Default Risk Capital Requirement for Securitisations (CTP)

For default risk of securitisations (CTP), each index is defined as a bucket of its own. A non- exhaustive list of indices include: CDX North America IG, iTraxx Europe IG, CDX HY, iTraxx XO, LCDX (loan index), iTraxx LevX (loan index), Asia Corp, Latin America Corp, Other Regions Corp, Major Sovereign (G7 and Western Europe) and Other Sovereign. 8.41 Bespoke securitisation exposures should be allocated to the index bucket of the index they are a bespoke tranche of. For instance, the bespoke tranche 5% - 8% of a given index should be allocated to the bucket of that index. 8.42 The default risk weights for securitisations applied to tranches are based on the corresponding risk weights for the banking book instruments, as set out in 18 to 22 of SAMA Minimum Capital Requirements for Credit Risk , with the following modification: the maturity component in the banking book securitisation framework is set to zero, ie a one-year maturity is assumed to avoid double-counting of risks in the maturity adjustment (of the banking book approach) since migration risk in the trading book will be captured in the credit spread capital requirement.. 8.43 For the non-tranched products, the same risk weights for non-securitisations as set out in [8.24] apply. For the tranched products, banks must derive the risk weight using the banking book treatment as set out in [8.42]. 8.44 Within a bucket (ie for each index) at an index level, the capital requirement for default risk of securitisations (CTP) is determined in a similar approach to that for non-securitisations. (1) The hedge benefit ratio (HBR), as defined in [8.23] , is modified and applied to net short positions in that bucket as in the formula below, where the subscript ctp for the term HBR ctp indicates that the HBR is determined using the combined long and short positions across all indices in the CTP (ie not only the long and short positions of the bucket by itself). The summation of risk-weighted amounts in the formula spans all exposures relating to the index (ie index tranche, bespoke, non-tranche index or single name). (2) A deviation from the approach for non-securitisations is that no floor at zero applies at the bucket level, and consequently, the DRC requirement at the index level (DRC b ) can be negative. 8.45 The total DRC requirement for securitisations (CTP) is calculated by aggregating bucket level capital amounts as follows. For instance, if the DRC requirement for the index CDX North America IG is +100 and the DRC requirement for the index Major Sovereign (G7 and Western Europe) is - 100, the total DRC requirement for the CTP is 100 - 0.5 × 100 = 50. 37 37 The procedure for the DRC b and DRC ctp terms accounts for the basis risk in cross index hedges, as the hedge benefit from cross-index short positions is discounted twice, first by the hedge benefit ratio HBR in DRC b , and again by the term 0.5 in the DRC Ctp equation.