BIPRU 9.5 Synthetic securitisation

1. (1)

   An originator of a synthetic securitisation may calculate risk weighted exposure amounts1, 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 either of the following conditions is fulfilled:1

   1. (a)

      1significant credit risk is considered to have been transferred to third parties, either through funded or unfunded credit protection; or

   2. (b)

      1the originator applies a 1250% risk weight to all securitisation positions he holds in this securitisation or deducts these securitisation positions from capital resources according to GENPRU 2.2.237 R;

   1and the transfer complies with the conditions in (2)-(8).

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

1. (2)

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

2. (3)

   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.

3. (4)

   The instruments used to transfer credit risk must not contain terms or conditions that:

   1. (a)

      impose significant materiality thresholds below which credit protection is deemed not to be triggered if a credit event occurs;

   2. (b)

      allow for the termination of the protection due to deterioration of the credit quality of the underlying exposures;

   3. (c)

      other than in the case of early amortisation provisions, require positions in the securitisation to be improved by the originator; or

   4. (d)

      increase the originator's cost of credit protection or the yield payable to holders of positions in the securitisation in response to a deterioration in the credit quality of the underlying pool.

4. (5)

   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]

5. (6)

   1Significant credit risk will be considered to have been transferred if either of the following conditions is met:

   1. (a)

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

   2. (b)

      where 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.

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

6. (7)

   1An originator must notify the FSA that it is relying on the deemed transfer of significant credit risk under BIPRU 9.5.1R (6) 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. (a)

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

   2. (b)

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

   3. (c)

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

   4. (d)

      a 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. (e)

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

BIPRU 9.5.3 R-BIPRU 9.5.8 R apply to the calculation by an originator of risk weighted exposure amounts for exposures securitised in a synthetic securitisation.

1. (1)

   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).

2. (2)

   For firms calculating risk weighted exposure amounts and expected loss amounts under the IRB approach, the expected loss amount in respect of such exposures must be zero.

3. (3)

   For clarity, this paragraph refers to the entire pool of exposures included in the securitisation.

   [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)]

BIPRU 9.5.6 R-BIPRU 9.5.8 R apply to the treatment of maturity mismatches in a synthetic securitisation.

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]

1. (1)

   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*)]

2. (2)

   The following apply for the purposes of the formula in (1):

   1. (a)

      RW* is risk weighted exposure amounts;

   2. (b)

      RW(Ass) is risk weighted exposure amounts for exposures if they had not been securitised calculated on a pro-rata basis;

   3. (c)

      RW(SP) is risk weighted exposure amounts calculated under BIPRU 9.6.3 G as if there was no maturity mismatch;

   4. (d)

      T is maturity of the underlying exposures expressed in years;

   5. (e)

      t is maturity of credit protection expressed in years; and

   6. (f)

      t* is 0.25.

      [Note: BCD Annex IX Part 2 point 7]