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MIPRU 4.2BA Securitisation

Application

MIPRU 4.2BA.1R

1This section applies to a firm carrying on any home financing connected to regulated mortgage contracts or home financing and home financing administration connected to regulated mortgage contracts (see MIPRU 4.2.23 R).

Purpose

MIPRU 4.2BA.2R
MIPRU 4.2BA.3G

Where a firm has transferred significant credit risk associated with securitised exposures which it has originated under MIPRU 4.2BA.5 R (High-level principles) and has complied with other applicable requirements in this section, it may exclude those securitised exposures from the calculation of its risk weighted exposure amount and expected loss amounts.

Organisation

MIPRU 4.2BA.4G

This section is organised as follows.

  1. (1)

    High-level principles (MIPRU 4.2BA.5 R to MIPRU 4.2BA.8 G)

  2. (2)

    Systems and controls (MIPRU 4.2BA.9 R to MIPRU 4.2BA.16 R)

  3. (3)

    Structural features (MIPRU 4.2BA.17 R to MIPRU 4.2BA.22 R)

  4. (4)

    Implied future support (MIPRU 4.2BA.23 R to MIPRU 4.2BA.30 R)

  5. (5)

    Calculation of risk weighted exposure amounts (MIPRU 4.2BA.31 R to MIPRU 4.2BA.53 R)

  6. (6)

    Disclosure to investors (MIPRU 4.2BA.54 R)

High-level principles

MIPRU 4.2BA.5R
  1. (1)

    Economic substance: the risk management and capital treatment of a securitisation must be determined on the basis of its economic substance and not its legal form.

  2. (2)

    Eligible structures: only standalone traditional securitisations are eligible.

  3. (3)

    Eligible underlying assets: term assets (e.g. residential mortgages) originated by the firm are eligible.

  4. (4)

    Effective credit-risk transfer: the securitisation mechanism (e.g. true sale) must effectively transfer the risks of the securitised exposures to the holders of the securitisation positions, except those risks that remain adequately covered by the firm's capital. The securities issued must not represent payment obligations of the firm.

  5. (5)

    Significant credit risk transfer: the proportion of risk transferred must be commensurate with, or exceed, the proportion by which risk weighted exposure amounts are reduced.

  6. (6)

    Implied future support: a firm must not provide any support (direct or indirect) to investors in the securitisation beyond the firm's contractual obligations, with a view to reducing potential or actual losses, unless permitted in MIPRU 4.2BA.27 R.

  7. (7)

    Maximum regulatory capital: the maximum regulatory capital requirement for retained securitisation exposure is the lowest of:

    1. (a)

      the regulatory capital resources requirement plus expected losses for the securitised exposures before entering into the securitisation; or

    2. (b)

      the capital resources requirement from the application of a risk weight of 1250% to the retained securitisation positions; or

    3. (c)

      deduction of the retained securitisation positions from capital resources.

MIPRU 4.2BA.6G

Eligible structures exclude, for example, structures such as master trusts, synthetic securitisations and asset-backed commercial paper programmes. Financial derivatives (e.g. interest-rate swaps) used to structure the securitisation should be with third-party counterparties, not the firm or connected entities.

MIPRU 4.2BA.7G

Eligible underlying assets would exclude, for example, assets purchased from third-party entities, those arising from re-securitisations and any revolving exposures such as credit cards.

MIPRU 4.2BA.8G

Further provisions on implied future support are contained in MIPRU 4.2BA.23 R to MIPRU 4.2BA.30 R.

Systems and controls

MIPRU 4.2BA.9R

Policies and procedures: a firm must evaluate and address all risks, including reputational risks, through appropriate policies and procedures, to ensure in particular that the economic substance of the transaction is fully reflected in risk assessments and management decisions.

MIPRU 4.2BA.10R

Monitoring: a firm must continuously monitor risks that it may be subject to when it has excluded the securitised exposures from its calculation of risk weighted exposure amounts.

MIPRU 4.2BA.11R

Exposure quality: a firm must consider the impact that securitisation has on the quality of the remaining exposures it holds and the capital planning implications.

MIPRU 4.2BA.12R

Stress testing: the firm must carry out regular stress testing which takes into account:

  1. (1)

    the firm-wide impact of securitisation activities and exposures in stressed market conditions; and

  2. (2)

    the implications for other sources of risk including, but not limited to, credit risk, concentration risk, counterparty risk, market risk, liquidity risk and reputational risk.

MIPRU 4.2BA.13G

Stress testing of securitisation activities should take into account both existing securitisations and pipeline transactions, as there is a risk that the latter would not be completed in a stressed market scenario.

MIPRU 4.2BA.14G

The frequency and extent of the stress testing should be determined by the materiality of the firm's securitisation activities. A firm should have procedures in place to assess and respond to the stress-testing results.

MIPRU 4.2BA.15R
  1. (1)

    Credit-granting: a firm must apply the same sound and well-defined criteria used under SYSC 7.1.9 R for credit-granting in respect of exposures held on the balance sheet to exposures to be securitised.

  2. (2)

    These criteria must include the processes for approving and, where relevant, amending, renewing and re-financing credits.

MIPRU 4.2BA.16R

Legal opinions: legal opinions obtained in the context of securitisation transactions must be reviewed by an independent legal adviser periodically, or when there is a change in law (including case law) or any applicable rules that may affect the opinion.

Structural features

MIPRU 4.2BA.17R

The transferee must be a securitisation special purpose entity.

MIPRU 4.2BA.18R

A firm must not maintain effective or indirect control over the transferred exposures.

MIPRU 4.2BA.19G

For the purposes of MIPRU 4.2BA.18 R, a firm will be considered to have maintained effective control over the transferred exposures if:

  1. (1)

    it has the right to repurchase previously transferred exposures to realise their benefits; or

  2. (2)

    it is required to re-assume any previously transferred risk.

MIPRU 4.2BA.20G

For the purposes of MIPRU 4.2BA.18 R, the originator's retention of servicing rights or obligations in respect of the exposures does not, of itself, constitute indirect control of the exposures.

MIPRU 4.2BA.21R

A clean-up call option must satisfy all of the following conditions:

  1. (1)

    it must be exercisable at the discretion of the firm;

  2. (2)

    it must only be exercised when 10% or less of the original value of the exposures securitised remains unamortised;

  3. (3)

    it must not be structured so that allocating losses to credit enhancement positions or other positions held by investors can be avoided; and

  4. (4)

    it must not otherwise be structured to provide credit enhancement.

MIPRU 4.2BA.22R

The credit enhancement documentation must not contain clauses that require securitisation positions to be improved by the firm in response to a deterioration in the credit quality of the securitised exposures, including:

  1. (1)

    altering the credit quality of the underlying exposures; or

  2. (2)

    increasing the yield payable to investors in the securitisation positions.

Implied future support

MIPRU 4.2BA.23R

The securitisation documentation must make clear, where applicable, that any repurchase of securitised exposures or securitisation positions by the firm beyond its contractual obligations is not mandatory and may only be made at fair market value.

MIPRU 4.2BA.24R

In general, any such repurchase must be subject to the firm's credit-granting process, which should be adequate to ensure that the repurchase does not provide support.

MIPRU 4.2BA.25R

If a firm repurchases securitised exposures or securitisation positions, it must:

  1. (1)

    be able to demonstrate that it has adequately considered the following:

    1. (a)

      the price of the repurchase;

    2. (b)

      the firm's capital and liquidity position before and after repurchase;

    3. (c)

      the performance of the securitised exposures; and

    4. (d)

      the performance of the securitisation positions;

  2. (2)

    have concluded, taking into account the factors in (1) and any other relevant information, that the repurchase is not structured to provide support; and

  3. (3)

    keep adequate records of the considerations and conclusions under (1) and (2).

MIPRU 4.2BA.26R

A firm must consider at least the following situations to determine whether there may be a breach of the prohibition against implied future support in MIPRU 4.2BA.5R (6):

  1. (1)

    support given under a contractual obligation;

  2. (2)

    support which is not provided for under the contractual documentation for the securitisation; and

  3. (3)

    support given under the contractual documentation for the securitisation which the firm is entitled, but not obliged, to give.

MIPRU 4.2BA.27R
  1. (1)

    The support described in MIPRU 4.2BA.26R (1) is permitted.

  2. (2)

    The support described in MIPRU 4.2BA.26R (2) is not permitted.

  3. (3)

    The support described in MIPRU 4.2BA.26R (3) is permitted if the following conditions are met:

    1. (a)

      contractual and marketing documents of the securitisation expressly envisage and allow for the possibility of the firm providing such support;

    2. (b)

      the nature of any support that the firm may give is precisely described in the contractual and marketing documents of the securitisation;

    3. (c)

      both the firm and a person, whose only information comes from the marketing documents, must be able to ascertain at the time of the securitisation the maximum amount of support that can be given in future;

    4. (d)

      an assessment has been made by the firm of significant risk transfer, that must include the maximum possible contractual support; and

    5. (e)

      the firm's capital resources and capital resources requirement are adjusted at the time of the securitisation on the basis that the firm has provided support to the maximum amount possible, whether by an immediate deduction from capital resources or appropriate risk weighting.

MIPRU 4.2BA.28G

A waiver of the right to future margin income will not breach the prohibition against implied future support in MIPRU 4.2BA.5R (6) provided that:

  1. (1)

    the degree of support that can be given can be defined precisely by reference to the contractual documentation for the securitisation, even if the amount of support may not be ascertainable in absolute monetary terms; and

  2. (2)

    no adjustment to the firm's capital resources or capital resources requirement is required, as a firm should not include future margin income in its income or capital resources.

MIPRU 4.2BA.29G

If a firm is found to have provided support to a securitisation this implies that the firm may be likely to provide future support to its securitisations, thus failing to achieve a significant transfer of risk. The FCA will consider taking appropriate measures to reflect this increased expectation after any instance of support is found.

MIPRU 4.2BA.30R

If a firm is found to have provided support to a securitisation it will be required to:

  1. (1)

    hold capital resources against all of the securitised exposures associated with the securitisation transaction as if they had not been securitised; and

  2. (2)

    disclose publicly in a timely fashion:

    1. (a)

      where it has provided such support; and

    2. (b)

      the regulatory capital impact of doing so.

Calculation of risk weighted exposure amounts

MIPRU 4.2BA.31R

The risk weighted exposure amount equals the on-balance sheet exposure value multiplied by the risk weight associated with the credit quality step with which the credit assessment of that exposure value is associated.

MIPRU 4.2BA.32R

Where there is an exposure to different tranches in a securitisation, the exposure to each tranche must be considered as a separate securitisation position.

MIPRU 4.2BA.33R

The providers of credit protection to securitisation positions must be treated as holding positions in the securitisation.

MIPRU 4.2BA.34R

Securitisation positions include exposures to a securitisation arising from interest rate or currency derivative contracts.

MIPRU 4.2BA.35R

The ECAI rating of a securitisation position must, at a minimum, comply with the following:

  1. (1)

    there must be no mismatch between the types of payments reflected in the credit assessment and the types of payment to which the firm is entitled under the contract giving rise to the securitisation position in question;

  2. (2)

    the rating must be publicly available to the market; and

  3. (3)

    the rating must not be based, or partly based, on support provided by the firm itself.

MIPRU 4.2BA.36G

Credit assessments may only be treated as publicly available under MIPRU 4.2BA.35R (2) if they have been published in a publicly accessible forum and they are included in the ECAI's transition matrix; a rating that is only made available to a limited number of entities may not be treated as publicly available.

MIPRU 4.2BA.37G

MIPRU 4.2BA.35R (3) refers, for example, to situations where a firm holds securitisation positions which receive a lower risk weight by virtue of credit protection provided by the firm itself acting in a different capacity in the securitisation transaction.

MIPRU 4.2BA.38R

The assessment of whether a firm is providing unfunded support to its securitisation positions must take into account the economic substance of that support in the context of the overall transaction and any circumstances in which the firm could become exposed to a higher credit risk in the absence of that support. In this case the firm must consider the relevant position as if it were not rated and must apply the relevant treatment for unrated positions.

Multiple credit assessments for a rated position

MIPRU 4.2BA.39R

Where a rated position has credit assessments from two nominated ECAIs, the firm must use the less favourable credit assessment.

MIPRU 4.2BA.40R

Where a rated position has more than two nominated ECAI credit assessments, the two most favourable credit assessments must be used. If the two most favourable credit assessments are different, the less favourable of the two must be used.

MIPRU 4.2BA.41R

Where eligible credit protection under MIPRU 4.2C (Credit risk mitigation) is provided directly to the securitisation special purpose entity and that protection is reflected in the credit assessment of a position by a nominated ECAI, the risk weight associated with that credit assessment may be used. Where the credit protection is not provided to the securitisation special purpose entity but provided directly to a securitisation position, the credit assessment must not be recognised

Minimum operational requirements

MIPRU 4.2BA.42R

A firm must attribute to an unrated position an inferred rating equivalent to the rating of those rated positions (the reference positions) which are the most senior positions and are, in all respects, subordinate to the unrated securitisation position in question when the following minimum operational requirements are satisfied:

  1. (1)

    the reference positions must be subordinate in all respects to the unrated securitisation position;

  2. (2)

    the maturity of the reference positions must be equal to or longer than that of the unrated position in question; and

  3. (3)

    on an ongoing basis, any inferred rating must be updated to reflect any changes in the credit assessment of the reference positions.

MIPRU 4.2BA.43R

Where publicly available credit assessments for securitisation positions are available from eligible ECAIs, a firm must:

  1. (1)

    nominate one or more of the eligible ECAIs;

  2. (2)

    use the credit assessments of nominated ECAIs in the calculation of its risk weighted exposure amounts under this section; and

  3. (3)

    apply those credit assessments consistently in respect of its rated positions.

MIPRU 4.2BA.44R

Where a firm holds a rated position it must use the credit assessment from the nominated ECAIs to determine the risk weight for the position using:

  1. (1)

    the table in MIPRU 4.2E.14 R to determine the credit quality step associated with that credit assessment; and

  2. (2)

    the table in MIPRU 4.2BA.45 R to determine the risk weight to be applied to the rated position, based on the associated credit quality step.

MIPRU 4.2BA.45R

Table: Rated positions in securitisations for which a credit assessment by a nominated ECAI is available

This table belongs to MIPRU 4.2BA.44 R.

Credit quality step

1

2

3

4

Other credit quality steps

Securitisation positions

20%

50%

100%

350%

1250%

Resecuritisation positions

40%

100%

225%

650%

1250%

Concentration ratio approach for unrated securitisation positions

MIPRU 4.2BA.46R

When calculating its risk weighted exposure amount for securitised positions, subject to satisfying the conditions in MIPRU 4.2BA.47 R, a firm may apply the weighted-average risk weight that would be applied to the securitised exposures multiplied by a concentration ratio.

MIPRU 4.2BA.47R

The use of the concentration ratio approach for unrated securitisation positions is only permitted where all the following conditions are met:

  1. (1)

    the concentration ratio is equal to the sum of the nominal amounts of all the tranches divided by the sum of the nominal amounts of the tranches junior to, or equal to, the tranche in which the position is held, including that tranche itself;

  2. (2)

    where the resulting risk weight for a securitisation position is lower than any risk weight applicable to a more senior tranche then that higher risk weight must be applied to the securitisation position;

  3. (3)

    the composition of the pool of securitised exposures is known at all times;

  4. (4)

    the firm must be able, at all times, to calculate accurately the risk weighted exposure amounts of the pool of securitised exposures based on its knowledge of the composition of the pool;

  5. (5)

    any change to the composition of the pool of securitised exposures during the life of the transaction that would lead to an increase in the total risk weighted exposure amount of the pool, using the risk weights specified in MIPRU 4.2F (Exposures and risk weights), is either

    1. (a)

      prohibited by the documentation; or

    2. (b)

      included in the firm's calculation of its capital resources.

MIPRU 4.2BA.48G

It is sufficient for the purposes of MIPRU 4.2BA.47R (4) for the composition of the pool of securitised exposures to be reported to the firm at least daily through information service providers, secure websites or other appropriate sources.

MIPRU 4.2BA.49R

Where the firm is unable to determine the risk weights that would be applied to the securitised exposures, it must apply a risk weight of 1250%.

Conversion factor for unrated liquidity facilities

MIPRU 4.2BA.50R
  1. (1)

    A conversion factor of 100% must be applied to the nominal amount of unrated liquidity facilities unless the conditions in MIPRU 4.2BA.51 R or MIPRU 4.2BA.53 R for a conversion factor of 50% or 0% are met.

  2. (2)

    The risk weight to be applied is the highest risk weight that would be applied to any of the securitised exposures by a firm holding those exposures.

MIPRU 4.2BA.51R
  1. (1)

    A conversion factor of 50% may be applied to the nominal amount of an unrated liquidity facility where all the conditions in MIPRU 4.2BA.52 R are met.

  2. (2)

    The risk weight to be applied is the highest risk weight that would be applied to any of the securitised exposures by a firm holding those exposures.

MIPRU 4.2BA.52R

The conditions for the application of a conversion factor of 50% are:

  1. (1)

    the liquidity facility documentation must clearly identify and limit the circumstances under which the facility may be drawn;

  2. (2)

    it must not be possible for the facility to be drawn so as to provide credit support by covering losses already incurred at the time of drawdown, for example by providing liquidity for exposures in default at the time of drawdown or by acquiring assets at more than fair value;

  3. (3)

    the facility must not be used to provide permanent or regular funding for the securitisation;

  4. (4)

    repayment of drawdowns on the facility must not be subordinated to the claims of investors, other than to claims arising in respect of interest rate or currency derivative contracts, fees or other such payments, nor be subject to waiver or deferral;

  5. (5)

    it must not be possible for the facility to be drawn after all applicable credit enhancements from which the liquidity facility would benefit are exhausted; and

  6. (6)

    the facility must include a provision that results in an automatic reduction in the amount that can be drawn by the amount of exposures that are in default.

MIPRU 4.2BA.53R

A conversion factor of 0% may be applied to the nominal amount of an unrated liquidity facility where the following conditions are met:

  1. (1)

    the conditions for a conversion factor of 50% in MIPRU 4.2BA.52 R are met;

  2. (2)

    the liquidity facility is unconditionally cancellable; and

  3. (3)

    repayment of any drawings on the facility are senior to any other claims on the cashflows arising from the securitised exposures.

Disclosure to investors

MIPRU 4.2BA.54R

A firm must ensure that investors have access to all materially relevant data determined as at the date of the securitisation and, where appropriate due to the nature of the securitisation, thereafter. These data must include:

  1. (1)

    the credit quality, performance, cashflows and supporting collateral of the securitisation exposures; and

  2. (2)

    information necessary to conduct comprehensive and well-informed stress tests on the cashflows and collateral values supporting the securitisation exposures.