Default Risk Capital Requirement for Securitisations (Non-CTP)

Effective from Dec 28 2022 - Dec 31 2022
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Gross jump-to-default risk positions (gross JTD)
8.27	For the computation of gross JTD on securitisations, the same approach must be followed as for default risk (non-securitisations), except that an LGD ratio is not applied to the exposure. Because the LGD is already included in the default risk weights for securitisations to be applied to the securitisation exposure (see below), to avoid double counting of LGD the JTD for securitisations is simply the market value of the securitisation exposure (ie the JTD for tranche positions is their market value).
8.28	For the purposes of offsetting and hedging recognition for securitisations (non-CTP), positions in underlying names or a non-tranched index position may be decomposed proportionately into the equivalent replicating tranches that span the entire tranche structure. When underlying names are treated in this way, they must be removed from the non-securitisation default risk treatment.
Net jump-to-default risk positions (net JTD)
8.29	For default risk of securitisations (non-CTP), offsetting is limited to a specific securitisation exposure (ie tranches with the same underlying asset pool). This means that:
	(1)	no offsetting is permitted between securitisation exposures with different underlying securitised portfolio (ie underlying asset pools), even if the attachment and detachment points are the same; and
	(2)	no offsetting is permitted between securitisation exposures arising from different tranches with the same securitised portfolio.
8.30	Securitisation exposures that are otherwise identical except for maturity may be offset. The same offsetting rules for non-securitisations including scaling down positions of less than one year as set out in [8.15] through [8.18] apply to JTD risk positions for securitisations (non- CTP). Offsetting within a specific securitisation exposure is allowed as follows.
	(1)	Securitisation exposures that can be perfectly replicated through decomposition may be offset. Specifically, if a collection of long securitisation exposures can be replicated by a collection of short securitisation exposures, then the securitisation exposures may be offset.
	(2)	Furthermore, when a long securitisation exposure can be replicated by a collection of short securitisation exposures with different securitised portfolios, then the securitisation exposure with the “mixed” securitisation portfolio may be offset by the combination of replicating securitisation exposures.
	(3)	After the decomposition, the offsetting rules would apply as in any other case. As in the case of default risk (non-securitisations), long and short securitisation exposures should be determined from the perspective of long or short the underlying credit, eg the bank making losses on a long securitisation exposure in the event of a default in the securitised portfolio.
Calculation of default risk capital requirement for securitisations (non-CTP)
8.31	For default risk of securitisations (non-CTP), the buckets are defined as follows:
	(1)	Corporates (excluding small and medium enterprises) – this bucket takes into account all regions.
	(2)	Other buckets – these are defined along two dimensions:
		(a)	Asset classes: the 11 asset classes are defined as asset-backed commercial paper; auto Loans/Leases; residential mortgage-backed securities (MBS); credit cards; commercial MBS; collateralised loan obligations; collateralised debt obligation (CDO)-squared; small and medium enterprises; student loans, other retail; and other wholesale.
		(b)	Regions: the four regions are defined as Asia, Europe, North America and all other.
8.32	To assign a securitisation exposure to a bucket, banks must rely on a classification that is commonly used in the market for grouping securitisation exposures by type and region of underlying.
	(1)	The bank must assign each securitisation exposure to one and only one of the buckets above and it must assign all securitisations with the same type and region of underlying to the same bucket.
	(2)	Any securitisation exposure that a bank cannot assign to a type or region of underlying in this fashion must be assigned to the “other bucket”.
8.33	The capital requirement for default risk of securitisations (non-CTP) is determined using a similar approach to that for non-securitisations. The DRC requirement within a bucket is calculated as follows:
	(1)	The hedge benefit discount HBR, as defined in [8.23], is applied to net short securitisation exposures in that bucket.
	(2)	The capital requirement is calculated as in [8.25].
8.34	For calculating the weighted net JTD, the risk weights of securitisation exposures are defined by the tranche instead of the credit quality. The risk weight for securitisations (non-CTP) is applied as follows:
	(1)	The default risk weights for securitisation exposures are based on the corresponding risk weights for banking book instruments, as set out in 18 to 22 of Minimum Capital Requirements for Credit Risk with the following modification: the maturity component in the banking book securitisation framework is set to zero (ie a one-year maturity is assumed) to avoid doublecounting of risks in the maturity adjustment (of the banking book approach) since migration risk in the trading book will be captured in the credit spread capital requirement. (2) Following the corresponding treatment in the banking book, the hierarchy of approaches in determining the risk weights should be applied at the underlying pool level.
	(3)	The capital requirement under the standardised approach for an individual cash securitisation position can be capped at the fair value of the transaction.
8.35	No hedging is recognised between different buckets. Therefore, the total capital requirement for default risk securitisations must be calculated as a simple sum of the bucket-level capital requirements.

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