CA-6.1 CA-6.1 Scope and Definitions of Transactions Covered under the Securitisation Framework
CA-6.1.1
Conventional bank licensees 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.January 2015CA-6.1.1A
A
conventional bank licensee must meet all the requirements listed in the Paragraph CA-6.1.1.B below, to use any of the approaches specified in the securitisation framework. If aconventional bank licensee does not perform the level of the due diligence specified, it must risk weight the amount of the securitisation (or re-securitisation) exposure at 1,250% using the approach outlined in the Paragraphs CA-6.4.2 to CA-6.4.4.January 2015CA-6.1.1B
In order for a
conventional bank licensee to use the securitisation framework, aconventional bank licensee must have the information specified below or risk weight the exposure at 1,250%:(a) Aconventional bank licensee 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) Aconventional bank licensee must be able to access performance information on the underlying pools on an ongoing 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, aconventional bank licensee 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) Aconventional bank licensee must have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of theconventional bank licensee'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.January 2015CA-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.
Conventional bank licensees 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.January 2015CA-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.January 2015CA-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 wherecredit 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 thecredit risk of the portfolio. Accordingly, the investors' potential risk is dependent upon the performance of the underlying pool.January 2015CA-6.1.5
Conventional bank licensees' 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 originatingconventional bank licensee must also be treated as securitisation exposures.January 2015CA-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.
January 2015CA-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.
January 2015CA-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.
January 2015CA-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.
January 2015CA-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).
January 2015CA-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.
January 2015
