a firm'sIRB permission allows it to use this treatment; and
the conditions in (2)(16) are satisfied,
a firm may attribute to an unrated position in an asset backed commercial paper programme a derived rating as laid down in (3).
Positions in the commercial paper issued from the programme must be rated positions.
Under the ABCP internal assessment approach, the unrated position must be assigned by the firm to one of the rating grades described in (5). The position must be attributed a derived rating that is the same as the credit assessments corresponding to that rating grade as laid down in (5). Where this derived rating is, at the inception of the securitisation, at the level of investment grade or better, it must be treated in the same way as an eligible credit assessment by an eligible ECAI for the purposes of calculating risk weighted exposure amounts.
The internal assessment methodology must be used in the firms internal risk management processes, including its decision making, management information and capital allocation processes.
The firms internal assessment methodology must include rating grades. There must be a correspondence between such rating grades and the credit assessments of eligible ECAIs. This correspondence must be explicitly documented.
The firm must be able to satisfy the FSA that its internal assessment of the credit quality of the position reflects the publicly available assessment methodology of one or more eligible ECAIs, for the rating of securities backed by the exposures of the type securitised.
If a firm'sIRB permission permits this, a firm need not comply with the requirement for the assessment methodology of the ECAI to be publicly available where it can demonstrate that due to the specific features of the securitisation for example its unique structure - there is as yet no publicly available ECAI assessment methodology.
The ECAIs, the methodology of which must be reflected as required by (6), must include those ECAIs which have provided an external rating for the commercial paper issued from the programme. Quantitative elements such as stress factors used in assessing the position to a particular credit quality must be at least as conservative as those used in the relevant assessment methodology of the ECAIs in question.
In developing its internal assessment methodology the firm must take into consideration relevant published ratings methodologies of the eligible ECAIs that rate the commercial paper of the ABCP programme1. This consideration must be documented by the firm and updated regularly, as outlined in (15).
The ABCP programme must have collections policies and processes that take into account the operational capability and credit quality of the servicer. The programme must mitigate seller/servicer risk through various methods, such as triggers based on current credit quality that would preclude commingling of funds.
The ABCP programme must incorporate structural features for example wind down triggers - into the purchase of exposures in order to mitigate potential credit deterioration of the underlying portfolio.
The ABCP programme must incorporate underwriting standards in the form of credit and investment guidelines. In deciding on an asset purchase, the programme administrator must consider the type of asset being purchased, the type and monetary value of the exposures arising from the provision of liquidity facilities and credit enhancements, the loss distribution, and the legal and economic isolation of the transferred assets from the entity selling the assets. A credit analysis of the asset sellers risk profile must be performed and must include analysis of past and expected future financial performance, current market position, expected future competitiveness, leverage, cash flow, and interest coverage, and debt rating. In addition, a review of the sellers underwriting standards, servicing capabilities, and collection processes must be performed.
The ABCP programme's underwriting standards must establish minimum asset eligibility criteria that, in particular,
exclude the purchase of assets that are significantly past due or defaulted;
limit excess concentration to individual obligor or geographic area; and
limit the tenor of the assets to be purchased.
The aggregated estimate of loss on an asset pool that the ABCP programme is considering purchasing must take into account all sources of potential risk, such as credit risk and dilution risk. If the seller-provided credit enhancement is sized based on only credit-related losses, then a separate reserve must be established for dilution risk, if dilution risk is material for the particular exposure pool. In addition, in sizing the required enhancement level, the programme must review several years of historical information, including losses, delinquencies, dilutions, and the turnover rate of the receivables.
Internal or external auditors, an ECAI, or the firm's internal credit review or risk management function must perform regular reviews of the internal assessment process and the quality of the internal assessments of the credit quality of the firms exposures to an ABCP programme. If the firms internal audit, credit review, or risk management functions perform the review, then these functions must be independent of the ABCP programme business line, as well as the customer relationship.
The firm must track the performance of its internal ratings over time to evaluate the performance of its internal assessment methodology and must make adjustments, as necessary, to that methodology when the performance of the exposures routinely diverges from that indicated by the internal ratings.
[Note:BCD Annex IX Part 4 points 43 and 44]