Annex 4
to the Regulations No. 60
of the Financial and Capital Market Commission
of 2 May 2007
Calculation of the Risk–Weighted Value of a Securitisation Position
Section 1. Definitions
1. The following definitions are used in this Annex:
1.1. excess spread is finance charge collections and other fee income received in
respect of securitisation transactions, net of costs and expenses;
1.2. clean–up call option is a contractual option for the originator to repurchase or
extinguish securitisation positions before all underlying exposures have been repaid where the
amount of the outstanding underlying exposures falls below a specified level;
1.3. liquidity facility is a securitisation position arising from a contractual agreement
to provide funding to ensure timeliness of cash flows to investors;
1.4. Kirb is 8% of the risk–weighted exposure amounts that would be calculated under
the IRB Approach in respect of the securitised exposures, had they not been securitised, plus
the amount of expected losses associated with those exposures calculated under the IRB
Approach;
1.5. the Ratings Based Method is the method of calculating risk–weighted exposure
amounts for securitisation positions in accordance with Paragraphs 60–65 of Section 4 of this
Annex;
1.6. the Supervisory Formula Method is the method of calculating risk–weighted
exposure amounts for securitisation positions in accordance with Paragraphs 66–70 of Section
4 of this Annex;
1.7. unrated position is a securitisation position which does not have an ECAI rating as
defined in Paragraphs168–169 of the Regulations;
1.8. rated position is a securitisation position which has an ECAI rating as defined in
Paragraphs168–169 of the Regulations;
1.9. asset–backed commercial paper programme (hereinafter, an ABCP programme) is
a securitisation programme whereby the securities issued are predominantly commercial
papers with an original maturity of one year or less.
Section 2. Minimum Requirements for the Recognition of a Significant Credit
Risk Transfer and Calculation of the Risk–weighted Value and Expected Loss
Amounts for Securitised Exposures
Minimum Requirements for the Recognition of a Significant Credit Risk Transfer
in a Traditional Securitisation
2. The originator institution of a traditional securitisation shall be entitled to exclude
securitised exposures from the calculation of risk–weighted values and expected loss amounts
where a significant credit risk associated with the securitised exposures has been transferred
to third parties and the transfer complies with the following conditions:
2.1. the securitisation transaction documents reflect the economic substance of the
transaction;
2.2. the securitised exposures are not available to the originator institution and its
creditors, including in bankruptcy and receivership. This shall be supported by the opinion of
a qualified legal counsel;
2.3. the securities issued do not represent a payment obligation of the originator
institution;
2.4. the transferee is a special (securitisation) purpose entity (hereinafter, SPE);
2.5. the originator institution does not maintain effective or indirect control over the
transferred exposures. An originator shall be considered to have maintained effective control
over the transferred exposures where it has the right to repurchase from the transferee the
previously transferred exposures in order to gain benefits or where it is obligated to re–
assume the transferred risk. Where the originator institution retains servicing rights or
obligations in respect of the transferred exposures, this shall not constitute indirect control of
the exposures;
2.6. in the case of a clean–up call option the following conditions shall be met:
2.6.1. the clean–up call option may be exercised at the discretion of the originator
institution;
2.6.2. the clean–up call option may only be exercised when 10% or less of the original
value of the exposures securitised remains unamortised;
2.6.3. the clean–up call option is not structured to avoid allocating losses to credit
enhancement positions or other positions held by investors and is not otherwise structured to
provide credit enhancement;
2.7. the securitisation documents do not contain one or both of the following clauses
whereby the originator institution (other than in the case of early amortisation provisions):
2.7.1. improves the positions in the securitisation, including, but not limited to, by
altering (replacing) the underlying exposures or increasing the yield payable to investors in
response to a deterioration in the credit quality of the securitised exposures;
2.7.2. increases the yield payable to holders of positions in the securitisation in
response to a deterioration in the credit quality of the underlying pool.
Minimum Requirements for the Recognition of a Significant Credit Risk Transfer
in a Synthetic Securitisation
3. The originator institution of a synthetic securitisation shall be entitled to calculate
risk–weighted values, and, as relevant, expected loss amounts, for the securitised exposures in
accordance with Paragraphs 4 and 5 of this Annex where a significant credit risk has been
transferred to third parties either through funded or unfunded credit protection and the transfer
complies with the following conditions:
3.1. the securitisation transaction documents reflect the economic substance of the
transaction;
3.2. the credit protection by which the credit risk is transferred complies with the
eligibility and other requirements under Paragraphs 150–160 of the Regulations for the
recognition of such credit protection. In this context, a special purpose entity (SPE) shall not
be recognised as an eligible unfunded protection provider;
3.3. the instruments used to transfer credit risk do not contain conditions that:
3.3.1. impose significant materiality thresholds below which credit protection is
deemed not to be triggered where a credit event occurs;
3.3.2. allow for the termination of the protection due to deterioration of credit quality
of the underlying exposures;
2
3.3.3. other than in the case of early amortisation provisions, require positions in the
securitisation to be improved by the originator institution;
3.3.4. increase the institution's cost of credit protection or the yield payable to holders
of positions in securitisation in response to a deterioration in credit quality of the underlying
pool;
3.4. an opinion is obtained from a qualified legal counsel confirming the enforceability
of the credit protection in all relevant jurisdictions.
Originator Institution’s Calculation of Risk–weighted Values for Securitised
Exposures in a Synthetic Securitisation
4. When calculating the risk–weighted value for securitised exposures, where the
conditions of Paragraph 3 of this Annex are met, the originator institution of a synthetic
securitisation shall, subject to Paragraphs 6–8 of this Annex, use the relevant calculation
methods set out in Section 4 of this Annex instead of those set out in Paragraphs 88–110 of
the Regulations (under the SA). Where an institution calculates the risk–weighted value and
expected loss amounts under Paragraphs 111–149 (the IRB Approach), the expected loss
amount in respect of such exposures shall be zero.
5. Paragraph 4 of this Annex refers to the entire pool of exposures included in the
securitisation. In accordance with Paragraphs 6–8 of this Annex, the originator shall calculate
risk–weighted values in respect of all tranches in the securitisation in accordance with the
provisions of Section 4 of this Annex, including those relating to the recognition of credit risk
mitigation. For example, where a tranche is transferred to a third party by means of unfunded
credit protection, the risk weight of that third party shall be applied to the tranche in the
calculation of the originator's risk–weighted exposure amounts.
Treatment of Maturity Mismatches in a Synthetic Securitisation
6. To calculate the risk–weighted value in accordance with Paragraph 4 of this Annex,
any maturity mismatch between the credit protection by which the tranching is achieved and
the securitised exposures shall be taken into consideration in accordance with Paragraphs 7–8
of this Annex.
7. The maturity of a securitised exposure shall be considered the longest maturity of
any of those exposures subject to a maximum of five years. The maturity of the credit
protection shall be determined in accordance Annex 3.
8. The originator shall ignore any maturity mismatch when calculating the risk–
weighted values for tranches to which, in accordance with Section 4 of this Annex, a risk
weighting of 1 250% applies. For all other tranches, the maturity mismatch treatment set out
in Annex 3 shall be applied in accordance with the following formula:
RW* = [RW(SA) x (t–t*)/(T–t*)] + [RW(Ass) x (T–t)/(T–t*)] ,
where:
RW* is the risk–weighted value for the purposes of Paragraph 73.1 of the Regulations;
RW(Ass) is the risk–weighted exposure amount for exposures if they had not been
securitised, that is calculated on a pro–rata basis;
3
RW(SA) is the risk–weighted value that is calculated under Paragraph 4 of this Annex
if there was no maturity mismatch;
T is the maturity of the respective exposures expressed in years;
t is the maturity of credit protection expressed in years;
t* is 0,25.
Section 3. External Credit Assessments
Requirements to Be Met by the Credit Assessments of Eligible ECAI
9. To be used for the purposes of calculating risk–weighted exposure amounts under
Section 4 of this Annex, a credit assessment of an eligible ECAI shall comply with the
following conditions:
9.1. there shall be no mismatch between the types of payments reflected in the rating
and the types of payment to which the institution is entitled under the contract giving rise to
the securitisation position in question;
9.2. the rating shall be available publicly to the market. Ratings shall be considered
publicly available only if they have been published in a publicly accessible forum and are
included in the ECAI's transition matrix. Ratings that are made available only to a limited
number of entities shall not be considered publicly available.
Use of Credit Assessments
10. An institution shall choose one or more eligible ECAI whose ratings it shall use
for the calculation of its risk–weighted values under Paragraphs 161–173 of the Regulations
(a nominated ECAI).
11. Subject to Paragraphs 13–15 of this Annex, an institution shall use the ratings from
the nominated ECAI consistently in respect of its securitisation positions.
12. Subject to Paragraphs 13 and 14 of this Annex, an institution shall not use the
ratings of one ECAI for its positions in some tranches and of another ECAI for its positions in
other tranches within the same structure that may or may not have been rated by the first
ECAI.
13. Where a position has the ratings of two nominated ECAI, the institution shall use
the less favourable rating.
14. Where a position has the ratings of more than two nominated ECAI, the institution
shall use two most favourable ratings. Where the two most favourable ratings are different,
the least favourable one shall be used.
15. Where credit protection that is eligible under Paragraphs 150–160 of the
Regulations is provided directly to the SPE and that protection is taken into account in the
rating of a position by a nominated ECAI, the risk weight associated with that rating may be
used. Where the protection is not eligible under Paragraphs 150–160 of the Regulations, the
rating shall not be recognised. Where credit protection is not provided to the SPE but rather
directly to a securitisation position, the rating shall not be recognised.
4
Section 4. Calculation
Calculation of the Risk–weighted Value
16. For the purposes of Paragraphs 164–167 of the Regulations, the risk–weighted
value of a securitisation position shall be calculated by applying the relevant risk weight as set
out in Section 4 of this Annex to the exposure value of the position.
17. Subject to Paragraph 18 of this Annex:
17.1. where an institution calculates the risk–weighted value under Paragraphs 21–50
of this Annex, the value of an on–balance sheet securitisation position shall be its balance
sheet value;
17.2. where an institution calculates the risk–weighted value under Paragraphs 51–92
of this Annex, the value of an on–balance sheet securitisation position shall be gross of value
adjustments;
17.3. the value of an off–balance sheet securitisation position shall be its nominal
value multiplied with a conversion degree as prescribed in this Annex. The conversion degree
shall be 100% unless otherwise specified.
18. The value of a securitisation position arising from a derivative financial instrument
listed in Paragraph 92 of the Regulations shall be determined in accordance with Annex 1.
19. Where a securitisation position is subject to funded credit protection, the exposure
value of that position may be modified in accordance with the requirements of Annex 3 as
further specified in this Annex.
20. Where an institution has two or more overlapping securitisation positions, it will
be required, to the extent that they overlap, to include in its calculation of the risk–weighted
value only the position or the part of the position that produces the higher risk–weighted
value. For the purpose of this Paragraph, overlapping is that positions, wholly or partially,
represent an exposure to the same risk such that to the extent of the overlap there is a single
exposure.
Calculation of the Risk–weighted Value under the Standardised Approach
21. Subject to Paragraph 23 of this Annex, the risk–weighted value of a rated
securitisation position shall be calculated by applying to the exposure value the risk weight
associated with the credit quality step as set out in Tables 1 and 2. Mapping of ECAI ratings
across credit quality steps is set out in Annex 13.
Table 1. Positions without short–term rating
Credit quality step
1
2
3
4
Risk weight
20%
50%
100%
350%
5 and below
1 250%
Table 2. Positions with a short–term rating
5
Credit quality step
Risk weight
1
2
3
20%
50%
100%
All other credit
assessments
1 250%
22. Subject to Paragraphs 25–31 of this Annex, the risk–weighted value of an unrated
securitisation position shall be calculated by applying a risk weight of 1 250%.
Originator and Sponsor Institutions
23. For an originator institution or a sponsor institution, the risk–weighted values that
are calculated for securitisation positions may be limited to the risk–weighted values that are
calculated for the securitised exposures assuming that had they not been securitised, on
condition that a 150% risk weight is applied to all past due items and items belonging to high
risk categories that are included in the pool of securitised exposures.
Unrated Positions
24. An institution that has an unrated securitisation position shall be entitled to apply
the approach set out in Paragraph 25 of this Annex for calculating the risk–weighted value for
that position provided that the composition of the pool of exposures/assets subject to
securitisation is known at all times.
25. An institution shall be entitled to apply the average weighted risk weight that
would be applied to the securitised exposures under the Standardised Approach (Paragraphs
88–110 of the Regulations) by the institution holding the exposures, multiplied with a
concentration ratio. This concentration ratio shall be calculated as the sum of the nominal
amounts of all tranches divided by the sum of the nominal amounts of the tranches junior to
or pari passu with the tranche in which the institution holds the position, including that
tranche itself. The calculated risk weight shall not be higher than 1 250% or lower than any
risk weight applicable to a rated more senior tranche. Where the institution cannot determine
the risk weight that would be applied to the securitised exposures under the Standardised
Approach (Paragraphs 88–110 of the Regulations), it shall apply a risk weight of 1 250% to
the position.
Securitisation Positions in a Second Loss Tranche or a Better Tranche in an ABCP
Programme
26. Subject to Paragraphs 28–31 of this Annex in respect of an agreement for liquidity
provision, an institution shall be entitled to apply to securitisation positions that meet the
conditions set out in Paragraph 27 of this Annex a risk weight that is the greater of 100% or
the highest of the risk weights that would be applied to any of the securitised exposures under
Paragraphs 88–110 of the Regulations (under the SA) by an institution holding the securitised
exposures.
27. In order to use the provisions of Paragraph 26 of this Annex, the securitisation
position shall be:
27.1. in a tranche which is economically in a second loss position or better in the
securitisation and the first loss tranche shall provide a meaningful credit enhancement to the
second loss tranche;
6
27.2. of a quality equivalent to investment grade or better;
27.3. held by an institution which does not hold a position in the first loss tranche.
Agreement for Unrated Liquidity Facilities
Eligible Agreement for Liquidity Facilities
28. To establish the exposure value for liquidity facilities, a conversion factor of 20%
may be applied to the nominal amount of a liquidity facility provided that the original
maturity is one year or less, and a conversion factor of 50% may be applied provided that the
original maturity is more than one year, where the following conditions are met:
28.1. the documents of the agreement for liquidity facility shall clearly identify the
circumstances under which the facility may be drawn;
28.2. the liquidity facility shall not be drawn to cover the losses already incurred at the
time of drawing, e. g., by providing liquidity in respect of exposures in default at the time of
drawing or by acquiring assets at a higher price than fair value;
28.3. the liquidity facility shall not be used to provide permanent or regular funding
for the securitisation transactions;
28.4. repayment of draws on the liquidity facility shall not be subordinated to the
claims of investors other than to claims arising in respect of interest rate or foreign exchange
derivative contracts, fees or other similar payments, nor be subject to waiver or deferral;
28.5. it shall not be possible for the liquidity facility to be drawn after all applicable
credit enhancements from which the liquidity facility would benefit are exhausted;
28.6. the agreement for liquidity facility shall include a provision for an automatic
reduction in the amount that can be drawn by the amount of exposures that are in default,
where default meets the definition set out in Paragraphs 111–149 of the Regulations or where
the pool of securitised exposures consists of rated instruments and the agreement for liquidity
facility is terminated where the average quality of the pool falls below investment grade.
29. The risk weight to be applied shall be the highest risk weight that would be applied
to any of the securitised exposures under Paragraphs 88–110 of the Regulations by an
institution holding the exposures.
Liquidity Facilities that may be Drawn Only in the Event of a General Market
Disruption
30. To determine the exposure value for liquidity facility, a conversion factor of 0%
may be applied to the nominal amount of the liquidity facility where the liquidity facility may
be drawn only in the event of a general market disruption (i. e., where more than one SPE
across different transactions are unable to roll over maturing commercial papers and that
inability is not the result of an impairment of the SPE's credit quality or of credit quality of the
securitised exposures), provided that the conditions set out in Paragraph 28 of this Annex are
met.
Agreement for Cash Advance Facilities
31. To determine the exposure value of an agreement for cash advance facilities, a
conversion factor of 0% may be applied to the nominal amount of the facility provided that it
is unconditionally cancellable assuming that the conditions set out in Paragraph 28 of this
7
Annex are satisfied and that the requirement for the repayment of draws on the facility is
senior to any other claims on the cash flows arising from the securitised exposures.
Additional Capital Requirements for Securitisation of Revolving Exposures with an
Early Amortisation Provision
32. In addition to the risk–weighted value that is calculated in respect of the
securitisation positions, the originator institution shall calculate the risk–weighted value
according to the method set out in Paragraphs 33–47 of this Annex where it sells revolving
exposures into a securitisation that contains an early amortization provision.
33. An institution shall calculate the risk–weighted exposure amount in respect of the
sum of the originator's interest and of the investors' interest.
34. Where securitised exposures comprise both revolving and non–revolving
exposures, the originator institution shall apply the method set out in Paragraphs 35–45 of this
Annex to that portion of the underlying pool containing revolving exposures.
35. For the purposes of Paragraphs 32–45 of this Annex, the originator's interest is the
exposure value that is made up of the notional part of a pool of drawn amounts and whose
proportion in relation to the amount of the total pool determines the proportion of the cash
flow generated by principal and interest collections and other associated amounts that are not
available to make payments to those having securitisation positions. The originator's interest
may be recognised also where it is not subordinate to the investors' interest.
The investors' interest is the exposure value made up of the remaining notional part of
the pool of drawn amounts.
36. The exposure of the originator institution, associated with its rights in respect of
the originator's interest, shall not be considered a securitisation position but as a pro rata
exposure to the securitised exposures as if they had not been securitised.
Exemptions from Early Amortisation Treatment
37. The originators of the following types of securitisation shall be exempt from the
capital requirements referred to in Paragraph 32 of this Annex:
37.1. securitisations of revolving exposures whereby investors are fully exposed to all
future draws by borrowers (to borrow or repay a loan) so that the originator institution does
not assume risk even after an early amortisation event has occurred,
37.2. securitisations where any early amortisation provision is solely triggered by the
events not related to the performance of the securitised assets or the originator institution’s
performance, such as material changes in tax laws or regulatory provisions
Maximum Capital Requirement
38. For the originator institution the total of the risk–weighted value in respect of its
positions in the investors' interest and of the risk–weighted value that is calculated in
accordance with Paragraph 32 of this Annex shall be no greater than the greater of the
following:
8
38.1. risk–weighted values calculated in respect of its positions in the investors'
interest;
38.2. risk–weighted values that would be calculated in respect of the securitised
exposures by an institution holding the exposures as if they had not been securitised in an
amount equal to the investors' interest.
39. Deduction of net gains, if any, arising from the capitalisation of future income
required under Paragraph 342.6.7 of the Regulations shall not be included in the maximum
amount referred to in Paragraph 38 of this Annex.
Calculation of the Risk–weighted Value
40. The risk–weighted value to be calculated in accordance with Paragraph 32 of this
Annex shall be determined by multiplying the amount of the investors' interest with the
appropriate conversion factor as indicated in Paragraphs 42–47 of this Annex and the
weighted average risk weight that would apply to the securitised exposures as if the exposures
had not been securitised.
41. An early amortisation provision shall be considered controlled where the following
conditions are met:
41.1. the originator institution has an appropriate capital/liquidity plan to ensure that it
has sufficient capital and liquidity available in the event of an early amortisation;
41.2. throughout the duration of the transaction there is a pro rata sharing between the
originator's interest and the investor's interest of payments of interest and principal, expenses,
losses and recoveries based on the balance of receivables outstanding at one or more reference
points during each month;
41.3. the amortisation period is considered sufficient where 90% of the total debt (the
originator's and the investors' interest) outstanding at the beginning of the early amortisation
period have been repaid or recognised as in default;
41.4. the speed of repayment is not more rapid than would be achieved by a straight–
line amortisation over the period set out in Paragraph 41.3 of this Annex.
42. In the case of securitisations of retail exposures which are uncommitted and
unconditionally cancellable without prior notice, e. g., credit card loans, and the securitisation
transaction is subject to an early amortisation provision and the early amortisation is triggered
by the excess spread level falling below the excess spread trapping point, an institution shall
compare the three–month average excess spread level with the excess spread levels at which
excess spread is required to be trapped.
43. Where the securitisation does not require excess spread to be trapped, the trapping
point is deemed to be 4,5 percentage points greater than the excess spread level at which an
early amortisation is triggered.
44. The conversion factor to be applied shall be determined by the level of the actual
three month average excess spread in accordance with Table 3.
Table 3. Applied conversion factors
9
Securitisations subject to
a controlled early
amortisation provision
Conversion factor
Securitisations subject to a
non–controlled
early amortisation provision
Conversion factor
0%
0%
Level A
1%
5%
Level B
2%
15%
Level C
10%
50%
Level D
20%
100%
Level E
40%
100%
3 months average
excess spread
Above level A
45. In Table 3, Level A is the excess spread less than 133,33% of the trapping point of
the excess spread, but not less than 100% of that trapping point, Level B is the excess spread
less than 100% of the trapping point of the excess spread, but not less than 75% of that
trapping point, Level C is the excess spread less than 75% of the trapping point of the excess
spread, but not less than 50% of that trapping point, Level D is the excess spread less than
50% of the trapping point of the excess spread, but not less than 25% of that trapping point
and Level E is the excess spread less than 25% of the trapping point of the excess spread.
46. All other securitisations subject to a controlled early amortisation provision of
revolving exposures shall be subject to a conversion factor of 90% (e. g., committed retail
exposures).
47. All other securitisations subject to a non–controlled early amortisation provision of
revolving exposures shall be subject to a conversion factor of 100%.
Recognition of Credit Risk Mitigation on Securitisation Positions
48. Where there is a credit protection on a securitisation position, the calculation of the
risk–weighted value may be modified in accordance with Annex 3.
Reduction in the Risk–weighted Value
49. In accordance with Paragraph 348.6 of the Regulations, in respect of a
securitisation position for which a 1 250% risk weight applies, an institution shall be entitled,
as an alternative to including the position in the calculation of the risk–weighted value, to
deduct from own funds the exposure value of the position. For this purpose, eligible funded
credit protection may be taken into account in the calculation of the exposure value in
accordance with Paragraph 48 of this Annex.
50. Where an institution uses the alternative referred to in Paragraph 49 of this Annex
that is 12,5 times the amount deducted in accordance with Paragraph 49, for the purposes of
Paragraph 23 of this Annex be subtracted from the amount specified in Paragraph 23 as the
maximum risk–weighted value to be calculated by the institutions indicated in that Paragraph.
10
Calculation of the Risk–weighted Value under the IRB Approach
Hierarchy of Methods
51. For the purposes of Paragraphs 164–167 of the Regulations, the risk–weighted
value of a securitisation positions shall be calculated in accordance with Paragraphs 52–92 of
this Annex.
52. For a rated position or a position in respect of which an inferred rating may be
used, the Ratings Based Method set out in Paragraphs 60–65 of this Annex shall be used to
calculate the risk–weighted value.
53. For an unrated position the Supervisory Formula Method set out in Paragraphs 66–
70 of this Annex shall be used, except in cases where the Internal Assessment Approach is
permitted to be used as set out in Paragraphs 57–58 of this Annex.
54. An institution other than the originator institution or the sponsor institution shall
be entitled to only use the Supervisory Formula Method with the approval of the Commission.
55. Where the originator or the sponsor institution cannot calculate Kirb and has not
obtained the Commission’s approval to use the Internal Assessment Approach for positions in
ABCP programmes, and where other institutions have not obtained the Commission’s
approval to use the Supervisory Formula Method or the Internal Assessment Approach for
positions in ABCP programmes, they shall assign a risk weight of 1 250% to securitisation
positions which are unrated and in respect of which an inferred rating may not be used.
Use of Inferred Ratings
56. To an unrated position an institution shall assign an inferred credit assessment that
is equivalent to the credit assessment of rated positions (reference positions) which are the
most senior positions which are in all respects subordinate to the unrated securitisation
position in question, where the following operational requirements are met:
56.1. the reference positions are subordinate in all respects to the unrated securitisation
position;
56.2. the maturity of the reference positions is equal to or longer than that of the
unrated position in question;
56.3. any inferred rating is updated on an ongoing basis to reflect any changes in the
credit assessment of the reference positions.
The Internal Assessment Approach for Positions in ABCP Programmes
57. Subject to the Commission’s approval an institution shall be entitled to attribute to
an unrated position in an ABCP programme and derive rating as laid down in Paragraph 58 of
this Annex , provided that the following conditions are satisfied:
57.1. ABCP are assigned an external rating;
57.2. the institution shall satisfy the Commission that its internal assessment of the
credit quality of the positions reflects the publicly available assessment methodology of one
11
or more eligible ECAIs, used for the rating of the securities backed by similar relevant
securitised exposures;
57.3. the ECAIs whose methodology shall be observed in accordance with Paragraph
57.2 of this Annex shall be the ECAIs which have assigned an external rating for the
commercial papers issued within the ABCP programme. Quantitative elements, such as stress
factors, that are used in assessing the position to a particular credit quality shall be at least as
conservative as those used in the relevant assessment methodology of the ECAIs in question;
57.4. when developing its internal assessment methodology, an institution shall take
into consideration the relevant published ratings methodologies of the eligible ECAIs that rate
the commercial papers of the ABCP programme. An institution shall document this
consideration and update regularly in accordance with Paragraph 57.8 of this Annex;
57.5. an institution's internal assessment methodology shall include rating grades. The
correspondence between the rating grades and the credit assessments of eligible ECAIs shall
be established and explicitly documented;
57.6. the internal assessment methodology shall be used in the institution's internal
risk management process, including decision making, drawing up management information
and capital allocation;
57.7. internal or external auditors, an ECAI, or the institution's internal credit review
or risk management unit shall perform regular reviews of the internal assessment process and
the quality of the internal assessments of credit quality. Where such review is undertaken by
the institution's internal audit or credit review or risk management unit, it shall be independent
of the ABCP programme business line, as well as the customer relationship;
57.8. an institution shall track the performance of its internal ratings over time to
evaluate the quality of its internal assessment methodology and shall make adjustments, as
necessary, to that methodology where the quality of the exposures routinely diverges from
that indicated by the internal ratings;
57.9. the ABCP programme shall incorporate underwriting standards in the form of
credit quality and investment guidelines. In deciding on an asset purchase, the ABCP
programme administrator shall consider the type of the asset being purchased, the type and
monetary value of the exposures arising from the provision of liquidity facilities and credit
enhancements, the loss distribution, and the legal and economic isolation of the transferred
assets from the entity selling the assets. An institution shall make credit analysis of the asset
seller's risk profile that shall include the analysis of past and expected future financial
performance, current market position, expected future competitiveness, leverage, cash flow,
interest coverage and debt rating. In addition, a review of the seller's underwriting standards,
servicing capabilities, and collection processes shall be performed;
57.10. the ABCP programme's underwriting standards shall establish the following
minimum asset eligibility criteria that:
57.10.1. exclude the purchase of assets that are significantly past due or defaulted;
57.10.2. limit excess concentration to individual obligor or geographic area;
57.10.3. limit the types of the assets to be purchased;
57.11. the ABCP programme shall have collections policies and procedures that take
into account the operational capability and credit quality of the servicer. The programme shall
mitigate seller/servicer risk through various methods, such as triggers based on the current
credit quality that would preclude co–mingling of funds;
57.12. the aggregated estimate of loss on an asset pool that the ABCP programme is
considering purchasing shall take into account all sources of potential risk, such as credit and
dilution risk. Where the credit enhancement provided by the seller is sized basing only on
credit risk, a separate reserve shall be established for dilution risk where dilution risk is
12
material for a particular exposure pool. In addition, when sizing the required enhancement
level, the programme shall review several years of historical information, including losses,
delinquencies, dilutions, and the turnover rate of the receivables;
57.13. the ABCP programme shall incorporate structural features into the purchase of
assets/exposures in order to mitigate potential credit deterioration of the underlying portfolio.
The Commission may waive the requirement for the assessment methodology of the
ECAI to be publicly available where it considers that due to the specific features of the
securitisation, e. g., its unique structure, there is as yet no publicly available ECAI assessment
methodology.
58. The institution shall assign the unrated position to one of the rating grades
described in Paragraph 57 of this Annex. The position shall be attributed a derived rating that
complies with the credit assessment corresponding to that rating grade as laid down in
Paragraph 57. Where at the inception of the securitisation the derived rating is at the level of
investment grade or better, it shall be considered the same as an eligible credit assessment by
an eligible ECAI for the purposes of calculating the risk–weighted value.
Maximum Risk–weighted Value
59. The originator institution, the sponsor institution or other institutions that can
calculate Kirb, can reduce the risk–weighted amount calculated in respect of its positions in a
securitisation to the amount that, in accordance with Paragraph 73.1 of the Regulations,
equals 8% of the risk–weighted value which would be produced if the securitised assets had
not been securitised and were on the balance sheet, plus the expected losses of those
exposures.
Ratings Based Method
60. Under the Ratings Based Method, the risk–weighted value of a rated securitisation
position shall be calculated by applying to the exposure value the risk weight associated with
the credit quality step as set out in Tables 4 and 5, multiplied with 1,06. Mapping of ECAI
ratings across credit quality steps is set out in Annex 13.
Table 4. Positions other than ones with short–term credit assessments
Credit quality step
Risk weight
1
2
A
7%
8%
B
12%
15%
C
20%
25%
3
4
5
6
7
10%
12%
20%
35%
60%
18%
20%
35%
50%
75%
35%
35%
35%
50%
75%
13
8
9
10
11
Below 11
100%
250%
425%
650%
1 250%
100%
250%
425%
650%
1 250%
100%
250%
425%
650%
1 250%
Table 5. Positions with short–term credit assessments
Credit quality step
Risk weight
1
2
3
All other credit assessments
A
7%
12%
60%
1 250%
B
12%
20%
75%
1 250%
C
20%
35%
75%
1 250%
61. Subject to Paragraphs 62 and 63 of this Annex the risk weights in column A of
each table shall be applied where the position is in the most senior tranche. In order to
determine whether a tranche is the most senior, it is not required to take into consideration the
amounts due under interest rate or foreign exchange derivative contracts, fees due, or other
similar payments.
62. A risk weight of 6% may be applied to a position where it is in the most senior
tranche provided that this tranche is senior in all respects to another tranche and a positions
would receive a risk weight of 7% under Paragraph 60 of this Annex, provided that:
62.1. the Commission is satisfied that this is justified by the loss absorption qualities
of subordinate tranches;
62.2. either the position has an external rating that is associated with the credit quality
step 1 in Tables 4 or 5 or, if it is unrated, the requirements of Paragraph 56 of this Annex are
satisfied and the reference positions are the positions in the subordinate tranche which would
receive a risk weight of 7% under Paragraph 60 of this Annex.
63. The risk weights in column C of each table shall be applied where the position is
in a securitisation transaction in which the effective number of exposures securitised is less
than six. When calculating the effective number of exposures securitised, multiple exposures
to one obligor shall be treated as one exposure. The effective number of exposures shall be
calculated as follows:
N 
(  EAD i )
2
i

EAD
2
i
i
where:
EADi represents the sum of the exposure values of all exposures to the i–th obligor.
In the case of resecuritisation (securitisation of securitised exposures) an institution shall look
at the number of securitised exposures in the pool instead of the number of underlying
exposures in the original pools from which the securitised exposures stem. Where the
portfolio share associated with the largest exposure (C1) is known, the institution may
compute N as 1/C1.
14
64. The risk weights in Column B shall be applied to other positions.
65. Credit risk mitigation on securitisation positions may be recognised in accordance
with Paragraphs 76–78 of this Annex.
Supervisory Formula Method
66. In view of Paragraphs 74 and 75 of this Annex, under the Supervisory Formula
Method the risk weight for a securitisation position shall be the greater of 7% or the risk
weight to be applied in accordance with Paragraphs 67–69 of this Annex.
67. In view of Paragraphs 74 and 75 of this Annex, the risk weight to be applied to the
exposure amount shall be as follows:
12.5 x (S[L+T] – S[L]) / T,
where:
if L  Kirbr
L
S[L]  
ω(Kirbr  L)/Kirbr

Kirbr  K[L]  K[Kirbr]  d  Kirbr/ ω1  e


if Kirbr  L
where:
h
 (1  Kirbr / SNZ ) N
c
v
f
 Kirbr /(1  h)
( SNZ  Kirbr ) Kirbr  0.25 (1  SNZ ) Kirbr
N
2
 v  Kirbr
(1  Kirbr ) Kirbr  v
2



c



1 h
(1  h) 



a
(1  c )c
1
f
 g c
b
d
 g  (1  c )
 1  (1  h)  (1  Beta[ Kirbr ; a, b])
g

K [ L]  (1  h)  ((1  Beta[ L; a, b]) L  Beta[ L; a  1, b] c).
 = 1000,
 = 20,
where:
Beta [L; a, b] refers to the cumulative beta distribution with parameters a and b
evaluated at L;
T (the thickness of the tranche in which the position is held) shall be measured as the
ratio of the nominal amount of the tranche to the sum of the exposure values of the exposures
that have been securitised. For this purpose, the exposure value of the derivative instrument
15
listed in Paragraph 92 of the Regulations, where the current replacement cost is a negative
value, shall be the potential future credit exposure calculated in accordance with Annex 1;
Kirbr is the ratio of Kirbr to the sum of the exposure values of the exposures that have
been securitised.
Kirb is expressed in decimal form (e. g., Kirb equal to 15% of the pool would be
expressed as Kirb of 0,15).
L (the credit enhancement level) shall be measured as the ratio of the nominal amount
of all tranches subordinate to the tranche in which the position is held to the sum of the
exposure values of the exposures that have been securitised. Capitalised future income shall
not be included in the measured L. When calculating the credit enhancement level, amounts
due by counterparties to derivative instruments listed in Paragraph 92 of the Regulations that
represent tranches more junior than the tranche in question may be measured at their current
replacement cost (without taking into account the potential future credit exposures);
N is the effective number of exposures calculated in accordance with Paragraph 63 of
this Annex.
ELGD, the exposure–weighted average loss–given–default, shall be calculated as
follows:
ELGD 
 ELGD EAD
 EAD
i
i
i
i
i
where:
LGD represents the average LGD associated with all exposures to the it–h obligor,
where LGD is determined in accordance with Paragraphs 111–149 of the Regulations (under
the IRB Approach). In the case of resecuritisation, an LGD of 100% shall be applied to the
securitisation positions. Where default and dilution risks for the purchased receivables are
treated in an aggregate manner within a securitisation (i. e., a single reserve or collateral is
available to cover losses from either source), the risk–weighted average LGD shall be
constructed as a weighted average LGD for credit risk and the 75% LGD’s for dilution risk.
The weights shall be the stand–alone capital requirements for credit risk and dilution risk
respectively.
(As amended by the Regulations No. 173 of the Board of the Financial and Capital Market Commission of
14.12.2007 taking effect on 20.12.2007)
Simplified Inputs
68. Where the exposure value of the largest securitised exposure C1 is no more than
3% of the sum of the exposure values of the securitised exposures, for the purposes of the
Supervisory Formula Method an institution shall be entitled to set LGD as 50% and N equal
to either:

 C  C1
N   C1 Cm   m
 m 1

or


 max{1  m C1 , 0 }


1
N=1/ C1,
16
where:
Cm is the ratio of the sum of the exposure values of the largest m exposures to the sum
of the exposure values of the securitised exposures. The level of m may be set by an
institution.
69. For securitisations involving retail exposures, the Commission may permit the
Supervisory Formula Method to be implemented using the simplifications h = 0 and v = 0.
70. Credit risk mitigation on securitisation positions may be recognised in accordance
with Paragraphs 76, 77 and 79–83 of this Annex.
Agreement for Liquidity Facilities
71. The provisions of Paragraphs 72–75 of this Annex shall apply to the exposure
value of an unrated securitisation position that is an agreement for liquidity facilities.
Liquidity Facilities Only Available in the Event of a General Market Disruption
72. A conversion factor of 20% may be applied to the nominal amount of a liquidity
facility that may only be drawn in the event of a general market disruption and that meets the
conditions to be an eligible liquidity facility as set out in Paragraph 28 of this Annex.
Agreement for Cash Advance Facilities
73. A conversion factor of 0% may be applied to the nominal amount of a liquidity
facility that meets the conditions set out in Paragraph 30 of this Annex.
Exceptional Cases when Kirb Cannot Be Calculated
74. Where it is not practical for an institution to calculate risk–weighted exposure
amounts assuming that they had not been securitised, the institution shall be entitled, on an
exceptional basis and subject to the consent of the Commission, to be temporarily allowed to
apply the method set out in Paragraph 75 of this Annex for the calculation of the risk–
weighted value for an unrated securitisation position in the form of a liquidity facility
provided that the liquidity facility meets the conditions to be an eligible liquidity facility set
out in Paragraph 28 of this Annex or in accordance with the conditions of Paragraph 72 of this
Annex.
75. The highest risk weight that would be applied in accordance with Paragraphs 88–
110 of the Regulations (under the SA) to any of the securitised exposures, assuming that they
not been securitised, may be applied to the securitisation position represented by the liquidity
facility position. To determine the exposure value of the position, a conversion factor of 50%
may be applied to the nominal amount of the liquidity facility provided that the facility has an
original maturity of one year or less. Where the liquidity facility complies with the conditions
of Paragraph 72 of this Annex, a conversion factor of 20% may be applied. In other cases a
conversion factor of 100% shall be applied.
Recognition of Credit Risk Mitigation in Respect of Securitisation Positions
17
Funded Credit Protection
76. Eligible funded credit protection is a funded protection which is eligible for the
calculation of the risk–weighted value in accordance with Paragraphs 88–110 of the
Regulations (under the SA) as laid down in Paragraphs 150–160 of the Regulations and the
recognition shall be dependent on compliance with the minimum requirements as laid down
in those paragraphs.
Unfunded Credit Protection
77. Eligible unfunded credit protection and unfunded protection providers shall be
limited to those which are eligible under Paragraphs 150–160 of the Regulations and their
recognition shall be dependent on compliance with the minimum requirements as laid down
in those paragraphs.
Calculation of Capital Requirements for Securitisation Positions with Credit Risk
Mitigation
Ratings Based Method
78. Where the risk–weighted value is calculated under the Ratings Based Method, the
exposure value and/or the risk–weighted value for a securitisation position in respect of which
credit protection has been obtained may be modified in accordance with the provisions of
Annex 3 as far as they apply to the calculation of the risk–weighted value in accordance with
Paragraphs 88–110 of the Regulations (under the SA).
Supervisory Formula Method — Full Credit Protection
79. Where the risk–weighted value is calculated under the Supervisory Formula
Method, an institution shall determine the effective risk weight of the position. The institution
shall do this by dividing the risk–weighted value of the position by the exposure value of the
position and multiplying the result with 100.
80. In the case of funded credit protection, the risk–weighted value of the
securitisation position shall be calculated by multiplying the funded protection–adjusted
exposure amount of the position (E*, as calculated in accordance with Paragraphs 150–160 of
the Regulations under the Standardised Approach assuming that E is the securitisation
position amount) with the effective risk weight.
81. In the case of unfunded credit protection, the risk–weighted value of the
securitisation position shall be calculated by multiplying GA (the amount of the protection
adjusted for any currency mismatch and maturity mismatch in accordance with the provisions
of Annex 3) with the risk weight of the protection provider and adding this to the amount
arrived at by multiplying the amount of the securitisation position minus GA with the
effective risk weight.
Supervisory Formula Method — Partial Protection
18
82. Where the credit risk mitigation covers the first loss or losses on a pro rata basis
on the securitisation position, an institution shall be entitled to apply Paragraphs 79–81 of this
Annex.
83. In other cases an institution shall treat the securitisation position as two or more
positions and the uncovered portion as the position with a lower credit quality. In order to
calculate the risk–weighted value for this position, the provisions in Paragraphs 66–70 of this
Annex shall apply assuming that in the case of funded protection T shall be adjusted to e* and
to T–g in the case of unfunded credit protection, where e* denotes the ratio of E* to the total
notional amount of the underlying pool, where E* is the adjusted exposure amount of the
securitisation position calculated in accordance with the provisions of Annex 3 as they apply
to the calculation of the risk–weighted value under Paragraphs 88–110 of the Regulations
(under the SA) assuming that the amount of the securitisation position is E and g is the ratio
of the nominal amount of credit protection (adjusted for any currency or maturity mismatch in
accordance with the provisions of Annex 3) to the sum of the exposure amounts of the
securitised exposures. In the case of unfunded credit protection the risk weight of the
protection provider shall be applied to that portion of the position not falling within the
adjusted value of T.
Additional Capital Requirements for Securitisations of Revolving Exposures with an
Early Amortisation Provision
84. In addition to the risk–weighted value that is calculated for the securitisation
positions of an institution, the originator institution shall calculate the risk–weighted value
according to the methodology set out in Paragraphs 37–42 of this Annex where it sells
revolving exposures into a securitisation that contains an early amortisation provision.
85. For the purposes of Paragraph 84 of this Annex, Paragraphs 86 and 87 shall
replace Paragraphs 35 and 36 of this Annex.
86. For the purposes of Paragraph 84 of this Annex, the originator’s interest shall be
the sum of:
86.1. the exposure value constituted of the notional part of the securitised pool of
drawn amounts, the proportion of which in relation to the amount of the total securitised pool
determines the proportion of the cash flows generated by principal and interest collections and
other associated amounts which are not available to make payments to the holders of
securitisation positions; plus
86.2. the exposure value of that part of the pool of undrawn credit lines, the drawn
amounts of which have been securitised and the proportion of which to the total amount of
undrawn amounts is the same as the proportion of the exposure value described in Paragraph
86.1 to the securitised pool of drawn amounts.
The originator's interest may be recognised also when it is not subordinate to the
investors' interest.
The investors' interest is the exposure value stemming from the notional part of the
pool of drawn amounts that does not fall within Paragraph 86.1 plus the exposure value of
that part of the pool of undrawn amounts of credit lines, the drawn amounts of which have
been securitised and do not fall within Paragraph 86.2.
19
87. The exposure of the originator institution associated with its rights in respect of
that part of the originator's interest described in Paragraph 86.1 shall not be considered a
securitisation position, but a pro rata exposure stemming from the securitised exposures
(drawn amounts) assuming that they had not been securitised in an amount equal to that
referred to in Paragraph 86.1. The originator institution shall also be considered to have a pro
rata exposure to the undrawn amounts of credit lines whose drawn amounts have been
securitised, in an amount equal to that referred to in Paragraph 86.2.
Reduction in the Risk–weighted Value
88. The risk–weighted value of a securitisation position to which a 1 250% risk weight
is assigned may be reduced by an amount that 12,5 times exceeds the amount of any value
adjustments made by an institution in respect of the securitised exposures. To the extent that
value adjustments are taken into account for this purpose, they shall not be taken into account
for the purposes of the calculation set out in Paragraph 36 of Section1 of Annex 6 (deductions
from capital).
89. The risk–weighted value of a securitisation position may be reduced by an amount
that 12,5 times exceeds the amount of any value adjustments made by an institution in respect
of the position.
90. As provided in Paragraph 348.6 of the Regulations, in respect of a securitisation
position to which a 1 250% risk weight applies, an institution shall be entitled, as an
alternative to including the position in the calculation of the risk–weighted value, to deduct
from own funds the exposure value of the position.
91. For the purposes of Paragraph 90 of this Annex:
91.1. the exposure value of the position may be derived from the risk–weighted value
taking into account all reductions made in accordance with Paragraphs 88 and 89 of this
Annex;
91.2. the calculation of the exposure value may reflect eligible funded protection in
accordance with the methodology prescribed in Paragraphs 76–83 of this Annex;
91.3. where the Supervisory Formula Method is used to calculate the risk–weighted
value and L < Kirbr and [L+T] > Kirbr the position may be treated as two positions with L equal
to Kirbr for the more senior of the positions.
92. Where an institution uses the option indicated in Paragraph 90, an amount that
12,5 times exceeds the amount deducted in accordance with this Paragraph shall, for the
purposes of Paragraph 59 of this Annex, be deducted from the amount specified in
Paragraph 59 as the maximum risk–weighted value to be calculated by the institutions
indicated in that Paragraph.
20