[Regulation 23 (11)(k) heading substituted by section 2(hh) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
| (k) | Securitisation exposure: SEC-IRBA |
| (i) | A bank must use the SEC-IRBA to calculate capital requirements for a securitisation exposure to an IRB pool with the following bank-supplied inputs— |
| (A) | the IRB capital charge had the underlying exposures not been securitised (KIRB) as defined in (ii) below; |
| (B) | the tranche attachment point A and the tranche detachment point D as defined in subregulation (11)(l) provided that where the only difference between exposures to a transaction is related to maturity, A and D will be the same; and (C) the supervisory parameter p, as defined below. |
| (ii) | The variable KIRB is a ratio which shall be expressed in decimal form (that is, a capital requirement equal to 15% of the pool shall be expressed as 0,15) and be calculated as |
| (A) | the capital requirement relating to the relevant underlying exposures in the pool, that is, the amount of capital that the bank would have been required to maintain if the bank directly held or was directly exposed to the underlying assets/exposures included in the pool, which amount of required capital- |
| (i) | shall be calculated in accordance with the relevant IRB approach envisaged in sub-regulation (10) as if the exposures in the pool were held directly by the bank, notwithstanding the clarification in subregulation (23)(6)(h)(i) for mixed pools; |
| (ii) | shall include the amount of expected loss relating to any of the said underlying exposures, and the not immaterial dilution risk as discussed in subregulation 23(11)(d)(vi)(A)(ii); |
| (iii) | shall include the effects of any eligible risk-mitigation instruments held against the underlying assets/ exposures included in the pool, |
divided by
| (B) | the aggregate amount of exposures included in the pool, that is, the sum of all drawn amounts relating to the relevant securitised exposures plus the EAD amount associated with any undrawn commitments related to the securitised exposures. |
provided that
| (i) | in the case of a structure that involves a special purpose entity (SPE),— |
| (aa) | all the exposures of the SPE that are related to the securitisation scheme shall be treated as exposures in the pool, including assets where the SPE invested in a reserve account(such as a cash collateral account) or claims against counterparties resulting from interest swaps or currency swaps, where in the case of swaps other than credit derivatives, the numerator of KIRB must include the positive current market value times the risk weight of the swap provider times 8%. In contrast, the denominator should not take into account such a swap, as such a swap would not provide a credit enhancement to any tranche |
| (bb) | the bank can exclude the SPE’s exposures from the pool for capital calculation purposes if the bank can demonstrate to the satisfaction of Authority that the risk of the SPE’s exposures is immaterial and/or the Authority is satisfied with the risk mitigants in place. |
| (ii) | The relevant best market practices can eliminate or at least significantly reduce the potential risk from a default of a swap provider, for example: |
| (aa) | cash collateralisation of the market value in combination with an agreement of prompt additional payments in case of an increase of the market value of the swap; and |
| (bb) | minimum credit quality of the swap provider with the obligation to post collateral or present an alternative swap provider without any costs for the SPE in the event of a credit deterioration on the part of the original swap provider. |
| (iii) | In the case of funded synthetic securitisations, any proceeds of the issuances of credit-linked notes or other funded obligations of the SPE that serve as collateral for the repayment of the securitisation exposure in question and for which the bank cannot demonstrate to the Authority that it is immaterial, must be included in the calculation of KIRB if the default risk of the collateral is subject to the tranched loss allocation. That is, in the case of swaps other than credit derivatives, the numerator of KIRB must include the required capital amount of the collateral (i.e. exposure amount of the collateral times its risk weight% multiplied by 8%), but the denominator should be calculated without recognition of the collateral. |
| (iii) | To calculate KIRB, the treatment of eligible purchased receivables described in Regulations 23(11), 23(13) and 23(14), may be used, subject to the requirements specified in subparagraph (iv) and (v) and (vi) below, if according to the IRB minimum requirements: |
| (A) | for non-retail assets, it would be an undue burden on a bank to assess the default risk of individual obligors; and |
| (B) | for retail assets, a bank is unable to primarily rely on internal data; and |
All other IRB requirements must be met by the bank.
| (iv) | For purposes of subparagraph (iii) above, “eligible purchased receivables” should be understood as referring to any securitised exposure for which the conditions in subparagraph (iii) above are met, and “eligible corporate receivables” should be understood as referring to any securitised nonretail exposure. |
| (v) | The Authority may deny the use of a top-down approach for eligible purchased receivables for securitised exposures depending on the bank’s compliance with minimum requirements. |
| (vi) | The requirements to use a top-down approach for the eligible purchased receivables as set out in subregulation (23)(11)(b)(vi)(F) should be applied to the securitisation exposures with the following exceptions: |
| (A) | the requirement in subregulation 23(11)(d)(vi)(C)(ii)(cc) for the bank to have a claim on all proceeds from the pool of receivables or a relevant pro-rata interest in the proceeds does not apply. Instead, the bank must have a claim on all proceeds from the pool of securitised exposures that have been allocated to the bank’s exposure in the securitisation in accordance with the terms of the related securitisation documentation; |
| (B) | in subregulation 23(11)(b)(vi)(F), the bank should be interpreted as the bank calculating KIRB and as the bank estimating PD, LDG or EL for the securitised exposures |
| (C) | if the bank calculating KIRB cannot itself meet the requirements in subregulation 23(11)(b)(vi)(F), it must instead ensure that it meets these requirements through a party to the securitisation acting for and in the interest of the investors in the securitisation, in accordance with the terms of the related securitisation documentation. More specifically, requirements for effective control and ownership must be met for all proceeds from the pool of securitised exposures that have been allocated to the bank’s exposure to the securitisation. |
| (D) | for purposes of subregulation 23(11)(b)(vi)(F), the relevant eligibility criteria and advancing policies are those of the securitisation, and not those of the bank calculating KIRB. |
| (vii) | When the bank raised a specific credit impairment or received a non-refundable purchase price discount in respect of the exposure included in the pool, the bank shall in the calculation of the amounts specified in paragraph (k)(i) above, apply the gross amount relating to the exposure, that is, the amount before the relevant specific credit impairment and/ or non-refundable purchase price discount is taken into consideration, |
| (viii) | Dilution risk in a securitisation must be recognised if it is not immaterial as demonstrated by the bank to the Authority and read with the provisions of subregulation (11)(k)(i) above and. |
| (A) | In circumstances where default and dilution risk are treated in an aggregate manner (e.g. an identical reserve or overcollateralization is available to cover losses for both risks) in order to calculate capital requirements for a securitisation exposure, a bank must determine KIRB for dilution risk and default risk respectively and combine them into a single KIRB prior to applying the SEC-IRBA. |
| (B) | Where pool level credit enhancement is not available to cover losses from either credit risk or dilution risk, in the case of separate waterfalls for credit risk and dilution risk, a bank should consult with the Authority on how the capital calculation should be performed. |
[Regulation 23(11)(k) substituted by section 2(hh) of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
