Securitisation

Part

BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

Chapter

Securitisation

Printed on: 01/11/2024

Rulebook at: 01/01/2010

BIPRU 9

Securitisation

BIPRU 9.1

Application and purpose

01/01/2007

Application

BIPRU 9.1.1

BIPRU 9.1 applies to a BIPRU firm.

01/01/2007

Purpose

BIPRU 9.1.2

The purpose of BIPRU 9 is to implement:

(1) Articles 94 to 96, paragraphs (1) and (5) of Article 97 , Article 99, Article 100(1) and Article 101;
(2) Points 8 and 9 of Annex V; and
(3) Parts 2, 3 (in part) and 4 of Annex IX;

of the Banking Consolidation Directive.

01/01/2007

General obligations: Risk-weighted exposures

BIPRU 9.1.3

A firm must calculate the risk weighted exposure amount for securitisation positions in accordance with BIPRU 9.

01/01/2007

BIPRU 9.1.4

A firm should apply the securitisation framework set out in this chapter for determining regulatory capital requirements on exposures arising from traditional securitisations and from synthetic securitisations and from structures that contain features of both.

01/01/2007

BIPRU 9.1.5

Since transactions may be structured in many different ways, the capital treatment of a position should be determined on the basis of its economic substance rather than merely its legal form. A firm should look to the economic substance of a transaction to determine whether the securitisation framework is applicable for purposes of determining regulatory capital. A firm should consult the FSA when there is uncertainty about whether a given transaction should be considered a securitisation.

01/01/2007

General obligations: Systems

BIPRU 9.1.6

The risks arising from securitisation transactions in relation to which a firm is originator or sponsor must be evaluated and addressed through appropriate policies and procedures, to ensure in particular that the economic substance of the transaction is fully reflected in the risk assessment and management decisions.

[Note: BCD Annex V point 8]

01/01/2007

BIPRU 9.1.7

A firm that is a party to a securitisation should fully understand the risks it has assumed or retained. In particular it should do so in order that it can correctly determine in accordance with BIPRU 9 the capital effects of the securitisation.

01/01/2007

BIPRU 9.1.8

The FSA expects an originator to continue to monitor any risks that it may be subject to when it has excluded the securitised exposures from its calculation of risk weighted exposure amounts. The originator should consider capital planning implications where risks may return and the impact that securitisation has on the quality of the remaining exposures held by the originator.

01/01/2007

BIPRU 9.1.8A

(1) The FSA expects firms to conduct regular stress testing in relation to their securitisation activities and off-balance sheet exposures. The stress tests should consider the firm-wide impact of those activities and exposures in stressed market conditions and the implications for other sources of risk, for example, credit risk, concentration risk, counterparty risk, market risk, liquidity risk and reputational risk. Stress testing of securitisation activities should take into account both existing securitisations and pipeline transactions, as there is a risk that these would not be completed in a stressed market scenario.
(2) The frequency and extent of the stress testing should be determined by the materiality of the firm's securitisation activities and off-balance sheet exposures.
(3) A firm should have procedures in place to assess and respond to the results produced from the stress testing and these should be taken into account under the overall Pillar 2 rule.

14/12/2009

Trading book and non-trading book

BIPRU 9.1.9

BIPRU 9 deals with:

(1) requirements for originators and sponsors of securitisations of non-trading book exposures; and
(2) the calculation of risk weighted exposure amount for securitisation positions for the purposes of calculating either the credit risk capital component or the counterparty risk capital component.

01/01/2007

BIPRU 9.1.10

BIPRU 7 sets out the calculation of the market risk capital requirement for securitisation positions held in the trading book.

01/01/2007

BIPRU 9.2

Approach to be used

01/01/2007

BIPRU 9.2.1

(1) Where a firm uses the standardised approach set out in BIPRU 3 (Standardised approach to credit risk) for the calculation of risk weighted exposure amount for the standardised credit risk exposure class to which the securitised exposures would otherwise be assigned under BIPRU 3, then it must calculate the risk weighted exposure amount for a securitisation position in accordance with the standardised approach to securitisations set out in BIPRU 9.9, BIPRU 9.10, BIPRU 9.11 and BIPRU 9.13.
(2) In all other cases it must calculate a risk weighted exposure amount in accordance with the IRB approach to securitisations set out in BIPRU 9.9, BIPRU 9.10, BIPRU 9.12, BIPRU 9.13 and BIPRU 9.14.

[Note: BCD Article 94]

01/01/2007

BIPRU 9.3

Requirements for originators

01/01/2007

BIPRU 9.3.1

(1) Where significant credit risk associated with securitised exposures has been transferred from the originator in accordance with the terms of BIPRU 9.4 or BIPRU 9.5, that originator may:

(a) in the case of a traditional securitisation, exclude from its calculation of risk weighted exposure amounts and, as relevant, expected loss amounts, the exposures which it has securitised; and
(b) in the case of a synthetic securitisation, calculate risk weighted exposure amounts and, as relevant, expected loss amounts in respect of such exposures, in accordance with the provisions of BIPRU 9.5.

(2) Where (1) applies, the originator must calculate the risk weighted exposure amounts prescribed in this chapter for the positions it may hold in the securitisation.
(3) Where the originator fails to transfer significant credit risk in accordance with (1), it need not calculate risk weighted exposure amounts for any positions it may hold in the securitisation in question.

[Note: BCD Article 95]

01/01/2007

BIPRU 9.3.2

Subject to BIPRU 9.3.6 G, for the purposes of BIPRU 9.4.1 R and BIPRU 9.5.1 R the transfer of credit risk to third parties should only be considered significant if the proportion of risk transferred is broadly commensurate with, or exceeds, the proportion by which risk weighted exposure amounts are reduced.

01/01/2007

BIPRU 9.3.3

For measuring the reduction in risk and risk weighted exposure amounts, an originator should assess the securitisation positions it holds against the underlying exposures if they had never been securitised.

01/01/2007

BIPRU 9.3.4

An originator should use an appropriate method, consistent with its own internal processes, to assess whether the risk transferred is significant.

01/01/2007

BIPRU 9.3.5

If the result of,

(1) applying a risk weight of 1250% to all positions that an originator holds in the securitisation; or
(2) deducting all those positions from capital resources;

is a reduction in the originator's capital requirement compared to the capital requirements that would apply had it not transferred the securitised exposures, then the originator may treat the risk transferred as significant for the purposes of BIPRU 9.4.1 R and BIPRU 9.5.1 R.

01/01/2007

BIPRU 9.3.6

An originator should not adjust its assessment of the transfer of risk in order to reflect uncertainties related to the effectiveness of a securitisation under BIPRU 9.4 or BIPRU 9.5. Instead the originator should treat the terms of BIPRU 9.4 or BIPRU 9.5 as not having been satisfied.

01/01/2007

BIPRU 9.4

Traditional securitisation

01/01/2007

Minimum requirements for recognition of significant credit risk transfer

BIPRU 9.4.1

The originator of a traditional securitisation may exclude securitised exposures from the calculation of risk weighted exposure amounts and expected loss amounts if significant credit risk associated with the securitised exposures has been transferred to third parties and the transfer complies with the conditions in BIPRU 9.4.2 R BIPRU 9.4.10 R.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.2

The securitisation documentation must reflect the economic substance of the transaction.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.3

The securitised exposures must be put beyond the reach of the originator and its creditors, including in bankruptcy and receivership. This must be supported by the opinion of qualified legal counsel.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.4

Legal counsel's opinions should be reviewed as necessary. For example, an opinion should be reviewed if a relevant statutory provision is amended or where a new decision or judgment of a court might have a bearing on the conclusions reached.

01/01/2007

BIPRU 9.4.5

The securities issued must not represent payment obligations of the originator.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.6

The transferee must be a securitisation special purpose entity.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.7

The originator must not maintain effective or indirect control over the transferred exposures.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.8

Where there is a clean-up call option, the following conditions must be satisfied:

(1) the clean-up call option is exercisable at the discretion of the originator;
(2) the clean-up call option may only be exercised when 10% or less of the original value of the exposures securitised remains unamortised; and
(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.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.9

The securitisation documentation must not contain clauses that:

(1) other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator including but not limited to altering the underlying credit exposures or increasing the yield payable to investors in response to a deterioration in the credit quality of the securitised exposures; or
(2) increase the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.4.10

For the purposes of BIPRU 9.4.7 R, an originator will be considered to have maintained effective control over the transferred exposures if it has the right to repurchase from the transferee the previously transferred exposures in order to realise their benefits or if it is obligated to re-assume transferred risk. The originator's retention of servicing rights or obligations in respect of the exposures does not of itself constitute indirect control of the exposures.

[Note: BCD Annex IX Part 2 point 1 (part)]

01/01/2007

BIPRU 9.5

Synthetic securitisation

01/01/2007

Minimum requirements for recognition of significant credit risk transfer

BIPRU 9.5.1

(1) An originator of a synthetic securitisation may calculate risk weighted exposure amount , and, as relevant, expected loss amounts, for the securitised exposures in accordance with BIPRU 9.5.3 R and BIPRU 9.5.4 R, if significant credit risk has been transferred to third parties, either through funded or unfunded credit protection, and the transfer complies with the conditions in (2)-(5).
(2) The securitisation documentation must reflect the economic substance of the transaction.
(3) The credit protection by which the credit risk is transferred must comply with the eligibility and other requirements under BIPRU 5 (Credit risk mitigation) and, so far as applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach) for the recognition of such credit protection. For the purposes of this rule, securitisation special purpose entities must not be recognised as eligible unfunded protection providers.
(4) The instruments used to transfer credit risk must not contain terms or conditions that:

(a) impose significant materiality thresholds below which credit protection is deemed not to be triggered if a credit event occurs;
(b) allow for the termination of the protection due to deterioration of the credit quality of the underlying exposures;
(c) other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator; or
(d) increase the originator's cost of credit protection or the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.

(5) An opinion must be obtained from qualified legal counsel confirming the enforceability of the credit protection in all relevant jurisdictions.

[Note: BCD Annex IX Part 2 point 2]

01/01/2007

Originators' calculation of risk-weighted exposure amounts for exposures securitised in a synthetic securitisation

BIPRU 9.5.2

BIPRU 9.5.3 R-BIPRU 9.5.8 R apply to the calculation by an originator of risk weighted exposure amounts for exposures securitised in a synthetic securitisation.

01/01/2007

BIPRU 9.5.3

(1) In calculating risk weighted exposure amounts for the securitised exposures, where the conditions in BIPRU 9.5.1 R are met, the originator of a synthetic securitisation must, subject to the treatment of maturity mismatches set out in BIPRU 9.5.6 R-BIPRU 9.5.8 R, use the relevant calculation methodologies set out in BIPRU 9.9-BIPRU 9.14and not those set out in BIPRU 3 (Standardised credit risk) or BIPRU 4 (IRB approach).
(2) For firms calculating risk weighted exposure amounts and expected loss amounts under the IRB approach, the expected loss amount in respect of such exposures must be zero.
(3) For clarity, this paragraph refers to the entire pool of exposures included in the securitisation.

[Note: BCD Annex IX Part 2 point 3 and point 4 (part)]

01/01/2007

BIPRU 9.5.4

Subject to the treatment of maturity mismatches set out in BIPRU 9.5.6 R-BIPRU 9.5.8 R, the originator must calculate risk weighted exposure amounts in respect of all tranches in the securitisation in accordance with the provisions of BIPRU 9.9-BIPRU 9.14. For example, where a tranche is transferred by means of unfunded credit protection to a third party, the risk weight of that third party must be applied to the tranche in the calculation of the originators risk weighted exposure amount.

[Note: BCD Annex IX Part 2 point 4 (part)]

01/01/2007

Treatment of maturity mismatches in synthetic securitisations

BIPRU 9.5.5

BIPRU 9.5.6 R-BIPRU 9.5.8 R apply to the treatment of maturity mismatches in a synthetic securitisation.

01/01/2007

BIPRU 9.5.6

For the purposes of calculating risk weighted exposure amounts in accordance with BIPRU 9.5.3 R, any maturity mismatch between the credit protection by which the tranching is achieved and the securitised exposures must be taken into consideration in accordance with BIPRU 9.5.7 R-BIPRU 9.5.8 R.

[Note: BCD Annex IX Part 2 point 5]

01/01/2007

BIPRU 9.5.7

The maturity of the securitised exposures must be taken to be the longest maturity of any of those exposures subject to a maximum of five years. The maturity of the credit protection must be determined in accordance with BIPRU 5 (Credit risk mitigation) and, so far as relevant, BIPRU 4.10 (Credit risk mitigation under the IRB approach).

[Note: BCD Annex IX Part 2 point 6]

01/01/2007

BIPRU 9.5.8

(1) An originator must ignore any maturity mismatch in calculating risk weighted exposure amounts for tranches appearing pursuant to BIPRU 9.9-BIPRU 9.14 with a risk weight of 1250%. For all other tranches the maturity mismatch treatment prescribed in BIPRU 5.8 (Maturity mismatches) must be applied in accordance with the following formula:

RW* is [RW(SP) x (t-t*)/(T-t*)] + [RW(Ass) x (T-t)/(T-t*)]

(2) The following apply for the purposes of the formula in (1):

(a) RW* is risk weighted exposure amounts;
(b) RW(Ass) is risk weighted exposure amounts for exposures if they had not been securitised calculated on a pro-rata basis;
(c) RW(SP) is risk weighted exposure amounts calculated under BIPRU 9.6.3 G as if there was no maturity mismatch;
(d) T is maturity of the underlying exposures expressed in years;
(e) t is maturity of credit protection expressed in years; and
(f) t* is 0.25.

[Note: BCD Annex IX Part 2 point 7]

01/01/2007

BIPRU 9.6

Implicit support

01/01/2007

BIPRU 9.6.1

An originator which, in respect of a securitisation, has made use of BIPRU 9.3.1 R in the calculation of risk weighted exposure amounts, or a sponsor, must not, with a view to reducing potential or actual losses to investors, provide support to the securitisation beyond its contractual obligations.

[Note: BCD Article 101(1)]

01/01/2007

BIPRU 9.6.2

If an originator or sponsor fails to comply with BIPRU 9.6.1 R in respect of a securitisation, it must:

(1) hold capital against all of the securitised exposures associated with the securitisation transaction as if they had not been securitised; and
(2) disclose publicly:

(a) that it has provided non-contractual support, and
(b) the regulatory capital impact of doing so.

[Note: BCD Article 101(2)]

01/01/2007

BIPRU 9.6.3

(1) Securitisation documentation should make clear, where applicable, that any repurchase of securitised exposures or securitisation positions by the originator or sponsor beyond its contractual obligations is not mandatory and may only be made at fair market value. In general, any such repurchase should be subject to a firm's credit review and approval process, which should be adequate to ensure that the repurchase complies with BIPRU 9.6.1 R.
(2) If an originator or sponsor repurchases securitised exposures or securitisation positions, it should be able to satisfy the FSA that it has adequately considered the following:

(a) the price of the repurchase;
(b) the firm's capital and liquidity position before and after repurchase;
(c) the performance of the securitised exposures; and
(d) the performance of the issued securities;

and has concluded that, taking into account those factors and any other relevant factors, the repurchase is not structured to provide support.
(3) A firm should keep adequate records of the matters in (1) and (2).

01/01/2007

BIPRU 9.6.4

If a firm is found to have provided implicit support to a securitisation, that fact increases the expectation that the firm will provide future support to its securitisations thus failing to achieve a significant transfer of risk. The FSA will consider taking appropriate measures to reflect this increased expectation after an instance of implicit support is found.

01/01/2007

BIPRU 9.6.5

A firm may need to consider three main situations to determine whether there is a breach of the prohibition against implicit support in BIPRU 9.6.1 R:

(1) support given under a contractual obligation;
(2) support given under the contractual documentation for the securitisation which the firm is entitled, but not obliged, to give; and
(3) support which is not provided for under the contractual documentation for the securitisation.

01/01/2007

BIPRU 9.6.6

(1) The support described in BIPRU 9.6.5 G (1) is permitted by BIPRU 9.6.1 R.
(2) The support described in BIPRU 9.6.5 G (3) is not permitted by BIPRU 9.6.1 R.
(3) The support described in BIPRU 9.6.5 G (2) may be permitted by BIPRU 9.6.1 R under the following conditions:

(a) the fact that the firm may give it is expressly set out in the contractual and marketing documents for the securitisation;
(b) the nature of the support that the firm may give is precisely described in the documentation;
(c) the maximum degree of support that can be given can be ascertained at the time of the securitisation both by the firm and by a person whose only information comes from the marketing documents for the securitisation;
(d) the assessment of whether there has been significant risk transfer and the amount of that transfer is made on the basis that the firm will provide support to the maximum degree possible; and
(e) the firm's capital resources and capital resources requirement are adjusted at the time of the securitisation on the basis that the firm has provided support to the maximum degree possible, whether by an immediate deduction from capital or appropriate risk weighting.

01/01/2007

BIPRU 9.6.7

A waiver of the right to future margin income may not breach the prohibition against implicit support:

(1) the degree of support that can be given can be defined precisely by reference to the securitisation contractual documentation , albeit the amount of support may not be ascertainable in absolute monetary terms; and
(2) no adjustment to the firm's capital resources or capital resources requirement is required, as a firm should not in any case reflect future margin income in its income or capital resources.

01/01/2007

BIPRU 9.6.8

For the purposes of BIPRU 9.6.2 R (2), firms will be expected to include disclosure of implicit support in accordance with the general and technical requirements on public disclosure, as outlined in BIPRU 11 (Disclosure).

01/01/2007

BIPRU 9.7

Recognition of credit assessments of ECAIs

01/01/2007

BIPRU 9.7.1

An ECAI's credit assessment may be used to determine the risk weight of a securitisation position in accordance with BIPRU 9.9 only if the ECAI is an eligible ECAI.

[Note: BCD Article 97(1)]

01/01/2007

BIPRU 9.7.2

(1) A firm may not use a credit assessment of an eligible ECAI to determine the risk weight of a securitisation position in accordance with BIPRU 9.9 unless it complies with the principles of credibility and transparency as elaborated in (2) to (4).
(2) There must be no mismatch between the types of payments reflected in the credit assessment and the types of payment to which the firm is entitled under the contract giving rise to the securitisation position in question.
(3) The credit assessment must be available publicly to the market. Credit assessments may only be treated as publicly available if:

(a) they have been published in a publicly accessible forum, and
(b) they are included in the ECAI's transition matrix.

(4) Credit assessments that are made available only to a limited number of entities may not be treated as publicly available.

[Note: BCD Article 97(5) and Annex IX Part 3 point 1]

01/01/2007

BIPRU 9.7.3

The guidance in BIPRU 3.3 (Recognition of ratings agencies) applies for the purposes of BIPRU 9 as it does to exposure risk weighting in BIPRU 3, save that the reference in BIPRU 3.3 to the regulation 22 of the Capital Requirements Regulations 2006 should be read as a reference to regulation 23 of the Capital Requirements Regulations 2006 for the purposes of BIPRU 9.

01/01/2007

BIPRU 9.8

Use of ECAI credit assessments for the determination of applicable risk weights

01/01/2007

BIPRU 9.8.1

The use of ECAIs' credit assessments for the calculation of a firm's risk weighted exposure amounts under BIPRU 9 must be consistent and in accordance with BIPRU 9.8.2 R BIPRU 9.8.7 R. Credit assessments must not be used selectively.

[Note: BCD Article 99]

01/01/2007

BIPRU 9.8.2

A firm may nominate one or more eligible ECAIs the credit assessments of which must be used in the calculation of its risk weighted exposure amounts under BIPRU 9 (a nominated ECAI).

[Note: BCD Annex IX Part 3 point 2]

01/01/2007

BIPRU 9.8.3

Subject to BIPRU 9.8.5 R BIPRU 9.8.7 R, a firm must use credit assessments from nominated ECAIs consistently in respect of its securitisation positions.

[Note: BCD Annex IX Part 3 point 3]

01/01/2007

BIPRU 9.8.4

Subject to BIPRU 9.8.5 R and BIPRU 9.8.6 R, a firm must not use an ECAI's credit assessments for its positions in some tranches and another ECAI's credit assessments for its positions in other tranches within the same structure that may or may not be rated by the first ECAI.

[Note: BCD Annex IX Part 3 point 4]

01/01/2007

BIPRU 9.8.5

Where a position has two credit assessments by nominated ECAIs, the firm must use the less favourable credit assessment.

[Note: BCD Annex IX Part 3 point 5]

01/01/2007

BIPRU 9.8.6

Where a position has more than two credit assessments by nominated ECAIs, the two most favourable credit assessments must be used. If the two most favourable assessments are different, the least favourable of the two must be used.

[Note: BCD Annex IX Part 3 point 6]

01/01/2007

BIPRU 9.8.7

(1) Where credit protection eligible under BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach) is provided directly to the SSPE, and that protection is reflected in the credit assessment of a position by a nominated ECAI, the risk weight associated with that credit assessment may be used.
(2) If the protection is not eligible under BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach), the credit assessment must not be recognised.
(3) In the situation where the credit protection is not provided to the SSPE but rather is provided directly to a securitisation position, the credit assessment must not be recognised.

[Note: BCD Annex IX Part 3 point 7]

01/01/2007

BIPRU 9.9

Calculation of risk-weighted exposure amounts for securitisation positions

01/01/2007

BIPRU 9.9.1

To calculate the risk weighted exposure amount of a securitisation position, the relevant risk weight must be assigned to the exposure value of the position in accordance with BIPRU 9.9 - BIPRU 9.14 based on the credit quality of the position.

[Note: BCD Article 96(1) (part) and Annex IX, Part 4 point 1]

01/01/2007

BIPRU 9.9.2

For the purpose of BIPRU 9.9.1 R, the credit quality of a position may be determined by reference to an ECAI credit assessment or otherwise, as set out in BIPRU 9.9 BIPRU 9.14.

[Note: BCD Article 96(1) (part)]

01/01/2007

BIPRU 9.9.3

(1) Where there is an exposure to different tranches in a securitisation, the exposure to each tranche must be considered a separate securitisation position.
(2) The providers of credit protection to securitisation positions must be treated as holding positions in the securitisation.
(3) securitisation positions include exposures to a securitisation arising from interest rate or currency derivative contracts.

[Note: BCD Article 96(2)]

01/01/2007

BIPRU 9.9.4

Subject to BIPRU 9.9.5 R,

(1) where a firm calculates risk weighted exposure amounts under the standardised approach to securitisations outlined in BIPRU 9.11, the exposure value of an on-balance sheet securitisation position must be its balance sheet value;
(2) where a firm calculates risk weighted exposure amounts under the IRB approach to securitisations outlined in BIPRU 9.12, the exposure value of an on-balance sheet securitisation position must be measured gross of value adjustments;
(3) the exposure value of an off-balance sheet securitisation position must be its nominal value multiplied by a conversion figure as prescribed in this chapter; and
(4) the conversion figure referred to in (3) must be 100% unless otherwise specified.

[Note: BCD Annex IX Part 4 point 2]

01/01/2007

BIPRU 9.9.5

The exposure value of a securitisation position arising from a financial derivative instrument must be determined in accordance with BIPRU 13 (Treatment of derivative instruments).

[Note: BCD Annex IX Part 4 point 3]

01/01/2007

BIPRU 9.9.6

Where a securitisation position is subject to funded credit protection, the exposure value of that position may be modified in accordance with and subject to the requirements of BIPRU 5 (Credit risk mitigation) as further specified in BIPRU 9.11.13 R and BIPRU 9.14.

[Note: BCD Annex IX Part 4 point 4]

01/01/2007

BIPRU 9.9.7

Where a securitisation position is subject to funded or unfunded credit protection the risk weight to be applied to that position may be modified in accordance with BIPRU 5 (Credit risk mitigation) and, if applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach) read in conjunction with BIPRU 9.14.

[Note: BCD Article 96(3)]

01/01/2007

BIPRU 9.9.8

(1) Where a firm has two or more overlapping positions in a securitisation the firm must, to the extent that the positions overlap, include in its calculation of risk weighted exposure amounts only the position, or portion of a position, producing the higher risk weighted exposure amounts.
(2) For the purposes of (1), overlapping means that the positions, wholly or partially, represent an exposure to the same risk such that to the extent of the overlap there is a single exposure.

[Note: BCD Annex IX Part 4 point 5]

01/01/2007

BIPRU 9.9.9

Subject to the provisions of GENPRU that deal with the deduction of securitisation positions at stage M in the relevant capital resources table, the risk weighted exposure amount must be included in the firm's total of risk weighted exposure amounts for the purposes of the calculation of its credit risk capital requirement.

[Note: BCD Article 96(4)]

01/01/2007

BIPRU 9.10

Reduction in risk-weighted exposure amounts

01/01/2007

BIPRU 9.10.1

BIPRU 9.10 applies as follows:

(1) BIPRU 9.10.2 R and BIPRU 9.10.3 R apply to both the standardised approach and the IRB approach; and
(2) BIPRU 9.10.4 R BIPRU 9.10.7 R apply to the IRB approach.

01/01/2007

BIPRU 9.10.2

In respect of a securitisation position in respect of which a 1250% risk weight is assigned, a firm may, as an alternative to including the position in its calculation of risk weighted exposure amounts, deduct from its capital resources the exposure value of the position. For these purposes, the calculation of the exposure value may reflect eligible funded protection in a manner consistent with BIPRU 9.14.

[Note: BCD Annex IX Part 4 points 35, 74 and 75(b)]

01/01/2007

BIPRU 9.10.3

Where a firm applies BIPRU 9.10.2 R, 12.5 times the amount deducted in accordance with that paragraph must, for the purposes of BIPRU 9.11.5 R and BIPRU 9.12.8 R, be subtracted from the amount specified in whichever of those rules applies as the maximum risk weighted exposure amount to be calculated by a firm to which one of those rules applies.

[Note: BCD Annex IX Part 4 point 36 and point 76]

01/01/2007

BIPRU 9.10.4

The risk weighted exposure amount of a securitisation position to which a 1250% risk weight is assigned may be reduced by 12.5 times the amount of any value adjustments made by the firm in respect of the securitised exposures.

[Note: BCD Annex IX Part 4 point 72 (part)]

01/01/2007

BIPRU 9.10.5

To the extent that value adjustments are taken account of for the purposes of BIPRU 9.10.4 R they must not be taken account of for the purposes of the calculation indicated in BIPRU 4.3.8 R (Treatment of expected loss amounts).

[Note: BCD Annex IX Part 4 point 72 (part)]

01/01/2007

BIPRU 9.10.6

The risk weighted exposure amount of a securitisation position may be reduced by 12.5 times the amount of any value adjustments made by the firm in respect of the position.

[Note: BCD Annex IX Part 4 point 73]

01/01/2007

BIPRU 9.10.7

For the purposes of BIPRU 9.10.2 R (as it applies to the IRB approach):

(1) the exposure value of the position may be derived from the risk weighted exposure amounts taking into account any reductions made in accordance with BIPRU 9.10.4 R BIPRU 9.10.6 R;
(2) where the supervisory formula method is used to calculate risk weighted exposure amounts and L K_IRBR and [L+T] > K_IRBR the position may be treated as two positions with L equal to K_IRBR for the more senior of the positions.

[Note: BCD Annex IX Part 4 point 75(a) and (c)]

01/01/2007

BIPRU 9.11

Calculation of risk weighted exposure amounts under the standardised approach to securitisations

01/01/2007

BIPRU 9.11.1

Subject to BIPRU 9.11.5 R, the risk weighted exposure amount of a rated securitisation position must be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment has been determined to be associated, as prescribed in BIPRU 9.11.2 R or BIPRU 9.11.3 R.

[Note: BCD Annex IX Part 4 point 6]

01/01/2007

BIPRU 9.11.2

Table: Positions other than ones with short-term credit assessments
This table belongs to BIPRU 9.11.1 R

Credit Quality step

5 and below

Risk weight

20%

50%

100%

350%

1250%

[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: www.fsa.gov.uk/pubs/international/ecais_securitisation.pdf]

01/01/2007

BIPRU 9.11.3

Table: Positions with short-term credit assessments
This table belongs to BIPRU 9.11.1 R

Credit quality step

All other credit assessments

Risk weight

20%

50%

100%

1250%

[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: www.fsa.gov.uk/pubs/international/ecais_securitisation.pdf]

01/01/2007

BIPRU 9.11.4

Subject to BIPRU 9.11.6 R BIPRU 9.11.12 R, the risk weighted exposure amount of an unrated securitisation position must be calculated by applying a risk weight of 1250%.

[Note: BCD Annex IX Part 4 point 7]

01/01/2007

Originator and sponsor firms

BIPRU 9.11.5

For an originator or sponsor, the risk weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to the risk weighted exposure amounts which would be calculated for the securitised exposures had they not been securitised subject to the presumed application of a 150% risk weight to all past due items and items belonging to regulatory high risk categories (see BIPRU 3.4.104 R and BIPRU 3 Annex 3 R) amongst the securitised exposures.

[Note: BCD Annex IX Part 4 point 8]

01/01/2007

Treatment of unrated securitisation positions

BIPRU 9.11.6

(1) A firm having an unrated securitisation position may apply the treatment set out in this paragraph for calculating the risk weighted exposure amount for that position provided the composition of the pool of exposures securitised is known at all times.
(2) A firm may apply the weighted-average risk weight that would be applied to the securitised exposures referred to in (1) under the standardised approach by a firm holding the exposures multiplied by a concentration ratio.
(3) This concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to, or pari passu with, the tranche in which the position is held including that tranche itself.
(4) The resulting risk weight must not be higher than 1250% or lower than any risk weight applicable to a rated more senior tranche.
(5) Where the firm is unable to determine the risk weights that would be applied to the securitised exposures under the standardised approach, it must apply a risk weight of 1250% to the position.

[Note: BCD Annex IX Part 4 points 9 and 10]

01/01/2007

BIPRU 9.11.7

(1) This provision contains guidance on the requirement in BIPRU 9.11.6 R (1) that the composition of the pool of exposures securitised must be known at all times.
(2) The composition should be known sufficiently at the time of purchase for the firm to be able accurately to calculate the risk weighted exposure amounts of the pool under the standardised approach.
(3) Thereafter, any change to the composition of the pool during the life of the transaction that would lead to an increase in the risk weighted exposure amount of the pool of exposures under the standardised approach should be either:

(a) prohibited by the documentation; or
(b) included in the firm's capital calculations.

(4) It would be sufficient for the purposes of (2) for the composition of the pool to be reported to the firm at least daily, via information service providers, secure web-sites or other appropriate sources.

01/01/2007

Treatment of securitisation positions in a second loss tranche or better in an ABCP programme

BIPRU 9.11.8

Subject to the availability of a more favourable treatment by virtue of the provisions concerning liquidity facilities in BIPRU 9.11.10 R BIPRU 9.11.12 R, a firm may apply to securitisation positions meeting the conditions set out in BIPRU 9.11.9 R a risk weight that is the greater of:

(1) 100%, or
(2) the highest of the risk weights that would be applied to any of the securitised exposures under the standardised approach by a firm holding the exposures.

[Note: BCD Annex IX Part 4 point 11]

01/01/2007

BIPRU 9.11.9

For the treatment in BIPRU 9.11.8 R to be available,:

(1) the securitisation position must be in an ABCP programme;
(2) the securitisation position must be in a tranche which is economically in a second loss position or better in the securitisation and the first loss tranche must provide meaningful credit enhancement to the second loss tranche;
(3) the securitisation position must be of a quality the equivalent of investment grade or better; and
(4) the firm in question must not hold a position in the first loss tranche.

[Note: BCD Annex IX Part 4 point 12]

01/01/2007

Treatment of unrated liquidity facilities

BIPRU 9.11.10

When the conditions in this paragraph have been met, and in order to determine its exposure value, a conversion figure of 20% may be applied to the nominal amount of a liquidity facility with an original maturity of one year or less and a conversion figure of 50% may be applied to the nominal amount of a liquidity facility with an original maturity of more than one year. The risk weight to be applied is the highest risk weight that would be applied to any of the securitised exposures under the standardised approach by a firm holding the exposures. Those conditions are as follows:

(1) the liquidity facility documentation must clearly identify and limit the circumstances under which the facility may be drawn;
(2) it must not be possible for the facility to be drawn so as to provide credit support by covering losses already incurred at the time of draw for example, by providing liquidity in respect of exposures in default at the time of draw or by acquiring assets at more than fair value;
(3) the facility must not be used to provide permanent or regular funding for the securitisation;
(4) repayment of draws on the facility must not be subordinated to the claims of investors other than to claims arising in respect of interest rate or currency derivative contracts, fees or other such payments, nor be subject to waiver or deferral;
(5) it must not be possible for the facility to be drawn after all applicable credit enhancements from which the liquidity facility would benefit are exhausted; and
(6) the facility must include a provision that results in an automatic reduction in the amount that can be drawn by the amount of exposures that are in default, where default has the meaning given to it for the purposes of the IRB approach, or where the pool of securitised exposures consists of rated instruments, that terminates the facility if the average quality of the pool falls below investment grade.

[Note: BCD Annex IX Part 4 point 13]

01/01/2007

Liquidity facilities that may be drawn only in the event of a general market disruption

BIPRU 9.11.11

To determine its exposure value a conversion figure of 0% may be applied to the nominal amount of a liquidity facility that may be drawn only in the event of a general market disruption (i.e. where more than one SSPE across different transactions are unable to roll over maturing commercial paper and that inability is not the result of an impairment of the SSPE's credit quality or of the credit quality of the securitised exposures), provided that the conditions set out in BIPRU 9.11.10 R are satisfied.

[Note: BCD Annex IX Part 4 point 14]

01/01/2007

Cash advance facilities

BIPRU 9.11.12

To determine its exposure value, a conversion figure of 0% may be applied to the nominal amount of a liquidity facility that is unconditionally cancellable provided that the conditions set out at BIPRU 9.11.10 R are satisfied and that repayment of draws on the facility are senior to any other claims on the cash flows arising from the securitised exposures.

[Note: BCD Annex IX Part 4 point 15]

01/01/2007

Standardised approach: recognition of credit risk mitigation on securitisation positions

BIPRU 9.11.13

Where a firm calculates the risk weighted exposure amount of a securitisation position under the standardised approach, where credit protection is obtained on a securitisation position, the calculation of risk weighted exposure amounts may be modified in accordance with BIPRU 5 (Credit risk mitigation).

[Note: BCD Annex IX Part 4 point 34]

01/01/2007

BIPRU 9.12

Calculation of risk-weighted exposure amounts under the IRB approach

01/01/2007

BIPRU 9.12.1

BIPRU 9.12 applies to the calculation of risk weighted exposure amounts of securitisation positions under the IRB approach.

[Note: BCD Annex IX Part 4 point 37 (part)]

01/01/2007

Hierarchy of methods

BIPRU 9.12.2

For a rated position or a position in respect of which an inferred rating may be used, the ratings based method must be used to calculate the risk weighted exposure amount.

[Note: BCD Annex IX Part 4 point 38]

01/01/2007

BIPRU 9.12.3

For an unrated position the supervisory formula method must be used except where a firm uses the ABCP internal assessment approach.

[Note: BCD Annex IX Part 4 point 39]

01/01/2007

BIPRU 9.12.4

In cases where both the ABCP internal assessment approach and the supervisory formula method are available, a firm should determine the most appropriate approach and apply that approach consistently.

01/01/2007

BIPRU 9.12.5

A firm other than an originator or a sponsor may not use the supervisory formula method unless its IRB permission expressly permits it to do so.

[Note: BCD Annex IX Part 4 point 40]

01/01/2007

BIPRU 9.12.6

Subject to any IRB permission of the type described in BIPRU 9.12.28 G, in the case of an originator or sponsor unable to calculate K_IRB and which has not obtained approval to use the ABCP internal assessment approach, and in the case of other firms where they have not obtained approval to use the supervisory formula method or, for positions in ABCP programmes, the ABCP internal assessment approach, a risk weight of 1250% must be assigned to securitisation positions which are unrated and in respect of which an inferred rating may not be used.

[Note: BCD Annex IX Part 4 point 41]

01/01/2007

Use of inferred ratings

BIPRU 9.12.7

When the following minimum operational requirements are satisfied a firm must attribute to an unrated position an inferred credit assessment equivalent to the credit assessment of those rated positions (the reference positions) which are the most senior positions which are in all respects subordinate to the unrated securitisation position in question:

(1) the reference positions must be subordinate in all respects to the unrated securitisation position;
(2) the maturity of the reference positions must be equal to or longer than that of the unrated position in question; and
(3) on an ongoing basis, any inferred rating must be updated to reflect any changes in the credit assessment of the reference positions.

[Note: BCD Annex IX Part 4 point 42]

01/01/2007

Maximum risk-weighted exposure amounts

BIPRU 9.12.8

For an originator, a sponsor, or for other firms which can calculate K_IRB, the risk weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to that which would produce an amount in respect of its credit risk capital requirement equal to the sum of 8% of the risk weighted exposure amount which would be produced if the securitised assets had not been securitised and were on the balance sheet of the firm plus the expected loss amounts of those exposures.

[Note: BCD Annex IX Part 4 point 45]

01/01/2007

Ratings based method

BIPRU 9.12.9

BIPRU 9.12.10 R to BIPRU 9.12.19 R apply to the calculation of risk weighted exposure amount of securitisation positions under the ratings based method.

01/01/2007

BIPRU 9.12.10

Under the ratings based method, the risk weighted exposure amount of a rated securitisation position must be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment is associated as prescribed in BIPRU 9.12.11 R and BIPRU 9.12.12 R multiplied by 1.06.

[Note: BCD Annex IX Part 4 point 46]

01/01/2007

BIPRU 9.12.11

Table: Positions other than ones with short-term credit assessments
This table belongs to BIPRU 9.12.10 R

Credit Quality Step (CQS)

Risk weight

CQS 1

12%

20%

CQS 2

15%

25%

CQS 3

10%

18%

35%

CQS 4

12%

20%

CQS 5

20%

35%

CQS 6

35%

50%

CQS 7

60%

75%

CQS 8

100%

CQS 9

250%

CQS 10

425%

CQS 11

650%

Below CQS 11

1250%

[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: www.fsa.gov.uk/pubs/international/ecais_securitisation.pdf]

01/01/2007

BIPRU 9.12.12

Table: Positions with short term credit assessments
This table belongs to BIPRU 9.12.10 R

Credit Quality Step (CQS)

Risk weight

CQS 1

12%

20%

CQS 2

12%

20%

35%

CQS 3

60%

75%

All other credit assessments

1250%

[Note: For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: www.fsa.gov.uk/pubs/international/ecais_securitisation.pdf ]

01/01/2007

BIPRU 9.12.13

Subject to BIPRU 9.12.16 R and BIPRU 9.12.17 R, the risk weights in column A of each table in BIPRU 9.12.11 R and BIPRU 9.12.12 R must be applied where the position is in the most senior tranche of a securitisation.

[Note: BCD Annex IX Part 4 point 47(part)]

01/01/2007

BIPRU 9.12.14

When determining under BIPRU 9.12.13 R whether a tranche is the most senior for these purposes, a firm need not take into consideration amounts due under interest rate or currency derivative contracts, fees due, or other similar payments.

[Note: BCD Annex IX Part 4 point 47 (part)]

01/01/2007

BIPRU 9.12.15

A senior liquidity facility need not be taken into account for the purposes of determining the most senior tranche under BIPRU 9.12.13 R.

01/01/2007

BIPRU 9.12.16

A firm may apply a risk weight of 6% to a position in the most senior tranche of a securitisation where that tranche is senior in all respects to another tranche of the securitisation positions which would receive a risk weight of 12% under BIPRU 9.12.10 R, provided that:

(1) it can be demonstrated that this is justified due to the loss absorption qualities of subordinate tranches in the securitisation; and
(2) either the position has an external credit assessment which has been determined to be associated with credit quality step 1 in BIPRU 9.12.11 R and BIPRU 9.12.12 R or, if it is unrated, requirements (1) to (3) in BIPRU 9.12.7 R are satisfied where reference positions are taken to mean positions in the subordinate tranche which would receive a risk weight of 12% under BIPRU 9.12.10 R.

[Note: BCD Annex IX Part 4 point 48]

01/01/2007

BIPRU 9.12.17

The risk weights in column C of each table in BIPRU 9.12.11 R and BIPRU 9.12.12 R must be applied where the position is in a securitisation where the effective number of exposures securitised is less than six. In calculating the effective number of exposures securitised multiple exposures to one obligor must be treated as one exposure. The effective number of exposures is calculated as:
N = (((_i)(EAD_i))²)/((_i)(EAD_i²))
where EAD_i represents the sum of the exposure values of all exposures to the i^th obligor.

[Note: BCD Annex IX Part 4 point 49(part)]

01/01/2007

BIPRU 9.12.18

In the case of resecuritisation, the firm must look at the number of securitisation exposures in the pool and not the number of underlying exposures in the original pools from which the underlying securitisation exposures stem. If the portfolio share associated with the largest exposure, C₁, is available, the firm may compute N as 1/C₁.

[Note: BCD Annex IX Part 4 point 49 (part)]

01/01/2007

BIPRU 9.12.19

The risk weight in Column B in the tables in BIPRU 9.12.11 R and BIPRU 9.12.12 R must be applied to all other positions.

[Note: BCD Annex IX Part 4 point 50]

01/01/2007

The ABCP internal assessment approach

BIPRU 9.12.20

(1) If:

(a) a firm's IRB permission allows it to use this treatment; and
(b) the conditions in (2)(16) are satisfied,

a firm may attribute to an unrated position in an asset backed commercial paper programme a derived rating as laid down in (3).
(2) Positions in the commercial paper issued from the programme must be rated positions.
(3) Under the ABCP internal assessment approach, the unrated position must be assigned by the firm to one of the rating grades described in (5). The position must be attributed a derived rating that is the same as the credit assessments corresponding to that rating grade as laid down in (5). Where this derived rating is, at the inception of the securitisation, at the level of investment grade or better, it must be treated in the same way as an eligible credit assessment by an eligible ECAI for the purposes of calculating risk weighted exposure amounts.
(4) The internal assessment methodology must be used in the firms internal risk management processes, including its decision making, management information and capital allocation processes.
(5) The firms internal assessment methodology must include rating grades. There must be a correspondence between such rating grades and the credit assessments of eligible ECAIs. This correspondence must be explicitly documented.
(6) The firm must be able to satisfy the FSA that its internal assessment of the credit quality of the position reflects the publicly available assessment methodology of one or more eligible ECAIs, for the rating of securities backed by the exposures of the type securitised.
(7) If a firm's IRB permission permits this, a firm need not comply with the requirement for the assessment methodology of the ECAI to be publicly available where it can demonstrate that due to the specific features of the securitisation for example its unique structure - there is as yet no publicly available ECAI assessment methodology.
(8) The ECAIs, the methodology of which must be reflected as required by (6), must include those ECAIs which have provided an external rating for the commercial paper issued from the programme. Quantitative elements such as stress factors used in assessing the position to a particular credit quality must be at least as conservative as those used in the relevant assessment methodology of the ECAIs in question.
(9) In developing its internal assessment methodology the firm must take into consideration relevant published ratings methodologies of the eligible ECAIs that rate the commercial paper of the ABCP programme. This consideration must be documented by the firm and updated regularly, as outlined in (15).
(10) The ABCP programme must have collections policies and processes that take into account the operational capability and credit quality of the servicer. The programme must mitigate seller/servicer risk through various methods, such as triggers based on current credit quality that would preclude commingling of funds.
(11) The ABCP programme must incorporate structural features for example wind down triggers - into the purchase of exposures in order to mitigate potential credit deterioration of the underlying portfolio.
(12) The ABCP programme must incorporate underwriting standards in the form of credit and investment guidelines. In deciding on an asset purchase, the programme administrator must consider the type of 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. A credit analysis of the asset sellers risk profile must be performed and must include analysis of past and expected future financial performance, current market position, expected future competitiveness, leverage, cash flow, and interest coverage, and debt rating. In addition, a review of the sellers underwriting standards, servicing capabilities, and collection processes must be performed.
(13) The ABCP programme's underwriting standards must establish minimum asset eligibility criteria that, in particular,

(a) exclude the purchase of assets that are significantly past due or defaulted;
(b) limit excess concentration to individual obligor or geographic area; and
(c) limit the tenor of the assets to be purchased.

(14) The aggregated estimate of loss on an asset pool that the ABCP programme is considering purchasing must take into account all sources of potential risk, such as credit risk and dilution risk. If the seller-provided credit enhancement is sized based on only credit-related losses, then a separate reserve must be established for dilution risk, if dilution risk is material for the particular exposure pool. In addition, in sizing the required enhancement level, the programme must review several years of historical information, including losses, delinquencies, dilutions, and the turnover rate of the receivables.
(15) Internal or external auditors, an ECAI, or the firm's internal credit review or risk management function must perform regular reviews of the internal assessment process and the quality of the internal assessments of the credit quality of the firms exposures to an ABCP programme. If the firms internal audit, credit review, or risk management functions perform the review, then these functions must be independent of the ABCP programme business line, as well as the customer relationship.
(16) The firm must track the performance of its internal ratings over time to evaluate the performance of its internal assessment methodology and must make adjustments, as necessary, to that methodology when the performance of the exposures routinely diverges from that indicated by the internal ratings.

[Note: BCD Annex IX Part 4 points 43 and 44]

01/01/2007

Supervisory formula method

BIPRU 9.12.21

Subject to any permission of the type described in BIPRU 9.12.28 G, under the supervisory formula method, the risk weight for a securitisation position must be the greater of 7% or the risk weight to be applied in accordance with BIPRU 9.12.22 R.

[Note: BCD Annex IX Part 4 point 52]

01/01/2007

BIPRU 9.12.22

(1) Subject to any permission of the type described in BIPRU 9.12.28 G, the risk weight to be applied to the exposure amount must be:
12.5 (S[L+T] - S[L]) / T
(2) The remaining provisions of this paragraph define the terms used in the formulae in (1) and (3).
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15) In these expressions, Beta [x; a, b]refers to the cumulative beta distribution with parameters a and b evaluated at x.
(16) T (the thickness of the tranche in which the position is held) is measured as the ratio of (a) the nominal amount of the tranche to (b) the sum of the exposure values of the exposures that have been securitised. For these purposes the exposure value of a financial derivative instrument must, where the current replacement cost is not a positive value, be the potential future credit exposure calculated in accordance with BIPRU 13 (Treatment of derivative instruments).
(17) K_IRBR is the ratio of (a) K_IRB to (b) the sum of the exposure values of the exposures that have been securitised. K_IRBR is expressed in decimal form (for example, K_IRB equal to 15% of the pool would be expressed as K_IRBR of 0.15).
(18) L (the credit enhancement level) is 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 must not be included in the measured L. Amounts due by counterparties to financial derivative instruments that represent tranches more junior than the tranche in question may be measured at their current replacement cost (without the potential future credit exposures) in calculating the enhancement level.
(19) N is the effective number of exposures calculated in accordance with BIPRU 9.12.17 R - BIPRU 9.12.18 R.
(20) ELGD, the exposure-weighted average loss-given-default, is calculated as follows:
(21) In (20) LGD_i represents the average LGD associated with all exposures to the i^th obligor, where LGD is determined in accordance with BIPRU 4. In the case of resecuritisation, an LGD of 100% must be applied to the securitised positions. When default risk and dilution risk for purchased receivables are treated in an aggregate manner within a securitisation (e.g. a single reserve or over-collateralisation is available to cover losses from either source), the LGD input must be constructed as a weighted average of the LGD for credit risk and the 75% LGD for dilution risk. The weights are the stand-alone capital charges for credit risk and dilution risk respectively.

[Note: BCD Annex IX Part 4 point 53 (part)]

06/04/2007

Simplified inputs

BIPRU 9.12.23

(1) Under the supervisory formula method, if 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, then for the purposes of the supervisory formula method the firm may set LGD equal 50% and N equal to either:

(a)
;or
(b) N=1/ C₁.

(2) C_m is the ratio of the sum of the exposure values of the largest 'm' exposures to the sum of the exposure values of the exposures securitised. The level of m may be set by the firm.
(3) For securitisations involving retail exposures, the supervisory formula method may be implemented using the simplifications: h = 0 and v = 0.

[Note: BCD Annex IX Part 4 point 53 (part)]

01/01/2007

BIPRU 9.12.24

Where a securitisation of retail exposures has a sufficiently low value of N for the simplification in BIPRU 9.12.23 R (3) to result in a material change in the capital charge as compared to the position if the approach in BIPRU 9.12.23 R were not taken, a firm should discuss with the FSA the suitability of its use.

01/01/2007

Liquidity Facilities

BIPRU 9.12.25

The provisions in BIPRU 9.12.26 R to BIPRU 9.12.28 G apply for the purposes of determining the exposure value of an unrated securitisation position in the form of certain types of liquidity facility.

[Note: BCD Annex IX Part 4 point 55]

01/01/2007

Liquidity facilities only available in the event of general market disruption

BIPRU 9.12.26

A conversion figure 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 set out in BIPRU 9.11.10 R.

[Note: BCD Annex IX Part 4 point 56]

01/01/2007

Cash advance facilities

BIPRU 9.12.27

A conversion figure of 0% may be applied to the nominal amount of a liquidity facility that meets the conditions set out in BIPRU 9.11.12 R.

[Note: BCD Annex IX Part 4 point 57]

01/01/2007

Exceptional treatment for liquidity facilities where K_IRB cannot be calculated

BIPRU 9.12.28

(1) When it is not practical for the firm to calculate the risk weighted exposure amounts for the securitised exposures as if they had not been securitised and the position does not qualify for the ABCP internal assessment approach, a firm may apply to the FSA for a variation of its IRB permission under which, on an exceptional basis, it may temporarily apply the method in (2) for the calculation of risk weighted exposure amounts for an unrated securitisation position in the form of a liquidity facility that meets the conditions to be a liquidity facility set out in BIPRU 9.11.10 R or that falls within the terms of BIPRU 9.12.26 R.
(2) Under the method in this paragraph, the highest risk weight that would be applied under the standardised approach to any of the securitised exposures had they not been securitised may be applied to the securitisation position represented by the liquidity facility. To determine the exposure value of the position a conversion figure of 50% may be applied to the nominal amount of the liquidity facility if the facility has an original maturity of one year or less. If the liquidity facility complies with the conditions in BIPRU 9.12.26 R a conversion figure of 20% may be applied. In other cases a conversion factor of 100% must be applied.

[Note: BCD Annex IX Part 4 points 58 and 59]

01/01/2007

BIPRU 9.13

Securitisations of revolving exposures with early amortisation provisions

01/01/2007

BIPRU 9.13.1

Where there is a securitisation of revolving exposures subject to an early amortisation provision, the originator must calculate an additional risk weighted exposure amount in accordance with this section in respect of the risk that the levels of credit risk to which it is exposed may increase following the operation of the early amortisation provision. Accordingly this section sets out how an originator must calculate a risk weighted exposure amount when it sells revolving exposures into a securitisation that contains an early amortisation provision.

[Note: BCD Article 100(1), Annex IX Part 4 points 16 and 68]

01/01/2007

Additional capital requirements for securitisations of revolving exposures with early amortisation provisions

BIPRU 9.13.2

A firm must calculate a risk weighted exposure amount in respect of the sum of the originators interest and the investors interest.

01/01/2007

BIPRU 9.13.3

For securitisation structures where the securitised exposures comprise revolving exposures and non-revolving exposures, an originator must apply the treatment set out in this section to that portion of the underlying pool containing revolving exposures.

[Note: BCD Annex IX Part 4 point 18]

01/01/2007

BIPRU 9.13.4

For the purposes of this section, subject to BIPRU 9.13.6 R:

(1) originators interest means the exposure value of that notional part of a pool of drawn amounts sold into a securitisation, the proportion of which in relation to the amount of the total pool sold into the structure 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 those having securitisation positions in the securitisation;
(2) to qualify as such the originators interest may not be subordinate to the investors interest; and
(3) investors interest means the exposure value of the remaining notional part of the pool of drawn amounts.

[Note: BCD Annex IX Part 4 point 19]

01/01/2007

BIPRU 9.13.5

Subject to BIPRU 9.13.7 R, the exposure of the originator associated with its rights in respect of the originators interest must not be treated as a securitisation position but as a pro rata exposure to the securitised exposures as if they had not been securitised.

[Note: BCD Annex IX Part 4 point 20]

01/01/2007

BIPRU 9.13.6

(1) For firms using the IRB approach set out in BIPRU 4, this paragraph applies in place of BIPRU 9.13.4 R.
(2) For the purposes of this section, originators interest means the sum of:

(a) the exposure value of that notional part of a pool of drawn amounts sold into a securitisation, the proportion of which in relation to the amount of the total pool sold into the structure 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 those having securitisation positions in the securitisation; and
(b) the exposure value of that part of the pool of undrawn amounts of the credit lines, the drawn amounts of which have been sold into the securitisation, the proportion of which to the total amount of such undrawn amounts is the same as the proportion of the exposure value described in (a) to the exposure value of the pool of drawn amounts sold into the securitisation.

(3) To qualify as such the originators interest may not be subordinate to the investors interest.
(4) Investors interest means the exposure value of the notional part of the pool of drawn amounts not falling within (2)(a) plus the exposure value of that part of the pool of undrawn amounts of credit lines, the drawn amounts of which have been sold into the securitisation, not falling within (2)(b).

[Note: BCD Annex IX Part 4 points 69 and 70]

01/01/2007

BIPRU 9.13.7

For firms using the IRB approach set out in BIPRU 4, this paragraph applies in place of BIPRU 9.13.5 R. The exposure of the originator associated with its rights in respect of that part of the originators interest described in BIPRU 9.13.6 R (2)(a) must not be treated as a securitisation position but as a pro rata exposure to the securitised drawn amounts as if they had not been securitised in an amount equal to that described in BIPRU 9.13.6 R (2)(a). The originator must also be considered to have a pro rata exposure to the undrawn amounts of the credit lines, the drawn amounts of which have been sold into the securitisation, in an amount equal to that described in BIPRU 9.13.6 R (2)(b).

[Note: BCD Annex IX Part 4 point 71]

01/01/2007

Exemptions from early amortisation treatment

BIPRU 9.13.8

Originators of the following types of securitisation are exempt from the capital requirement in BIPRU 9.13.1 R:

(1) securitisations of revolving exposures whereby investors remain fully exposed to all future draws by borrowers so that the risk on the underlying facilities does not return to the originator even after an early amortisation event has occurred; and
(2) securitisations where any early amortisation provision is solely triggered by events not related to the performance of the securitised assets or the originator, such as material changes in tax laws or regulations.

[Note: BCD Annex IX Part 4 point 21]

01/01/2007

Maximum capital requirement

BIPRU 9.13.9

For an originator subject to the capital requirement in BIPRU 9.13.1 R the total of the risk weighted exposure amounts in respect of its positions in the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) and the risk weighted exposure amounts calculated under BIPRU 9.13.1 R must be no greater than the greater of:

(1) the risk weighted exposure amounts calculated in respect of its positions in the investors interest (as so defined); and
(2) the risk weighted exposure amounts that would be calculated in respect of the securitised exposures by a firm holding the exposures as if they had not been securitised in an amount equal to the investors interest (as so defined).

[Note: BCD Annex IX Part 4 point 22]

01/01/2007

BIPRU 9.13.10

Deduction of net gains, if any, arising from the capitalisation of future income required under GENPRU 2.2.90 R (Core tier one capital: profit and loss account and other reserves: Securitisation) must be treated outside the maximum amount indicated in BIPRU 9.13.9 R.

[Note: BCD Annex IX Part 4 point 23]

01/01/2007

Calculation of risk-weighted exposure amounts

BIPRU 9.13.11

The risk weighted exposure amount to be calculated in accordance with BIPRU 9.13.1 R must be determined by multiplying the amount of the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) by the product of:

(1) the appropriate conversion figure as indicated in BIPRU 9.13.16 R, BIPRU 9.13.19 R or BIPRU 9.13.20 R; and
(2) the weighted average risk weight that would apply to the securitised exposures if the exposures had not been securitised.

[Note: BCD Annex IX Part 4 point 24]

01/01/2007

BIPRU 9.13.12

An early amortisation provision must be treated as controlled for the purposes of this section where the following conditions are met:

(1) the originator has an appropriate capital/liquidity plan in place to ensure that it has sufficient capital and liquidity available in the event of an early amortisation;
(2) throughout the duration of the transaction there is a pro rata sharing between the originators interest and the investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R) 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;
(3) the amortisation period is considered sufficient for 90% of the total debt (originators and investors interest (as defined in BIPRU 9.13.4 R or BIPRU 9.13.6 R)) outstanding at the beginning of the early amortisation period to have been repaid or recognised as in default; and
(4) the speed of repayment is no more rapid than would be achieved by straight-line amortisation over the period set out in (3).

[Note: BCD Annex IX Part 4 point 25]

01/01/2007

BIPRU 9.13.13

In the case of a securitisation meeting the following conditions:

(1) it is subject to an early amortisation provision;
(2) the securitisation is of retail exposures which are uncommitted and unconditionally cancellable without prior notice; and
(3) the early amortisation is triggered by the excess spread level falling to a specified level

a firm must, to calculate the appropriate conversion figure referred to in BIPRU 9.13.11 R, compare the three-month average excess spread level with the excess spread levels at which excess spread is required to be trapped.

[Note: BCD Annex IX Part 4 point 26]

01/01/2007

BIPRU 9.13.14

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.

[Note: BCD Annex IX Part 4 point 27]

01/01/2007

BIPRU 9.13.15

The conversion figure to be applied must be determined by the level of the actual three month average excess spread in accordance with BIPRU 9.13.16 R.

[Note: BCD Annex IX Part 4 point 28]

01/01/2007

BIPRU 9.13.16

Table: Conversion figures
This table belongs to BIPRU 9.13.15 R

Securitisations subject to a controlled early amortisation provision

Securitisation subject to a non-controlled early amortisation provision

3 months average excess spread

Conversion figure

Above level A

Level A

Level B

15%

Level C

10%

50%

Level D

20%

100%

Level E

40%

100%

01/01/2007

BIPRU 9.13.17

In BIPRU 9.13.16 R:

(1) Level A means levels of excess spread less than 133.33% of the trapping level of excess spread but not less than 100% of that trapping level;
(2) Level B means levels of excess spread less than 100% of the trapping level of excess spread but not less than 75% of that trapping level;
(3) Level C means levels of excess spread less than 75% of the trapping level of excess spread but not less than 50% of that trapping level;
(4) Level D means levels of excess spread less than 50% of the trapping level of excess spread but not less than 25% of that trapping level; and
(5) Level E means levels of excess spread less than 25% of the trapping level of excess spread.

[Note: BCD Annex IX Part 4 point 29]

01/01/2007

BIPRU 9.13.18

In the case of a securitisation meeting the conditions in this paragraph, a firm may apply to the FSA for a waiver that would allow a treatment which approximates closely to that prescribed in BIPRU 9.13.13 R to BIPRU 9.13.17 R for determining the conversion figure indicated. If a firm wants such a waiver, it should satisfy the FSA that:

(1) the securitisation is subject to an early amortisation provision of retail exposures;
(2) those retail exposures are uncommitted and unconditionally cancellable without prior notice;
(3) the early amortisation is triggered by a quantitative value in respect of something other than the three month average excess spread;
(4) the firm can establish a quantitative measure equivalent, in relation to the value in (3), to the trapping level of excess spread; and
(5) that treatment is a prudent measure of the risk that the levels of credit risk to which it is exposed may increase following the operation of the early amortisation provision (referred to in BIPRU 9.13.1R).

[Note: BCD Annex IX Part 4 point 30]

01/01/2007

BIPRU 9.13.19

All other securitisations subject to a controlled early amortisation provision of revolving exposures are subject to a credit conversion figure of 90%.

[Note: BCD Annex IX Part 4 point 32]

01/01/2007

BIPRU 9.13.20

All other securitisations subject to a non-controlled early amortisation provision of revolving exposures are subject to a credit conversion figure of 100%.

[Note: BCD Annex IX Part 4 point 33]

01/01/2007

Liquidity plans

BIPRU 9.13.21

A firm which is an originator of a revolving securitisation transaction involving early amortisation provisions should have liquidity plans to address the implications of both scheduled and early amortisation.

[Note: BCD Annex V point 9]

01/01/2007

BIPRU 9.14

Recognition of credit risk mitigation on securitisation positions under the IRB approach

01/01/2007

BIPRU 9.14.1

This section applies to credit risk mitigation in relation to a securitisation position for a firm calculating risk weighted exposure amounts using the IRB approach.

[Note: BCD Annex IX Part 4 point 37 (part)]

01/01/2007

BIPRU 9.14.2

Where a firm uses the ratings based method to calculate the risk weighted exposure amounts of securitisation positions, the firm may recognise credit risk mitigation in accordance with BIPRU 9.14.4 R to BIPRU 9.14.6 R.

[Note: BCD Annex IX Part 4 point 51]

01/01/2007

BIPRU 9.14.3

Where a firm uses the supervisory formula method to calculate the risk weighted exposure amounts of securitisation positions, the firm may recognise credit risk mitigation in accordance with BIPRU 9.14.4 R to BIPRU 9.14.5 R and BIPRU 9.14.7 R to BIPRU 9.14.13 R.

[Note: BCD Annex IX Part 4 point 54]

01/01/2007

Funded protection

BIPRU 9.14.4

Eligible funded protection is limited to that which is eligible for the calculation of risk weighted exposure amounts under the standardised approach as laid down under BIPRU 5 and recognition is subject to compliance with the relevant minimum requirements as laid down under BIPRU 5.

[Note: BCD Annex IX Part 4 point 60]

01/01/2007

Unfunded credit protection

BIPRU 9.14.5

Eligible unfunded credit protection and unfunded protection providers are limited to those which are eligible under BIPRU 5 (Credit risk mitigation) and BIPRU 4.10 (Credit risk mitigation under the IRB approach) and recognition is subject to compliance with the relevant minimum requirements laid down under those provisions.

[Note: BCD Annex IX Part 4 point 61]

01/01/2007

Credit risk mitigation under the ratings based method

BIPRU 9.14.6

Where risk weighted exposure amounts are calculated using the ratings based method, the exposure value and/or the risk weighted exposure amount for a securitisation position in respect of which credit protection has been obtained may be modified in accordance with the provisions of BIPRU 5 (Credit risk mitigation) as they apply for the calculation of risk weighted exposure amounts under the standardised approach set out in BIPRU 3.

[Note: BCD Annex IX Part 4 point 62]

01/01/2007

Credit risk mitigation under the supervisory formula method full credit protection

BIPRU 9.14.7

BIPRU 9.14.8 R BIPRU 9.14.10 R apply where risk weighted exposure amounts are calculated using the supervisory formula method where there is full credit protection.

[Note: BCD Annex IX Part 4 point 63 (part)]

01/01/2007

BIPRU 9.14.8

A firm must determine the effective risk weight of the position. It must do this by dividing the risk weighted exposure amount of the position by the exposure value of the position and multiplying the result by 100.

[Note: BCD Annex IX Part 4 point 63 (part)]

01/01/2007

BIPRU 9.14.9

In the case of funded credit protection, the risk weighted exposure amount of the securitisation position must be calculated by multiplying the funded protection-adjusted exposure amount of the position (E*, as calculated under BIPRU 5.4.28 R (3), taking the amount of the securitisation position to be E) by the effective risk weight.

[Note: BCD Annex IX Part 4 point 64]

01/01/2007

BIPRU 9.14.10

In the case of unfunded credit protection, the risk weighted exposure amount of the securitisation position must be calculated by multiplying G_A (the amount of the protection adjusted for any currency mismatch and maturity mismatch in accordance BIPRU 5.7.23 R (2)) by the risk weight of the protection provider; and adding this to the amount arrived at by multiplying the amount of the securitisation position minus G_A by the effective risk weight.

[Note: BCD Annex IX Part 4 point 65]

01/01/2007

Credit risk mitigation under the supervisory formula method partial protection

BIPRU 9.14.11

BIPRU 9.14.12 R BIPRU 9.14.13 R apply where risk weighted exposure amounts are calculated using the supervisory formula method where there is partial protection.

01/01/2007

BIPRU 9.14.12

If the credit risk mitigation covers the first loss or losses on a proportional basis on the securitisation position, a firm may apply BIPRU 9.14.7 R to BIPRU 9.14.10 R.

[Note: BCD Annex IX Part 4 point 66]

01/01/2007

BIPRU 9.14.13

In other cases the firm must treat the securitisation position as two or more positions with the uncovered portion being the position with the lower credit quality. For the purposes of calculating the risk weighted exposure amount for this position, the provisions in BIPRU 9.12.22 R to BIPRU 9.12.24 G apply subject to the modifications that T is adjusted to e* in the case of funded credit protection; 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 BIPRU 5.4.28 R (3) taking the amount of the securitisation position to be 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 BIPRU 5 (Credit risk mitigation)) 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 must be applied to that portion of the position not falling within the adjusted value of T.

[Note: BCD Annex IX Part 4 point 67]

01/01/2007

BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms

Securitisation

Securitisation

Application and purpose

Application

Purpose

General obligations: Risk-weighted exposures

General obligations: Systems

Trading book and non-trading book

Approach to be used

Requirements for originators

Traditional securitisation

Minimum requirements for recognition of significant credit risk transfer

Synthetic securitisation

Minimum requirements for recognition of significant credit risk transfer

Originators' calculation of risk-weighted exposure amounts for exposures securitised in a synthetic securitisation

Treatment of maturity mismatches in synthetic securitisations

Implicit support

Recognition of credit assessments of ECAIs

Use of ECAI credit assessments for the determination of applicable risk weights

Calculation of risk-weighted exposure amounts for securitisation positions

Reduction in risk-weighted exposure amounts

Calculation of risk weighted exposure amounts under the standardised approach to securitisations

Originator and sponsor firms

Treatment of unrated securitisation positions

Treatment of securitisation positions in a second loss tranche or better in an ABCP programme

Treatment of unrated liquidity facilities

Liquidity facilities that may be drawn only in the event of a general market disruption

Cash advance facilities

Standardised approach: recognition of credit risk mitigation on securitisation positions

Calculation of risk-weighted exposure amounts under the IRB approach

Hierarchy of methods

Use of inferred ratings

Maximum risk-weighted exposure amounts

Ratings based method

The ABCP internal assessment approach

Supervisory formula method

Simplified inputs

Liquidity Facilities

Liquidity facilities only available in the event of general market disruption

Cash advance facilities

Exceptional treatment for liquidity facilities where KIRB cannot be calculated

Securitisations of revolving exposures with early amortisation provisions

Additional capital requirements for securitisations of revolving exposures with early amortisation provisions

Exemptions from early amortisation treatment

Maximum capital requirement

Calculation of risk-weighted exposure amounts

Liquidity plans

Recognition of credit risk mitigation on securitisation positions under the IRB approach

Funded protection

Unfunded credit protection

Credit risk mitigation under the ratings based method

Credit risk mitigation under the supervisory formula method full credit protection

Credit risk mitigation under the supervisory formula method partial protection

Exceptional treatment for liquidity facilities where K_IRB cannot be calculated