Treatment of Credit Risk Mitigation for Securitization Exposures

No: 44047144

Date(g): 27/12/2022 | Date(h): 4/6/1444

Status: In-Force

Effective from Jan 01 2023 - Dec 31 2022
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18.56	A bank may recognize credit protection purchased on a securitization exposure when calculating capital requirements subject to the following:
	(1)	Collateral recognition is limited to that permitted under the credit risk mitigation framework – in particular, paragraph 9.34 when the bank applies the SEC-ERBA or SEC-SA, and paragraph 12.7 when the bank applies the SEC-IRBA. Collateral pledged by SPEs may be recognized;
	(2)	Credit protection provided by the entities listed in paragraph 9.75 may berecognized. SPEs cannot be recognized as eligible guarantors; and
	(3)	Where guarantees or credit derivatives fulfil the minimum operational conditions as specified in paragraphs 9.69 to 9.74, banks can take account of such credit protection in calculating capital requirements for securitization exposures.
18.57	When a bank provides full (or pro rata) credit protection to a securitization exposure, the bank must calculate its capital requirements as if it directly holds the portion of the securitization exposure on which it has provided credit protection (in accordance with the definition of tranche maturity given in 18.22 and 18.23).
18.58	Provided that the conditions set out in 18.56 are met, the bank buying full (or pro rata) credit protection may recognize the credit risk mitigation on the securitization exposure in accordance with the CRM framework.
18.59	In the case of tranched credit protection, the original securitization tranche will be decomposed into protected and unprotected sub-tranches:⁷³
	(1)	The protection provider must calculate its capital requirement as if directly exposed to the particular sub-tranche of the securitization exposure on which it is providing protection, and as determined by the hierarchy of approaches for securitization exposures and according to 18.60 to 18.62.
	(2)	Provided that the conditions set out in 18.56 are met, the protection buyer may recognize tranched protection on the securitization exposure. In doing so, it must calculate capital requirements for each sub-tranche separately and as follows:
		(a)	For the resulting unprotected exposure(s), capital requirements will be calculated as determined by the hierarchy of approaches for securitization exposures and according to 18.60 to 18.62.
		(b)	For the guaranteed/protected portion, capital requirements will be calculated according to the applicable CRM framework (in accordance with the definition of tranche maturity given in 18.22 and 18.23).
18.60	If, according to the hierarchy of approaches determined by 18.41 to 18.48, the bank must use the SEC-IRBA or SEC-SA, the parameters A and D should be calculated separately for each of the subtranches as if the latter would have been directly issued as separate tranches at the inception of the transaction. The value for KIRB (respectively KSA) will be computed on the underlying portfolio of the original transaction.
18.61	If, according to the hierarchy of approaches determined by 18.41 to 18.48, the bank must use the SEC-ERBA for the original securitization exposure; the relevant risk weights for the different subtranches will be calculated subject to the following:
	(1)	For the sub-tranche of highest priority,⁷⁴ the bank will use the risk weight of the original securitization exposure.
	(2)	For a sub-tranche of lower priority:
		(a)	Banks must infer a rating from one of the subordinated tranches in the original transaction. The risk weight of the sub-tranche of lower priority will be then determined by applying the inferred rating to the SEC- ERBA. Thickness input T will be computed for the subtranche of lower priority only.
		(b)	Should it not be possible to infer a rating the risk weight for the subtranche of lower priority will be computed using the SEC-SA applying the adjustments to the determination of A and D described in 18.60 above. The risk weight for this sub-tranche will be obtained as the greater of
			(i)	The risk weight determined through the application of the SEC-SA with the adjusted A, D points and
			(ii)	The SEC-ERBA risk weight of the original securitization exposure prior to recognition of protection.
18.62	Under all approaches, a lower-priority sub-tranche must be treated as a non-senior securitization exposure even if the original securitization exposure prior to protection qualifies as senior as defined in 18.18.
18.63	A maturity mismatch exists when the residual maturity of a hedge is less than that of the underlying exposure.
18.64	When protection is bought on a securitization exposure(s), for the purpose of setting regulatory capital against a maturity mismatch, the capital requirement will be determined in accordance with 9.10 to 9.14. When the exposures being hedged have different maturities, the longest maturity must be used.
18.65	When protection is bought on the securitized assets, maturity mismatches may arise in the context of synthetic securitizations (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 all the tranches of the synthetic securitization may differ from that of the underlying exposures. Banks that synthetically securitize exposures held on their balance sheet by purchasing tranched credit protection must treat such maturity mismatches in the following manner: For securitization exposures that are assigned a risk weight of 1250%, maturity mismatches are not taken into account. For all other securitization exposures, the bank must apply the maturity mismatch treatment set forth in 9.10 to 9.14. When the exposures being hedged have different maturities, the longest maturity must be used.

⁷³ The envisioned decomposition is theoretical and it should not be viewed as a new securitization transaction. The resulting subtranches should not be considered resecuritisations solely due to the presence of the credit protection.
⁷⁴ ‘Sub-tranche of highest priority’ only describes the relative priority of the decomposed tranche. The calculation of the risk weight of each sub- tranche is independent from the question if this sub-tranche is protected (i.e. risk is taken by the protection provider) or is unprotected (i.e. risk is taken by the protection buyer).