Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof38. Capital Adequacy, Leverage and TLACCapital Adequacy, Leverage and TLAC - Directives and interpretations for completion of monthly return concerning capital adequacy, leverage and TLAC (Form BA 700)Subregulation (6) Conditions relating to external credit assessment in respect of a securitisation scheme or resecuritisation exposure |
| (6) | Conditions relating to external credit assessment in respect of a securitisation scheme or resecuritisation exposure |
Irrespective of whether a bank adopted the standardised approach or IRB approach for the measurement of the bank's exposure to creciit risk and securitisation schemes or any resecuritisation exposure, when the bank calculates its minimum required amount of capital and reserve funds, the bank shall not recognise any credit assessment issued in respect of any securitisation or resecuritisation exposure unless the said external credit assessment complies with the requirements specified below:
[Words preceding regulation 38(6)(a) substituted by section 9(n) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (a) | The external credit assessment— |
| (i) | shall be issued by an eligible external credit assessment institution— |
| (A) | which credit assessment shall be publicly available, that is, the credit assessment shall be published by the relevant external credit assessment institution in an accessible form and shall be included in the external credit assessment institution's transition matrix, instead of being made available only to the parties involved in the securitisation scheme or resecuritisation exposure; |
| (B) | which credit assessment institution shall have demonstrated its expertise relating to the assessment of securitisation or resecuritisation exposures, which expertise is likely to be evidenced by strong market acceptance; |
| (ii) | shall be based on the total amount of credit exposure arising from all relevant payments due, that is, for example, when the outstanding amount relates to both principal and interest amounts, the credit assessment shall be based on the timely repayment of both the relevant principal amount and the relevant interest amount; |
| (b) | Notwithstanding any provision to the contrary specified in these Regulations or any other law, in addition to the aforesaid external credit assessment that shall be publicly available— |
| (i) | the eligible external credit assessment institution's relevant procedures, methodologies, assumptions, and the key elements underlying the aforesaid assessment shall be publicly available, on a non-selective basis, and free of charge; |
| (ii) | the relevant loss and cash-flow analysis and sensitivity of ratings to changes in the underlying rating assumptions shall be publicly available. |
Provided that, when an eligible credit assessment is not provided free of charge, the relevant eligible external credit assessment institution shall, within its own publicly available Code of Conduct, in accordance with the 'comply or explain' provisions of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies duly explain its non-compliance with the provisions of this paragraph (b);
| (c) | A bank shall apply credit assessments issued by an eligible external credit assessment institution consistently across a given type of securitisation or resecuritisation exposure, provided that— |
| (i) | the bank shall not apply credit assessments issued by one eligible credit assessment institution in respect of one or more tranches relating to a particular securitisation scheme or resecuritisation exposure, and credit assessments issued by another eligible credit assessment institution in respect of other positions relating to the same securitisation structure or resecuritisation exposure; |
| (ii) | a bank shall in no case apply an external credit assessment for the calculation of the bank's minimum required amount of capital and reserve funds when the said assessment is in any manner influenced by or based on any form of unfunded support provided by that bank, irrespective whether the position is held in the bank's banking book or trading book. |
For example, when a bank buys asset-backed commercial paper from or related to a scheme or structure in respect of which the bank also provided unfunded securitisation exposure extended by the bank to that ABCP programme, scheme or structure, such as a liquidity facility or credit enhancement, and the latter exposure plays a role in determining the credit assessment on the said ABCP programme, scheme or structure, the bank shall regard the first-said acquired ABCP position as unrated, and continue to maintain capital against the said securitisation exposures provided by the bank, that is, the aforesaid liquidity facility and/or credit enhancement.
| (iii) | a bank's capital requirement related to an acquired ABCP position envisaged in subparagraph (ii) above, which position is held in the bank's trading book, shall in no case be less than the required amount of capital and reserve funds related to a similar position held in the bank's banking book; |
| (iv) | a bank shall recognise any overlap in exposure in accordance with the relevant requirements specified in regulation 23(6)(h)(ix). |
For example, a bank that provides a liquidity facility that fully supports the asset-backed commercial paper issued in terms of an ABCP programme, and subsequently purchases twenty per cent of the outstanding ABCP of that programme, may recognise an overlap of twenty per cent.
If the bank provided a liquidity facility that covers ninety per cent of the outstanding ABCP and purchased twenty per cent of the ABCP, the overlap shall be ten per cent.
If the bank provided a liquidity facility that covers fifty per cent of the outstanding ABCP and subsequently purchases twenty per cent of the ABCP, the two exposures shall be risk weighted without recognizing any overlap.
| (v) | when— |
| (A) | two or more eligible external credit assessment institutions assess the credit risk associated with a particular securitisation exposure differently, the bank shall risk weight the said exposure in accordance with the relevant requirements specified in regulation 23(5)(b)(i); |
| (B) | an external credit assessment assigned to a particular securitisation exposure is based on protection provided directly to the special purpose institution by an eligible protection provider, the bank— |
| (i) | shall apply the risk weight associated with the said external credit assessment to the relevant exposure; |
| (ii) | shall, in order to avoid any double counting of the protection obtained by the special-purpose institution, disregard the said credit protection; |
| (C) | protection is obtained by a special-purpose institution from a protection provider other than an eligible protection provider, the bank shall treat the relevant securitisation exposures as unrated; |
| (D) | credit protection is obtained by the bank in respect of a particular securitisation exposure within a particular securitisation structure, the bank shall treat the relevant exposure as an unrated protected exposure in accordance with the relevant requirements specified in regulations 23(7), 23(9), 23(12) or 23(14). |