BIPRU 9.12 Calculation of risk-weighted exposure amounts under the IRB approach

BIPRU 9.12 applies to the calculation of risk weighted exposure amounts of securitisation positions under the IRB approach.

[Note: BCD Annex IX Part 4 point 37 (part)]

For a rated position or a position in respect of which an inferred rating may be used, the ratings based method must be used to calculate the risk weighted exposure amount.

[Note: BCD Annex IX Part 4 point 38]

For an unrated position the supervisory formula method must be used except where a firm uses the ABCP internal assessment approach.

[Note: BCD Annex IX Part 4 point 39]

A firm other than an originator or a sponsor may not use the supervisory formula method unless its IRB permission expressly permits it to do so.

[Note: BCD Annex IX Part 4 point 40]

Subject to any IRB permission of the type described in BIPRU 9.12.28 G, in the case of an originator or sponsor unable to calculate K_IRB and which has not obtained approval to use the ABCP internal assessment approach, and in the case of other firms where they have not obtained approval to use the supervisory formula method or, for positions in ABCP programmes, the ABCP internal assessment approach, a risk weight of 1250% must be assigned to securitisation positions which are unrated and in respect of which an inferred rating may not be used.

[Note: BCD Annex IX Part 4 point 41]

When the following minimum operational requirements are satisfied a firm must attribute to an unrated position an inferred credit assessment equivalent to the credit assessment of those rated positions (the reference positions) which are the most senior positions which are in all respects subordinate to the unrated securitisation position in question:

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.

   [Note: BCD Annex IX Part 4 point 42]

For an originator, a sponsor, or for other firms which can calculate K_IRB, the risk weighted exposure amounts calculated in respect of its positions in a securitisation may be limited to that which would produce an amount in respect of its credit risk capital requirement equal to the sum of 8% of the risk weighted exposure amount which would be produced if the securitised assets had not been securitised and were on the balance sheet of the firm plus the expected loss amounts of those exposures.

[Note: BCD Annex IX Part 4 point 45]

BIPRU 9.12.10 R to BIPRU 9.12.19 R apply to the calculation of risk weighted exposure amount of securitisation positions under the ratings based method.

Under the ratings based method, the risk weighted exposure amount of a rated securitisation position4 or resecuritisation position4 must be calculated by applying to the exposure value the risk weight associated with the credit quality step with which the credit assessment is associated as prescribed in BIPRU 9.12.11 R multiplied by 1.06.

[Note: BCD Annex IX Part 4 point 46]

4For the purposes of BIPRU 9.12.10 R:

1. (1)

   the weightings in column C of BIPRU 9.12.11 R must be applied where the securitisation position is not a resecuritisation position and where the effective number of exposures securitised is less than six;4

2. (2)

   for the remainder of the securitisation positions that are not resecuritisation positions, the weightings in column B must be applied unless the position is in the most senior tranche of a securitisation, in which case the weightings in column A must be applied; and4

3. (3)

   for resecuritisation positions, the weightings in column E must be applied unless the resecuritisation position is in the most senior tranche of the resecuritisation and none of the underlying exposures were themselves resecuritisation exposures, in which case column D must be applied.4

[Note: BCD Annex IX Part 4 point 47(part)]

When determining under BIPRU 9.12.13 R whether a tranche is the most senior for these purposes, a firm need not take into consideration amounts due under interest rate or currency derivative contracts, fees due, or other similar payments.

[Note: BCD Annex IX Part 4 point 47 (part)]

In calculating the effective number of exposures securitised,4 multiple exposures to one obligor must be treated as one exposure. The effective number of exposures is calculated as:

N = (((_i)(EAD_i))²)/((_i)(EAD_i²))

where EAD_i represents the sum of the exposure values of all exposures to the i^th obligor. If the portfolio share associated with the largest exposure, C1, is available, the firm may compute N as 1/C1.4

[Note: BCD Annex IX Part 4 point 49]4

1. (1)

   If:

   1. (a)

      a firm's IRB permission allows it to use this treatment; and

   2. (b)

      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).

2. (2)

   Positions in the commercial paper issued from the programme must be rated positions.

3. (3)

   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.

4. (4)

   The internal assessment methodology must be used in the firms internal risk management processes, including its decision making, management information and capital allocation processes.

5. (5)

   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.

6. (6)

   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.

7. (7)

   If a firm's IRB 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.

8. (8)

   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.

9. (9)

   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).

10. (10)

    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.

11. (11)

    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.

12. (12)

    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.

13. (13)

    The ABCP programme's underwriting standards must establish minimum asset eligibility criteria that, in particular,

    1. (a)

       exclude the purchase of assets that are significantly past due or defaulted;

    2. (b)

       limit excess concentration to individual obligor or geographic area; and

    3. (c)

       limit the tenor of the assets to be purchased.

14. (14)

    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.

15. (15)

    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.

16. (16)

    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]

Subject to any permission of the type described in BIPRU 9.12.28 G, under the supervisory formula method, the risk weight for a securitisation position must be the risk weight to be applied in accordance with BIPRU 9.12.22 R. However, the risk weight must be no less than 20% for resecuritisation positions and no less than 7% for all other securitisation positions.4

[Note: BCD Annex IX Part 4 point 52]

1. (1)

   Subject to any permission of the type described in BIPRU 9.12.28 G, the risk weight to be applied to the exposure amount must be:

   12.5 (S[L+T] - S[L]) / T

2. (2)

   The remaining provisions of this paragraph define the terms used in the formulae in (1) and (3).

3. (3)
   2
4. (4)
   
5. (5)
   
6. (6)
   
7. (7)
   
8. (8)
   
9. (9)
   
10. (10)
    
11. (11)
    
12. (12)
    
13. (13)
    
14. (14)
    
15. (15)

    In these expressions, Beta [x; a, b]refers to the cumulative beta distribution with parameters a and b evaluated at x.

16. (16)

    T (the thickness of the tranche in which the position is held) is measured as the ratio of (a) the nominal amount of the tranche to (b) the sum of the exposure values of the exposures that have been securitised. For these purposes the exposure value of a financial derivative instrument must, where the current replacement cost is not a positive value, be the potential future credit exposure calculated in accordance with BIPRU 13 (Treatment of derivative instruments).

17. (17)

    K_IRBR is the ratio of (a) K_IRB to (b) the sum of the exposure values of the exposures that have been securitised. K_IRBR is expressed in decimal form (for example, K_IRB equal to 15% of the pool would be expressed as K_IRBR of 0.15).

18. (18)

    L (the credit enhancement level) is measured as the ratio of the nominal amount of all tranches subordinate to the tranche in which the position is held to the sum of the exposure values of the exposures that have been securitised. Capitalised future income must not be included in the measured L. Amounts due by counterparties to financial derivative instruments that represent tranches more junior than the tranche in question may be measured at their current replacement cost (without the potential future credit exposures) in calculating the enhancement level.

19. (19)

    N is the effective number of exposures calculated in accordance with BIPRU 9.12.17 R - BIPRU 9.12.18 R. In the case of resecuritisations, the firm must look at the number of securitisation exposures in the pool and not the number of underlying exposures in original pools from which the underlying securitisation exposures stem.4

20. (20)

    ELGD, the exposure-weighted average loss-given-default, is calculated as follows:

    
21. (21)

    In (20) LGD_i represents the average LGD associated with all exposures to the i^th obligor, where LGD is determined in accordance with BIPRU 4. In the case of resecuritisation, an LGD of 100% must be applied to the securitised positions. When default risk and dilution risk for purchased receivables are treated in an aggregate manner within a securitisation (e.g. a single reserve or over-collateralisation is available to cover losses from either source), the LGD input must be constructed as a weighted average of the LGD for credit risk and the 75% LGD for dilution risk. The weights are the stand-alone capital charges for credit risk and dilution risk respectively.

    [Note: BCD Annex IX Part 4 point 53 (part)]

1. (1)

   Under the supervisory formula method, if the exposure value of the largest securitised exposure, C₁, is no more than 3% of the sum of the exposure values of the securitised exposures, then for the purposes of the supervisory formula method the firm may set LGD equal 50% and N equal to either:

   1. (a)
      

      ;or

   2. (b)

      N=1/ C₁.

2. (2)

   C_m is the ratio of the sum of the exposure values of the largest 'm' exposures to the sum of the exposure values of the exposures securitised. The level of m may be set by the firm.

3. (3)

   For securitisations involving retail exposures, the supervisory formula method may be implemented using the simplifications: h = 0 and v = 0.

   [Note: BCD Annex IX Part 4 point 53 (part)]

The provisions in BIPRU 9.12.26 R to BIPRU 9.12.28 G apply for the purposes of determining the exposure value of an unrated securitisation position in the form of certain types of liquidity facility.

[Note: BCD Annex IX Part 4 point 55]

A conversion figure of 0% may be applied to the nominal amount of a liquidity facility that meets the conditions set out in BIPRU 9.11.12 R.

[Note: BCD Annex IX Part 4 point 57]