Standardized Approach (SEC-SA)

Capital requirements are calculated under the SEC-SA as follows, where KSSFA(KA) is the capital requirement per unit of the securitization exposure and the variables a, u, and l are defined as: (1) a = - (1/( p * K A )) (2) u = D- K A (3) l = max (4 - K A ; 0) 19.12 The supervisory parameter p in the context of the SEC-SA is set equal to 1 for a securitization exposure that is not a resecuritization exposure. 19.13 The risk weight assigned to a securitization exposure when applying the SEC-SA would be calculated as follows: (1) When D for a securitization exposure is less than or equal to K A , the exposure must be assigned a risk weight of 1250%. (2) When A for a securitization exposure is greater than or equal to K A , the risk weight of the exposure, expressed as a percentage, would equal KSSFA(K A ) times 12.5 (3) When A is less than K A and D is greater than K A , the applicable risk weight is a weighted average of 1250% and 12.5 times K SSFA(KA) according to the following formula: 19.14 The risk weight for market risk hedges such as currency or interest rate swaps will be inferred from a securitization exposure that is pari passu to the swaps or, if such an exposure does not exist, from the next subordinated tranche. 19.15 The resulting risk weight is subject to a floor risk weight of 15%. Moreover, when a bank applies the SEC-SA to an unrated junior exposure in a transaction where the more senior tranches (exposures) are rated and therefore no rating can be inferred for the junior exposure, the resulting risk weight under SEC-SA for the junior unrated exposure shall not be lower than the risk weight for the next more senior rated exposure. 105 In particular, in the case of swaps other than credit derivatives, the numerator of KSA must include the positive current market value times the risk weight of the swap provider times 8%. In contrast, the denominator should not take into account such a swap, as such a swap would not provide a credit enhancement to any tranche. 106 Certain best market practices can eliminate or at least significantly reduce the potential risk from a default of a swap provider. Examples of such features could be cash collateralization of the market value in combination with an agreement of prompt additional payments in case of an increase of the market value of the swap and minimum credit quality of the swap provider with the obligation to post collateral or present an alternative swap provider without any costs for the SPE in the event of a credit deterioration on the part of the original swap provider. If SAMA are satisfied with these risk mitigants and accept that the contribution of these exposures to the risk of the holder of a securitization exposure is insignificant, SAMA may allow the bank to exclude these exposures from the KSA calculation. 107 As in the case of swaps other than credit derivatives, the numerator of KSA (i.e. weighted-average capital charge of the entire portfolio of underlying exposures) must include the exposure amount of the collateral times its risk weight times 8%, but the denominator should be calculated without recognition of the collateral.