18. Securitization: General Provisions

(2) For facilities that are not credit risk mitigants, use a credit conversion factor (CCF) of 100%. If contractually provided for, servicers may advance cash to ensure an uninterrupted flow of payments to investors so long as the servicer is entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying pool of exposures. The undrawn portion of servicer cash advances or facilities may receive the CCF for unconditionally cancellable commitments under chapters 5 to 7 and; (3) For derivatives contracts other than credit risk derivatives contracts, such as interest rate or currency swaps sold or purchased by the bank, use the measurement approach set out in counterparty credit risk overview chapter of Minimum Capital Requirements for Counterparty Credit Risk and Credit Valuation Adjustment . 18.21 An SPE is a corporation, trust or other entity organized for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs, normally a trust or similar entity, are commonly used as financing vehicles in which exposures are sold to the SPE in exchange for cash or other assets funded by debt issued by the trust. 18.22 For risk-based capital purposes, tranche maturity ( M T ) is the tranche’s remaining effective maturity in years and can be measured at the bank’s discretion in either of the following manners. In all cases, M T will have a floor of one year and a cap of five years. (1) As the euro 70 weighted-average maturity of the contractual cash flows of the tranche, as expressed below, where CF t denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t. The contractual payments must be unconditional and must not be dependent on the actual performance of the securitized assets. If such unconditional contractual payment dates are not available, the final legal maturity shall be used. (2) On the basis of final legal maturity of the tranche, where M L is the final legal maturity of the tranche. 18.23 When determining the maturity of a securitization exposure, banks should take into account the maximum period of time they are exposed to potential losses from the securitized assets. In cases where a bank provides a commitment, the bank should calculate the maturity of the securitization exposure resulting from this commitment as the sum of the contractual maturity of the commitment and the longest maturity of the asset(s) to which the bank would be exposed after a draw has occurred. If those assets are revolving, the longest contractually possible remaining maturity of the asset that might be added during the revolving period would apply, rather than the (longest) maturity of the assets currently in the pool. The same treatment applies to all other instruments where the risk of the commitment/protection provider is not limited to losses realized until the maturity of that instrument (e.g. total return swaps). For credit protection instruments that are only exposed to losses that occur up to the maturity of that instrument, a bank would be allowed to apply the contractual maturity of the instrument and would not have to look through to the protected position. 69 If a senior tranche is retranched or partially hedged (i.e. not on a pro rata basis), only the new senior part would be treated as senior for capital purposes. 70 The euro designation is used for illustrative purposes only. Operational Requirements for the Recognition of Risk Transference