Treatment of Credit Risk Mitigation for Securitization Exposures

If, according to the hierarchy of approaches determined by 18.41 to 18.48 , the bank must use the SEC-ERBA for the original securitization exposure; the relevant risk weights for the different subtranches will be calculated subject to the following: (1) For the sub-tranche of highest priority, 74 the bank will use the risk weight of the original securitization exposure. (2) For a sub-tranche of lower priority: (a) Banks must infer a rating from one of the subordinated tranches in the original transaction. The risk weight of the sub-tranche of lower priority will be then determined by applying the inferred rating to the SEC- ERBA. Thickness input T will be computed for the subtranche of lower priority only. (b) Should it not be possible to infer a rating the risk weight for the subtranche of lower priority will be computed using the SEC-SA applying the adjustments to the determination of A and D described in 18.60 above. The risk weight for this sub-tranche will be obtained as the greater of (i) The risk weight determined through the application of the SEC-SA with the adjusted A, D points and (ii) The SEC-ERBA risk weight of the original securitization exposure prior to recognition of protection. 18.62 Under all approaches, a lower-priority sub-tranche must be treated as a non-senior securitization exposure even if the original securitization exposure prior to protection qualifies as senior as defined in 18.18 . 18.63 A maturity mismatch exists when the residual maturity of a hedge is less than that of the underlying exposure. 18.64 When protection is bought on a securitization exposure(s), for the purpose of setting regulatory capital against a maturity mismatch, the capital requirement will be determined in accordance with 9.10 to 9.14 . When the exposures being hedged have different maturities, the longest maturity must be used. 18.65 When protection is bought on the securitized assets, maturity mismatches may arise in the context of synthetic securitizations (when, for example, a bank uses credit derivatives to transfer part or all of the credit risk of a specific pool of assets to third parties). When the credit derivatives unwind, the transaction will terminate. This implies that the effective maturity of all the tranches of the synthetic securitization may differ from that of the underlying exposures. Banks that synthetically securitize exposures held on their balance sheet by purchasing tranched credit protection must treat such maturity mismatches in the following manner: For securitization exposures that are assigned a risk weight of 1250%, maturity mismatches are not taken into account. For all other securitization exposures, the bank must apply the maturity mismatch treatment set forth in 9.10 to 9.14 . When the exposures being hedged have different maturities, the longest maturity must be used. 73 The envisioned decomposition is theoretical and it should not be viewed as a new securitization transaction. The resulting subtranches should not be considered resecuritisations solely due to the presence of the credit protection. 74 ‘Sub-tranche of highest priority’ only describes the relative priority of the decomposed tranche. The calculation of the risk weight of each sub- tranche is independent from the question if this sub-tranche is protected (i.e. risk is taken by the protection provider) or is unprotected (i.e. risk is taken by the protection buyer).