the external rating grade or an available inferred rating;

the seniority of the position;

the tranche maturity; and

in the case of non-senior tranches, the tranche thickness.

To account for tranche maturity, banks shall use linear interpolation between the risk weights for one and five years.

To account for tranche thickness, banks shall calculate the risk weight for non-senior tranches as follows, where T equals tranche thickness, and is measured as D minus A, as defined, respectively, in CRE44.15 and CRE44.14:

To be eligible for risk-weighting purposes, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest.

The external credit assessments must be from an eligible external credit assessment institution (ECAI) as recognised by the bank’s national supervisor in accordance with CRE21 with the following exception. In contrast with CRE21.2(3), an eligible credit assessment, procedures, methodologies, assumptions and the key elements underlying the assessments must be publicly available, on a non-selective basis and free of charge.2 In other words, a rating must be published in an accessible form and included in the ECAI’s transition matrix. Also, loss and cash flow analysis as well as sensitivity of ratings to changes in the underlying rating assumptions should be publicly available. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement.

Eligible ECAIs must have a demonstrated expertise in assessing securitisations, which may be evidenced by strong market acceptance.

Where two or more eligible ECAIs can be used and these assess the credit risk of the same securitisation exposure differently, CRE21.6 to CRE21.8 will apply.

Where credit risk mitigation (CRM) is provided to specific underlying exposures or the entire pool by an eligible guarantor as defined in CRE22 and is reflected in the external credit assessment assigned to a securitisation exposure(s), the risk weight associated with that external credit assessment should be used. In order to avoid any double-counting, no additional capital recognition is permitted. If the CRM provider is not recognised as an eligible guarantor under CRE22, the covered securitisation exposures should be treated as unrated.

In the situation where a credit risk mitigant solely protects a specific securitisation exposure within a given structure (eg asset-backed security tranche) and this protection is reflected in the external credit assessment, the bank must treat the exposure as if it is unrated and then apply the CRM treatment outlined in CRE22 or in the foundation internal ratings-based (IRB) approach of CRE30 to CRE36, to recognise the hedge.

A bank is not permitted to use any external credit assessment for risk-weighting purposes where the assessment is at least partly based on unfunded support provided by the bank. For example, if a bank buys asset-backed commercial paper (ABCP) where it provides an unfunded securitisation exposure extended to the ABCP programme (eg liquidity facility or credit enhancement), and that exposure plays a role in determining the credit assessment on the ABCP, the bank must treat the ABCP as if it were not rated. The bank must continue to hold capital against the other securitisation exposures it provides (eg against the liquidity facility and/or credit enhancement).

The reference securitisation exposure (eg asset-backed security) must rank pari passu or be subordinate in all respects to the unrated securitisation exposure. Credit enhancements, if any, must be taken into account when assessing the relative subordination of the unrated exposure and the reference securitisation exposure. For example, if the reference securitisation exposure benefits from any third-party guarantees or other credit enhancements that are not available to the unrated exposure, then the latter may not be assigned an inferred rating based on the reference securitisation exposure.

The maturity of the reference securitisation exposure must be equal to or longer than that of the unrated exposure.

On an ongoing basis, any inferred rating must be updated continuously to reflect any subordination of the unrated position or changes in the external rating of the reference securitisation exposure.

The external rating of the reference securitisation exposure must satisfy the general requirements for recognition of external ratings as delineated in CRE42.8.