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  • CA-6.3 CA-6.3 Operational Requirements for the Recognition of Risk Transference

    • CA-6.3.1

      The following operational requirements are applicable to the standardised approach of the securitisation framework.

      January 2015

    • Operational 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. Conventional bank licensees 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 control35 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.

        35 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.

        January 2015

    • Operational 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. Conventional bank licensees may not recognise SPSVs as eligible guarantors in the securitisation framework;
        (d) Conventional bank licensees 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:
        (i) 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);
        (ii) Clauses that require the originating bank to alter the underlying exposures to improve the pool's weighted average credit quality;
        (iii) Clauses that increase the conventional bank licensees' cost of credit protection in response to deterioration in the pool's quality;
        (iv) 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
        (v) 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.
        January 2015

      • CA-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 conventional bank licensee 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 conventional bank licensee applying the standardised approach for securitisation must risk weight all retained positions that are unrated or rated below investment grade at 1,250%. For all other securitisation exposures, the conventional bank licensee must apply the maturity mismatch treatment set forth in Paragraphs CA-4.6.1 to CA-4.6.4.

        January 2015

    • Operational 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.
        January 2015

      • CA-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, conventional bank licensees 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 clean-up call) that effectively terminates the transaction and the purchased credit protection on a specific date, the conventional bank licensee must treat the transaction in accordance with Paragraph CA-6.3.4 and Paragraphs CA-4.6.1 to CA-4.6.4.

        January 2015

      • CA-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 conventional bank licensee and must be treated in accordance with the supervisory guidance pertaining to securitisation transactions.

        January 2015