Governance for securitisation

(3) A Bank’s Governing Body must oversee the Bank’s securitisation exposures. The governing body:

• (a) must understand, and set the scope and purpose of, the Bank’s securitisations; and
• (b) must be aware of the risks and other implications associated with securitisation.

(4) The Governing Body must ensure that the Bank’s senior management establishes and implements securitisation policies that include:

• (a) appropriate risk management systems to identify, measure, monitor, report on and control or mitigate the risks arising from the Bank’s involvement in securitisation; and
• (b) how the Bank monitors, and reports on, the effect of securitisation on its risk profile.

(5) A Bank must be able to demonstrate to the AFSA that the Bank’s ICAAP captures the following specific risks relating to securitisation:

• (a) Credit Risk, Market Risk, Liquidity Risk and reputation risk for each securitisation exposure;
• (b) potential delinquencies and losses on the exposures;
• (c) risks arising from the provision of credit enhancements and liquidity facilities; and
• (d) risks arising from guarantees provided by monoline insurers and other third parties.

Calculation of RWAs for securitisation

(6) A Bank that is an originator or sponsor of a traditional securitisation may exclude, from the calculation of its risk-weighted assets, exposures relating to the securitised assets only if:

• (a) the immediate transferee of the underlying assets is an SPE, and the holders of the legal or beneficial interests in the SPE have the right to pledge or exchange those interests without restriction;
• (b) substantially all Credit Risk associated with the securitised assets have been transferred;
• (c) the Bank has no direct or indirect control over the securitised assets;
• (d) the securitised assets are legally isolated from the Bank (through the sale of the assets or through sub-participation) so that the assets are beyond the reach of the Bank and its creditors even in case of bankruptcy or insolvency;
• (e) a qualified legal counsel (whether external or in-house) has given a written reasoned opinion that paragraph (d) is satisfied;
• (f) any clean-up call complies with rules in this section;
• (g) the securities issued are not obligations of the Bank, so that investors have a claim only on the securitised assets and have no claim against the Bank;
• (h) the securitisation does not include any term or condition that:
• (i) requires the Bank to alter the underlying exposures to improve the pool’s weighted average credit quality (unless the improvement is achieved by selling exposures at market prices to parties who are neither affiliated, connected or related to the Bank);
• (ii) allows increases in a retained first loss position or credit enhancement; or
• (iii) increases the yield payable to parties other than the Bank (for example, payments to investors and providers of credit enhancement) in response to a deterioration in the credit quality of the underlying assets; and

(i) the securitisation does not have:

(i) termination provisions for specific changes in tax and regulation;

(ii) termination options or triggers (except clean-up calls that comply with relevant rules in this section); or

(iii) early amortisation provisions that, according to rules in this section, would result in the securitisation not meeting the other requirements in paragraphs (a) to (h).

Due diligence requirements

(7) A Bank must not apply a risk-weight to a securitisation exposure using table 5 H, unless the Bank meets the following due diligence requirements:

• (a) The Bank must have, in relation to securitisation, appropriate policies:
• (i) to ensure that the economic substance of each securitisation is taken into account in managing the risks arising from the Bank’s involvement in securitisation;
• (ii) to document its systems and controls in relation to securitisation and the risks that arise from it; and
• (iii) that set out the effects of securitisation on capital.
• (b) The Bank must have, on an ongoing basis, a clear understanding of the risk characteristics of its individual securitisation exposures (whether on-balance-sheet or off-balance-sheet) and the risk characteristics of the pool underlying those exposures.
• (c) The Bank must understand, at all times, the structural features that may materially affect the performance of its securitisation exposures (such as contractual waterfall and waterfallrelated triggers, credit enhancements, liquidity facilities, market value triggers, and dealspecific definitions of default).
• (d) The Bank must have continuous access to performance information about its underlying assets.

(8) If the Bank fails to meet a due diligence requirement in relation to a securitisation exposure, the AFSA may direct the Bank:

• (a) to apply a risk-weight of 1,250% to the exposure; or
• (b) to deduct the amount of the exposure from its regulatory capital.

(9) For re-securitisation, the Bank must have not only information on the securitisation tranches (such as the issuer name and credit quality) but also the characteristics and performance of the pools underlying those tranches.

Capital treatment to be based on economic substance

(10) The capital treatment of a securitisation exposure must be determined on the basis of the economic substance, rather than the legal form, of the securitisation structure. If a Bank is uncertain about whether a transaction is a securitisation, the Bank must consult with the AFSA.

(11) Despite anything in these rules, the AFSA may look through the structure to the economic substance of the transaction, and:

• (a) vary the capital treatment of a securitisation exposure; or
• (b) reclassify a transaction as a securitisation or not a securitisation and impose a capital requirement or limit on the transaction.

Retained securitisation exposures

(12) A Bank that is an originator or sponsor of a securitisation might, despite having transferred the underlying assets or the Credit Risk to those assets, continue to be exposed (through retained securitisation exposures) in relation to the securitisation. The Bank must hold regulatory capital against all of its retained securitisation exposures.

(13) The sources of retained securitisation exposures include:

• (a) investments in the securitisation;
• (b) investments in asset-backed securities (including mortgage- backed securities);
• (c) retention of a subordinated tranche;
• (d) credit enhancements provided by the Bank; and
• (e) liquidity facilities provided by the Bank. A repurchased securitisation exposure must be treated as a retained securitisation exposure.

(14) A Bank that is an originator or sponsor of a securitisation must retain 5% of the total issuance.

Effect of giving implicit support

(15) A Bank that gives implicit support to a securitisation:

• (a) must include the underwriting exposures of the securitisation in its calculation of riskweighted assets (as if those assets had not been securitised and had remained on its balance sheet);
• (b) must not recognise any gain-on-sale of the underlying assets; and
• (c) must disclose to investors that it has provided implicit support and the effect on regulatory capital of doing so.

Treatment of on-balance-sheet retained securitisation exposures

(16) The RWA amount of an on-balance-sheet retained securitisation exposure is calculated by multiplying the exposure by the applicable risk-weight in table 5 H.

Table 5 H Risk-weights based on ECRA rating

Note In the table, the ratings are given according to Standard & Poor’s conventions. If a claim or asset is not rated by Standard & Poor’s, its ratings must be mapped to the equivalent Standard & Poor’s rating.

(17) If an exposure is to be deducted from the Bank’s regulatory capital, the amount of the deduction may be calculated net of any specific provision taken against the exposure.

Exceptions to treatment of unrated securitisation exposures

(18) The rule that the treatment of unrated securitisation exposures is as directed by the AFSA (to either apply 1,250% risk- weight or deduct the amount) does not apply to:

• (a) the most senior exposure in a securitisation;
• (b) exposures:
• (i) that are in a second loss position or better in ABCP programmes; and
• (ii) that meet the requirements in paragraph 36 of Section H in the BPG; and
• (c) eligible liquidity facilities.

Treatment of off-balance-sheet retained securitisation exposures

(19) A 100% credit conversion factor must be applied to an off-balance-sheet retained securitisation exposure unless the exposure qualifies as:

• (a) an eligible liquidity facility, or
• (b) an eligible servicer cash advance facility.

(20) The description, operational requirements, eligibility criteria, terms and conditions, procedures, formulae, parameters and the methods for the treatment of eligible liquidity facilities referred in paragraph (19) above are detailed in Section H of Chapter 5 of the BPG. In order to use such liquidity facilities and to assign appropriate capital requirements to the resulting risk exposures, a Bank must fully comply with the relevant paragraphs in Section H of Chapter 5 of the BPG. Failure to do so, would be seen by the AFSA as attempts to overstate the capital position of the Bank.

Capital relief from Credit Risk Mitigation techniques obtained by Bank

(21) A Bank that has obtained a Credit Risk Mitigation technique (such as eligible financial collateral, an eligible credit derivative, a guarantee or an eligible netting agreement) applicable to a securitisation exposure may reduce its capital requirement for the exposure. Collateral pledged by an SPE as part of the securitisation may be used as a Credit Risk Mitigation technique if it is eligible financial collateral. However, an SPE of a securitisation cannot be an eligible protection provider in the securitisation. In this rule, collateral is used to hedge the Credit Risk of a securitisation exposure rather than to mitigate the underlying exposures of the securitisation. Note For eligible financial collateral see Rule 5.17. For eligible protection provider, see paragraph 47 in Chapter 5 of the BPG.

Treatment of Credit Risk Mitigation techniques provided by Bank

(22) If a Bank provides a Credit Risk Mitigation technique to a securitisation exposure, the calculation of its risk-weighted assets for Credit Risk must be in accordance with the Rules from 5.14 to 5.20 in this Chapter. The Bank must calculate the capital requirement as if it were an investor in the securitisation. If a Bank provides a Credit Risk Mitigation technique to an unrated credit enhancement, it must treat the protection provided as if it were directly holding the unrated credit enhancement.

Treatment of enhanced portions

(23) The RWA for a credit-enhanced portion of a securitisation must be calculated in accordance with the standardised approach in Rules 5.5 to 5.10 of this Chapter.

Effect of Credit Risk Mitigation techniques

(24) The description, operational requirements, eligibility criteria, terms and conditions, procedures, formulae, parameters and the methods for considering the effect of providing Credit Risk Mitigation to a securitisation in the calculation of RWAs are detailed in Section H of Chapter 5 of the BPG. In order to calculate the RWAs appropriately in such cases, a Bank must fully comply with the relevant paragraphs in Section H of Chapter 5 of the BPG. Failure to do so, would be seen by the AFSA as attempts to overstate the capital position of the Bank.

Early amortisation provisions

Definitions

(25) In relation to early amortization provisions, the following are the definitions used: excess spread, in relation to a securitisation, means finance charge collections and other income received by the SPV or trust, minus certificate interest, servicing fees, charge-offs, costs and expenses. Excess spread is also known as future margin income. securitisation involving revolving exposures means a securitisation in which 1 or more of the underlying exposures represents, directly or indirectly, current or future draws on a revolving credit facility (such as a credit card facility, home equity line of credit or commercial line of credit). uncommitted credit line is a credit line that may be cancelled at any time, without any condition and without any need to give advance notice. Any other credit line is a committed credit line.

(26) The description, operational requirements, eligibility criteria, terms and conditions, procedures, formulae, parameters and the methods for the treatment of securitisations with early amortization provisions and calculation of RWAs are detailed in Section H of Chapter 5 of the BPG. In order to calculate the RWAs appropriately in such cases, a Bank must fully comply with the relevant paragraphs in Section H of Chapter 5 of the BPG. Failure to do so, would be seen by the AFSA as attempts to overstate the capital position of the Bank.