Title[ Part 2: The First Pillar - Minimum Capital Requirements
Section[ 3. Standardised approach for securitisation exposures
(i) Scope
566. 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.
(ii) Risk weights
567. 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 561 is required. Deduction is also required for unrated positions with the exception of the circumstances described in paragraphs 571 to 575.
Long-term rating category 95
External Credit Assessment
Credit AAA to A+ to A- BBB+ to BB+ to B- B+ & Below
Assessment AA- BBB- or Unrated
Risk 20% 50% 100% 350% Deduction
Weight
Short-term rating category
External Credit Assessment
A-1/P-1 A-2/P-2 A-3/P-3 All other ratings or unrated
Risk Weight 20% 50% 100% Deduction
568. The capital treatment of positions retained by originators, liquidity facilities, credit risk mitigants, and securitisations of revolving exposures are identified separately. The treatment of clean-up calls is provided in paragraphs 557 to 559.
Investors may recognise ratings on below-investment grade exposures
569. 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.
Originators to deduct below-investment grade exposures
570. Originating banks as defined in paragraph 543 must deduct all retained securitisation exposures rated below investment grade (i.e. BBB-).
(iii) Exceptions to general treatment of unrated securitisation exposures
571. 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 574, and (iii) eligible liquidity facilities.
Treatment of unrated most senior securitisation exposures
572. 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.
573. In the look-through treatment, the unrated most senior position receives the average risk weight of the underlying exposures subject to supervisory review. Where the bank is unable to determine the risk weights assigned to the underlying credit risk exposures, the unrated position must be deducted.
Treatment of exposures in a second loss position or better in ABCP programmes
574. 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.
575. 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.
Risk weights for eligible liquidity facilities
576. For eligible liquidity facilities as defined in paragraph 578 and where the conditions for use of external credit assessments in paragraph 565 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.
(iv) Credit conversion factors for off-balance sheet exposures
577. 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.
Eligible liquidity facilities
578. 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 452 to 459. 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.
579. Where these conditions are met, the bank may apply a 20% CCF to the amount of eligible liquidity facilities with an original maturity of one year or less, or a 50% CCF if the facility has an original maturity of more than one year. However, if an external rating of the facility itself is used for risk-weighting the facility, a 100% CCF must be applied.
Eligible liquidity facilities available only in the event of market disruption
580. Banks may apply a 0% CCF to eligible liquidity facilities that are only available in the event of a general market disruption (i.e. whereupon more than one SPE across different transactions are unable to roll over maturing commercial paper, and that inability is not the result of an impairment in the SPEs’ credit quality or in the credit quality of the underlying exposures). To qualify for this treatment, the conditions provided in paragraph 578 must be satisfied. Additionally, the funds advanced by the bank to pay holders of the capital market instruments (e.g. commercial paper) when there is a general market disruption must be secured by the underlying assets, and must rank at least pari passu with the claims of holders of the capital market instruments.
Treatment of overlapping exposures
581. 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.
Eligible servicer cash advance facilities
582. Subject to national discretion, 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. At national discretion, such undrawn servicer cash advances or facilities that are unconditionally cancellable without prior notice may be eligible for a 0% CCF.
(v) Treatment of credit risk mitigation for securitisation exposures
583. 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.
584. 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.
Collateral
585. Eligible collateral is limited to that recognised under the standardised approach for
CRM (paragraphs 145 and 146). Collateral pledged by SPEs may be recognised.
Guarantees and credit derivatives
586. Credit protection provided by the entities listed in paragraph 195 may be recognised. SPEs cannot be recognised as eligible guarantors.
587. Where guarantees or credit derivatives fulfil the minimum operational conditions as specified in paragraphs 189 to 194, banks can take account of such credit protection in calculating capital requirements for securitisation exposures.
588. Capital requirements for the guaranteed/protected portion will be calculated according to CRM for the standardised approach as specified in paragraphs 196 to 201.
Maturity mismatches
589. For the purpose of setting regulatory capital against a maturity mismatch, the capital requirement will be determined in accordance with paragraphs 202 to 205. When the exposures being hedged have different maturities, the longest maturity must be used.
(vi) Capital requirement for early amortisation provisions
Scope
590. 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 undrawn 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).
591. The capital requirement should reflect the type of mechanism through which an early amortisation is triggered.
592. 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 594 to 605) to that portion of the underlying pool containing revolving exposures.
593. 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.
Maximum capital requirement
594. 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 561 to 563.
Mechanics
595. 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.
(vii) Determination of CCFs for controlled early amortisation features
596. An early amortisation feature is considered controlled when the definition as specified in paragraph 548 is satisfied.
Uncommitted retail exposures
597. 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 550 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).
598. 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.
599. 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 90% CCF
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% CCF
Non-retail credit lines 90% CCF 90% CCF
600. Banks are required to apply the conversion factors set out above for controlled mechanisms to the investors’ interest referred to in paragraph 595.
Other exposures
601. 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.
(viii) Determination of CCFs for non-controlled early amortisation features
602. Early amortisation features that do not satisfy the definition of a controlled early amortisation as specified in paragraph 548 will be considered non-controlled and treated as follows.
Uncommitted retail exposures
603. 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 597 and 598:
604. 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 100% CCF
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% CCF
Non-retail credit lines 100% CCF 100% CCF
Other exposures
605. 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.
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