| ii) | the junior or subordinated risk positions can absorb losses without interrupting contractual payments to more senior tranches; |
| iii) | the potential risk of loss for the investors in commercial paper issued by the special-purpose institution primarily depends upon the performance of the underlying risk exposures obtained by the special-purpose institution; |
| iv) | the packaging of risk relating to multiple underlying assets, reference assets or reference entities for transfer creates risks that are more complex than those for a single asset |
| v) | there will tend to be substantially higher loss severity for lower rated tranches in a synthetic securitisation scheme than for higher rated tranches. Within a synthetic securitisation structure, investors in junior tranches will suffer a total loss before the investors in more senior tranches incur any loss. |
| b) | The use of a credit-derivative instrument to transfer risk may lead to a change in the risk profile of the assets remaining on a bank's balance sheet, in terms of both the quality and the spread of risk. For example, the transfer of the risk relating to high-quality exposures may lead to deterioration in the average quality of the asset portfolio remaining on the bank's balance sheet. |
| c) | Retention or repurchase of significant securitisation exposures by the institution that transferred the risk may undermine the intent of a synthetic securitisation scheme to transfer risk to third-party investors. |
| d) | A bank that wishes to engage in a synthetic securitisation scheme shall have in place a robust risk-management framework, the fundamental elements of which framework are specified in regulation 23(9)(d) of the Regulations relating to Banks. |
| e) | A reduction in the credit-risk exposure of a reporting bank as a result of a transaction involving a credit-derivative instrument shall be allowed only to the extent that- |
| i) | the bank achieves an effective and verifiable transfer of risk; |
| ii) | such risk mitigation was not already taken into account in the calculation of the required capital and reserve funds of the reporting bank. |
| 2) | Conditions relating to a transfer of risk, including risk mitigation |
| a) | In the calculation of a bank's required capital and reserve funds as envisaged in section 70 of the Act, the provisions of regulations 23(7), 23(9), 23(12) and 23(14) of the Regulations relating to Banks regarding credit risk-mitigation instruments, including credit-derivative instruments, insofar as the said provisions are relevant, shall mutatis mutandis apply to a synthetic securitisation scheme: |
Provided that-
| i) | in the case of a conflict between the provisions of the said regulations and this Schedule, the provisions of this Schedule shall prevail; |
| ii) | eligible collateral in respect of a bank's risk exposure shall be limited to the instruments specified in regulation 23(9)(b) of the Regulations relating to Banks; |
| iii) | a bank may in the calculation of the bank's required capital and reserve funds recognise eligible collateral pledged as security to the bank by a special-purpose institution; |
| iv) | eligible guarantors in respect of a bank's risk exposure shall be limited to the guarantors specified in regulation 23(9)(c) of the Regulations relating to Banks; |
| v) | a special-purpose institution shall not qualify as an eligible guarantor in relation to any risk exposure incurred by a bank in terms of this Schedule; |
| vi) | a significant amount of credit risk associated with the underlying exposure shall be transferred to third party investors; |
| vii) | a bank shall calculate any maturity mismatches in respect of credit protection obtained in accordance with the relevant requirements specified in regulation 23(9)(e) of the Regulations relating to Banks provided that- |
| A) | when the exposures in the underlying pool have different maturities, the bank shall use the longest maturity in order to determine the maturity of the pool; |
| B) | subject to the provisions of item (i) below, a bank that adopted the standardised approach for the measurement of the bank's exposure in respect of a securitisation scheme, which bank acts in a primary role, shall in accordance with the requirements specified in regulation 23(6)(h) of the Regulations relating to Banks deduct from its capital and reserve funds all retained positions that are unrated or rated below investment grade; |
| C) | a bank that adopted the IRB approach for the measurement of the bank's exposure in respect of a securitisation scheme, which bank acts in a primary role, shall in accordance with the relevant requirements specified in regulation 23(11) of the Regulations relating to Banks deduct from its capital and reserve funds any retained positions that are unrated; |
| D) | a bank shall disregard any maturity mismatch relating to any instrument that is deducted from the bank's capital and reserve funds. |
| b) | Subsequent to the transfer of risk by an institution that acts in a primary role to a special-purpose institution in terms of a synthetic securitisation scheme, the said special-purpose institution shall have no right of recourse against an institution acting in a primary role or any of its associated companies or, when such an institution is a bank, against any other institution within the banking group of which such a bank is a member in respect of costs, expenses or losses incurred in connection with any of the risks transferred: Provided that the transferring institution may in terms of a separate transaction act in a secondary role and, when such transferring institution is a bank, act in such a secondary role in accordance with the provisions of this Schedule. |
| c) | Item (b) relating to the transfer of risk shall not apply when the special-purpose institution has a right of recourse against an institution acting in a primary role or any of its associated companies or, when such an institution is a bank, against any other institution within the banking group of which such a bank is a member in respect of losses incurred in connection with any of the risk after the transfer thereof in terms of a synthetic securitisation scheme, and such right of recourse emanates from warranties given by such an institution in respect of risk so transferred: Provided that- |
| i) | the warranties do not relate to the future creditworthiness of the obligor in terms of the risk transferred; and |
| ii) | the warranties do not relate to matters that do not fall within the control of the institution providing the warranties. |
| d) | The risk relating to an asset or a credit commitment of an institution or of any of its associated companies or, when such an institution is a bank, of any other institution within the banking group of which such a bank is a member shall not be transferred to a special-purpose institution if the transfer will result in a breach of any of the terms of the relevant underlying transaction. |
| e) | A bank or another institution within a banking group of which such a bank is a member, acting in a primary role, may replace, at its own discretion, the risk relating to any asset transferred in terms of a synthetic securitisation scheme, excluding the risk relating to a non-performing asset, with the risk relating to an asset of equivalent credit quality. |
| f) | A bank or another institution within a banking group of which such a bank is a member, acting in a primary role, may repurchase risk relating to an asset from a special-purpose institution only when such repurchase is conducted in compliance with the conditions specified below. |
| i) | The repurchase of risk relating to an asset shall be conducted on market related terms and conditions. |
| ii) | Such a bank or other institution within a banking group of which such a bank is a member shall not have any prior obligation to repurchase risk relating to an asset from the special-purpose institution. |
| iii) | The repurchase of risk relating to an asset from the special-purpose institution shall be subject to the bank's normal credit approval and review processes. |
| iv) | When the institution acting in a primary role is a bank, the total value of risk relating to assets repurchased from a special-purpose institution in terms of this item, other than in the bank's normal course of trading in Government securities and qualifying items, and held on the books of the bank at any time, does not exceed 10 per cent of the maximum value of the pool of risk relating to assets held by the special-purpose institution: |
Provided that the Registrar may in the Registrar's sole discretion and subject to such conditions as the Registrar may determine, allow a bank to repurchase risk relating to assets in excess of this limitation.
| v) | A bank or another institution within a banking group of which such a bank is a member may repurchase the risk relating to a non-performing asset only if such a bank's or other institution's external auditors have certified that the said risk is acquired at fair market value, which value shall reflect the risk relating to the non-performing status of the asset. |
| vi) | To the extent that such a repurchase of risk amounts to such a bank or another institution within a banking group of which such a bank is a member providing a liquidity facility, the provisions in this Schedule relating to liquidity facilities shall apply in addition to the provisions of this subparagraph. |
| g) | Once a synthetic securitisation scheme has been perfected, the transfer by a bank acting in a primary role of further risk in terms of that scheme shall be permissible only for purposes of maintaining the capital value of the portfolio of risk included in the scheme: |
Provided that-
| ii) | the Registrar may in the Registrar's sole discretion and subject to such conditions as the Registrar may determine allow such a bank to transfer further risk in excess of this limitation. |
| h) | A bank that acts as an originator in a synthetic securitisation scheme may invest in commercial paper issued by the special-purpose institution in terms of the synthetic securitisation scheme: Provided that- |
| ii) | a material portion of the commercial paper shall be represented by mezzanine positions that are transferred to third parties. |
| i) | Retained senior unrated tranches will not be recognised for risk mitigation purposes unless- |
| i) | external protection is obtained from a recognised protection provider or is in the form of eligible collateral; or |
| ii) | all of the following conditions are met- |
| A) | the most senior rated commercial paper with a rating of AAA or higher, or the equivalent thereof, shall be demonstrably legally subordinated to or rank pari passu with the said unrated tranche; |
| B) | the remaining maturity of the said subordinated rated positions shall be equal to or longer than the remaining maturity of the unrated position; and |
| C) | the first-loss and second-loss credit-enhancement facilities are treated in accordance with the provisions of paragraph 6. |
| j) | When an institution acting in a primary role, by itself or together with its associated companies, and, when such an institution is a bank, such a bank, by itself or together with any institution or institutions within a banking group of which such a bank is a member, enters into a swap agreement with a special-purpose institution that intentionally bears losses in respect of the risk transferred to the special-purpose institution in terms of a synthetic securitisation scheme and which losses are for the account of the institution that acts in a primary role, the said institution shall comply with the provisions of paragraph 6 below. |
| k) | In order to promote market discipline- |
| i) | Credit risk relating to underlying assets, reference assets or reference entities shall be transferred to more than one investor, other than an institution that acts in a primary role, by means of the issue of senior commercial paper by a special-purpose institution: Provided that the Registrar may in the Registrar's sole discretion and subject to such conditions as the Registrar may determine allow a placement with one investor. |
| ii) | A significant amount of the commercial paper shall be rated by a credit-rating agency: Provided that the Registrar may in the Registrar's sole discretion and subject to such conditions as the Registrar may determine allow a securitisation structure that is unrated . |
| iii) | Subject to the provisions of subitems (i) and (ii) above, a significant amount of the externally rated credit risk relating to underlying assets, reference assets or reference entities shall be issued to investors. |
| l) | The instrument used to transfer risk to a special-purpose institution shall not contain terms or conditions that limit the amount of credit risk transferred. As a minimum, such terms or conditions shall not include- |
| i) | Significant materiality thresholds below which threshold credit protection is deemed not to be triggered even when a credit event occurs. |
| ii) | The termination of the protection as a result of deterioration in the credit quality of the underlying or reference credit exposure. |
| A) | requires an institution that acts as an originator to alter the underlying or reference credit exposures in order to improve the asset pool's weighted average credit quality; |
| B) | increases an institution's cost of credit protection in response to a deterioration in the quality of the asset pool; |
| C) | increases the yield payable to parties other than the institution that acts as an originator, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying or reference asset pool; |
| D) | provides for an increase in a retained first-loss position or credit-enhancement facility provided by an institution that acts as an originator after the transaction's inception. |
| m) | Any contractual arrangement relating to a clean-up call in respect of risk transferred to the special-purpose institution shall comply with the conditions specified in paragraph 11 below. |
| n) | A bank or another institution within a banking group of which such a bank is a member, acting in a primary role, which bank-institution wishes to recognise the risk mitigation effect relating to a synthetic securitisation scheme, shall obtain a legal opinion from an independent legal counsel, which legal opinion shall confirm- |
| i) | the bank's compliance with the conditions specified in this subparagraph (2); |
| ii) | the enforceability of the relevant contract(s) in all relevant jurisdictions. |
| o) | An institution acting in a primary role, by itself or together with its associated companies, and, when such an institution is a bank, such ' a bank, by itself or together with any institution or institutions within a banking group of which such a bank is a member, shall not- |
| i) | in the case of a special-purpose institution that is a company- |
| A) | directly or indirectly acquire or hold any equity share capital in such a special-purpose institution of which the nominal value represents 20 per cent or more of the nominal value of all the issued equity share capital in the special-purpose institution; |
| B) | have the right to determine the outcome of the voting at a general meeting of the special-purpose institution; |
| ii) | in the case of a special-purpose institution that is a trust- |
| A) | directly or indirectly acquire or hold any beneficial interest in or be a beneficiary of such a special-purpose institution of which the value represents 20 per cent or more of the interest (beneficial or otherwise) in the property forming the subject matter of the special-purpose institution; |
| B) | have the right to determine the outcome of the voting at a general meeting of the special-purpose institution. |
| p) | The board of directors or body of trustees, as the case may be, of a special-purpose institution shall be independent of the institution acting in a primary role and, whenever such an institution is a bank, of any other institution within a banking group of which such a bank is a member: Provided that an institution acting in a primary role may- |
| i) | in the case of a company, appoint one director to its board of directors, which board of directors shall consist of not less than three members; or |
| ii) | in the case of a trust, appoint one trustee to its body of trustees, which body of trustees shall consist of not less than three members. |
| q) | The name of a special-purpose institution shall not include the name of the bank acting in a primary role or imply any association with such a bank. |
| 3) | Support beyond contractual terms |
| a) | When a bank, or another institution within a banking group of which such a bank is a member, acting in a primary role, in the opinion of the Registrar, provides implicit support to a securitisation scheme, that is, support beyond the predetermined contractual obligation- |
| i) | the implicit support shall be regarded as a first-loss credit enhancement facility; |
| ii) | the bank, as a minimum- |
| A) | shall maintain capital and reserve funds against all exposures associated with the securitisation scheme; |
| B) | shall not recognise in the bank's capital and reserve funds any gain relating to the securitisation transaction, such as an amount relating to expected future margin income; |
| C) | shall disclose to the public sufficiently detailed information relating to the implicit support, including the related capital impact of providing implicit support to a securitisation scheme. |
