MIPRU 4.2BA Securitisation

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).

A firm must calculate the risk weighted exposure amounts for the securitisation positions it holds under MIPRU 4.2BA.31 R to MIPRU 4.2BA.53 R.

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.

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.

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.

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.

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.

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.

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.

The transferee must be a securitisation special purpose entity.

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

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.

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.

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.

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.

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).

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.

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.

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.

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.

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

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

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

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.

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.

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

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.

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

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.

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.

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.

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.

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.

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%.

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.

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.

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.

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.

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.