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BIPRU 9.4 Traditional securitisation

Minimum requirements for recognition of significant credit risk transfer

BIPRU 9.4.1R

The originator of a traditional securitisation may exclude securitised exposures from the calculation of risk weighted exposure amounts and expected loss amounts if either of the following conditions is fulfilled:

  1. (1)

    2significant credit risk associated with the securitised exposures is considered to have been transferred to third parties; or

  2. (2)

    2the originator applies a 1250% risk weight to all securitisation positions it holds in the securitisation or deducts these securitisation positions from capital resources according to GENPRU 2.2.237 R;

2and the transfer complies with the conditions in BIPRU 9.4.2R BIPRU 9.4.14R.

[Note: BCD Annex IX Part 2 point 1, paragraph 12]

BIPRU 9.4.2R

The securitisation documentation must reflect the economic substance of the transaction.

[Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.3R

The securitised exposures must be put beyond the reach of the originator and its creditors, including in bankruptcy and receivership. This must be supported by the opinion of qualified legal counsel.

[Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.4G

Legal counsel's opinions should be reviewed as necessary. For example, an opinion should be reviewed if a relevant statutory provision is amended or where a new decision or judgment of a court might have a bearing on the conclusions reached.

BIPRU 9.4.5R

The securities issued must not represent payment obligations of the originator.

[Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.6R

The transferee must be a securitisation special purpose entity.

[Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.7R

The originator must not maintain effective or indirect control over the transferred exposures.

[Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.8R

Where there is a clean-up call option, the following conditions must be satisfied:

  1. (1)

    the clean-up call option is exercisable at the discretion of the originator;

  2. (2)

    the clean-up call option may only be exercised when 10% or less of the original value of the exposures securitised remains unamortised; and

  3. (3)

    the clean-up call option is not structured to avoid allocating losses to credit enhancement positions or other positions held by investors and is not otherwise structured to provide credit enhancement.

    [Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.9R

The securitisation documentation must not contain clauses that:

  1. (1)

    other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator including but not limited to altering the underlying credit exposures or increasing the yield payable to investors in response to a deterioration in the credit quality of the securitised exposures; or

  2. (2)

    increase the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.

    [Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.10R

For the purposes of BIPRU 9.4.7 R, an originator will be considered to have maintained effective control over the transferred exposures if it has the right to repurchase from the transferee the previously transferred exposures in order to realise their benefits or if it is obligated to re-assume transferred risk. The originator's retention of servicing rights or obligations in respect of the exposures does not of itself constitute indirect control of the exposures.

[Note: BCD Annex IX Part 2 point 1 (part)]

BIPRU 9.4.11R

2Significant credit risk will be considered to be transferred for an originator in the following cases:

  1. (1)

    2the risk weighted exposure amounts of the mezzanine securitisation positions held by the originator in the securitisation do not exceed 50% of the risk weighted exposure amounts of all mezzanine securitisation positions existing in this securitisation;

  2. (2)

    2where there are no mezzanine securitisation positions in a given securitisation and the originator can demonstrate that the exposure value of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight exceeds a reasoned estimate of the expected loss on the securitised exposures by a substantial margin, the originator does not hold more than 20% of the exposure values of the securitisation positions that would be subject to deduction from capital resources or a 1250% risk weight.

2[Note: BCD, Annex IX, Part 2, Point 1, paragraph 1a]

BIPRU 9.4.12R

2An originator must notify the appropriate regulator that it is relying on the deemed transfer of significant credit risk under BIPRU 9.4.11R within a reasonable period before or after a relevant transfer, not being later than one month after the date of the transfer. The notification must include the following information:

  1. (1)

    2the risk weighted exposure amount of the securitised exposures and retained securitisation positions;

  2. (2)

    2the exposure value of the securitised exposures and the retained securitisation positions;

  3. (3)

    2details of the securitisation positions, including rating, exposure value broken down by securitisation positions sold and retained;

  4. (4)

    2a statement that sets out why the firm is satisfied that the reduction in risk weighted exposure amounts is justified by a commensurate transfer of credit risk to third parties;

  5. (5)

    2any relevant supporting documents, for example, a summary of the transaction.

BIPRU 9.4.13G

2In the event that the appropriate regulator decides that the possible reduction in risk weighted exposure amounts which the originator would achieve by the securitisation referred to in BIPRU 9.4.11R is not justified by a commensurate transfer of credit risk to third parties, it will use its powers under section 55J (Variation etc on the Authority's own initiative) of the Act to require the firm to increase its risk weight exposure amount to an amount commensurate with the appropriate regulator's assessment of the transfer of credit risk to third parties.

BIPRU 9.4.14G

2An originator may be granted a waiver of the requirements in BIPRU 9.4.11R and BIPRU 9.4.12R.

BIPRU 9.4.15D

2An originator's application for a waiver of the requirements in BIPRU 9.4.11R and BIPRU 9.4.12R must demonstrate that the following conditions are satisfied.

  1. (1)

    2it has policies and methodologies in place which ensure that the possible reduction of capital requirements which the originator achieves by the securitisation is justified by a commensurate transfer of credit risk to third parties; and

  2. (2)

    2that such a transfer of credit risk to third parties is also recognised for the purposes of all the firm's internal risk management and internal capital allocation.

2[Note: BCD, Annex IX, Part 2, Point 1, paragraph 1c]

BIPRU 9.4.16G

2BIPRU 1.3.10 G sets out the appropriate regulator's approach to the granting of waivers. The conditions in BIPRU 9.4.15D are minimum requirements. Satisfaction of those does not automatically mean the appropriate regulator will grant the relevant waiver. The appropriate regulator will in addition also apply the tests in section 138A (Modification or waiver of rules) of the Act.

BIPRU 9.4.17G

2When considering an application for a waiver of the requirements in BIPRU 9.4.11R and BIPRU 9.4.12R, the appropriate regulator may undertake a visit to the firm in order to examine the firm's risk management and governance arrangements. Before such a visit, the appropriate regulator may request information from the firm additional or supplementary to that provided in the waiver application.

BIPRU 9.4.18G

2An originator should clearly state the scope of the waiver of the requirements in BIPRU 9.4.11R and BIPRU 9.4.12R it is seeking in its application. For example, residential mortgage backed securities may be subdivided into prime and sub-prime with only one sub-category within the scope of the waiver. Relevant asset classes may therefore be defined according to a firm's internal usage of terms.