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BIPRU 4.9 The IRB approach: Securitisation, non-credit obligations assets and CIUs

Application

BIPRU 4.9.1R

BIPRU 4.9 applies with respect to securitisation exposures, non credit-obligation assets and exposures to CIUs.

Securitisation exposures

BIPRU 4.9.2R

The following must be calculated in accordance with BIPRU 9 (Securitisation):

  1. (1)

    risk-weighted exposure amounts for securitised exposures and for exposures belonging to the IRB exposure class referred to in BIPRU 4.3.2 R (6) (securitisation positions); and

  2. (2)

    the expected loss amounts for securitised exposures.

[Note: BCD Article 87(10) and Article 88(3)]

Provision of credit protection

BIPRU 4.9.3R

Where a firm provides credit protection for a number of exposures under terms that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, if the product has an external credit assessment from an eligible ECAI the risk weights set out in BIPRU 9 must be applied. If the product is not rated by an eligible ECAI, the risk weights of the exposures included in the basket must be aggregated, excluding n-1 exposures where the sum of the expected loss amount multiplied by 12.5 and the risk weighted exposure amount must not exceed the nominal amount of the protection provided by the credit derivative multiplied by 12.5. The n-1 exposures to be excluded from the aggregation must be determined on the basis that they must include those exposures each of which produces a lower risk weighted exposure amount than the risk weighted exposure amount of any of the exposures included in the aggregation.

[Note: BCD Annex VII Part 1 point 9]

Non credit obligation assets: Introduction

Non credit obligation assets: Inclusion of residual value of leases

BIPRU 4.9.5R

The non credit obligation asset IRB exposure class includes the residual value of leased properties, if not included in the lease exposure as defined in BIPRU 4.4.75 R.

[Note: BCD Article 86(8)]

Non credit obligation assets: Risk weighted exposure amount

BIPRU 4.9.6R

The risk weighted exposure amounts must be calculated according to the formula:

Risk-weighted exposure amount = 100% * exposure value except for when the exposure is a residual value of leased properties1 in which case it must1 be calculated as follows:

1/t * 100% * exposure value;where t is the greater of 1 and the nearest number of whole years of the lease remaining.1

[Note: BCD Annex VII Part 1 point 27]

1
BIPRU 4.9.7G

t should be an integer number reflecting the nearest number of whole years of the lease remaining and should decrease as the lease matures so that the discounted value steps up gradually from a small value to 100% as the end of the lease approaches.

BIPRU 4.9.8R

Where a firm has full recourse in respect of purchased receivables for default risk and for dilution risk, to the seller of the purchased receivables, BIPRU 4.8.21 R and BIPRU 4.8.30 R need not be applied. The exposure may instead be treated as a collateralised exposure.

[Note: BCD Article 87(2) (part)]

Non credit obligation assets: Exposure value

BIPRU 4.9.9R

The exposure value of non credit-obligation assets must be the value presented in the financial statements.

[Note: BCD Annex VII Part 3 point 13]

Non credit obligation assets: Expected loss amounts

BIPRU 4.9.10R

For non credit-obligation assets the expected loss amount must be zero.

[Note: BCD Article 88(4)]

Collective investment undertakings

BIPRU 4.9.11R
  1. (1)

    Where exposures in the form of a CIU1 meet the criteria set out in BIPRU 3.4.121 R to BIPRU 3.4.122 R (Conditions for look through treatment under the standardised approach) and the firm is aware of all of the underlying exposures of the CIU, the firm must look through to those underlying exposures in order to calculate risk weighted exposure amounts and expected loss amounts in accordance with the methods set out in BIPRU 4.BIPRU 4.9.12 R applies to the part of the underlying exposures of the CIU of which the firm is not aware or could not reasonably be aware. In particular, BIPRU 4.9.12 R must apply where it would be unduly burdensome for the firm to look through the underlying exposures in order to calculate risk weighted exposure amounts and expected loss amounts in accordance with methods set out in this rule.1

  2. (2)

    Where (1) applies but a firm does not meet the conditions for using the methods set out in BIPRU 4 for all or part of the underlying exposures of the CIU,1 risk weighted exposure amounts and expected loss amounts must be calculated in accordance with the following approaches.

  3. (3)

    For equity exposures the approach set out in BIPRU 4.7.9 R - BIPRU 4.7.12 R (Simple risk weights) must be used. If, for those purposes, the firm is unable to differentiate between private equity, exchange-traded and other equity exposures, it must treat the exposures concerned as other equity exposures.

  4. (4)

    For all other underlying exposures, the standardised approach must be used, subject to the following modifications:

    1. (a)

      [deleted]1

      1
    2. (b)

      [deleted]1

      1
    3. (c)

      for exposures subject to a specific risk weight for unrated exposures or subject to the credit quality step yielding the highest risk weight for a given exposure class, the risk weight must be multiplied by a factor of two, but cannot be higher than 1250%; and1

    4. (d)

      for all other exposures, the risk weight must be multiplied by a factor of 1.1 and subject to a minimum of 5%.1

[Note: BCD Article 87(11)]

BIPRU 4.9.12R
  1. (1)

    Where exposures in the form of a CIU do not meet the criteria set out in BIPRU 3.4.121 R to BIPRU 3.4.122 R (Conditions for look through treatment under the standardised approach) or the firm is not aware of all of the underlying exposures of the CIU, a firm must look through to the underlying exposures and calculate risk weighted exposure amounts and expected loss amounts in accordance with the approach set out in BIPRU 4.7.9 R - BIPRU 4.7.12 R (Simple risk weights). If, for those purposes, the firm is unable to differentiate between private equity, exchange-traded and other equity exposures, it must treat the exposures concerned as other equity exposures. For these purposes, non-equity exposures must be assigned to one of the classes (private equity, exchange traded equity or other equity) set out in BIPRU 4.7.9 R (Simple risk weight approach) and unknown exposures must be assigned to the other equity class.

  2. (2)

    Alternatively to the method described in (1), a firm may calculate itself or rely on a third party to calculate and report the average risk weighted exposure amounts based on the CIU's underlying exposures and calculated in accordance with the approaches in BIPRU 4.9.11R (3) to BIPRU 4.9.11R (4),1 provided that the correctness of the calculation and the report is adequately ensured.

  3. (3)

    [deleted]1

    1
  4. (4)

    [deleted]1

    1
    1. (a) 1

      [deleted]1

    2. (b)

      [deleted]1

      1

[Note: BCD Article 87(12)]

BIPRU 4.9.13G

For the purposes of BIPRU 4.9.12 R (1), in the case of non-equity exposures a firm should look at the risk profile of the underlying exposures and map these to an equivalent equity risk weight. For example, if the underlying exposures are exchange-traded, the risk weight of exchange-traded equity exposures will apply. If the underlying exposures are unknown, the risk weight of the other equity class will apply. Only under exceptional circumstances would supervisors expect to see non-equity exposures mapped to the diversified private equity risk weight.

BIPRU 4.9.14G

For the purposes of BIPRU 4.9.12 R (2), a firm should ensure that any third party relied on for the calculations and report possesses the necessary competence and experience to ensure that the calculations and report are correct.

BIPRU 4.9.15R

The expected loss amounts for exposures referred to in BIPRU 4.9.11 R - BIPRU 4.9.12 R must be calculated in accordance with the methods set out in BIPRU 4.4.61 R (Calculation of expected loss for sovereigns, institutions and corporates), BIPRU 4.5.12 R - BIPRU 4.5.14 R (Calculation of expected loss for specialised lending), BIPRU 4.6.47 R - BIPRU 4.6.48 R (Calculation of expected loss for retail exposures), BIPRU 4.7.12 R, BIPRU 4.7.17 R and BIPRU 4.7.26 R (Calculation of expected loss for equity exposures) and BIPRU 4.8.30 R (Dilution risk of purchased receivables).

[Note: BCD Article 88(6)]