Basel
ii in the United States of America
From the
Basel ii
Compliance Professionals Association (BCPA),
the largest association of Basel ii Professionals in the
world
Final Rule, USA: Risk-Based Capital Standards:
Advanced Capital Adequacy Framework — Basel II
Synthetic securitizations
Background
In a synthetic securitization, an
originating bank uses credit derivatives or guarantees to transfer the credit risk, in
whole or in part, of one or more underlying exposures to
third-party protection providers.
The
credit derivative or guarantee may be either
collateralized or uncollateralized.
In the
typical synthetic securitization, the underlying exposures remain on the balance
sheet of the originating bank, but a portion of the originating bank’s credit exposure
is transferred to the protection provider or covered by collateral pledged by the
protection provider.
In general, the final rule’s treatment of
synthetic securitizations is identical to that of
traditional securitizations and to that described in the
proposal.
The
operational requirements for synthetic securitizations are
more detailed than those for traditional
securitizations and are intended to ensure that the
originating bank has truly transferred credit risk of the underlying exposures to
one or more third-party protection providers.
Although synthetic securitizations
typically employ credit derivatives, which might suggest that such transactions would
be subject to the CRM rules in section 33 of the final rule, banks must apply the
securitization framework when calculating risk-based
capital requirements for a synthetic securitization
exposure.
Banks
may ultimately be redirected to the securitization CRM rules
to adjust the securitization framework capital requirement for an exposure to reflect the
CRM technique used in the transaction.
Operational requirements for synthetic
securitizations
For synthetic securitizations, an
originating bank may recognize for risk-based capital purposes the use of CRM to hedge,
or transfer credit risk associated with, underlying exposures only if each of the
following conditions is satisfied:
(i) The credit risk mitigant is financial
collateral, an eligible credit derivative from an eligible securitization guarantor
(defined above), or an eligible guarantee from an eligible securitization guarantor.
(ii) The bank transfers credit risk
associated with the underlying exposures to third-party investors, and the terms and
conditions in the credit risk mitigants employed do not include provisions that:
(A) Allow for the termination of the
credit protection due to deterioration in the credit quality of the underlying
exposures;
(B) Require the bank to alter or replace
the underlying exposures to improve the credit quality of the underlying
exposures;
(C) Increase the bank’s cost of credit
protection in response to deterioration in the credit quality of the underlying
exposures;
(D) Increase the yield payable to parties
other than the bank in response to a deterioration in the credit quality of the
underlying exposures; or
(E)
Provide for increases in a retained first loss position or
credit enhancement provided by the bank after the inception
of the securitization.
(iii) The bank obtains a well-reasoned
opinion from legal counsel that confirmsthe enforceability of the credit risk mitigant in all relevant jurisdictions.
(iv) Any clean-up calls relating to the
securitization are eligible clean-up calls (as discussed above).
Failure to meet the above operational
requirements for a synthetic securitization prevents the originating bank from using
the securitization framework and requires the originating bank to hold risk-based
capital against the underlying exposures as if they had
not been synthetically securitized.
A bank
that provides credit protection to a synthetic securitization must use the securitization
framework to compute risk-based capital requirements for its exposures to the
synthetic securitization even if the originating bank failed to meet one or more of the
operational requirements for a synthetic securitization.
Consistent with the treatment of
traditional securitization exposures, a bank must use the RBA for synthetic securitization
exposures that have an appropriate number ofexternal or
inferred ratings.
For an
originating bank, the RBA will typically be used only for the most senior tranche
of the securitization, which often has an inferred rating.
If a bank has a synthetic securitization
exposure that does not have an external or inferred rating, the bank must apply the SFA to the
exposure (if the bank and the exposure qualify for use of the SFA) without considering
any CRM obtained as part of the synthetic securitization.
Then, if the bank has
obtained a credit risk mitigant on the exposure as part of the synthetic securitization, the
bank may apply the securitization CRM rules to reduce its
risk-based capital requirement for the exposure.
For
example, if the credit risk mitigant is financial collateral, the bank
may use the standard supervisory or own estimates haircuts
to reduce its risk-based capital requirement.
If the
bank is a protection provider to a synthetic securitization and
has obtained a credit risk mitigant on its
exposure, the bank may also apply the
securitization CRM rules in section 46 of the final rule
to reduce its risk-based capital requirement on the
exposure.
If
neither the RBA nor the SFA is available, a bank must deduct
the exposure from regulatory capital.
First-loss tranches
If a bank has a first-loss position in a
pool of underlying exposures in connection with a synthetic securitization, the bank
must deduct the position from regulatory capital unless
(i) the
position qualifies for use of the RBA or
(ii) the
bank and the position qualify for use of the SFA and KIRB
is greater than L.
Mezzanine tranches
In a typical synthetic securitization, an
originating bank obtains credit protection on a mezzanine, or second-loss, tranche of
a synthetic securitization by either
(i) obtaining a credit default swap or
financial guarantee from a third-party financial
institution; or
(ii)
obtaining a credit default swap or financial guarantee
from an SPE whose obligations are secured by financial
collateral.
For a bank that creates a synthetic
mezzanine tranche by obtaining an eligible credit derivative or guarantee from an
eligible securitization guarantor, the bank generally will treat the notional amount of the
credit derivative or guarantee (as adjusted to reflect any maturity mismatch, lack of
restructuring coverage, or currency mismatch) as a wholesale exposure to the protection
provider and use the IRB approach for wholesale exposures
to determine the bank’s risk-based capital requirement for
the exposure.
A bank that creates the synthetic mezzanine
tranche by obtaining from a non-eligible securitization guarantor a guarantee or
credit derivative that is collateralized by financial collateral generally will
(i) first use
the SFA to calculate the risk-based capital requirement on the exposure (ignoring the
guarantee or credit derivative and the associated
collateral); and
(ii)
then use the securitization CRM rules to calculate any reductions to the risk-based capital
requirement resulting from the associated collateral.
The bank may look only to the protection
provider from which it obtains the guarantee or credit derivative when determining its
risk-based capital requirement for the exposure (that is, if the protection provider
hedges the guarantee or credit derivative with a guarantee or credit derivative from a
third party, the bank may not look through the protection provider to that third party
when calculating its risk-based capital requirement for the exposure).
For a bank providing credit protection on
a mezzanine tranche of a synthetic securitization, the bank must use the RBA
to determine the risk-based capital requirement for the
exposure if the exposure has an external or inferred
rating.
If the
exposure does not have an external or inferred rating
and the exposure qualifies for use of the SFA, the
bank may use the SFA
to calculate the risk-based capital requirement for the
exposure.
If neither the RBA nor the SFA are available,
the bank must deduct the exposure from regulatory capital. If a bank providing
credit protection on the mezzanine tranche of a synthetic securitization obtains a credit
risk mitigant to hedge its exposure, the bank may apply the securitization CRM rules to
reflect the risk reduction achieved by the credit risk mitigant.
Super-senior tranches
A bank that has the most senior position
in a pool of underlying exposures in connection with a synthetic securitization
must use the RBA to calculate its risk-based capital requirement for the exposure if
the exposure has at least one external or inferred rating (in the case of an investing bank)
or at least two external or inferred ratings (in the case of an originating bank).
If the
super-senior tranche does not have an external or inferred rating and the bank and the
exposure qualify for use of the SFA, the bank may use the SFA
to calculate the risk-based capital requirement for the
exposure.
If
neither the RBA nor the SFA are available, the
bank must deduct the exposure from regulatory
capital.
If an investing bank in the
super-senior tranche of a synthetic securitization obtains a credit risk mitigant to hedge
its exposure, however, the investing bank may apply the securitization CRM rules to
reflect the risk reduction achieved by the credit risk mitigant.
Return
to Table of Contents
Return to
Index
Read more
about our
Certified Basel
ii Professional (CBiiPro)
program
Read more
about our Certified Pillar 2 Expert
(CP2E)
program
Read more about our
Certified Pillar 3 Expert
(CP3E)
program
Read
more about our Certified
Stress Testing Expert (CSTE)
program
 | |
