Operational Requirements for the Recognition of Risk Transference

Effective from Dec 28 2022 - Dec 27 2022
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18.24	An originating bank may exclude underlying exposures from the calculation of risk-weighted assets only if all of the following conditions have been met. Banks meeting these conditions must still hold regulatory capital against any securitization exposures they retain.
	(1)	Significant credit risk associated with the underlying exposures has been transferred to third parties.
	(2)	The transferor does not maintain effective or indirect control over the transferred exposures. The exposures 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. Banks should obtain legal opinion⁷¹ that confirms true sale. The transferor’s retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures. The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it:
		(a)	Is able to repurchase from the transferee the previously transferred exposures in order to realize their benefits; or
		(b)	Is obligated to retain the risk of the transferred exposures.
	(3)	The securities issued are not obligations of the transferor. Thus, investors who purchase the securities only have claim to the underlying exposures.
	(4)	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, unless such restriction is imposed by a risk retention requirement.
	(5)	Clean-up calls must satisfy the conditions set out in 18.28.
	(6)	The securitization does not contain clauses that
		(a)	Require the originating bank to alter the underlying exposures such that the pool’s credit quality is improved unless this is achieved by selling exposures to independent and unaffiliated third parties at market prices;
		(b)	Allow for increases in a retained first-loss position or credit enhancement provided by the originating bank after the transaction’s inception; or
		(c)	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.
	(7)	There must be no termination options/triggers except eligible clean-up calls, termination for specific changes in tax and regulation or early amortization provisions such as those set out in 18.27.
18.25	For synthetic securitizations, the use of credit risk mitigation (CRM) techniques (i.e. collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognized for risk-based capital purposes only if the conditions outlined below are satisfied:
	(1)	Credit risk mitigants must comply with the requirements set out in chapter 9.
	(2)	Eligible collateral is limited to that specified in 9.34. Eligible collateral pledged by SPEs may be recognized.
	(3)	Eligible guarantors are defined in 9.76. Banks may not recognize SPEs as eligible guarantors in the securitization framework.
	(4)	Banks must transfer significant credit risk associated with the underlying exposures to third parties.
	(5)	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:
		(a)	Clauses that materially limit the credit protection or credit risk transference (e.g. an early amortization provision in a securitization of revolving credit facilities that effectively subordinates the bank’s interest; significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs; or clauses that allow for the termination of the protection due to deterioration in the credit quality of the underlying exposures);
		(b)	Clauses that require the originating bank to alter the underlying exposure to improve the pool’s average credit quality;
		(c)	Clauses that increase the banks’ cost of credit protection in response to deterioration in the pool’s quality;
		(d)	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
		(e)	Clauses that provide for increases in a retained first-loss position or credit enhancement provided by the originating bank after the transaction’s inception.
	(6)	A bank should obtain legal opinion that confirms the enforceability of the contract.
	(7)	Clean-up calls must satisfy the conditions set out in 18.28.
18.26	A securitization transaction is deemed to fail the operational requirements set out in 18.24 or 18.25 if the bank
	(1)	Originates/sponsors a securitization transaction that includes one or more revolving credit facilities, and
	(2)	The securitization transaction incorporates an early amortization or similar provision that, if triggered, would
		(a)	Subordinate the bank’s senior or pari passu interest in the underlying revolving credit facilities to the interest of other investors;
		(b)	Subordinate the bank’s subordinated interest to an even greater degree relative to the interests of other parties; or
		(c)	In other ways increases the bank’s exposure to losses associated with the underlying revolving credit facilities.
18.27	If a securitization transaction contains one of the following examples of an early amortization provision and meets the operational requirements set forth in 18.24 or 18.25, an originating bank may exclude the underlying exposures associated with such a transaction from the calculation of risk-weighted assets, but must still hold regulatory capital against any securitization exposures they retain in connection with the transaction:
	(1)	Replenishment structures where the underlying exposures do not revolve and the early amortization ends the ability of the bank to add new exposures;
	(2)	Transactions of revolving credit facilities containing early amortization features that mimic term structures (i.e. where the risk on the underlying revolving credit facilities does not return to the originating bank) and where the early amortization provision in a securitization of revolving credit facilities does not effectively result in subordination of the originator’s interest;
	(3)	Structures where a bank securitizes one or more revolving credit facilities and where investors remain fully exposed to future drawdowns by borrowers even after an early amortization event has occurred; or
	(4)	The early amortization provision is solely triggered by events not related to the performance of the underlying assets or the selling bank, such as material changes in tax laws or regulations.
18.28	For securitization 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:
	(1)	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;
	(2)	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
	(3)	The clean-up call must only be exercisable when 10% or less of the original underlying portfolio or securities issued remains, or, for synthetic securitizations, when 10% or less of the original reference portfolio value remains.
18.29	Securitization transactions that include a clean-up call that does not meet all of the criteria stated in 18.28 above result in a capital requirement for the originating bank. For a traditional securitization, the underlying exposures must be treated as if they were not securitized. Additionally, banks must not recognize in regulatory capital any gain on sale, in accordance with SAMA Circular No. 341000015689, Date: 19 December 2012. For synthetic securitizations, the bank purchasing protection must hold capital against the entire amount of the securitized exposures as if they did not benefit from any credit protection. If a synthetic securitization incorporates a call (other than a clean-up call) that effectively terminates the transaction and the purchased credit protection on a specific date, the bank must treat the transaction in accordance with 18.65.
18.30	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 deducted from regulatory capital.

⁷¹ Legal opinion is not limited to legal advice from qualified legal counsel, but allows written advice from in-house lawyers.

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