Securitisation structures

69. A securitisation may be a traditional securitisation or a synthetic securitisation.

70. In a traditional securitisation, title to the underlying assets is transferred to a Special Purpose Entity, and the cash flows from the underlying pool of assets are used to service at least 2 tranches. A traditional securitisation generally assumes the movement of assets off the originator’s balance- sheet.

71. A synthetic securitisation is a securitisation with at least 2 tranches that reflect different degrees of Credit Risk where the Credit Risk of the underlying pool of exposures is transferred, in whole or in part, through the use of credit derivatives or guarantees. In a synthetic securitisation, the third party to whom the risk is transferred need not be a Special Purpose Entity.

72. The AFSA would treat as securitisations other structures designed to finance assets that are legally transferred to a scheme by packaging them into tradeable securities secured on the assets and serviced from their related cash flows. Funded credit derivatives would include credit-linked notes, and unfunded credit derivatives would include credit default swaps.

73. A securitisation exposure of a Bank is a risk position (whether on-balance-sheet or off-balance- sheet) held by the Bank arising from a securitisation. A few examples of sources are:

(a) investments in a securitization;

(b) asset-backed securities (including mortgage-backed securities);

(c) credit enhancements and liquidity facilities;

(d) interest rate swaps and currency swaps;

(e) credit derivatives;

(f) corporate bonds, equity securities and private equity investments;

(g) reserve accounts (such as cash collateral accounts) recorded as assets by a Bank that is, or that acts in the capacity of, an originator.

74. For purposes of calculating a Bank’s capital requirement, the parties to a securitisation are the originator, the issuer and the investors. Depending on the securitisation structure, a Bank may be (or act in the capacity of) originator, issuer, investor or any 1 or more of the following:

(a) a manager of the securitisation;

(b) a sponsor of the securitisation;

(c) an adviser to the securitisation;

(d) an entity to place the securities with investors;

(e) a provider of credit enhancement;

(f) a provider of a liquidity facility;

(g) a servicer to carry out certain activities usually carried out by the manager of the securitisation in relation to the underlying assets.

75. A Bank may act as sponsor of a securitisation or similar programme involving assets of a customer. As sponsor, the Bank earns fees to manage or advise on the programme, place the securities with investors, provide credit enhancement or provide a liquidity facility.

76. A Bank is an originator of a securitisation if:

(a) the Bank originates, directly or indirectly, underlying assets included in the securitisation; or

(b) the Bank serves as sponsor of an asset-backed commercial paper programme (or similar programme) that acquires exposures from third parties.

77. In relation to a programme that acquires exposures from third parties, a Bank would generally be considered a sponsor (and, therefore, an originator) if the Bank, in fact or in substance, manages or advises the programme, places securities into the market, provides a liquidity facility or provides a credit enhancement. Acts of management would include handling related taxes, managing escrow accounts, remitting payments and obtaining insurance.

78. The process of a securitisation is:

(a) first, the origination of assets or Credit Risk;

(b) second, the transfer of the assets or Credit Risk; and

(c) third, the issuance of securities to investors.

79. In a securitisation, the cash flow from the pool is used to make payments on obligations to at least 2 tranches or classes of investors (typically holders of debt securities), with each tranche or class being entitled to receive payments from the pool before or after another tranche or class of investors, so that the tranches or classes bear different levels of Credit Risk.

Special Purpose Entities

80. A special purpose entity (or SPE) is a legal entity that is created solely for a particular financial transaction or series of transactions. The SPE must not engage in any other business. In a securitisation, an SPE typically purchases and holds the assets for the purposes of the securitisation. The SPE’s payment for the pool is typically funded by debt, including through the issue of securities by the SPE. A SPE created under the provisions of the Special Purpose Companies Rules (SPC) of the AIFC legal framework would be a specific example of the SPEs addressed by this part of the BPG.

81. The purpose of the SPE and the extent of a Bank’s involvement in the SPE, should be clear. The SPE’s activities should be limited to those necessary to accomplish that purpose. Most securitisations need the creation of an SPE to:

(a) hold the assets transferred by the originator;

(b) issue securities based on the assets; and

(c) act as intermediary between the originator and the investors.

82. A synthetic securitisation may or may not require an SPE. An SPE may take the form of a limited partnership, limited liability company, corporation, trust or collective investment fund. By its nature, an SPE is a legal shell with only the specific assets transferred by the originator (that is, the SPE has no other property in which any other party could have an interest). An SPE must be bankruptcy- remote from the originator. It must not be consolidated with the originator for tax, accounting or legal purposes. Any undertaking given by a Bank to an SPV must be stated clearly in the transaction documents for the securitization.

Operational requirements for using external ratings

83. Depending on the securitisation structure, 1 or more ECRAs may be involved in rating the securitisation. A Bank must use only ECRAs that have a demonstrated expertise in assessing securitisations. Expertise might be evidenced by strong market acceptance.

84. For the purposes of risk-weighting, an ECRA must take into account the total amount of the Bank’s exposure on all payments owed to it. For example, if the Bank is owed principal and interest, the ECRA’s assessment must have taken into account timely repayment of both principal and interest.

85. A credit rating assigned by an ECRA must be publicly available. If the rating assigned to a facility is not publicly available, the facility must be treated as unrated. The loss and cash flow analysis for the securitisation, and the sensitivity of the rating to changes in the assumptions on which it was made, must also be publicly available. Information required under this section should be published in an accessible form for free. Information that is made available only to the parties to a securitisation is not considered publicly available.

86. A credit rating assigned by an ECRA must be applied consistently across all tranches of a securitisation. A Bank must not use an ECRA’s credit rating for 1 or more tranches and another ECRA’s rating for other tranches within the same securitisation structure (whether or not those other tranches are rated by the first ECRA).

87. Under Rules in Chapter 5 of BBR, use of ratings from ECRA should be as follows:

(a) if there are 2 different assessments by ECRAs, the higher risk-weight must be applied; and

(b) if there are 3 or more different assessments by ECRAs, the assessments corresponding to the 2 lowest risk-weights should be referred to and the higher of those 2 risk-weights must be applied.

88. A Bank would be taken to maintain effective control over transferred Credit Risk exposures if:

(a) the Bank is able to repurchase from the transferee the transferred exposures in order to realise their benefits; or

(b) the Bank is obligated to retain the risk of the exposures.

89. A Bank that is an originator may act as servicer of the underlying assets, and the Bank’s retention of servicing rights would not necessarily constitute indirect control over the assets.

Operational requirements for synthetic securitisation

90. In calculating its risk-weighted assets, a Bank that is an originator or sponsor of a synthetic securitisation may exclude securitised exposures only if:

(a) substantially all Credit Riskassociated with the securitised exposures have been transferred;

(b) the CRM technique used to obtain capital relief is eligible financial collateral, an eligible credit derivative, a guarantee or an eligible netting agreement;

(c) the securitisation does not include any terms or conditions that limit the amount of Credit Risk transferred, such as clauses that:

(i) materially limit the credit protection or Credit Risk transference (including clauses that provide significant materiality thresholds below which credit protection is not to be triggered even if a credit event occurs and clauses that allow termination of the protection because of deterioration in the credit quality of the underlying exposures);

(ii) require the Bank to alter the underlying exposures to improve the pool’s weighted average credit quality;

(iii) increase the Bank’s cost of credit protection to the Bank in response to a deterioration in the credit quality of the underlying exposures;

(iv) allow increases in a retained first loss position or credit enhancement; or

(v) increase 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 exposures;

(d) a qualified legal counsel (whether external or in-house) has given a written reasoned opinion that paragraph (c) is satisfied and that the contract for the transfer of the Credit Risk is enforceable in all relevant jurisdictions;

(e) any clean-up call complies with the Rules in this section; and

(f) if the Credit Risk associated with the securitised exposures is transferred to an SPE:

(i) the securities issued by the SPE are not obligations of the Bank;

(ii) the holders of the beneficial interests in the SPE have the right to pledge or exchange those interests without restriction; and

(iii) the Bank holds no more than 20% of the aggregate original amount of all securities issued by the SPE, unless:

(a) the holdings consist entirely of securities that are rated AAA to AA- (long term) or A-1 (short term); and

(b) all transactions with the SPE are at arm’s length and on market terms and conditions.

Requirements for clean-up calls—traditional and synthetic securitisations

91. A clean-up call is an option that permits the securitisation exposures to be called before all of the underlying exposures or securitisation exposures have been repaid. There is no capital requirement for a securitisation that includes a clean- up call, if:

(a) the exercise of the clean-up call is at the discretion of the originator or sponsor;

(b) the clean-up call is not structured:

(i) to avoid allocating losses to credit enhancements or positions held by investors; or

(ii) to provide credit enhancement; and

(c) the clean-up call may only be exercised:

(i) for a traditional securitisation—when 10% or less of the original underlying pool of assets, or securities issued, remains; or

(ii) for a synthetic securitisation—when 10% or less of the original reference portfolio value remains.

92. For a traditional securitisation, a clean-up call might be carried out by repurchasing the remaining securitisation exposures after the balance of the pool has, or the outstanding securities have, fallen below a specified level. For a synthetic securitisation, a clean-up call might take the form of a clause that extinguishes the credit protection.

93. In the case of a securitisation that includes a clean-up call that does not comply with all of the operational requirements specified in this section, the originator or sponsor must calculate a capital requirement for the securitisation. If the clean-up call is exercised and found to serve as a credit enhancement, the exercise of the call must be considered as implicit support and treated in accordance with the relevant Rules in this section addressing implicit support. For a traditional securitisation, the underlying assets must be treated as if they were not securitised. No gain-on- sale of those assets may be recognised. For a synthetic securitisation, a Bank that purchases protection must hold capital against the entire amount of the securitised exposures as if they did not benefit from any credit protection.

Treatment of most senior exposure

94. If the most senior exposure in a securitisation is unrated and the composition of the underlying pool is known at all times, a Bank that holds or guarantees such an exposure may determine the risk weight by applying a “look-through” treatment. The Bank need not consider any interest rate or currency swap when determining whether an exposure is the most senior in a securitisation. While employing the look-through treatment, a Bank should risk-weight the most senior unrated position by applying,, the average risk-weight of the underlying exposures, subject to the AFSA’s review.

Treatment of second loss position in Asset Backed Commercial Paper (ABCP) programmes

95. An unrated securitisation exposure arising from a second loss position (or better position) in an ABCP programme is subject to a risk-weight of the higher of:

(d) 100%; and

(e) the highest risk-weight applicable to an underlying exposure covered by the facility.

If it satisfies the following conditions:

(f) the exposure is economically in a second loss position or better and the first loss position provides significant credit protection to the second loss position;

(g) the associated Credit Risk is the equivalent of investment grade or better; and

(h) the Bank holding the exposure does not retain or provide the first loss position.

Treatment of overlapping exposures

96. Overlapping exposures may result if a Bank provides 2 or more facilities (such as liquidity facilities and credit enhancements) in relation to a securitisation that can be drawn under various conditions with different triggers. In effect, the Bank provides duplicate cover to the underlying exposures. For the purposes of calculating its capital requirements, a Bank’s exposure (exposure A) overlaps another exposure (exposure B) if in all circumstances the Bank will preclude any loss to it on exposure B by fulfilling its obligations with respect to exposure A.

97. If a Bank has 2 or more overlapping exposures to a securitisation, the Bank must, to the extent that the exposures overlap, include in its calculation of risk-weighted assets only the exposure, or portion of the exposure, producing the higher or highest risk-weighted assets amount. If the overlapping exposures are subject to different credit conversion factors, the Bank must apply the higher or highest factor to the exposures.

98. An example of the treatment of an overlapping exposure is given here:

If, under exposure A, a Bank provides full credit support to some notes while simultaneously holding as exposure B a portion of those notes, its full credit support obligation precludes any loss from its exposure from its holding of the notes. If the Bank can satisfactorily show that fulfilling its obligations with respect to exposure A will preclude a loss from its exposure B under any circumstance, there are overlapping exposures between the 2 exposures and the Bank need not calculate risk-weighted assets for exposure B.

Liquidity facility and eligible liquidity facility

99. A liquidity facility, for a securitisation, is a commitment from the facility provider to provide liquid funds if:

(a) funds are needed to meet contractual payments to investors; and

(b) there is a delay between the date of collection of the related cash flows and the date on which the payment to the investors is due.

100. Liquidity facilities are required to be built into securitisation structures to address and manage timing mismatches between cash collections from the underlying assets and the scheduled payments to the investors in certain situations. To be an eligible liquidity facility:

(a) the commitment to provide liquid funds must be in writing and must clearly state the circumstances under which the facility may be availed of and the limits for any drawdown;

(b) drawdowns must be limited to the amount that is likely to be repaid fully from the liquidation of the underlying exposures and any seller-provided credit enhancements;

(c) the facility must not cover any losses incurred in the underlying pool of exposures before a drawdown;

(d) the facility must not be structured in such a way that drawdowns are certain;

(e) the facility must be subject to a condition that precludes it from being availed of to cover Credit Risk exposures that are past due for more than 90 days;

(f) if the exposures that the facility is required to fund are ECRA-rated securities, the facility can only be used to fund securities that are rated, by an ECRA, investment grade at the time of funding;

(g) the facility cannot be availed of after all applicable credit enhancements (whether transaction- specific or programme-wide enhancements), from which the liquidity would benefit, have been exhausted; and

(h) the repayment of drawdowns on the facility (that is, assets acquired under a purchase agreement or loans made under a lending agreement):

(i) must not be subordinated to any interests of any note holder in the programme (such as an ABCP programme); and

(ii) must not be subject to deferral or waiver.

101. If a Bank that is an originator or sponsor of a securitisation also provides a liquidity facility that is not an eligible servicer cash advance facility to the securitisation, the risk-weight of the exposure from the facility must be calculated by:

(a) applying:

(i) a 50% Credit Conversion Factor (regardless of the maturity of the facility) if the facility is an eligible liquidity facility; or

(ii) a 100% Credit Conversion Factor if the facility is not an eligible liquidity facility; and

(b) multiplying the resulting credit equivalent amount by the applicable risk-weight in table 5H in Chapter 5 of the BBR, depending on the credit rating of the Bank (or by 100% if the Bank is unrated).

However, if an ECRA rating of the facility is itself used for risk- weighting the facility, a 100% credit conversion factor must be applied.

Treatment of unrated eligible liquidity facility

102. A Bank providing an eligible liquidity facility that is unrated, or that is treated as unrated, must apply to the resulting securitisation exposure the highest risk weight that would be applied to an underlying exposure covered by the facility. An eligible liquidity facility must be treated as unrated, when the facility’s rating is not publicly available or when the facility is provided to a particular securitisation exposure (such as a particular tranche) and the resulting mitigation is reflected in the ECRA rating of the securitisation.

Treatment of eligible servicer cash advance facility

103. A servicer cash advance facility is a liquidity facility under which a servicer to a securitisation advances cash to ensure timely payment to investors. A zero percent risk-weight may be applied to an undrawn servicer cash advance facility only if the facility is an eligible servicer cash advance facility. If the servicer cash advance facility is not an eligible servicer cash advance facility, the facility must be treated according to the paragraph 101 (a) (ii) above of this section.

104. To be an eligible servicer cash advance facility:

(a) the servicer must be entitled to full reimbursement;

(b) the servicer’s right to reimbursement must be senior to other claims on cash flows from the underlying pool;

(c) the facility is itself an eligible liquidity facility; and

(d) the facility may be cancelled at any time, without any condition and without any need to give advance notice.

Effect of CRM techniques

105. If a CRM technique is provided to specific underlying exposures or the entire pool of exposures by an eligible protection provider and the CRM is reflected in the ECRA rating assigned to a securitisation exposure, the risk-weight based on that rating must be used. To avoid double- counting, no additional capital recognition is permitted. Eligible protection provider means:

(a) a central counterparty;

(b) the Republic of Kazakhstan or any other sovereign;

(c) an entity that is treated as a sovereign in accordance with the Basel Accords;

(d) a public sector enterprise or other entity that has:

(i) a risk-weight of 20% or lower; and

(ii) a lower risk-weight than the party to whom the protection is provided; or

(e) a parent entity, subsidiary or affiliate of a party to whom the protection is provided that has a lower risk-weight than the party.

106. If the provider of the CRM technique is not an eligible protection provider, a Bank must treat the exposure as unrated. A Bank must not use an ECRA rating if the assessment by the ECRA is based partly on unfunded support provided by the Bank itself.

107. If a Bank buys ABCP for which it provides an unfunded securitisation exposure (such as a liquidity facility or credit enhancement) to the ABCP programme and the exposure plays a role in determining the credit assessment on the ABCP, the Bank must treat the ABCP as if it were unrated.

108. If the CRM technique is provided solely to protect a particular securitisation exposure (for example, if the technique is provided to a tranche of the securitisation) and the protection is reflected in the ECRA rating of the securitisation, a Bank must treat the exposure as unrated. This applies to a securitisation exposure whether it is in the Bank’s Trading Book or banking book. The capital requirement for a securitisation exposure in the Trading Book must not be less than the amount that would be required if the exposure were in the Bank’s banking book.

109. For the treatment of an exposure arising from a liquidity facility of the kind described in paragraph 108 above, please follow the method set out in the paragraph 102 above for the treatment of unrated eligible liquidity facility.

Early amortisation provisions

110. An early amortisation provision in a securitisation is a mechanism that, if triggered, allows investors to be paid out before the originally stated maturity of the securities issued. An early amortisation provision may be controlled or non-controlled. Triggers employed could include economic triggers which are events that are economic in nature by reference to the financial performance of the transferred assets. An early amortisation provision is a controlled early amortisation provision if:

(a) the Bank concerned has appropriate capital and liquidity plans to ensure that it has sufficient capital and liquidity if the provision is triggered; and

(b) throughout the life of the securitisation (including the amortisation period) there is the same pro-rata sharing of interest, principal, expenses, losses and recoveries based on the Bank’s and investors’ relative shares of the receivables outstanding at the beginning of each month.

An early amortisation provision that fails to meet either requirement in this paragraph is a non- controlled early amortisation provision.

Operational requirements for securitisations with early amortisation provisions

111. A securitisation involving revolving exposures that is originated or sponsored by a Bank is taken to fail the operational requirements set out in BBR Rule 5.21 (6) for securitisations or operational requirements for synthetic securitisations provided in paragraph 90 of this Chapter, if the securitisation has an early amortisation provision (or a similar provision) that, if triggered, will:

(a) subordinate the Bank’s senior or equal interest in the underlying revolving credit facilities to the interest of other investors;

(b) subordinate the Bank’s subordinated interest to an even greater degree relative to the interests of other parties; or

(c) increase in any other way the Bank’s exposure to losses associated with the underlying revolving credit facilities.

112. A Bank that is the originator or sponsor of a securitisation that does not involve revolving exposures may exclude the underlying exposures from the calculation of risk-weighted assets if:

(a) the securitisation is a replenishment structure; and

(b) the securitisation has an early amortisation provision that ends the ability of the Bank to add new exposures.

113. A Bank that is the originator or sponsor of a securitisation involving revolving exposures may exclude the underlying exposures from the calculation of risk-weighted assets if:

(a) the securitisation meets the relevant operational requirements set out in BBR Rule 5.21 (6) for securitisations; and

(b) the securitisation has an early amortisation provision of the kind described in any of the following subparagraphs:

(i) the securitisation relates to revolving credit facilities that themselves have early amortisation features that mimic term structures (that is, where the risk on the underlying exposures does not return to the Bank) and the early amortisation provision in the securitisation, if triggered, would not effectively result in subordination of the Bank’s interest;

(ii) the Bank securitises 1 or more revolving credit facilities and investors remain fully exposed to future drawdowns by borrowers even after an early amortisation event has occurred;

(iii) the early amortisation provision is solely triggered by events not related to the performance of the securitised assets or of the Bank (such as material changes in tax laws or regulations).

114. The Bank must still hold Regulatory Capital against any securitisation exposures that it retains in relation to the securitisation.

Capital charges for securitisation involving revolving exposures with early amortisation

115. A Bank that is an originator or sponsor of a securitisation involving revolving exposures that has an early amortisation provision must calculate an additional capital charge to cover the possibility that the Bank’s Credit Risk exposure may increase if the provision is triggered. The charge must be calculated for the total exposure related to the securitisation (that is, for both drawn and undrawn balances related to the securitised exposures). If the underlying pool of a securitisation is made up of both revolving exposures and term exposures, the Bank must apply the amortisation treatment only to the portion of the underlying pool made up of those revolving exposures.

116. A Bank that is an originator or sponsor of a securitisation involving revolving exposures that has a controlled early amortisation provision must calculate a capital charge for the investors’ interest (that is, against both drawn and undrawn balances related to the securitised exposures). The capital charge is the product of:

(a) the investors’ interest;

(b) the appropriate credit conversion factor in accordance with table H1 in this section, depending on whether the securitised exposures are uncommitted retail credit lines or not; and

(c) the risk weight for the kind of underlying exposures (as if those exposures had not been securitised).

117. For uncommitted retail credit lines (such as credit card receivables) in securitisations that have controlled early amortisation provisions that can be triggered by the excess spread falling to a specified level, a Bank must compare the three-month average excess spread to the point at which the bank is required to trap excess spread (the excess spread trapping point) as economically required by the structure. If a securitisation does not require the trapping of excess spread, the excess spread trapping point for the securitisation is 4.5 percentage points (450 basis points) more than the excess spread at which early amortisation is triggered.

118. A Bank that is the originator or sponsor of a securitisation must divide the securitisation’s excess spread by the securitisation’s excess spread trapping point to determine the appropriate segments and apply the corresponding credit conversion factor for uncommitted credit lines in accordance with table H1.

Table H1 Credit conversion factors (CCFs) for securitisation involving revolving exposures with controlled early amortisation

119. The capital charge to be applied for securitisations involving revolving exposures with controlled early amortisation is the higher of the capital requirement for retained securitisation exposures in the securitisation and the capital requirement that would apply if the exposures had not been securitised. The Bank must also deduct from its CET1 the amount of any gain-on- sale and credit- enhancing interest-only strips arising from the securitisation.

Capital charges for Securitisation involving revolving exposures with non-controlled early amortisation

120. A Bank that is an originator or sponsor of a securitisation involving revolving exposures that has a non-controlled early amortisation provision must calculate a capital charge for the investors’ interest (that is, against both drawn and undrawn balances related to the securitised exposures). The capital charge is the product of:

(a) the investors’ interest;

(b) the appropriate credit conversion factor in accordance with table H1 in this section, depending on whether the securitised exposures are uncommitted retail credit lines or not; and

(c) the risk weight for the kind of underlying exposures (as if those exposures had not been securitised).

121. For uncommitted retail credit lines (such as credit card receivables) in securitisations that have non- controlled early amortisation provisions that can be triggered by the excess spread falling to a specified level, a Bank must compare the three-month average excess spread to the point at which the bank is required to trap excess spread (the excess spread trapping point) as economically required by the structure. If a securitisation does not require the trapping of excess spread, the excess spread trapping point for the securitisation is 4.5 percentage points more than the excess spread at which early amortisation is triggered.

122. A Bank that is the originator or sponsor of a securitisation must divide the securitisation’s excess spread by the securitisation’s excess spread trapping point to determine the appropriate segments and apply the corresponding credit conversion factor for uncommitted credit lines in accordance with table H2.

Table H2 Credit conversion factors (CCFs) for securitisations involving revolving exposures with non-controlled early amortisation

1.The capital charge to be applied under this subdivision is the higher of the capital requirement for retained securitisation exposures in the securitisation and the capitalrequirement that would apply if the exposures had not been securitised. The Bank must also deduct from its CET1 the amount of any gain-on- sale and credit-enhancing interest-only strips arising from the securitisation.