| (7) | Conditions relating to the calculation of minimum required capital and reserve funds in respect of a securitisation scheme or resecuritisation exposure, and related matters |
A bank—
| (i) | acting in a primary role and subsequently investing in commercial paper issued by a special-purpose institution shall have in place adequate risk-management systems and controls to ensure that the bank does not accumulate disproportionate levels of aggregate exposure to commercial paper issued by the special-purpose institution; |
| (ii) | that acted in a primary role and subsequently invests in a disproportionate level of commercial paper issued by a special-purpose institution is likely to contravene, amongst other things, the conditions relating to an effective and verifiable transfer of risk and sufficient market discipline as envisaged in the exemption notice relating to securitisation schemes. |
| (i) | Subject to the provisions of subregulation (2)(e) and based on— |
| (A) | the approach adopted by a bank for the measurement of the bank's exposure to credit risk, as envisaged in subregulation (2)(a) above, |
| (B) | the economic substance and not the legal form of a position obtained or exposure incurred by the bank in respect of a traditional or synthetic securitisation scheme, |
| (C) | such conditions as may be specified in writing by the Registrar, |
a bank shall in accordance with the relevant requirements specified in regulations 23(6), 23(8), 23(11) or 23(13) maintain capital against any risk exposure assumed or retained by the bank as a result of a securitisation or resecuritisation transaction, including any relevant exposure that arises from—
| (i) | the extension by the reporting bank of any credit enhancement facility to a special-purpose institution; |
| (ii) | the provision of any credit protection; |
| (iii) | an investment by the bank in commercial paper issued by a special-purpose institution; |
| (iv) | the retention of any subordinated exposure; |
| (v) | the extension of any liquidity facility to a special-purpose institution, |
provided that the bank shall for purposes of these Regulations treat the repurchase of any securitisation or resecuritisation exposures as a retained securitisation or resecuritisation exposure.
| (ii) | Irrespective of whether a bank adopted the standardised approach or IRB approach for the measurement of the bank's exposure to credit risk and securitisation schemes or any resecuritisation exposure, the bank— |
[Regulation 38(7)(b)(ii) substituted by section 9(o) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (A) | shall not exclude from the calculation of its required amount of capital and reserve funds any assets transferred to a special-purpose institution unless the said transfer of assets, amongst other things, complies with the relevant conditions specified in paragraph 4(2) of the exemption notice relating to securitisation schemes, provided that the bank shall comply with the relevant capital requirements specified in these Regulations in respect of any relevant risk exposure retained by the bank; |
| (B) | shall not, when the bank calculates its required amount of capital and reserve funds, recognise any risk mitigation in respect of a synthetic securitisation scheme unless the said risk mitigation, amongst other things, complies with the relevant conditions specified in paragraph 5(2) of the exemption notice relating to securitisation schemes. |
| (iii) | Irrespective of whether a bank adopted the standardised approach or IRB approach for the measurement of the bank's exposure to credit risk and securitisation schemes or any resecuritisation exposure, and irrespective of whether the relevant position or instrument is held in a bank's banking book or trading book, the bank shall on a continuous basis— |
Regulation 38(7)(b)(iii) substituted by section 9(p) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
| (A) | on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on- or off-balance sheet, as well as the risk characteristics of the pools underlying its securitisation exposures; |
| (B) | have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the bank’s exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default; |
| (C) | be able to access performance information on the underlying pools on an ongoing basis in a timely manner, which information should include, where appropriate: |
| (bb) | percentage of loans 30, 60 and 90 days past due; |
| (ee) | loans in foreclosure ; |
| (gg) | average loan-to-value ratio |
| (ii) | a measures of creditworthiness; |
| (jj) | industry and geographical diversification |
| (D) | For resecuritisations, banks must have information not only on the underlying securitisation tranches, such as the issuer name and credit quality, but also on the characteristics and performance of the pools underlying the securitisation tranches. |
| (E) | Otherwise, if the bank cannot perform the required level of due diligence as specified in sub-paragraph (A) to (D) above, the bank must assign a risk weight of 1250% to the securitisation exposure. |
[Regulation 38(7)(iii) substituted by section 5 of Notice No. 2561, GG46996, dated 30 September 2022 - effective 1 October 2022]
When the Authority is of the opinion that the credit risk inherent in a traditional or synthetic securitisation scheme is higher than the credit risk inherent in a well-diversified portfolio of similar rated corporate exposure, owing to higher default correlations in the portfolio of assets or risk that was securitised or resecuritised, the Authority may specify higher risk weights in respect of the commercial paper issued by the special-purpose institution in respect of the relevant securitisation scheme or resecuritisation exposure than the risk weights specified in these Regulations.
Regulation 38(7)(c) substituted by section 9(q) of Notice No. 943, GG46159, dated 31 March 2022 : effective 1 April 2022]
