal to the greater of (i) that required for retained securitisation exposures, or (ii) the capital requirement that would apply had the exposures not been securitised. In addition, banks must deduct the entire amount of any gain-on-sale and credit enhancing I/Os arising from the securitisation transaction in accordance with paragraphs CA-6.4.2 to CA-6.4.4.
Apr 08Mechanics
CA-6.4.37
The originator's capital charge for the investors' interest is determined as the product of (a) the investors' interest, (b) the appropriate CCF (as discussed below), and (c) the risk weight appropriate to the underlying exposure type, as if the exposures had not been securitised. As described below, the CCFs depend upon whether the early amortisation repays investors through a controlled or non-controlled mechanism. They also differ according to whether the securitised exposures are uncommitted retail credit lines (e.g. credit card receivables) or other credit lines (e.g. revolving corporate facilities). A line is considered uncommitted if it is unconditionally cancellable without prior notice.
Apr 08(vii) Determination of CCFs for Controlled Early Amortisation Features
CA-6.4.38
An early amortisation feature is considered controlled when the definition as specified in paragraph CA-6.2.6 is satisfied.
Apr 08Uncommitted Retail Exposures
CA-6.4.39
For uncommitted retail credit lines (e.g. credit card receivables) in securitisations containing controlled early amortisation features, banks must compare the three-month average excess spread defined in paragraph CA-6.2.8 to the point at which the bank is required to trap excess spread as economically required by the structure (i.e. excess spread trapping point).
Apr 08CA-6.4.40
In cases where such a transaction does not require excess spread to be trapped, the trapping point is deemed to be 4.5 percentage points.
Apr 08CA-6.4.41
The bank must divide the excess spread level by the transaction's excess spread trapping point to determine the appropriate segments and apply the corresponding conversion factors, as outlined in the following table.
Controlled Early Amortisation Features
Uncommitted Committed Retail credit lines 3-month average excess spread Credit Conversion Factor (CCF)
133.33% of trapping point or more
0% CCF
less than 133.33% to 100% of trapping point
1% CCF
less than 100% to 75% of trapping point
2% CCF
less than 75% to 50% of trapping point
10% CCF
less than 50% to 25% of trapping point
20% CCF
less than 25%
40% CCF90% CCF Non-retail credit lines 90% CCF 90% CCF Amended: April 2011
Apr 08CA-6.4.42
Banks are required to apply the conversion factors set out above for controlled mechanisms to the investors' interest referred to in paragraph CA-6.4.37.
Apr 08Other Exposures
CA-6.4.43
All other securitised revolving exposures (i.e. those that are committed and all non-retail exposures) with controlled early amortisation features will be subject to a CCF of 90% against the off-balance sheet exposures.
Apr 08(viii) Determination of CCFs for Non-controlled Early Amortisation Features
CA-6.4.44
Early amortisation features that do not satisfy the definition of a controlled early amortisation as specified in paragraph CA-6.2.6 will be considered non-controlled and treated as follows.
Apr 08Uncommitted Retail Exposures
CA-6.4.45
For uncommitted retail credit lines (e.g. credit card receivables) in securitisations containing non-controlled early amortisation features, banks must make the comparison described in paragraphs CA-6.4.38 and CA-6.4.40.
Apr 08CA-6.4.46
The bank must divide the excess spread level by the transaction's excess spread trapping point to determine the appropriate segments and apply the corresponding conversion factors, as outlined in the following table.
Non-controlled Early Amortisation Features
Uncommitted Committed Retail credit lines 3-month average excess spread Credit Conversion Factor (CCF)
133.33% or more of trapping point
0% CCF
less than 133.33% to 100% of trapping point
5% CCF
less than 100% to 75% of trapping point
15% CCF
less than 75% to 50% of trapping point
50% CCF
less than 50% of trapping point
100% CCF100% CCF Non-retail credit lines 100% CCF 100% CCF Amended: April 2011
Apr 08Other Exposures
CA-6.4.47
All other securitised revolving exposures (i.e. those that are committed and all non-retail exposures) with non-controlled early amortisation features will be subject to a CCF of 100% against the off-balance sheet exposures.
Apr 08Internal Ratings-based Approach for Securitisation Exposures
(i) Scope
CA-6.4.48
Banks that have received approval from CBB to use the IRB approach for the type of underlying exposures securitised (e.g. for their corporate or retail portfolio) must use the IRB approach for securitisations. Conversely, banks may not use the IRB approach to securitisation unless they receive approval to use the IRB approach for the underlying exposures from CBB.
Apr 08CA-6.4.49
If the bank is applying the IRB approach for some exposures and the standardised approach for other exposures in the underlying pool, it should generally use the approach corresponding to the predominant share of exposures within the pool. The bank must consult with the CBB on which approach to apply to its securitisation exposures. To ensure appropriate capital levels, there may be instances where the CBB requires a treatment other than this general rule.
Apr 08CA-6.4.50
Where there is no specific IRB treatment for the underlying asset type, originating banks that have received approval to use the IRB approach must calculate capital charges on their securitisation exposures applying the standardised approach in the securitisation framework, and investing banks with approval to use the IRB approach must apply the RBA.
Apr 08(ii) Hierarchy of Approaches
CA-6.4.51
The Ratings-Based Approach (RBA) must be applied to securitisation exposures that are rated, or where a rating can be inferred as described in paragraph CA-6.4.60. Where an external or an inferred rating is not available, either the Supervisory Formula (SF) or the Internal Assessment Approach (IAA) must be applied. The IAA is only available to exposures (e.g. liquidity facilities and credit enhancements) that banks (including third-party banks) extend to ABCP programmes. Such exposures must satisfy the conditions of paragraphs CA-6.4.62 and CA-6.4.63. For liquidity facilities to which none of these approaches can be applied, banks may apply the treatment specified in paragraph CA-6.4.84. Exceptional treatment for eligible servicer cash advance facilities is specified in paragraph CA-6.4.86. Securitisation exposures to which none of these approaches can be applied must be deducted.
Apr 08(iii) Maximum Capital Requirement
CA-6.4.52
For a bank applying the IRB approach to securitisation, the maximum capital requirement for the securitisation exposures it holds is equal to the IRB capital requirement that would have been assessed against the underlying exposures had they not been securitised and treated under the appropriate sections of the IRB framework including section CA-5.7. In addition, banks must deduct the entire amount of any gain-on-sale and credit enhancing I/Os arising from the securitisation transaction in accordance with paragraphs CA-6.4.2 to CA-6.4.4.
Apr 08(iv) Ratings-Based Approach (RBA)
CA-6.4.53
Under the RBA, the risk-weighted assets are determined by multiplying the amount of the exposure by the appropriate risk weights, provided in the tables in paragraph CA-6.4.58 and CA-6.4.59.
Apr 08CA-6.4.54
The risk weights depend on (i) the external rating grade or an available inferred rating, (ii) whether the credit rating (external or inferred) represents a long-term or a short term credit rating, (iii) the granularity of the underlying pool and (iv) the seniority of the position.
Apr 08CA-6.4.55
For purposes of the RBA, a securitisation exposure is treated as a senior tranche if it is effectively backed or secured by a first claim on the entire amount of the assets in the underlying securitised pool. While this generally includes only the most senior position within a securitisation transaction, in some instances there may be some other claim that, in a technical sense, may be more senior in the waterfall (e.g. a swap claim) but may be disregarded for the purpose of determining which positions are subject to the "senior tranches" column.
Apr 08CA-6.4.56
Examples:
(a) In a typical synthetic securitisation, the "super-senior" tranche would be treated as a senior tranche, provided that all of the conditions for inferring a rating from a lower tranche are fulfilled;(b) In a traditional securitisation where all tranches above the first-loss piece are rated, the most highly rated position would be treated as a senior tranche. However, when there are several tranches that share the same rating, only the most senior one in the waterfall would be treated as senior; and(c) Usually a liquidity facility supporting an ABCP programme would not be the most senior position within the programme; the commercial paper, which benefits from the liquidity support, typically would be the most senior position. However, a liquidity facility may be viewed as covering all losses on the underlying receivables pool that exceed the amount of overcollateralization or reserves provided by the seller and as being most senior only if it is sized to cover all of the outstanding commercial paper and other senior debt supported by the pool, so that no cash flows from the underlying pool could be transferred to other creditors until any liquidity draws were repaid in full. In such a case, the RBA risk weights in the left-most column can be used. If these conditions are not satisfied or for other reasons the liquidity facility constitutes a mezzanine position in economic substance rather than a senior position in the underlying pool, then the "Base risk weights" column is applicable.Amended: January 2012
Amended: April 2011
Apr 08CA-6.4.57
The risk weights provided in the table in paragraph CA-6.4.58 apply when the external assessment represents a long-term credit rating, as well as when an inferred rating based on a long-term rating is available.
Apr 08CA-6.4.58
Banks may apply the risk weights for senior positions if the effective number of underlying exposures (N, as defined in paragraph CA-6.4.77) is 6 or more and the position is senior as defined above. When N is less than 6, the risk weights in column 4 of the first table below apply. In all other cases, the risk weights in column 3 of the first table below apply.
RBA risk weights when the external assessment represents a long-term credit rating and/or an inferred rating derived from a long-term assessment External Rating (Illustrative) Risk weights for senior positions and eligible senior IAA exposures Base risk weights Risk weights for tranches backed by non-granular pools AAA 7% 12% 20% AA 8% 15% 25% A+ 10% 18% 35% A 12% 20% A- 20% 35% BBB+ 35% 50% BBB 60% 75% BBB- 100% BB+ 250% BB 425% BB- 650% Below BB- and unrated Deduction Apr 08CA-6.4.59
The risk weights in the table below apply when the external assessment represents a short-term credit rating, as well as when an inferred rating based on a short-term rating is available. The decision rules outlined in paragraph CA-6.4.58 also apply for short-term credit ratings.
RBA risk weights when the external assessment represents a short-term credit rating and/or an inferred rating derived from a short-term assessment External Rating (Illustrative) Risk weights for senior positions and eligible senior IAA exposures Base risk weights Risk weights for tranches backed by non-granular A-1/P- 7% 12% 2 A-2/P- 12% 20% 3 A-3/P- 60% 75% 7 All other ratings/unrated Deduction Deduction Deduction Apr 08Use of Inferred Ratings
