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Basel ii Accord
Sections 538 to 559 |
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IV. Credit Risk —
Securitisation
Framework
A. Scope and
definitions of transactions covered under the
securitisation
framework
538.
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. 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,
supervisors 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 their
national supervisors 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.
539.
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.
540.
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.
541.
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 199.
Reserve accounts, such as cash collateral
accounts, recorded as an asset
by
the originating bank must also be treated as
securitisation exposures.
542.
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.
B.
Definitions and general
terminology
1. Originating
bank
543.
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
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.
2. Asset-backed
commercial paper (ABCP)
programme
544.
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 entity.
3. Clean-up
call
545.
A clean-up call is an option that permits the
securitisation exposures (e.g.
assetbacked
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.
4. Credit
enhancement
546.
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.
5. Credit-enhancing
interest-only strip
547.
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.
6. Early
amortisation
548.
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
noncontrolled.
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
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).
549.
An early amortisation provision that does not
satisfy the conditions for a
controlled
early
amortisation provision will be treated as a
non-controlled early amortisation
provision.
7. Excess
spread
550.
Excess spread is generally defined as gross
finance charge collections and
other
income
received by the trust or special purpose entity
(SPE, specified in paragraph
552)
minus
certificate interest, servicing fees,
charge-offs, and other senior trust or
SPE
expenses.
8. Implicit
support
551.
Implicit support arises when a bank provides
support to a securitisation in excess
of
its
predetermined contractual
obligation.
9. Special purpose
entity (SPE)
552.
An SPE 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 SPE,
and
the
structure of which is intended to isolate the
SPE from the credit risk of an originator
or
seller
of exposures. SPEs 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.
C.
Operational requirements for the recognition of
risk
transference
553.
The following operational requirements are
applicable to both the standardised
and
IRB
approaches of the securitisation
framework.
1. Operational
requirements for traditional
securitisations
554.
An originating bank may exclude securitised
exposures from the calculation of riskweighted
assets 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 control 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 subparticipation)
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.
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.
(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 SPE 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 557.
(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.
2. Operational
requirements for synthetic
securitisations
555.
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 Section II.D
of
this
Framework.
(b)
Eligible collateral is limited to that specified
in paragraphs 145 and 146.
Eligible
collateral
pledged by SPEs may be
recognised.
(c)
Eligible guarantors are defined in paragraph
195. Banks may not recognise SPEs
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.
An
opinion must be obtained from a qualified legal
counsel that confirms the
enforceability
of the contracts in all relevant
jurisdictions.
(g)
Clean-up calls must satisfy the conditions set
out in paragraph 557.
556.
For synthetic securitisations, the effect of
applying CRM techniques for hedging
the
underlying
exposure are treated according to paragraphs 109
to 210. In case there is a
maturity
mismatch, the capital requirement will be
determined in accordance with paragraphs 202 to
205.
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 using the standardised
approach for securitisation must deduct all
retained positions that are unrated or rated
below investment grade.
A
bank using the IRB approach must deduct unrated,
retained positions if the
treatment
of the position is deduction specified in
paragraphs 609 to 643. 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
202 to 205.
3. Operational
requirements and treatment of clean-up
calls
557.
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:
(i)
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;
(ii)
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
(iii)
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.
558.
Securitisation transactions that include a
clean-up call that does not meet all of
the
criteria
stated in paragraph 557 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 562.
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 556
and
paragraphs
202 to 205.
559.
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.
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