18. Securitization: General Provisions

An originating bank may exclude underlying exposures from the calculation of risk-weighted assets only if all of the following conditions have been met. Banks meeting these conditions must still hold regulatory capital against any securitization exposures they retain. (1) Significant credit risk associated with the underlying exposures has been transferred to third parties. (2) The transferor does not maintain effective or indirect control over the transferred exposures. The exposures are legally isolated from the transferor in such a way (e.g. through the sale of assets or through sub-participation) that the exposures are put beyond the reach of the transferor and its creditors, even in bankruptcy or receivership. Banks should obtain legal opinion 71 that confirms true sale. The transferor’s retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures. The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it: (a) Is able to repurchase from the transferee the previously transferred exposures in order to realize their benefits; or (b) Is obligated to retain the risk of the transferred exposures. (3) The securities issued are not obligations of the transferor. Thus, investors who purchase the securities only have claim to the underlying exposures. (4) The transferee is an SPE and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction, unless such restriction is imposed by a risk retention requirement. (5) Clean-up calls must satisfy the conditions set out in 18.28. (6) The securitization does not contain clauses that (a) Require the originating bank to alter the underlying exposures such that the pool’s credit quality is improved unless this is achieved by selling exposures to independent and unaffiliated third parties at market prices; (b) Allow for increases in a retained first-loss position or credit enhancement provided by the originating bank after the transaction’s inception; or (c) Increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool. (7) There must be no termination options/triggers except eligible clean-up calls, termination for specific changes in tax and regulation or early amortization provisions such as those set out in 18.27.