In accordance with the hierarchy of approaches determined in 18.41 to 18.47, a bank must infer a rating for an unrated position and use the SEC-ERBA provided that the requirements set out in 20.10 are met. These requirements are intended to ensure that the unrated position is pari passu or senior in all respects to an externally-rated securitization exposure termed the “reference securitization exposure”.
20.10
The following operational requirements must be satisfied to recognize inferred ratings:
(1)
The reference securitization exposure (e.g. asset-backed security) must rank pari passu or be subordinate in all respects to the unrated securitization exposure. Credit enhancements, if any, must be taken into account when assessing the relative subordination of the unrated exposure and the reference securitization exposure. For example, if the reference securitization exposure benefits from any third-party guarantees or other credit enhancements that are not available to the unrated exposure, then the latter may not be assigned an inferred rating based on the reference securitization exposure.
(2)
The maturity of the reference securitization exposure must be equal to or longer than that of the unrated exposure.
(3)
On an ongoing basis, any inferred rating must be updated continuously to reflect any subordination of the unrated position or changes in the external rating of the reference securitization exposure.
(4)
The external rating of the reference securitization exposure must satisfy the general requirements for recognition of external ratings as delineated in 20.8.
