Appendix IX

No: 1651/67

Date(g): 8/9/2019 | Date(h): 9/1/1441

Effective from Oct 01 2019 - Sep 30 2019
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Collective investment undertakings, securitization vehicles and other structures¹⁷

Banks must consider exposures even when a structure lies between the bank and the exposures, that is, even when the bank invests in structures through an entity which itself has exposures to assets (hereafter referred to as the “underlying assets”). Banks must assign the exposure amount, ie the amount invested in a particular structure, to specific counterparties following the approach described below. Such structures include funds, securitizations and other structures with underlying assets.
Determination of the relevant counterparties to be considered:
A bank may assign the exposure amount to the structure itself, defined as a distinct counterparty, if it can demonstrate that the bank's exposure amount to each underlying asset of the structure is smaller than 0.25% of its eligible capital base, considering only those exposures to underlying assets that result from the investment in the structure itself and using the exposure value calculated according to sections titled “Any structure where all investors rank pari passu" and “Any structure with different seniority levels among investors" below in this appendix. (By definition, this required test will be passed if the bank's whole investment in a structure is below 0.25% of its eligible capital base.) In this case, a bank is not required to look through the structure to identify the underlying assets.
A bank must look through the structure to identify those underlying assets for which the underlying exposure value is equal to or above 0.25% of its eligible capital base. In this case, the counterparty corresponding to each of the underlying assets must be identified so that these underlying exposures can be added to any other direct or indirect exposure to the same counterparty. The bank’s exposure amount to the underlying assets that are below 0.25% of the bank's eligible capital base may be assigned to the structure itself (ie partial look-through is permitted).
If a bank is unable to identify the underlying assets of a structure:
	•	Where the total amount of its exposure does not exceed 0.25% of its eligible capital base, the bank must assign the total exposure amount of its investment to the structure;
	•	Otherwise, it must assign this total exposure amount to the unknown client.
The bank must aggregate all unknown exposures as if they related to a single counterparty (the unknown client), to which the large exposure limit would apply.
When the look-through approach (LTA) is not required according to the criteria mentioned in the second paragraph of this appendix, a bank must nevertheless be able to demonstrate that regulatory arbitrage considerations have not influenced the decision whether to look through or not - eg that the bank has not circumvented the large exposure limit by investing in several individually immaterial transactions with identical underlying assets.
Calculation of underlying exposures - bank’s exposure amount to underlying assets:
If the LTA need not be applied, a bank's exposure to the structure must be the nominal amount it invests in the structure.
Any structure where all investors rank pari passu (eg CIU):
When the LTA is required according to the paragraphs above, the exposure value assigned to a counterparty is equal to the pro rata share that the bank holds in the structure multiplied by the value of the underlying asset in the structure. Thus, a bank holding a 1% share of a structure that invests in 20 assets each with a value of 5 must assign an exposure of 0.05 to each of the counterparties. An exposure to a counterparty must be added to any other direct or indirect exposures the bank has to that counterparty.
Any structure with different seniority levels among investors (eg securitization vehicles) When the LTA is required according to the paragraphs above, the exposure value to a counterparty is measured for each tranche within the structure, assuming a pro rata distribution of losses amongst investors in a single tranche. To compute the exposure value to the underlying asset, a bank must:
	•	First, consider the lower of the value of the tranche in which the bank invests and the nominal value of each underlying asset included in the underlying portfolio of assets
	•	Second, apply the pro rata share of the bank's investment in the tranche to the value determined in the first step above.
Identification of additional risks:
Banks must identify third parties that may constitute an additional risk factor inherent in a structure itself rather than in the underlying assets. Such a third party could be a risk factor for more than one structure that a bank invests in. Examples of roles played by third parties include originator, fund manager, liquidity provider and credit protection provider.
The identification of an additional risk factor has two implications:
•	The first implication is that banks must connect their investments in those structures with a common risk factor to form a group of connected counterparties. In such cases, the manager would be regarded as a distinct counterparty so that the sum of a bank's investments in all of the funds managed by this manager would be subject to the large exposure limit, with the exposure value being the total value of the different investments. But in other cases, the identity of the manager may not comprise an additional risk factor - for example, if the legal framework governing the regulation of particular funds requires separation between the legal entity that manages the fund and the legal entity that has custody of the fund's assets. In the case of structured finance products, the liquidity provider or sponsor of short-term programs (asset- backed commercial paper - ABCP - conduits and structured investment vehicles - SIVs) may warrant consideration as an additional risk factor (with the exposure value being the amount invested). Similarly, in synthetic deals, the protection providers (sellers of protection by means of CDS/guarantees) may be an additional source of risk and a common factor for interconnecting different structures (in this case, the exposure value would correspond to the percentage value of the underlying portfolio).
•	The second implication is that banks may add their investments in a set of structures associated with a third party that constitutes a common risk factor to other exposures (such as a loan) it has to that third party. Whether the exposures to such structures must be added to any other exposures to the third party would again depend on a case- by-case consideration of the specific features of the structure and on the role of the third party. In the example of the fund manager, adding together the exposures may not be necessary because potentially fraudulent behavior may not necessarily affect the repayment of a loan. I he assessment may be different where the risk to the value of investments underlying the structures arises in the event of a third-party default. For example, in the case of a credit protection provider, the source of the additional risk for the bank investing in a structure is the default of the credit protection provider. The bank must add the investment in the structure to the direct exposures to the credit protection provider since both exposures might crystallize into losses in the event that the protection provider defaults (ignoring the covered part of the exposures may lead to the undesirable situation of a high concentration risk exposure to issuers of collateral or providers of credit protection).
It is conceivable that a bank may consider multiple third parties to be potential drivers of additional risk. In this case, the bank must assign the exposure resulting from the investment in the relevant structures to each of the third parties.
The requirement set out in section “Calculation of underlying exposures - bank’s exposure amount to underlying assets" in this appendix to recognise a structural risk inherent in the structure instead of the risk stemming from the underlying exposures is independent of whatever the general assessment of additional risks concludes.

¹⁷ Paragraphs 72-83 of BCBS "Supervisory framework for measuring and controlling large exposures" April 2014