Operational Requirements for the Recognition of Risk Transference

For synthetic securitizations, the use of credit risk mitigation (CRM) techniques (i.e. collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognized for risk-based capital purposes only if the conditions outlined below are satisfied: (1) Credit risk mitigants must comply with the requirements set out in chapter 9 . (2) Eligible collateral is limited to that specified in 9.34 . Eligible collateral pledged by SPEs may be recognized. (3) Eligible guarantors are defined in 9.76 . Banks may not recognize SPEs as eligible guarantors in the securitization framework. (4) Banks must transfer significant credit risk associated with the underlying exposures to third parties. (5) The instruments used to transfer credit risk may not contain terms or conditions that limit the amount of credit risk transferred, such as those provided below: (a) Clauses that materially limit the credit protection or credit risk transference (e.g. an early amortization provision in a securitization of revolving credit facilities that effectively subordinates the bank’s interest; significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs; or clauses that allow for the termination of the protection due to deterioration in the credit quality of the underlying exposures); (b) Clauses that require the originating bank to alter the underlying exposure to improve the pool’s average credit quality; (c) Clauses that increase the banks’ cost of credit protection in response to deterioration in the pool’s quality; (d) Clauses that 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 reference pool; and (e) Clauses that provide for increases in a retained first-loss position or credit enhancement provided by the originating bank after the transaction’s inception. (6) A bank should obtain legal opinion that confirms the enforceability of the contract. (7) Clean-up calls must satisfy the conditions set out in 18.28. 18.26 A securitization transaction is deemed to fail the operational requirements set out in 18.24 or 18.25 if the bank (1) Originates/sponsors a securitization transaction that includes one or more revolving credit facilities, and (2) The securitization transaction incorporates an early amortization or similar provision that, if triggered, would (a) Subordinate the bank’s senior or pari passu interest in the underlying revolving credit facilities to the interest of other investors; (b) Subordinate the bank’s subordinated interest to an even greater degree relative to the interests of other parties; or (c) In other ways increases the bank’s exposure to losses associated with the underlying revolving credit facilities.