An originator of a synthetic securitisation may calculate risk weighted exposure amount, and, as relevant, expected loss amounts, for the securitised exposures in accordance with BIPRU 9.5.3 R and BIPRU 9.5.4 R, if significant credit risk has been transferred to third parties, either through funded or unfunded credit protection, and the transfer complies with the conditions in (2)-(5).
The securitisation documentation must reflect the economic substance of the transaction.
The credit protection by which the credit risk is transferred must comply with the eligibility and other requirements under BIPRU 5 (Credit risk mitigation) and, so far as applicable, BIPRU 4.10 (Credit risk mitigation under the IRB approach) for the recognition of such credit protection. For the purposes of this rule, securitisation special purpose entities must not be recognised as eligible unfunded protection providers.
The instruments used to transfer credit risk must not contain terms or conditions that:
impose significant materiality thresholds below which credit protection is deemed not to be triggered if a credit event occurs;
allow for the termination of the protection due to deterioration of the credit quality of the underlying exposures;
An opinion must be obtained from qualified legal counsel confirming the enforceability of the credit protection in all relevant jurisdictions.
[Note: BCD Annex IX Part 2 point 2]
In calculating risk weighted exposure amounts for the securitised exposures, where the conditions in BIPRU 9.5.1 R are met, the originator of a synthetic securitisation must, subject to the treatment of maturity mismatches set out in BIPRU 9.5.6 R-BIPRU 9.5.8 R, use the relevant calculation methodologies set out in BIPRU 9.9-BIPRU 9.14and not those set out in BIPRU 3 (Standardised credit risk) or BIPRU 4 (IRB approach).
[Note: BCD Annex IX Part 2 point 3 and point 4 (part)]
Subject to the treatment of maturity mismatches set out in BIPRU 9.5.6 R-BIPRU 9.5.8 R, the originator must calculate risk weighted exposure amounts in respect of all tranches in the securitisation in accordance with the provisions of BIPRU 9.9-BIPRU 9.14. For example, where a tranche is transferred by means of unfunded credit protection to a third party, the risk weight of that third party must be applied to the tranche in the calculation of the originators risk weighted exposure amount.
[Note: BCD Annex IX Part 2 point 4 (part)]
For the purposes of calculating risk weighted exposure amounts in accordance with BIPRU 9.5.3 R, any maturity mismatch between the credit protection by which the tranching is achieved and the securitised exposures must be taken into consideration in accordance with BIPRU 9.5.7 R-BIPRU 9.5.8 R.
[Note: BCD Annex IX Part 2 point 5]
The maturity of the securitised exposures must be taken to be the longest maturity of any of those exposures subject to a maximum of five years. The maturity of the credit protection must be determined in accordance with BIPRU 5 (Credit risk mitigation) and, so far as relevant, BIPRU 4.10 (Credit risk mitigation under the IRB approach).
[Note: BCD Annex IX Part 2 point 6]
An originator must ignore any maturity mismatch in calculating risk weighted exposure amounts for tranches appearing pursuant to BIPRU 9.9-BIPRU 9.14 with a risk weight of 1250%. For all other tranches the maturity mismatch treatment prescribed in BIPRU 5.8 (Maturity mismatches) must be applied in accordance with the following formula:
RW* is [RW(SP) x (t-t*)/(T-t*)] + [RW(Ass) x (T-t)/(T-t*)]
The following apply for the purposes of the formula in (1):
RW* is risk weighted exposure amounts;
T is maturity of the underlying exposures expressed in years;
t is maturity of credit protection expressed in years; and
t* is 0.25.
[Note: BCD Annex IX Part 2 point 7]